UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
LENAWEE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-3088340
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
135 East Maumee Street 49221
Adrian, Michigan (Zip Code)
(Address of principal executive offices)
517-265-5144
517-265-3926 (FAX)
(Registrant's telephone number, including area code)
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Securities to be registered pursuant to Section 12(b) of the Act:
none
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
<PAGE>
Item 1. Business.
BUSINESS
Lenawee Bancorp, Inc. (the "Company"), a Michigan business corporation, is
a one bank holding company, which owns all of the outstanding capital stock of
the Bank of Lenawee (the "Bank"), a Michigan banking corporation. The Company
was formed in 1993 for the purpose of acquiring all of the common stock of the
Bank in a shareholder approved reorganization, which became effective April 15,
1993.
The Bank was originally organized in December 1869 as a Michigan chartered
bank. As of January 31, 2000, the Bank had approximately 130 full-time and
part-time employees. None of the Bank's employees are subject to collective
bargaining agreements. The Company does not directly employ any personnel. The
principal executive offices of the Company and the Bank are located at 135 East
Maumee Street, Adrian, Michigan 49221. The Bank's main office is located in
Adrian and it serves other communities with branch offices in Hudson, Morenci,
Saline, Tecumseh and Waldron. The Bank's offices are located throughout Lenawee
County, in the southeastern portion of Hillsdale County, and the southern
portion of Washtenaw County.
The area in which the Bank's offices are located, which is basically
southeastern Michigan, has historically been rural in character but now has a
growing urban population as residents choose the area to live in while commuting
to Ann Arbor, Detroit, and Toledo. The populations of the cities in which the
Bank's offices are located are approximately as follows: Adrian -22,000; Hudson
- - 2,500; Morenci - 2,300; Saline - 7,800; Tecumseh - 8,000; Waldron - 600.
Bank Services
The Bank is a full service bank offering a wide range of commercial and
consumer banking services. These traditional financial services include checking
accounts, savings accounts, certificates of deposit, commercial loans, real
estate loans and installment loans. Currently, the Bank does not offer trust
services. The Bank maintains correspondent relationships with major banks in
Detroit and Chicago, pursuant to which the Bank engages in federal funds sale
and purchase transactions, the clearance of checks and certain foreign currency
transactions. In addition, the Bank participates with other financial
institutions to fund certain large commercial loans which would exceed the
Bank's legal lending limit if made solely by the Bank. Annuities, mutual funds
and title insurance are available to Bank's customers through arrangements
maintained with third-party providers by the Bank's subsidiary Lenawee
Financial Services, Inc.
The Bank's deposits are generated in the normal course of business, and the
loss of any one depositor would not have a materially adverse effect on the
business of the Bank. The Bank's loan portfolios are primarily focused in its
market area. As of December 31, 1999, the Bank's certificates of deposits of
$100,000 or more constituted approximately 15% of total deposit liabilities. The
Bank's deposits originate primarily from its service area, and the Bank does not
obtain large deposits from outside its market area.
The Bank's principal sources of revenue are interest and fees on loans and
interest on investment securities. Interest and fees on loans constituted
approximately 79.5% and 75.1% of total revenues for the periods ended December
31, 1999, and December 31, 1998, respectively. Interest on securities, taxable
and nontaxable, constituted approximately 7.6% and 7.7% of total revenues in
1999 and 1998. Revenues were also generated from federal funds sold, dividend
income, deposit service charges, other financial service fees and gains on loan
sales.
The Bank provides real estate, consumer and commercial loans to customers
in its market. 56.9 percent of the Bank's loan portfolio was in fixed rate loans
as of December 31, 1999. Most of these loans, approximately 65.2%, mature within
five years. Approximately $39,031,000 in loans (or 19.8% of the Bank's total
loan portfolio) have fixed rates with maturities exceeding five years. As of
December 31, 1999, 46.7 percent of the Bank's interest-bearing deposits were
held in savings, NOW and MMDAs, all of which are variable rate products. Of the
$86,661,000 in time deposits, approximately $32,328,000 mature within a year,
with the balance maturing within a five-year period.
Requests to the Bank for credit are considered on the basis of credit
worthiness of each applicant, without consideration to race, color, religion,
national origin, sex, marital status, physical handicap, age, or the receipt of
income from public assistance programs. Consideration is given to the
applicant's capacity for repayment, collateral, capital and alternative sources
of repayment. Loan applications are accepted at all the Bank's offices and are
approved within the limits of eac lending officer's authority. Loan requests in
excess of $1,000,000 are presented to the Board of Directors for its review and
approval. Loan requests in excess of $500,000 are presented to a Loan Committee
of the Board of Directors for its review and approval.
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The Bank sells participations in commercial loans to other financial
institutions approved by the Bank, for the purpose of meeting legal lending
limit requirements or loan concentration considerations. The Bank sells fixed
rate and conforming adjustable rate residential mortgages to the Federal
National Mortgage Association ("FNMA"). Those residential real estate mortgage
loan requests that do not meet FNMA criteria are reviewed by the Bank for
approval and, if approved, are retained in the Bank's loan portfolio. The Bank
has the ability to purchase loans that meet its normal credit standards.
The Bank's investment policy is consistent with sound banking practices to
retain safety of principal and designed to provide a maximum total return over
the long term. The fundamental objectives of the Investment Policy are as
follows:
- Safety: To provide an investment media for funds, which assumes an
appropriate amount of risk within the context of the Bank's total risk
position.
- Liquidity: To provide sufficient liquidity needed to meet the
day-to-day, cyclical and long-term obligations and requirements.
- Earnings: To provide a flow of dependable earnings.
- Community: To provide a method of contributing to the communities that
the Bank serves.
Bank Competition
The Bank has nine offices in addition to a mobile bank. See "Properties"
below for more detail on these facilities. Within these communities, its
principal competitors are United Bank & Trust, Key Bank, Mid-Am Bank, Standard
Federal Bank, and TLC Community Credit Union. Each of these financial
institutions, which have headquarters in larger metropolitan areas, with the
exception of United Bank & Trust and TLC Community Credit Union, have
significantly greater assets and financial resources tha the Company. Based on
deposit information as of December 31, 1999, the Bank holds approximately 17% of
the deposits in Lenawee County. Information as to asset size of competitor
financial institutions is derived from publicly available reports filed by and
with regulatory agencies.
The financial services industry continues to change by becoming
increasingly competitive. Principal methods of competition include the types and
quality of services provided, loan and deposit product pricing, advertising and
marketing programs. The continual evolution of government regulation of
financial service industries has led to increased competition among banks and
other financial institutions for a significant portion of products that have
traditionally been provided by commercial banks Competition within the Bank's
markets has been relatively stable over the past several years. Management
continues to evaluate the opportunities for the expansion of products and
services, such as enhancement of its Internet product, and the provision of
trust and brokerage services, as well as additional branching opportunities.
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<PAGE>
Growth of Bank
The following table sets forth certain financial information regarding the
growth of the Bank (and accordingly, excludes holding company data):
<TABLE>
Balance as of December 31,
-------------------------------------------------------------------
(in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $ 239,078 $ 219,398 211,969 201,790 182,755
Loans, net 192,721 156,272 161,102 149,373 126,297
Securities, FHLB stock and FRB stock 24,950 31,220 25,796 33,189 36,229
Noninterest-bearing deposits 37,241 34,025 28,280 22,281 21,617
Interest-bearing deposits 162,519 152,173 146,796 137,263 141,234
Borrowed funds 16,177 10,626 16,346 22,935 1,630
Total deposits 199,760 186,198 175,076 159,544 162,851
Stockholders' equity 21,396 21,023 19,020 17,996 16,956
</TABLE>
The Bank of Lenawee has enjoyed a long and eventful history in the
communities it serves. Established late in 1869 with capital stock of $50,000,
its doors first opened on January 13, 1870. Fourteen leading businessmen
organized the new institution, which they named the Lenawee County Savings Bank.
Groundbreaking ceremonies for the Bank's present Main Office next to the
Croswell Opera House were held on May 15, 1907. In January 1918, the Bank became
a member of the Federal Reserve System.
Lenawee County Savings Bank's first branch was opened in 1953 at Main and
Front Streets. The new facility initially served drive-up customers at one
window. In 1967, a lobby was added to the building, which by then was popularly
called the Courthouse office. Another innovative customer service device--an
automated teller machine--was installed here. With the acquisition of the First
State Savings Bank of Morenci in 1956, the Bank welcomed a large number of
customers as well as new shareholders. This consolidation, which brought the
Bank to another community for the first time, also resulted in a name change.
Lenawee County Savings Bank then became Bank of Lenawee County. The office was
substantially expanded in 1982 to better serve its Michigan and neighboring Ohio
customers. In 1986, shareholders approved a minor name change and eliminated the
word "County" to simplify marketing communications.
The Bank of Lenawee's market position was strengthened on July 1, 1987 when
the former Hudson State Savings Bank was acquired. At the Annual Meeting on
April 15, 1993, the shareholders of the Bank of Lenawee voted to form a holding
company (Lenawee Bancorp, Inc.) With this action, the shareholders exchanged
their Bank of Lenawee shares for a like number of Lenawee Bancorp, Inc. shares.
This was another step in modernizing their corporate structure, allowing more
flexibility and the ability to continue to be competitive while serving their
customers.
In April 1997, the Bank opened a permanent facility in Tecumseh, located in
the historic Depot building in the downtown. The branch opening was a result of
market research performed with the Bank's Mobile Bank Office, which proved the
need for a permanent location after two years of part-time operations. The
Mobile Bank Office was then moved to Saline to test the Washtenaw County market.
The community responded favorably to their independent, community banking
philosophy and the Saline Banking Office began operating in October 1997. A new
drive-up featuring a full-service ATM opened for business in November of 1998 in
the same location to provide further convenience to customers. Plans are in
process to incorporate the Saline branch offices as a separate community bank
focused on the Washtenaw County Market.
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<PAGE>
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and the Bank. This summary is qualified in its entirety by reference
to the particular statutes and regulations. A change in applicable laws or
regulations may have a material effect on the Company, the Bank and the
businesses of the Company and the Bank.
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC,
the Division of Financial Institutions of the Michigan Office of Financial and
Insurance Services ("OFIS"), the Internal Revenue Service, and state taxing
authorities. The effect of such statutes, regulations and policies can be
significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Bank or the Company.
Federal law and regulations establish supervisory standards applicable to
the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
Recent Legislation
The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act")
represents a pivotal point in the history of the financial services industry.
The GLB Act modifies many of the principal federal laws which regulate financial
institutions and sweeps away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities became available for banking
organizations, other depository institutions, insurance companies and securities
firms to enter into combinations that permit a single financial services
organization to offer customers a more complete array of financial products and
services. Specifically, the GLB Act provides two new vehicles through which a
banking organization can engage in a variety of activities which, prior to the
Act, were not permitted. First, a bank holding company meeting certain
requirements may elect to become a financial holding company ("FHC"). FHCs are
generally authorized to engage in all "financial activities" and, under certain
circumstances, to make equity investments in other companies (i.e., merchant
banking). In order to be eligible to elect to become a FHC, a bank holding
company and all of its depository financial institutions must: (1) be "well
capitalized"; (2) be "well managed"; and (3) have a rating of "satisfactory" or
better in their most recent Community Reinvestment Act examination. Both the
bank holding company and all of its depository financial institutions must also
continue to satisfy these requirements after the bank holding company elects to
become a FHC or else the FHC will be subject to various restrictions. The
Federal Reserve Board will be the umbrella regulator of FHCs, but functional
regulation of a FHC's separately regulated subsidiaries will be conducted by
their primary functional regulator.
Second, the GLB Act also provides that a national bank (and a state bank,
so long as otherwise allowable under its state's law), which satisfies certain
requirements, may own a new type of subsidiary called a financial subsidiary
("FS"). The GLB Act authorizes FSs to engage in many (but not all) of the
activities that FHCs are authorized to engage in. In order to be eligible to own
a FS, a bank must satisfy the three requirements noted above, plus several
additional requirements.
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<PAGE>
The GLB Act also imposes several rules that are designed to protect the
privacy of the customers of financial institutions. For example, the GLB Act
requires financial institutions to annually adopt and disseminate a privacy
policy and prohibits financial institutions from disclosing certain customer
information to "non-affiliated third parties" for certain uses. All financial
institutions, regardless of whether they elect to utilize FHCs or FSs, are
subject to the GLB Act's privacy provisions. The Company and the Bank are also
subject to certain state laws that deal with the use and distribution of
non-public personal information. In addition to its privacy provisions, the GLB
Act also contains various other provisions that apply to banking organizations,
regardless of whether they elect to utilize FHCs or FSs.
The Company believes that the GLB Act could significantly increase
competition in its business and is evaluating the desirability of electing to
become a FHC. The Company believes that it is qualified to elect FHC status but
has not yet decided to do so.
The Company
General. The Company is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve Board under the Bank
Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve Board, and is required to
file with the Federal Reserve Board periodic reports of its operations and such
additional information as the Federal Reserve Board may require.
In accordance with Federal Reserve Board policy, the Company is expected to
act as a source of financial strength to the Bank and to commit resources to
support the Bank in circumstances where the Company might not do so absent such
policy. In addition, if the OFIS deems the Bank's capital to be impaired, the
OFIS may require the Bank to restore its capital by a special assessment upon
the Company as the Bank's sole shareholder. If the Company were to fail to pay
any such assessment, the directors of the Bank would be required, under Michigan
law, to sell the shares of the Bank's stock owned by the Company to the highest
bidder at either a public or private auction and use the proceeds of the sale to
restore the Bank's capital.
Investments and Activities. In general, any direct or indirect acquisition
by the Company of any voting shares of any bank which would result in the
Company's direct or indirect ownership or control of more than 5% of any class
of voting shares of such bank, and any merger or consolidation of the Company
with another bank holding company, will require the prior written approval of
the Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
Effective September 29, 1995, bank holding companies may acquire banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of assets of another
bank, or the assumption of liability by such a subsidiary to pay any deposits in
another bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain such cases an application to, and the prior
approval of, the Federal Reserve Board under the BHCA and/or the OFIS under the
Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company from
engaging, either directly or indirectly through a subsidiary, in any activity
other than managing or controlling banks unless the proposed non-banking
activity is one that the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Under current Federal Reserve Board regulations, such permissible
non-banking activities include such things as mortgage banking, equipment
leasing, securities brokerage, and consumer and commercial finance company
operations. As a result of recent amendments to the BHCA, well-capitalized and
well-managed bank holding companies may engage de novo in certain types of
non-banking activities without prior notice to, or approval of, the Federal
Reserve Board, provided that written notice of the new activity is given to the
Federal Reserve Board within 10 business days after the activity is commenced.
If a bank company wishes to engage in a non-banking activity by acquiring a
going concern, prior notice and/or prior approval will be required, depending
upon the
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<PAGE>
activities in which the company to be acquired is engaged, the size of the
company to be acquired and the financial and managerial condition of the
acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank company, and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank company. The Federal Reserve Board may
apply different standards to activities proposed to be commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
Capital Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank holding company may, among other
things, be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total average assets,
and (ii) a risk-based requirement expressed as a percentage of total
risk-weighted assets. The leverage capital requirement consists of a minimum
ratio of Tier 1 capital (which consists principally of shareholders' equity) to
total average assets of 3% for the most highly rated companies, with minimum
requirements of 4% to 5% for all others. The risk-based requirement consists of
a minimum ratio of total capital to total risk-weighted assets of 8%, of which
at least one-half must be Tier 1 capital.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve Board regulations provide that
additional capital may be required to take adequate account of, among other
things, interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securitie trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels. The Federal
Reserve Board has not advised the Company of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
Dividends. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues are received in the form of dividends paid
by the Bank. Thus, the Company's ability to pay dividends to its shareholders is
indirectly limited by statutory restrictions on the Bank's ability to pay
dividends. See "SUPERVISION AND REGULATION - The Bank - Dividends." Further, the
Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies. In the policy statement, the Federal
Reserve Board expressed its view that a bank experiencing earnings weakness
should not pay cash dividends exceeding its net income or which can only be
funded in ways that weakens the bank's financial health, such as by borrowing.
Additionally, the Federal Reserve Board possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. Similar enforcement powers over
the Bank are possessed by the Federal Reserve Board. The "prompt corrective
action" provisions of federal law and regulation authorizes the Federal Reserve
Board to restrict the payment of dividends by the Company for an insured bank
which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, can pay its debts as they come due in the usual course of business
and its total assets equal or exceed the sum of its liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of any
holders of preferred stock whose preferential rights are superior to those
receiving the distribution. The Company's Articles of Incorporation do not
authorize the issuance of preferred stock and there are no current plans to seek
such authorization.
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<PAGE>
The Bank
General. The Bank is a Michigan banking corporation, is a member of the
Federal Reserve System and its deposit accounts are insured by the Bank
Insurance Fund (the "BIF") of the FDIC. As a Federal Reserve System member, the
Bank is subject to the examination, supervision, reporting and enforcement
requirements of the OFIS, as the chartering authority for Michigan banks, and
the Federal Reserve Board, as administrator of the BIF. These agencies and the
federal and state laws applicable to the Bank and its operations, extensively
regulate various aspects of the banking business including, among other things,
permissible types and amounts of loans, investments and other activities,
capital adequacy, branching, interest rates on loans and on deposits, the
maintenance of non-interest bearing reserves on deposit accounts, and the safety
and soundness of banking practices.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their respective levels of capital and results of supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to establish
assessment rates at levels which will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
Accordingly, the FDIC established the schedule of BIF insurance assessments for
the first semi-annual assessment period of 1999, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category. For 1999, the Bank paid $20,852 in BIF insurance
assessments, representing a premium of .01% of average deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily durin the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
OFIS Assessments. Michigan banks are required to pay supervisory fees to
the OFIS to fund the operations of the OFIS. The amount of supervisory fees paid
by a bank is based upon the bank's total assets, as reported to the OFIS.
FICO Assessments. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation ("FICO"). FICO
was created in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Prior to January 1, 2000, the FICO assessments made against BIF members could
not exceed 20% of the amount of FICO assessments made against SAIF members. Last
year, SAIF members pay FICO assessments at a rate equal to approximately 0.063%
of deposits while BIF members paid FICO assessments at a rate equal to
approximately 0.013% of deposits. Between January 1, 2000 and the maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. It is
estimated that FICO assessments during this period will be less than 0.025% of
deposits.
Capital Requirements. The Federal Reserve Board has established the
following minimum capital standards for state-chartered, Fed-member banks, such
as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1
capital to total average assets of 3% for the most highly-rated banks with
minimum requirements of 4% to 5% for all others, and a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
Tier 1 capital consists principally of shareholders' equity. These capital
requirements are minimum requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual
institutions. For example, Federal Reserve regulations provide that higher
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<PAGE>
capital may be required to take adequate account of, among other things,
interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
<TABLE>
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
------------- ------------- --------------
<S> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible
equity to total assets
of 2% or less
</TABLE>
As of December 31, 1999, each of the Bank's ratios exceeded minimum
requirements for the well capitalized category.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
Dividends. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net income after deducting its losses and bad debts. A
Michigan state bank may not declare or pay a dividend unless the bank will have
a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
income for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. A Michigan state bank may, with the approval of the OFIS, by vote of
shareholders owning 2/3 of the stock eligible to vote, increase its capital
stock by a declaration of a stock dividend, provided that after the increase the
bank's surplus equals at least 20% of its capital stock, as increased. Th Bank
may not declare or pay any dividend until the cumulative dividends on preferred
stock (should any such stock be issued and outstanding) have been paid in full.
The Bank's Articles of Incorporation do not authorize the issuance of preferred
stock and there are no current plans to seek such authorization.
Federal law generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its company if the depository institution would thereafter be
undercapitalized. The Federal Reserve may prevent a member bank from paying
dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, the Federal Reserve may prohibit the payment of
-9-
<PAGE>
dividends by the Bank, if such payment is determined, by reason of the financial
condition of the Bank, to be an unsafe and unsound banking practice.
Insider Transactions. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act on any extensions of credit to the Company or its
subsidiaries, on investments in the stock or other securities of the Company or
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. 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 Company and its
subsidiaries, to principal shareholders of the Company, and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines to promote the safety and soundness of federally insured depository
institutions. These guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In general, the guidelines prescribe the
goals to be achieved in each area, and each institution will be 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.
State Bank Activities. Under federal law and Federal Reserve regulations,
Federal Reserve member state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. Federal law, as
implemented by Federal Reserve regulations, also prohibits Federal Reserve
member state banks and their subsidiaries, subject to certain exceptions, from
engaging as principal in any activity that is not permitted for a national bank
or its subsidiary respectively, unless the bank meets, and continues to meet,
its minimum regulatory capital requirements and the Federal Reserve determines
the activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. Impermissible investments and activities must be
divested or discontinued within certain time frames set by the Federal Reserve
in accordance with federal law. These restrictions are not currently expected to
have a material impact on the operations of the Bank.
Consumer Protection Laws. The Bank's business includes making a variety of
types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
Branching Authority. Michigan banks, such as the Bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the Federal Reserve).
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "IBBEA") allows banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including certain
limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by IBBEA only if specifically
authorized by state
-10-
<PAGE>
law. The legislation allowed individual states to "opt-out" of interstate
branching authority by enacting appropriate legislation prior to June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and non-U.S.
banks to establish branch offices in Michigan. The Michigan Banking Code
permits, in appropriate circumstances and with the approval of the OFIS, (i) the
acquisition of all or substantially all of the assets of a Michigan-chartered
bank by an FDIC-insured bank, savings bank, or savings and loan association
located in another state, (ii) the acquisition by a Michigan-chartered bank of
all or substantially all of the assets of an FDIC-insured bank, savings bank or
savings and loan association located in another state, (iii) the consolidation
of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states having laws permitting
such consolidation, with the resulting organization chartered by Michigan, (iv)
the establishment by a foreign bank, which has not previously designated any
other state as its home state under the International Banking Act of 1978, of
branches located in Michigan, and (v) the establishment or acquisition of
branches in Michigan by FDIC-insured banks located in other states, the District
of Columbia or U.S. territories or protectorates having laws permitting
Michigan-chartered banks to establish branches in such jurisdiction. Further,
the Michigan Banking Code permits, upon written notice to the OFIS, (i) the
acquisition by a Michigan-chartered bank of one or more branches (not comprising
all or substantially all of the assets) of a bank, savings bank, savings and
loan association or credit union located in Michigan or another state, the
District of Columbia, or a U.S. territory or protectorate, (ii) the
establishment by Michigan-chartered banks of branches located in other states,
the District of Columbia, U.S. territories or protectorates or a foreign
country, and (iii) the consolidation of one or more Michigan-chartered banks and
FDIC-insured banks, savings banks or savings and loan associations located in
other states, with the resulting organization chartered by one of such other
states.
-11-
<PAGE>
Item 2. Financial Information.
<TABLE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Years Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest and dividend income $ 17,923 $ 17,517 $ 16,929 $ 15,281 $ 13,668
Interest expense 6,312 7,205 7,586 6,934 6,024
Net interest income 11,611 10,312 9,343 8,347 7,644
Provision for loan losses 2,560 239 245 253 35
Noninterest income 2,237 2,850 1,769 1,459 1,188
Noninterest expense 8,994 8,913 7,632 6,803 6,194
Income before income taxes 2,294 4,010 3,235 2,750 2,603
Net income 1,563 2,660 2,132 1,865 1,808
Per Share Data (1):
Basic net income 1.83 3.13 2.51 2.19 2.12
Diluted net income 1.83 3.12 2.51 2.19 2.12
Cash dividends declared .75 .67 .60 .58 .55
Shareholders' equity and net ESOP 26.72 26.26 23.71 21.61 20.22
obligation per share
Shareholders' equity per share 21.64 21.92 20.24 18.46 17.24
Balance Sheet Data:
Total assets $ 239,904 $ 220,414 $ 212,920 $ 201,971 $ 182,925
Loans 197,308 158,487 163,039 151,021 127,798
Allowance for loan losses 4,646 2,182 1,964 1,761 1,651
Deposits 199,206 185,891 174,973 159,324 162,747
Borrowed funds 16,177 10,626 16,346 22,935 1,630
Shareholders' equity and net ESOP 22,775 22,345 20,074 18,397 17,240
obligations
Shareholders' equity 18,449 18,648 17,137 15,721 14,694
Ratios:
Net interest income to average earning assets 5.66% 5.07% 4.72% 4.75% 4.76%
Return on average shareholders' equity and
net ESOP obligation 6.65 12.46 10.99 10.47 11.23
Return on average shareholders' equity 8.02 14.76 12.84 12.27 13.75
Return on average assets .70 1.21 1.00 .97 1.01
Nonperforming loans to total loans 1.73 .25 .27 .26 .16
Tier 1 leverage ratio 9.60 9.90 9.30 9.30 9.40
Dividend payout ratio 40.98 21.41 23.86 26.48 25.77
Average shareholders' equity and net ESOP 10.52 9.72 9.11 9.26 9.03
obligation
Average shareholders' equity to average
Total assets 8.72 8.21 7.79 7.90 7.38
</TABLE>
(1) All amounts have been restated for all stock splits and stock dividends.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following financial review presents management's discussion and
analysis of consolidated financial condition and results of operations during
the period of 1997 through 1999. The discussion should be read in conjunction
with the Company's consolidated financial statements and accompanying notes.
Summary
At the end of 1999, preliminary indications were that the Company and the
Bank had achieved a record year in terms of overall operating performance, net
income and increased value to shareholder equity.
However, an event occurred subsequent to year-end that required a
substantial one-time adjustment that decreased net income and increased the
provision for loan losses. While the situation is not resolved, an overview is
as follows.
In August, 1999, the Bank purchased a $3,000,000 loan participation from
another Michigan-based independent bank. That participation represented a
portion of a $5,300,000 credit commitment made by that bank to a mid-Michigan
manufacturing company ("Borrowing Company"). Under the participation agreement,
the selling, or lead, bank was responsible for administration and monitoring of
the credit arrangement.
Subsequently, the Bank became aware of adverse financial circumstances at
the Borrowing Company and it is probable that both the lead bank and the Bank
will experience credit losses. There are allegations that officers of the
Borrowing Company committed fraudulent activities. In addition, there are
questions regarding the management of the situation by the lead bank. Legal
action has been initiated against the Borrowing Company by the lead bank.
Independent of that action, the Bank is exploring options for mitigation of any
losses to the Bank.
Although it is likely that a loss will be sustained, the magnitude of any
ultimate loss cannot be accurately determined as of this date. Based upon the
facts as they are now known, however, the Bank has taken a one-time, pre-tax
charge to 1999 earnings of $2,300,000 and has added that amount to its 1999
provision for loan losses.
This situation is unique in that while the borrower's adverse financial
circumstances occurred during 1999, the Bank was not alerted to its potential
severity until late January, 2000. After extensive review, management recognized
the loss in 1999.
The effect upon 1999 earnings and key performance ratios was as follows.
Pre-adjusted 1999 net earnings were $3,080,777, which would have resulted in a
return on average equity (ROE) of 16.70 percent, a return on average assets
(ROA) of 1.39 percent with basic and diluted earnings per share of $3.61. Those
pre-adjusted operating results are record performances and would have
represented an increase in net income of $420,303, or 15.80 percent. With the
adjustment, net income decreased to $1,562,778, return on average equity (ROE)
was 8.02 percent, return on average assets (ROA) was .70 percent and earnings
per share were $1.83.
As mentioned, efforts continue to mitigate any loss. In addition, this is a
single event and is not, in management's judgment, representative of a broader
weakness in the overall loan portfolio. Measured by regulatory criteria, the
Bank is a well-capitalized institution and, assuming a loss of the full
$2,300,000, would continue to be so classified. The Company remains
fundamentally strong and is continuing to execute its growth-oriented strategic
plan.
Despite this unusual event, 1999 was another year in which records were
established in a number of performance categories. Total assets increased by
$19,489,844, or 8.84 percent, and ended the year at $239,903,508. Led by the
Commercial Lending area and with virtually all portfolio segments displaying
substantial growth, total loans increased by $38,820,704, or 24.49 percent. The
significance of this growth is enhanced when one considers the fact that
$1,483,725 in agricultural loans and $49,491,958 in residential real estate
loans were sold to secondary market investors. In addition to the residential
real estate loans shown on the balance sheet, the Bank originated and, as of
year-end 1999, continued to service, $181,102,000 in sold loans. Demonstrating
that loan production did not come at the expense of pricing or quality, the net
interest margin of 5.66 percent continued to be very high compared to the Bank's
-13-
<PAGE>
peer group and loan delinquency throughout 1999 averaged .51 percent. Total
deposits increase $13,315,458, or 7.16 percent, from year to year and total
operating expenses, which increased a nominal $81,786, or .92 percent, were
well-controlled.
The Company and its subsidiary bank, Bank of Lenawee, consistently have
maintained a strong capital ratio. Its Tier I risk based capital ratio of 11.1%
makes it a well capitalized bank.
To achieve this historic success, the Company has relied on years of
continuous improvements in a business culture that emphasizes quality assets,
managed in an efficient manner so as to minimize the cost of overhead. Combining
technology with quality personal service has also been a key component to the
Company's success.
The Company has a surplus of capital. The Board of Directors has
established a long term goal to create more efficient utilization of capital.
The primary emphasis is releveraging capital through aggressive yet careful
growth and enhancement of nontraditional banking services. This is expected to
be accomplished through competitive, cost effective products and services,
efficiently delivered without compromising the Bank's risk and underwriting
standards. It is expected that the Company will continue to pay dividends in a
ratio to earnings consistent with the 1995 through 1998 period, while
maintaining the Company's equilibrium between growth, capital needs and
earnings.
Results of Operations
Table 1 - Earnings Performance (in thousands, except per share data)
<TABLE>
Years ended December 31
----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income.................................... $ 1,563 $ 2,660 $ 2,132
Basic earnings per share.................... 1.83 3.13 2.51
Diluted earnings per share.................. 1.83 3.12 2.51
Earnings ratios:
Return on average assets.................... .70% 1.21% 1.00%
Return on average shareholders' equity and
net ESOP obligation..................... 6.65 12.45 10.99
Return on average shareholders' equity...... 8.02 14.76 12.84
</TABLE>
-14-
<PAGE>
Net Interest Income
The following table sets forth the years ended December 31, 1999, 1998 and
1997, the average balances of major categories of interest-earning assets and
interest-bearing liabilities, interest income earned and interest expense paid
during such periods and the related weighted average rates of the Company.
Table 2 - Analysis of Net Interest Income
<TABLE>
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Average Interest Average Interest Yield/ Average Interest Yield/
Outstanding Earned/ Yield/ Outstanding Earned/ Rate Outstanding Earned/ Rate
Balance Paid Rate Balance Paid Balance Paid
------- ---- ---- ------- ---- ---- ------- ---- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $ 171,276 $ 16,025 9.36% $ 163,916 $ 15,292 9.33% $ 158,603 $ 14,539 9.17%
Securities available for sale (2) 28,456 1,555 5.46 28,894 1,594 5.52 31,177 1,889 6.06
Federal funds sold 2,319 118 5.09 5,205 277 5.32 4,469 238 5.33
Federal Home Loan Bank Stock 2,504 200 7.99 2,504 200 7.99 2,411 194 8.05
Interest-bearing balances with
financial institutions 517 25 4.84 3,027 154 5.09 1,161 69 5.94
--------- -------- --------- ------- --------- -------
Total interest-earning assets 205,072 17,923 8.74 203,546 17,517 8.61 197,821 16,929 8.56
--------- -------- --------- ------- --------- -------
Noninterest-earning assets:
Cash and due from financial
institutions 7,807 6,000 5,784
Premises and equipment, net 6,556 6,533 6,111
Other assets 3,893 3,403 3,334
--------- --------- ---------
Total assets $ 223,328 $ 219,482 $ 213,050
========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 48,636 $ 1,337 2.75% $ 45,655 $ 1,301 2.85% $ 42,423 $ 1,286 3.03%
Savings deposits 24,293 379 1.56 23,730 468 1.97 24,393 483 1.98
Time deposits 79,088 3,977 5.03 80,794 4,492 5.56 80,504 4,582 5.69
Repurchase agreements and other
borrowings 3,942 155 3.93 3,335 143 4.29 2,177 109 5.01
Advances from FHLB 7,812 464 5.94 13,194 801 6.07 18,975 1,126 5.93
--------- -------- --------- ------- --------- -------
Total interest-bearing
liabilities 163,771 6,312 3.85 166,708 7,205 4.32 168,472 7,586 4.50
--------- -------- --------- ------- --------- -------
Noninterest-bearing liabilities:
Demand deposits 34,634 29,907 24,333
Other liabilities 1,430 1,527 837
--------- --------- ---------
Total liabilities 199,835 198,142 193,642
Common stock subject to
repurchase obligation in ESOP 4,012 3,317 2,806
Shareholders' equity 19,481 18,023 16,602
========= --------- ---------
Total liabilities and
shareholders' equity $ 223,328 $ 219,482 $ 213,050
========= ========= =========
Net interest income, interest rate
spread $ 11,611 4.89% $ 10,312 4.29% $ 9,343 4.06%
======== ===== ======== ===== ======= =====
Net interest margin (net interest
income as a percent of average
interest-earning assets) 5.66% 5.07% 4.72%
===== ===== =====
Average interest-earning assets to
average interest-bearing liabilities 125.22% 122.10% 117.42%
======= ======= =======
</TABLE>
(1) For purposes of these computations, nonaccrual loans are included in
the average loan balances outstanding and loan fees are included in
interest on loans available. The inclusion of nonaccrual loans and
fees does not have a material effect on either the average balance or
the average yield
(2) Interest income on tax-exempt securities has not been adjusted to a
taxable equivalent basis.
-15-
<PAGE>
Net interest income is the principal source of income for the Bank. Net
interest income increased to $11,611,000 or by 12.6% in 1999. In the prior year
net interest income increased by 10.8% to $10,312,000 million in 1998 from
$9,343,000 million in 1997.
Net interest income is the difference between interest earned on loans,
securities, and other earning assets and interest paid on deposits and borrowed
funds. Table 3 analyzes the reasons for the increases and decreases in interest
income and expense. The change in interest due to changes in both balance and
rate has been allocated to change due to balance and change due to rate in
proportion to the relationship of the absolute dollar amounts of change in each.
Table 3 - Change in Net Interest Income (in thousands)
<TABLE>
1999 Compared to 1998 1998 Compared to 1997
--------------------- ---------------------
Amount of Amount of
--------- ---------
Increase/(Decrease) Increase/(Decrease)
------------------- -------------------
Due to Due to Due to Due to
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans........................ $ 688 $ 45 $ 733 $ 493 $ 260 $ 753
Securities available for sale (24) (15) (39) (133) (162) (295)
Federal funds sold........... (147) (12) (159) 39 - 39
Federal Home Loan Bank - - -
Stock...................... 7 (1) 6
Interest-bearing balances
With financial institutions (122) (7) (129) 96 (11) 85
------- ------ ------- -------- ------ ------
Total interest income...... 395 11 406 502 86 588
------- ------ ------- -------- ------ ------
Interest Expense
Interest-bearing deposits:
Demand..................... 83 (47) 36 95 (80) 15
Savings.................... 11 (100) (89) (13) (2) (15)
Time....................... (93) (422) (515) 16 (106) (90)
Repurchase agreements and
other borrowings........... 25 (13) 12 51 (17) 34
Advances from FHLB........... (320) (17) (337) (350) 25 (325)
------- ------ ------- -------- ------ ------
Total interest expense (294) (599) (893) (201) (180) (381)
------- ------ ------- -------- ------ ------
Net interest income $ 689 $ 610 $ 1,299 $ 703 $ 266 $ 969
======= ====== ======= ======== ====== ======
</TABLE>
The Company's commitment to reinvesting in its communities is evident in
its ratios of loans to assets and loans to deposits, which ratios are generally
greater than the average of the comparable ratios of the Company's peers. This
in turn translates into above peer net interest margin. (Based on FFIEC uniform
bank performance report.)
Net interest income as a percent of total interest income was 64.8%, 58.9%,
and 55.2% for 1999, 1998, and 1997 respectively. The net interest margin was
5.66, 5.07, and 4.72% for the same periods.
Interest and fees from loans represented 89.4%, 87.3%, and 85.9% of total
interest income for 1999, 1998, and 1997 respectively. Net interest income is
strongly influenced by the results of the Bank's lending activities.
Total interest expense decreased 16.8% from 1997 to 1999. Cost of funds are
influenced by the banks ability to provide a superior quality of service, as
customers factor the Bank's service quality into their decision on acceptable
deposit rates, as well as economic conditions and reciprocal activities of the
Federal Reserve. The Bank's asset/liability
-16-
<PAGE>
committee seeks to manage sources and uses of funds, and to monitor the gap in
maturities of these funds to maintain a steady net interest margin in varying
market conditions.
Table 4 - Composition of Average Earning Assets and Interest-Bearing Liabilities
<TABLE>
Years ended December 31
-------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
As a percent of average interest-earning assets
Loans...................................... 83.5% 80.5% 80.2%
Other earning assets....................... 16.5% 19.5% 19.8%
------ ------ ------
Average interest-earning assets......... 100.0% 100.0% 100.0%
Savings and NOW accounts................... 44.5% 41.6% 39.7%
Time deposits.............................. 48.3% 48.5% 47.8%
Borrowed funds............................. 7.2% 9.9% 12.5%
------ ------ ------
Average interest-bearing liabilities.... 100.0% 100.0% 100.0%
Interest-earning asset ratio................. 91.8% 92.7% 92.9%
</TABLE>
Noninterest Income
The major component of the Bank's noninterest income is service charges and
fees on deposits and gains from sale of Fannie Mae mortgage loans.
Deposit account service charges increased $163,000 or 26.4% from 1998 to
1999 and $35,000 or 6.1% from 1997 to 1998. The substantial increase reflects
the Banks enhanced ability to provide an improved quality of service and
appropriately charge for these services.
Table 5 - Noninterest Income (in thousands)
<TABLE>
Years ended December 31
-----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service charges and fees on deposit $ 779 $ 616 $ 581
accounts ...............................
Net gains on loan sales 1,032 1,994 790
Loan servicing fees, net of amortization 113 (145) 162
Other..................................... 313 385 236
--------- -------- --------
Total noninterest income............. $ 2,237 $ 2,850 $ 1,769
========= ======== ========
</TABLE>
The following table sets forth certain information with respect to the
origination and sale of real estate mortgage loans, including the net gains
recognized on the sale of such loans.
-17-
<PAGE>
Table 6 - Net Gains on the Sale of Real Estate Mortgage Loans (in thousands)
<TABLE>
Years ended December 31
--------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Real estate mortgage loans originated for sale............. $ 47,554 $ 102,722 $ 36,344
Real estate mortgage loan sales............................ 49,492 103,890 36,499
Net gains on the sale of real estate mortgage loans........ 1,032 1,994 790
Net gains as a percent of real estate mortgage loan sales..
2.09% 1.92% 2.16%
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $1.0 million,
$2.0 million and $.8 million in 1999, 1998 and 1997. The increase from 1997 to
1998 of $1.2 million was a result of a decline in the national interest rate
market creating an economic opportunity for mortgage loan consumers to reduce
personal costs by refinancing. The decrease from 1998 to 1999 of $1.0 million
was the result of a slowdown in refinance activity due to increasing national
interest rates leaving the primary profitability of the core real estate
mortgage business.
The Bank sells the majority of its fixed-rate mortgage obligations. The
majority of these loans are sold without recourse. The Bank retains servicing
rights on real estate mortgage loans sold.
Noninterest Expense
Table 7 - Noninterest Expense (in thousands)
<TABLE>
Years ended December 31
------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits............ $ 5,035 $ 5,091 $ 4,141
Occupancy and equipment................... 1,678 1,586 1,519
Insurance................................. 64 118 105
Printing, postage and supplies............ 328 333 290
Professional and outside services......... 208 362 300
State and other taxes..................... 169 172 154
Mobile banking costs...................... 236 225 240
Receivable financing services............. 282 187 119
Other..................................... 994 839 764
-------- -------- --------
Total noninterest expense............... $ 8,994 $ 8,913 $ 7,632
======== ======== ========
</TABLE>
Total operating expenses grew 16.7% from 1997 to 1998. The majority of the
increase was in employee salaries and benefits, primarily the result of the
addition of professional staff. The Bank has made a conscious effort to add to
staff to improve and expand its loan portfolios and technology utilization. This
is a long term initiative that is expected to contribute to future growth and
earnings. Total operating expenses grew a modest .9% from 1998 to 1999.
-18-
<PAGE>
The Loan Portfolio
The loan personnel of the Bank are committed to making quality loans that
produce a competitive rate of return for the Bank and also serve the community
by providing funds for home purchases, business purposes, and consumer needs. It
is management's intent to maintain a loan to deposit ratio near 100%, enabling
the Bank to sustain local economic development and earn the higher interest
rates available on loans.
The majority of loans are made to businesses in the form of commercial
loans and real estate mortgages. The Bank's consumer mortgage activity is
substantial; however, only a small portion of these loans are retained for the
Bank's own portfolio. The Bank does retain the servicing rights on substantially
all such sold loans. The Bank has built a $181.1 million servicing portfolio
primarily with the Federal National Mortgage Association ("FNMA"). At December
31, 1999 and 1998, the Bank was servicing loans of $181.1 million and $140.8
million, respectively, all of which relate to residential mortgages originated
by the Bank. The Bank originated $47,600,000 and $102,900,000 in mortgage loans
in 1999 and 1998, respectively, and sold to FNMA $49,492,000 in 1999 and
$103,890,000 in 1998.
The loan portfolio mix consists of 13.7% residential real estate, 17.7%
consumer installment, 52.5% commercial, and 16.0% agricultural.
Nearly 100% of loans are placed within Lenawee County and the closely
surrounding community areas in which the Bank designates as its market for
purposes of regulatory Community Reinvestment Act ("CRA") compliance.
Table 8 - Loan Portfolio Composition (in thousands)
<TABLE>
Balance as of December 31
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Agricultural....... $135,325 68.6 $112,451 71.0 $106,494 65.3 $ 97,869 64.8 $77,400 60.6
Real Estate -
Construction....... 9,934 5.0 7,462 4.7 4,862 3.0 3,814 2.5 2,597 2.0
Real Estate -
Mortgage........... 17,203 8.7 9,548 6.0 22,973 14.1 23,778 15.8 23,915 18.7
Consumer........... 34,846 17.7 29,026 18.3 28,710 17.6 25,560 16.9 23,886 18.7
--------- -------- -------- -------- --------
Total loans...... $197,308 100.0% $158,487 100.0% $163,039 100.0% $151,021 100.0% $127,798 100.0%
Less:
Deferred Loan
Fees/Costs......... (33) 27 113 150
Allowance for
Loan Losses........ (4,646) (2,182) (1,964) (1,761) (1,651)
--------- -------- -------- -------- --------
Total Loans
Receivable, Net.... $192,721 $156,272 $161,102 $149,373 $126,297
======== ======== ======== ======== ========
</TABLE>
-19-
<PAGE>
The Bank has a written lending policy to reduce credit risk, enhance
earnings and guide the lending officers in making credit decisions. There are
multiple levels in the loan authorization procedure depending on the dollar
amount of the loan request as follows:
$ 0 - 250,000 - One lender or committee of lenders
according to assigned authority.
250,001 - 500,000 - Officers' Loan Committee.
500,001 - 1,000,000 - Loan Committee of the Board of Directors.
1,000,001 - or more - Board of Directors, acting upon the
recommendation of the Director's Loan
Committee.
The Board of Directors has appointed a Loan Administrator who is
responsible for the supervision of the lending activities of the Bank. The Board
has also appointed a loan review officer who, combined with the utilization of
external loan specialist review, monitors the credit quality of the loan
portfolio independent of the loan approval process. Periodic reviews are
submitted by the loan review officers to the Chief Lending Officer and these
reviews are submitted to the Board of Directors on periodic basis.
The extent of loan quality is demonstrated by the historic low ratios of
nonperforming loans and charge offs as a percentage of the loan portfolio prior
to year end 1999. As referenced in more detail in Table 10 below, the Bank's
ratio of nonperforming loans to total loans at December 31, 1999 was 1.73%. This
increase over historic ratios was the result of one participation loan described
in the "Summary" at the beginning of this discussion. In 1999, the Bank had net
loans charged-off of $96,000, while net charge-offs were $21,000 and $42,000 in
1998 and 1997, respectively.
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued, accruing loans 90 days or more past due in
payments, collateral for loans which have been in-substance foreclosed, and
other real estate which has been acquired primarily through foreclosure and is
awaiting disposition. Loans are generally placed on a nonaccrual basis when
principal or interest is past due 90 days or more and when, in the opinion of
management, full collection of principal and interest is unlikely.
Table 9 - Maturities and Sensitivities of Loans to Changes in Interest Rates.
The following table shows the amount of total loans outstanding as of
December 31, 1999 which, based on remaining scheduled repayments of principal,
are due in the periods indicated.
<TABLE>
Maturing
(in thousands of dollars)
After one but
Within one Year within five years After five years Total
<S> <C> <C> <C> <C>
Real estate-mortgage.............. $ 3,779 $ 9,297 $ 4,127 $ 17,203
Real estate-construction.......... - 263 9,671 9,934
Consumer.......................... 8,088 17,703 9,055 34,846
Commercial and agricultural....... 54,738 64,009 16,578 135,325
----------- ------------ ---------- ----------
Totals...................... $ 66,605 $ 91,272 $ 39,431 197,308
=========== ============ ==========
Allowance for loan losses......... (4,646)
Deferred loan fees................ 59
----------
Total loans receivable, net....... $ 192,721
==========
</TABLE>
-20-
<PAGE>
Below is a schedule for the amounts maturing or repricing which are
classified according to their sensitivity to changes in interest rates.
<TABLE>
Interest Sensitivity
(in thousands of dollars)
Fixed Rate Variable Rate Total
---------- ------------- -----
<S> <C> <C> <C>
Due within 3 months...................... $ 4,368 $ 34,114 $ 38,482
Due after 3 months within 1 year......... 16,716 11,407 28,123
Due after one but within five years...... 52,077 39,195 91,272
Due after five years..................... 39,031 400 39,431
------------ ------------ ------------
Total.................................... $ 112,192 $ 85,116 197,308
============ ============
Allowance for loan losses................ (4,646)
Deferred loan fees....................... 59
------------
Total loans receivable, net.............. $ 192,721
============
</TABLE>
Table 10 - Nonperforming Assets (in thousands)
<TABLE>
December 31
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C>
Nonaccrual loans.............................................. $ 3071 $ 121 $ 78 $ 24 $ 95
90 days or more past due & still accruing..................... 275 275 367 369 108
--- --- --- --- ---
Total nonperforming loans................................... 3346 396 445 393 203
Other real estate............................................. 255 341 232 415 275
----- ------ ------ ------- ------
Total nonperforming assets.................................. $ 3601 $ 737 $ 677 $ 808 $ 478
====== ====== ====== ======= ======
Nonperforming loans as a percent of total loans............... 1.73% .25% .27% .26% .16%
Nonperforming assets as a percent of total loans.............. 1.87% .47% .42% .54% .37%
Nonperforming loans as a percent of the loan loss reserve .... 77.5% 18.15% 22.66% 22.32% 12.30%
</TABLE>
While the balance of nonperforming loans is 77.5% of the Bank's loan loss
reserve as of December 31, 1999, management is confident that substantial equity
exists in the majority of these credits. The loan loss reserve then, is adequate
for these loans as well as the remainder of the lending portfolio.
The allowance for loan losses is analyzed periodically by management. In so
doing, management assigns a portion of the allowance to specific credits that
have been identified as problem loans and reviews past loss experience. The
local economy and particular concentrations are considered, as well as a number
of other factors.
-21-
<PAGE>
Table 11 - Loan Loss Experience (in thousands)
<TABLE>
Year ended December 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans:
<S> <C> <C> <C> <C> <C>
Average daily balance of loans for the year, net..... $171,276 $163,916 $158,603 $141,422 $125,444
Amount of loans outstanding at end of period, net.... $192,721 $156,272 $161,102 $149,373 $126,297
Allowance for loan losses:
Balance at beginning of year......................... $ 2,182 $ 1,964 $ 1,761 $ 1,651 $ 1,579
Loans charged off:
Real estate-mortgage............................... 34 13 - - -
Real estate-construction........................... - - - - -
Commercial and agricultural........................ 28 14 15 8 -
Consumer........................................... 96 26 61 166 35
-------- -------- -------- -------- --------
Total charge-offs.............................. 158 53 76 174 35
Recoveries of loans previously charged off
Real estate........................................ 15 - - - 2
Real estate construction........................... - - - - -
Commercial and agricultural........................ 6 10 14 14 54
Consumer........................................... 41 22 20 17 16
-------- -------- -------- -------- --------
Total recoveries............................... 62 32 34 31 72
-------- -------- -------- -------- --------
Net loans charged off (recoveries)................... 96 21 42 143 (37)
Additions to allowance charged to operations......... 2,560 239 245 253 35
-------- -------- -------- -------- --------
Balance at end of year......................... $ 4,646 $ 2,182 $ 1,964 $ 1,761 $ 1,651
======== ======== ======== ======== ========
Ratios:
Net loans charged off to avg net loans outstanding... .06% .01% .03% .10% (.03)%
Allowance for loan losses to net loans outstanding... 2.41% 1.40% 1.22% 1.18% 1.31 %
</TABLE>
Table 12 - Allocation of the Allowance for Loan Losses (in thousands)
<TABLE>
Year ended December 31
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and agricultural................. $ 4,010 $ 1,680 $ 1,556 $ 1,564 $ 1,274
Real estate-mortgages....................... 33 18 2 1 1
Real estate-construction.................... 99 74 49 38 26
Consumer.................................... 135 130 27 2 81
Unallocated................................. 369 280 330 156 269
--------- --------- --------- --------- ---------
Total..................................... $ 4,646 $ 2,182 $ 1,964 $ 1,761 $ 1,651
========= ========= ========= ========= =========
</TABLE>
The portion of unallocated allowance for loan losses is representative of
the economic risk primarily in the commercial and agricultural loan portfolios.
The Securities Portfolio
Securities are purchased and classified as "available-for-sale." The Bank
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on
January 1, 1994. These securities may be sold to meet the Bank's liquidity needs
or to improve the quality of the investment portfolio.
Deposits
Deposits are gathered from the communities the Bank serves. Table 13
indicates a relatively stable base of deposits spread over the Bank's product
lines. Average total deposits grew 4.91% from 1997 to 1998 and grew 3.65% from
1998 to 1999. The increase from 1998 to 1999 resulted primarily from continued
success of a mobile courier operation.
The Bank is continually enhancing its deposit products and delivery system.
The Bank has a five year history of operating Internet banking successfully. The
Bank operates a full service mobile courier service with seven vehicles
-22-
<PAGE>
operating seven days per week, fourteen hours per day. The Bank also operates 11
automated teller and cash machines, 7 of which are off-site.
Table 13 - Average Daily Deposits (in thousands)
<TABLE>
Average for the Year
------------------------------------------------------------------------------------
1999 1998 1997
Amount % of Assets Amount % of Assets Amount % of Assets
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.......... $ 34,634 15.5% $ 29,907 13.7% $ 24,333 11.4%
MMDA/Savings and NOW accounts 72,929 32.7% 69,385 31.6% 66,816 31.4%
Time................................ 79,088 35.4% 80,794 36.8% 80,504 37.8%
--------- ----- --------- ----- -------- -----
Total Deposits................... $186,651 83.6% $180,086 82.1% $171,653 80.6%
======== ===== ========= ===== ======== =====
</TABLE>
The following table sets forth the average deposit balances and the average
rates paid thereon:
<TABLE>
Average for the Year
-----------------------------------------------------------------------------------
1999 1998 1997
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand............ $ 34,634 -% $ 29,907 -% $ 24,333 -%
MMDA/Savings and NOW accounts 72,929 2.35% 69,385 2.55% 66,816 2.65%
Time.................................. 79,080 5.03% 80,794 5.56% 80,504 5.69%
--------- ----- -------- ----- --------- -----
Total Deposits..................... $ 186,651 3.05% $180,086 3.48% $171,653 3.70%
========= ===== ======== ===== ========= =====
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1999:
<TABLE>
Amount
------
<S> <C>
Three months or less........................ $ 13,893,000
Over 3 months through 6 months.............. 6,225,000
Over 6 months through 1 year................ 4,012,000
Over 1 year................................. 5,929,000
--------------
$ 30,059,000
</TABLE>
The Bank operates in a competitive environment. Management monitors rates
at other financial institutions in the area to ascertain that its rates are
competitive with the market. Management also attempts to offer a wide variety of
products to meet the needs of its customers. The Bank offers business and
consumer checking accounts, regular and money market savings accounts, and
certificates having many options in their terms.
Capital
A financial institution's capital ratio is looked upon by the regulators
and the public as an indication of its soundness. Table 14 summarizes the
Company's regulatory capital and its capital ratios. Also shown are the capital
requirements established by the regulatory agencies for adequately and
well-capitalized institutions. The Bank's strong capital ratio puts it in the
best classification on which the FDIC bases its assessment charges. As capital
ratios continue to increase, management is challenged to find ways to
effectively administer the Bank's resources.
In 1999, the Company paid dividends totaling $635,000, approximately 41% of
earnings. In 1998, dividends of $569,000 were paid, 21% of earnings, while the
previous year $510,000 was paid out equaling 24% of earnings.
-23-
<PAGE>
Table 14- Capital Resources (in thousands)
<TABLE>
Regulatory Requirements December 31
Adequately Well ----------------------------------------------
Capitalized Capitalized 1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C>
Tier 1 capital.................. $ 22,441 $ 22,122 $ 19,939
Tier 2 allowable capital........ 2,535 2,182 1,964
--------- --------- ---------
Total qualifying capital...... $ 24,976 $ 24,304 $ 21,903
========= ========= =========
Ratio of equity to total assets
Tier 1 leverage ratio........... 4% 5% 9.60% 9.90% 9.30%
Tier 1 risk-based capital....... 4% 6% 11.10% 12.60% 12.00%
Total risk-based capital........ 8% 10% 12.30% 13.80% 13.10%
</TABLE>
Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure is interest rate risk and
liquidity risk. All of the Company's transactions are denominated in U.S.
dollars with no specific foreign exchange exposure. The Company has a limited
exposure to commodity prices related to agricultural loans. Any impacts that
changes in foreign exchange rate and commodity prices would have on interest
rates are assumed to be insignificant.
Interest rate risk (IRR) is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and stockholder value; however,
excessive levels of IRR could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
IRR at prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Company to assess the existing
and potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation, adopted a Joint
Agency Policy Statement on IRR effective June 26, 1996. The policy statement
provides guidance to examiners and bankers on sound practices for managing IRR,
which will form the basis for ongoing evaluation of the adequacy of IRR
management at supervised institutions. The policy statement also outlines
fundamental elements of sound management that have been identified in prior
Federal Reserve guidance and discusses the importance of these elements in the
context of managing IRR. Specifically, the guidance emphasizes the need for
active board of director and senior management oversight and a comprehensive
risk management process that effectively identifies, measures and controls IRR.
Financial institutions derive their income primarily from the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it cannot
adapt to interest rate changes. For example, assume that an institution's assets
carry intermediate or long tern fixed rates and that those assets are funded
with short-term liabilities. If market interest rates rise by the time the
short-term liabilities must be refinanced, the increase in the institution's
interest expense on its liabilities may not be sufficiently offset if assets
continue to earn at the long-term fixed rates. Accordingly, an institution's
profits could decrease on existing assets because the institution will either
have lower net interest income or possibly, net interest expense. Similar risks
exis when assets are subject to contractual interest rate ceilings, or rate
sensitive assets are funded by longer-term, fixed-rate liabilities in a
decreasing rate environment.
-24-
<PAGE>
Various techniques might be used by an institution to minimize IRR. One
approach used by the Company is to periodically analyze its assets and
liabilities and make future financing and investment decisions based on payment
streams, interest rates, contractual maturities, and estimated sensitivity to
actual or potential changes in market interest rates. Such activities fall under
the broad definition of asset/liability management.
Several ways an institution can manage IRR include: selling existing assets
or repaying certain liabilities; matching repricing periods for new assets and
liabilities, for example, by shortening terms of new loans or investments and
hedging existing assets, liabilities, or anticipated transactions. The Company
has not purchased derivative financial instruments in the past and does not
presently intend to purchase such instruments.
Financial institutions are also subject to repayment risk in falling rate
environments. For example, mortgage loans and other financial assets may be
prepaid by a debtor so that the debtor may refinance their obligations at new,
lower rates. Prepayments of assets carrying higher rates reduce the Company's
interest income and overall asset yields.
Certain portions of an institution's liabilities may be short-term or due
on demand, while most of its assets may be invested in long-term loans or
investments. Accordingly, the Company seeks to have in place sources of cash to
meet short-term demands. These funds can be obtained by increasing deposits,
borrowing or selling assets. Also, Federal Home Loan Bank advances and
short-term borrowings provide additional sources of liquidity for the Company.
Table 15 provides information about the Company's financial instruments
that are sensitive to changes in interest rates as of December 31, 1999 and
1998. The Company had no derivative financial instruments, or trading portfolio,
as of that date. The expected maturity date values for loans receivable,
mortgage-backed securities and investments securities were calculated without
adjusting the instrument's contractual maturity date for expectations of
prepayments. Expected maturity date values of interest-bearing core deposits
were not based upon estimates of the period over which the deposits would be
outstanding, but rather the opportunity for repricing.
-25-
<PAGE>
Table 15 - Quantitative and Qualitative Disclosures About Market Risk
(in thousands)
<TABLE>
1 9 9 9
Principal/Notional Amount Maturing in:
--------------------------------------
Fair
Value
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
---- ---- ---- ---- ---- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $ 21,084 $ 10,346 $ 8,443 $ 11,677 $ 21,611 $ 39,031 $ 112,192 $ 111,815
Average interest rate 8.30% 8.95% 9.10% 8.86% 8.45% 8.40% 8.54%
Variable interest rate loans 45,520 12,279 17,941 3,074 5,900 402 85,116 85,116
Average interest rate 9.04% 8.57% 8.50% 8.54% 8.58% 8.10% 8.80%
Fixed interest rate securities 525 3,628 5,404 - - 6,515 16,072 15,660
Average interest rate 5.79% 5.86% 6.20% - - 5.72% 5.92%
Tax-exempt fixed interest rate
securities 2,192 800 628 1,299 376 2,164 7,459 7,364
Average interest rate 3.70% 4.01% 4.88% 4.03% 3.39% 4.65% 4.15%
Federal funds sold 2,200 - - - - - 2,200 2,200
Average interest rate 1.75% - - - - - 1.75%
FHLB stock 2,504 - - - - - 2,504 2,504
Average interest rate 8.00% - - - - - 8.00%
Federal reserve stock 360 - - - - - 360 360
Average interest rate 6.00% - - - - - 6.00%
Rate sensitive liabilities:
Interest bearing demand and demand 89,516 - - - - - 89,516 89,516
Average interest rate .48% - - - - - .48%
Savings and money market 23,029 - - - - - 23,029 23,029
Average interest rate 1.50% - - - - - 1.50%
Time deposits 32,328 19,353 10,617 15,324 9,039 - 86,661 87,189
Average interest rate 5.22% 5.06% 5.75% 5.84% 5.76% - 5.42%
Fixed interest rate FHLB advances 8,322 348 376 407 440 4,281 14,174 14,181
Average interest rate 5.96% 6.04% 6.04% 6.04% 6.04% 6.04% 5.99%
Variable interest rate securities
sold under agreements to repurchase 1,423 - - - - - 1,423 1,423
Average interest rate 3.99% - - - - - 3.99%
Fixed interest rate securities
sold under agreements to repurchase 579 - - - - - 579 579
Average interest rate 6.13% - - - - - 6.13%
1 9 9 8
Principal/Notional Amount Maturing in:
--------------------------------------
Fair
Value
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
Rate sensitive assets:
Fixed interest rate loans $ 10,650 $ 6,775 $ 13,241 $ 10,908 $ 11,435 $ 36,602 $ 89,611 $89,387
Average interest rate 8.80% 9.18% 9.12% 8.92% 8.81% 7.76% 8.47%
Variable interest rate loans 37,464 11,726 13,641 2,531 1,955 1,559 68,876 68,876
Average interest rate 8.53% 8.99% 8.67% 9.30% 8.53% 8.37% 8.66%
Fixed interest rate securities 5,267 3,399 2,567 4,916 - 5,529 21,678 21,812
Average interest rate 5.90% 6.85% 5.93% 5.13% - 5.68% 5.82%
Tax-exempt fixed interest rate
securities 1,430 606 801 884 1,298 2,384 7,403 7,606
Average interest rate 3.97% 4.18% 4.49% 4.70% 4.57% 5.17% 4.62%
Federal funds sold 5,450 - - - - - 5,450 5,450
Average interest rate 4.75% - - - - - 4.75%
FHLB stock 2,504 - - - - - 2,504 2,504
Average interest rate 8.00% - - - - - 8.00%
Federal reserve stock 360 - - - - - 360 360
Average interest rate 6.00% - - - - - 6.00%
Rate sensitive liabilities:
Interest bearing demand and demand 83,806 - - - - - 83,806 83,806
Average interest rate .42% - - - - - .42%
Savings and money market 24,379 - - - - - 24,379 24,379
Average interest rate 1.97% - - - - - 1.97%
Time deposits 24,099 22,171 16,627 5,552 9,257 - 77,706 78,265
Average interest rate 5.12% 5.20% 5.11% 5.37% 5.59% - 5.21%
Fixed interest rate FHLB advances 297 322 348 376 407 4,722 6,472 6,580
Average interest rate 6.40% 6.04% 6.04% 6.04% 6.04% 6.04% 6.06%
Variable interest rate securities
sold under agreements to repurchase 3,603 - - - - - 3,603 3,603
Average interest rate 3.37% - - - - - 3.37%
Fixed interest rate securities sold
under agreements to repurchase 551 - - - - - 551 551
Average interest rate 4.75% - - - - - 4.75%
</TABLE>
-26-
<PAGE>
Forward Looking Statements
This Registration Statement contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on the operations and future prospects of the Company and the Bank
include, but are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Impact of Inflation
The majority of assets and liabilities of financial institutions are
monetary in nature. Generally, changes in interest rates have a more significant
impact on earnings of the Bank than inflation. Although influenced by inflation,
changes in rates do not necessarily move in either the same magnitude or
direction as changes in the price of goods and services. Inflation does impact
the growth of total assets, creating a need to increase equity capital at a
higher rate to maintain an adequate equity to assets ratio, which in turn
reduces the amount of earnings available for cash dividends.
Item 3. Properties.
BANK PROPERTIES
The Bank operates from 9 facilities, located in 6 communities primarily in
Lenawee County, with a small presence in Hillsdale County and Washtenaw County,
Michigan. The Bank's main office is located at 135 East Maumee Street, Adrian,
Michigan. This facility is a 3 story 40,768 square foot building constructed in
1906. The Bank's branch offices in Adrian, Hudson, Morenci, Saline, Tecumseh and
Waldron, range in size from 1200 square feet to 4000 square feet. All of the
properties are owned by the Bank with the exception of one leased office in
Saline. The Bank also operates a full service 48 foot long mobile facility,
which is used to bring the Bank services to retirement home residents and, from
time to time, to test potential future permanent branch office locations.
-27-
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
OWNERSHIP OF COMPANY STOCK BY MANAGEMENT AND OTHERS
The following table sets forth information as of the date of this
Registration Statement with respect to the beneficial ownership of the Company's
Common Stock by (i) each person known by the Company to be the beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director of the
Company, (iii) each named executive officer, and (iv) all directors and
executive officers as a group.
<TABLE>
Number of Shares(1)
Beneficially Owned Percent of Class(2)
<S> <C> <C>
Douglas L. Kapnick (Director) 84,912(3) 9.95%
Allan F. Brittain (Director & Executive Officer) 36,445(4) 4.26%
Fred R. Duncan (Director) 19,796 2.3%
Edward J. Engle, Jr. (Director) 2,008 *
William R. Gentner (Director) 3,436 *
J. Paul Rupert (Director) 2,544 *
Emory M. Schmidt (Director) 1,612 *
J. David Stutzman (Director) 3,276 *
Patrick K. Gill (Director & Executive Officer) 8,046 *
Pamela S. Fisher (Executive Officer) 3,809 *
Loren V. Happel (Executive Officer) 486 *
Stephen M. Mazurek (Executive Officer) 2,896 *
BONAT (ESOP/401K Trust) 103,851 12.2%
All Directors and Executive Officers as a group
(12 persons) 169,118 19.57%
</TABLE>
* Less than 1%.
(1) Includes shares subject to stock options which are exercisable within 60
days.
(2) Calculated based on shares outstanding plus shares subject to stock options
held by the director or officer which are exercisable within 60 days.
(3) Includes 4,400 shares owned by Mr. Kapnick's wife's trust.
(4) Includes 13,800 shares owned by Mr. Brittain's wife's trust. Does not
include 1,100 shares held by a trust of which Mr. Brittain serves as a
trustee but of which the beneficiary is an unrelated third party.
-28-
<PAGE>
Item 5. Directors and Executive Officers.
MANAGEMENT
Directors and Executive Officers
The Company's Articles of Incorporation provide for the Board of Directors
to hold office for staggered three year terms. The terms of each director will
expire at the annual meeting of shareholders as noted in the following directors
and executive officers information Table:
<TABLE>
Name Age Position Term Expiration
- ---- --- -------- ---------------
<S> <C> <C> <C>
Allan F. Brittain 62 Director & Chairman 2002
Fred R. Duncan 58 Director 2001
Edward J. Engle, Jr. 57 Director 2002
William R. Gentner 63 Director 2002
Patrick K. Gill 48 Director, President and Chief Executive Officer 2000
Douglas L. Kapnick 56 Director 2002
J. Paul Rupert 57 Director 2001
Emory M. Schmidt 56 Director 2001
J. David Stutzman 53 Director 2000
Pamela S. Fisher 50 Corporate Secretary, First Vice President N/A
of Administrative Services
Loren V. Happel 43 Treasurer, First Vice President N/A
and Chief Financial Officer
Stephen M. Mazurek 68 Senior Vice President N/A
</TABLE>
Profiles of Directors
Allan F. Brittain (Director since 1976)
Allan Brittain, 62, is Chairman of the Board of the Bank of Lenawee. Mr.
Brittain serves on the Executive Committee, Loan Committee, Asset/Liability
Committee, Pension, ESOP/401(k) Administrative Committee and the Compensation
Committee. He is also a member of the Board of Trustees for Siena Heights
University, a Board member of the Adrian Public Schools Educational Foundation,
a Board member and Trustee of the Charlotte Stephenson Home and also a Board
member of the Educational Advisory Group. Mr. Brittain began his career at the
Bank in March of 1963. He resides in Adrian, Michigan.
Fred R. Duncan (Director since 1984)
Fred Duncan, 58, is the former owner of the Metamora Elevator (grain elevator
business). He serves on the Loan Committee, the Asset/Liability Committee, and
the Audit, Loan Review and Compliance Committee. He is also a member of the
Fulton County Extension Office Advisory Board, Chairman of Administrative Board,
Metamora United Methodist Church, and a member of the Advisory Board for Owens
Community College. Mr. Duncan resides in Shelby, Michigan.
Edward J. Engle, Jr. (Director since 1986)
Edward Engle, 57, is President of Rima Manufacturing, a screw machine company in
Hudson, Michigan. He serves on the Loan Committee and is Chairman of the Audit,
Loan Review and Compliance Committee. Mr. Engle is a graduate of DePaul
University and Toledo University. Mr. Engle resides in Onsted, Michigan.
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<PAGE>
William R. Gentner (Director since 1997)
William Gentner, 63, is Owner and President of Gentner Inc. located in Saline,
Michigan, which he founded in Brooklyn, Michigan in 1957. Gentner Inc. is a
material supplier consisting of four transportation companies. It has 70
employees and nearly 50 Michigan Gravel Trains. Mr. Gentner serves on the
Asset/Liability Committee, and the Audit, Loan Review and Compliance Committee.
He is also the President of the Michigan Aggregate Carriers Trucking Association
and serves on the 911 Advisory Board for Lenawee County. Mr. Gentner resides in
Irish Hills, Michigan.
Patrick K. Gill (Director since 1993)
Patrick Gill, 48, is President and CEO of the Bank of Lenawee. Mr. Gill began
his career at the Bank of Lenawee in 1992. Mr. Gill serves on the Executive
Committee, the Pension, ESOP/401(k) Administrative Committee, the Compensation
Committee and is Chairman of the Loan Committee and the Asset/Liability
Committee. Mr. Gill is the Board President of the Lenawee United Way and
Volunteer Center. He also serves as a Board member of the Lenawee Chamber of
Commerce, a Board member of Catholic Social Services, a member of the Board of
Advisors at Adrian College and a Board member of the Saint Joseph Academy
Investment Advisory Board. Mr. Gill resides in Adrian, Michigan.
Douglas L. Kapnick (Director since 1982)
Douglas Kapnick, 56, is President of Kapnick and Company. Kapnick and Company is
a full service insurance broker with offices in Adrian and Southfield and 85
employees. Mr. Kapnick serves on the Loan Committee, the Compensation Committee
and is Chairman of the Executive Committee. He also serves on the Board of
Trustees for Siena Heights University, is a Director of the Emma Bixby Medical
Center Foundation, a Board member of the Greater Adrian Industrial Development
Corporation, and a Board member of th Adrian Symphony. He is also a recipient of
the Lenawee Maple Leaf Award. Mr. Kapnick resides in Adrian, Michigan.
J. Paul Rupert Ph.D. (Director since 1992)
Paul Rupert, 57, is President of Today's Office (retail office furniture) and
Office Mouse (retail electronics). He serves on the Asset/Liability Committee,
the Audit, Loan Review and Compliance Committee and is Chairman of the Pension,
ESOP/401(k) Administrative Committee and the Compensation Committee. Dr. Rupert
resides in Adrian, Michigan.
Emory M. Schmidt (Director since 1994)
Emory Schmidt, 56, is Vice President of Brazeway, Inc. Brazeway is a world wide
leader of extruded aluminum tubing and heat transfer components with facilities
in the U.S., Latin America, Europe and Asia. Mr. Schmidt serves on the Executive
Committee, the Asset/Liability Committee, the Audit, Loan Review and Compliance
Committee and the Compensation Committee. He also serves as a member of the
Adrian College Business Advisory Board, is the Vice President of the Adrian
Schools Education Foundation, and an Executive Committee Member of Lenawee
Health Systems. Mr. Schmidt resides in Adrian, Michigan.
J. David Stutzman (Director since 1993)
David Stutzman, 53, is a General Partner of Raymond & Stutzman Limited
Partnership which is a beef feeding and crop farming operation which operates in
Seneca, Michigan. Mr. Stutzman serves on the Executive Committee and the Loan
Committee. He also serves as a Board member of the Lenawee United Way, is an
Advisory Board member of the Producer's Livestock Association, is a past board
member of Morenci Area Schools and currently serves on various boards for the
First U.C.C. Church. Mr. Stutzman resides in Seneca, Michigan.
Director Compensation
Directors of the Company are not paid an annual retainer. Directors of the
Bank are paid an annual retainer fee of $600 ($5,400 to the Chairman).
Compensation is also paid for attendance at Company Board meetings ($150 each
meeting) and Bank Board meetings ($250 each meeting), and all committee meetings
($200 each meeting). Discretionary bonuses in the form of stock options were
paid as listed below for the years ended December 31, 1999, 1998 and 1997
respectively. During 1999, the Board of Directors of the Company and the Bank
held a total of 22 regular meetings. Various committees of the Boards held
meetings as needed. Each Director attended at least 75% of the total number of
meetings of the Board of Directors and meetings of committees on which they
served, except for Mr. Engle who attended 72%
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<PAGE>
Effective February 1, 1996, the Company adopted a Stock Option Plan for
directors and executive officers. The plan, unless extended or amended, will
terminate January 18, 2001. The plan provides for granting of options covering a
total of up to 52,800 shares of the Company's common stock. The plan provides
for the grant each year to each director not actively employed by the Company or
the Bank, as of the effective date of the plan, of options covering 660 shares
of common stock. The Chairma of the Bank and the President of the Bank and other
individuals are entitled to receive options covering a number of shares
determined by a committee of directors who are not employees of the Bank or the
Company. Options granted under the plan, vest at the rate of 20% at each
anniversary of the option grant date. Vesting is accelerated upon the optionee's
attainment of age 62, in the event of a change of control of the Company, the
death of the optionee or the optionee's total disability. The option price under
all options granted to date has been the most recent independent appraised price
for purposes of the Bank's Employee Stock Ownership Plan. The term of each
Option is established by the committee but may not exceed ten years from the
date of grant.
Stock Options granted to directors:
<TABLE>
1999 1998 1997
<S> <C> <C>
Each Outside Director: 660 @ $36 Each Outside Directors: 660 @ $25 Each Outside Directors: 600 @ $20.69
Chairman: 660 @ $36 Chairman: 660 @ $25 Chairman: None
CEO: 440 @ $36 CEO: 400 @ $25 CEO: 1000 @ $20.69
</TABLE>
(NOTE: All amounts shown have been adjusted for stock splits.)
The Audit Committee, comprised of five nonemployee directors met on three
occasions during 1999. Its primary duties and responsibilities include annually
recommending to the Board of Directors an independent public accounting firm to
be appointed auditors of the Company and the Bank, reviewing the scope and fees
for the audit, reviewing all the reports received from the independent certified
public accountants, and coordinating matters with the internal auditing
function.
Item 6. Executive Compensation.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Bank during the
last three years to its Chief Executive Officer and Chief Financial Officer.
There are no employees of the Company; all personnel are employed by the Bank.
No other executive officers of the Company or the Bank received annual
compensation in excess of $100,000 during this period.
<TABLE>
All Other
---------
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Patrick K. Gill, President/CEO 1999 $130,000 $48,950 $61,600 (1)
1998 130,000 15,900 42,900 (2)
1997 125,000 3,100
Loren V. Happel, CFO 1999 $ 80,400 $22,100
1998 80,400 9,900
1997 78,000 2,100
</TABLE>
(1) Includes the value of a 500 share grant of Company common stock, amounts
reimbursed for payment of taxes and automobile lease payments.
(2) Includes the value of a 250 share grant of Company common stock, amounts
reimbursed for payment of taxes and automobile lease payments.
The Bank maintains a defined benefit pension plan for substantially all
employees. The Bank also maintains an Employee Stock Ownership and 401(k) plan
covering substantially all employees.
-31-
<PAGE>
<TABLE>
EXECUTIVE OPTION GRANTS IN LAST FISCAL YEAR
Percent of
Total
Number of Options
Shares Granted to
Underlying Employees
Options in Fiscal Exercise Expiration
Granted Year Price Date
------- ---- ----- ----
<S> <C> <C> <C> <C>
Patrick K. Gill 440 100% $36.00(1) 2009
</TABLE>
(1) Appraised value in the most recent independent appraisal performed for
purposes of the Bank's Employee Stock Ownership Plan.
<TABLE>
YEAR END OPTION VALUES
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1999 December 31, 1999
----------------- -----------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
<S> <C> <C>
Patrick K. Gill 744/1536 $40,632/$75,685
</TABLE>
Item 7. Certain Relationships and Related Transactions.
CERTAIN TRANSACTIONS
Certain directors and officers of the Company have had and are expected to
have in the future, transactions with the Bank, or have been directors or
officers of corporations, or members of partnerships, which have had and are
expected to have in the future, transactions with the Bank. All such
transactions with officers and directors, either directly or indirectly, have
been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and these transactions do
not involve more than the normal risk of collectibility or present other
unfavorable features. All such future transactions, including transactions with
principal shareholders and other Company affiliates, will be made in the
ordinary course of business, on terms no less favorable to the Company than with
other customers, and will be subject to approval by a majority of the Company's
independent, outside disinterested directors.
Item 8. Legal Proceedings.
LEGAL PROCEEDINGS
Neither the Company nor the Bank as of December 31, 1999 were involved in
any legal proceedings other than routine litigation incidental to the ordinary
conduct of the business of the bank, none of which would result in a material
impact on the Company or the Bank, individually or in the aggregate, in the
event of an adverse outcome.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Shareholder Matters.
MARKET FOR COMMON STOCK AND DIVIDENDS
There is no active market for Company's Common Stock, and there is no
published information with respect to its market price. There are occasional
sales through brokers and direct sales by shareholders of which the Company's
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<PAGE>
management is aware. It is the understanding of the management of the Company
that over the last three years, the Company's Common Stock has sold at prices in
excess of book value. From January 1999, through December 1999, there were, so
far as the Company's management knows, 212 sales of shares of the Company's
Common Stock, involving a total of 83,710 shares. The price was reported to
management in only a few of these transactions, and management has no way of
confirming the prices that were reported. During this period, the highest price
known by management to be paid was $75.00 per share, and the lowest price was
$46.00 per share. To the knowledge of management, the last sale of Common stock
occurred on December 23, 1999, involving the sale of 75 shares at a price of
$75.00 per share. t a t a The following table sets forth the range of high and
low sales prices of the Company's Common Stock during 1999, 1998 and 1997, based
on information made available to the Company, as well as per share cash
dividends declared during those periods. Although management is not aware of any
transactions at higher or lower prices, there may have been transactions at
prices outside the ranges listed below:
<TABLE>
Cash
----
Sales Prices (1) Dividends Declared (1)
---------------- ----------------------
1997 High Low
---- ---- ---
<S> <C> <C> <C>
First Quarter............... $23.25 $23.25 0.15
Second Quarter.............. $23.25 $23.25 0.15
Third Quarter............... $24.50 $24.00 0.15
Fourth Quarter.............. $25.00 $24.50 0.15
1998 High Low
---- ---- ---
First Quarter............... $26.25 $25.00 0.20
Second Quarter.............. $35.00 $26.25 0.15 2 for 1 split
Third Quarter............... $42.50 $37.00 0.16
Fourth Quarter.............. $45.00 $42.50 0.16
1999 High Low
---- ---- ---
First Quarter............... $46.00 $46.00 0.23
Second Quarter.............. $52.50 $47.50 0.16
Third Quarter............... $70.00 $52.50 0.17 2 for 1 split
Fourth Quarter.............. $75.00 $70.00 0.19
</TABLE>
(1) Adjusted for all stock splits.
There are 3,000,000 shares of the Company's Common stock authorized, of
which 852,410 shares were issued and outstanding as of December 31, 1999. There
were approximately 540 shareholders of record, including trusts and shares
jointly owned, as of that date.
The holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors of the Company out of funds legally
available for that purpose. Dividends have been paid fourt times annually. In
determining dividends, the Board of Directors considers the earnings, capital
requirements and financial condition of the Company and the Bank, along with
other relevant factors. The Company's principal source of funds for cash
dividends is the dividends paid by the Bank. The ability of the Company and the
Bank to pay dividends is subject to regulatory restrictions and requirements.
See the discussion under "Business-Supervision and Regulation" above.
Item 10. Recent Sales of Unregistered Securities.
During the last three years the Company issued a total of 9,722 shares of
its common stock. Of these shares, 6,422 shares were issued to the trustee of
the Bank's Employee Stock Ownership/401(k) Plan, 750 shares were issued to the
Company's president and chief executive officer as compensation for services,
and 2,550 shares were issue to directors who exercised stock options. Exemption
from registration is claimed under Rule 147 and Section 4(2) of the
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<PAGE>
Securities Act of 1933. All shares were issued by a Michigan corporation to
residents of Michigan who took for investment.
Item 11. Description of Registrant's Securities to be Registered.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Articles of Incorporation, which are filed as an
exhibit to this Registration Statement and are incorporated herein by reference.
Under its Articles of Incorporation, as amended, the Company's authorized
capital stock consists of 3,000,000 shares of Common Stock, no par value per
share, of which 852,410 shares are outstanding and held of record by
approximately 540 persons as of the date of this Registration Statement.
All voting rights are vested in the holders of shares of Common Stock, with
each share entitling the holder to one vote. The shares of Common Stock do not
have cumulative voting rights, and holders have no preemptive right to subscribe
for additional securities issuable by the Company.
In the event of the liquidation of the Company, the holders of Common Stock
are entitled to receive, pro rata, any assets distributable to shareholders in
respect of shares held by them after satisfaction of the liquidation preferences
of any outstanding Preferred Stock. Subject to any prior rights of the holders
of Preferred Stock then outstanding, holders of the Company's Common Stock are
entitled to receive such dividends as are declared by the Board of Directors out
of funds legally available for that purpose. The outstanding shares of Common
Stock are fully paid and nonassessable.
The Board of Directors of the Company believes that the availability for
issuance of a substantial number of shares of the Company's Common Stock at the
discretion of the Board of Directors is advisable to provide the Company with
the flexibility to take advantage of opportunities to issue such stock in order
to obtain capital, as consideration for possible acquisitions and for other
purposes (including, without limitation, the issuance of additional shares
through stock splits and stock dividend in appropriate circumstances). There
are, at present, no plans, understandings, agreements or arrangements concerning
the issuance of additional shares of the Company's Common Stock.
Uncommitted authorized but unissued shares of the Company's Common Stock
may be issued from time to time to such persons and for such consideration as
the Board of Directors of the Company may determine and holders of the then
outstanding shares of Company Common Stock may or may not be given the
opportunity to vote thereon, depending upon the nature of any such transactions,
applicable law and the judgment of the Board of Directors of the Company
regarding the submission of such issuance to the Company's stockholders. As
noted, the Company's stockholders have no preemptive rights to subscribe to
newly issued shares.
Moreover, it is possible that additional shares of the Company's Common
Stock would be issued for the purpose of making an acquisition by an unwanted
suitor of a controlling interest in the Company more difficult, time consuming
or costly or would otherwise discourage an attempt to acquire control of the
Company. Under such circumstances, the availability of authorized and unissued
shares of the Company's capital stock may make it more difficult for
stockholders to obtain a premium for their s shares. Such authorized and
unissued shares could be used to create voting or other impediments or to
frustrate a person seeking to obtain control of the Company by means of a
merger, tender offer, proxy contest or other means. Such shares could be
privately placed with purchasers who might cooperate with the Board of Directors
of the Company in opposing such an attempt by a third party to gain control of
the Company. The issuance of new shares of the Company's capital stock could
also be used to dilute ownership of a person or entity seeking to obtain control
of the Company. Although the Company does not currently contemplate taking any
such action, shares of the Company's capital stock could be issued for the
purposes and effects described above and the Board of Directors reserves its
rights (if consistent with its fiduciary responsibilities) to issue such stock
for such purposes.
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<PAGE>
Anti-Takeover Provisions
In addition to the utilization of authorized but unissued shares as
described above, the Company's Articles of Incorporation and the Michigan
Business Corporation Act ("MBCA") contain other provisions which could be
utilized by the Company to impede certain efforts to acquire control of the
Company. Those provisions include the following:
Anti-Takeover Legislation. The MBCA contains provisions intended to protect
shareholders and prohibit or discourage certain types of hostile takeover
activities. These provisions regulate the acquisition of "control shares" of
large public Michigan corporation (the "Control Share Act").
The Control Share Act establishes procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by an acquiror which, when combined with other shares held by that person
or entity, would give the acquiror voting power at or above any of the following
thresholds: 20%, 33-1/3% or 50%. Under the Control Share Act, an acquiror may
not vote "control shares" unless the corporation's disinterested shareholders
vote to confer voting rights on the control shares. The acquiring person,
officers of the target corporation, and directors of the target corporation who
are also employees of the corporation are precluded from voting on the issue of
whether the control shares shall be accorded voting rights. The Control Share
Act does not affect the voting rights of shares owned by an acquiring person
prior to the control share acquisition.
The Control Share Act entitles a corporation to redeem control shares from
the acquiring person under certain circumstances. In other cases, the Control
Share Act confers dissenters' rights upon all of a corporation's shareholders
except the acquiring person.
The Control Share Act applies only to an "issuing public corporation." The
Company falls within the statutory definition of an ""issuing public
corporation." The Control Share Act automatically applies to any "issuing public
corporation" unless the corporation "opts out" of the statute by so providing in
its articles of incorporation or bylaws. The Company has not "opted out" of the
Control Share Act.
Fair Price Provision. Article X of the Company's Articles contains fair
price provisions comparable to those contained in the "Fair Price Act"
provisions of the MBCA. Article X provides that a supermajority vote of 90% of
the shareholders and no less than two-thirds of the votes of non-interested
shareholders must approve a "business combination." The Fair Price Act defines a
"business combination" to encompass any merger, consolidation, share exchange,
sale of assets, stock issue, liquidation, or reclassification of securities
involving an "interested shareholder" or certain "affiliates." An "interested
shareholder" is generally any person who owns 10% or more of the outstanding
voting shares of the Company. An "affiliate" is a person who directly or
indirectly controls, is controlled by, or is under common control with a
specified person.
The supermajority vote required by the Fair Price Act does not apply to
business combinations that satisfy certain conditions. These conditions include,
among others, that: (i) the purchase price to be paid for the shares of the
Company is at least equal to the highest of either (a) the market value of the
shares or (b) the highest per share price paid by the interested shareholder
within the preceding two-year period or in the transaction in which the
shareholder became an interested n, shareholder, whichever is higher; and (ii)
once a person has become an interested shareholder, the person must not become
the beneficial owner of any additional shares of the Company except as part of
the transaction which resulted in the interested shareholder becoming an
interested shareholder or by virtue of proportionate stock splits or stock
dividends.
The requirements of Article X do not apply to business combinations with an
interested shareholder that the "Continuing Directors" (as defined below) have
approved.
Classified Board. Pursuant to Article VIII of the Company's Articles, the
Board of Directors of the Company is classified into three classes, with each
class serving a staggered, three-year term. Classification of the Board could
have the effect of extending the time during which the existing Board of
Directors could control the operating policies of the Company even though
opposed by the holders of a majority of the outstanding shares of the Company's
Common Stock.
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<PAGE>
Under the Company's Bylaws, all nominations for directors by a stockholder
must be delivered to the Company in writing at least 60 days prior to the annual
meeting of the shareholders, regardless of any postponements, deferrals, or
adjournments of the meeting to a later date. A nomination that is not received
prior to this deadline will not be placed on the ballot. The Board believes that
advance notice of nominations by shareholders will afford a meaningful
opportunity to consider the qualifications of the proposed nominees and, to the
extent deemed necessary or desirable by the Board of Directors, will provide an
opportunity to inform shareholders about such qualifications. Although this
nomination procedure does not give the Board of Directors any power to approve
or disapprove of shareholder nominations for the election of directors, this
nomination procedure may have the effect of precluding a nomination for the
election of directors at a particular annual meeting if the proper procedures
are not followed.
The Company's Articles provide that any one or more directors may be
removed at any time, with or without cause, but only by either (i) the
affirmative vote of a majority of "Continuing Directors" and at least 80% of the
directors; or (ii) the affirmative vote, at a meeting of the shareholders called
for that purpose, of the holders of at least 80% of the voting power of the
then-outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors, voting together as a single class. A
"Continuing Director" is generally defined in the Articles as any member of the
Board who is unaffiliated with any "interested shareholder" (generally, an owner
of 10% or more of the Company's outstanding voting shares) and was a member of
the Board prior to the time an interested shareholder became an interested
shareholder, and any successor of a Continuing Director who is unaffiliated with
an interested shareholder and is recommended to succeed a Continuing Director by
a majority of the Continuing Directors then on the Board.
Any vacancies in the Board of Directors for any reason, and any newly
created directorships resulting from any increase in the number of directors,
may be filled only by the Board of Directors, acting by an affirmative vote of a
majority of the Continuing directors and an 80% majority of all of the directors
then in office, although less than a quorum. Any directors so chosen shall hold
office until the next annual meeting of shareholders at which directors are
elected to the class to which such a director was named and until their
respective successors shall be duly elected and qualified or their resignation
or removal. No decrease in the number of directors may shorten the term of any
incumbent director.
Board Evaluation of Certain Offers. Article IX of the Company's Articles
provides that the Board of Directors shall not approve, adopt or recommend any
offer of any person or entity (other than the Company) to make a tender or
exchange offer for any Company Common Stock, to merge or consolidate the Company
with any other entity, or to purchase or acquire all or substantially all of the
Company's assets, unless and until the Board has evaluated the offer and
determined that it would be in compliance with all applicable laws and that the
offer is in the best interests of the Company. In doing so, the Board may rely
on an opinion of legal counsel who is independent from the offeror, and/or may
test such legal compliance in front of any court or agency that may have
appropriate jurisdiction over the matter.
In making its determination, the Board must consider all factors it deems
relevant, including but not limited to: (i) the adequacy and fairness of the
consideration to be received by the Company and/or its shareholders, considering
historical trading prices of the Company's Common Stock, the price that could be
achieved in a negotiated sale of the Company as a whole, past offers, and the
future prospects of the Company; (ii) the potential social and economic impact
of the proposed transaction on the Company, its employees, customers and
vendors; (iii) the potential social and economic impact of the proposed
transaction on the communities in which the Company and its subsidiaries operate
or are located; (iv) the business and financial condition and earnings prospects
of the proposed acquiring person or entity; and (v) the competence, experience
and integrity of the proposed acquiring person or entity and its or their
management.
Amendment or Repeal of Certain Provisions of the Articles. Under Michigan
law, the Board of Directors need not adopt a resolution setting forth an
amendment to the Articles of Incorporation before the shareholders may note on
it. Unless the Articles of Incorporation provide otherwise, amendments to the
Articles of Incorporation generally require the approval of the holders of a
majority of the outstanding stock entitled to vote thereon, and if the amendment
would increase or decrease the number of authorized shares of any class or
series, or the par value of such shares, or would adversely affect the rights,
powers, or preferences of such class or series, a majority of the outstanding
stock of such class or series also would be required to approve the amendment.
The Company's Articles require, in order to amend, repeal or adopt any
provision inconsistent with Article VIII relating to the Board of Directors, the
affirmative vote of at least 80% of the issued and outstanding shares of the
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<PAGE>
Company's capital stock entitled to vote in the election of directors, voting as
a single class; provided, however, that such amendment or repeal or inconsistent
provision may be made by a majority vote of such shareholders at any meeting of
the shareholders duly called and held where such amendment has been recommended
for approval by at least 80% of all directors then holding office and by a
majority of the "continuing directors."
In order to amend, repeal, or adopt any provision that is inconsistent with
Article IX, at least 80% of the shareholders, voting together as a single class,
must approve the change, unless the change has been recommended for approval by
at least 80% of the directors, in which case a majority of the voting stock
could approve the action.
The Company's Articles require, in order to amend, repeal or adopt any
provision inconsistent with Article X relating to business combinations, the
affirmative vote of at least 90% of the issued and outstanding shares of the
Company's capital stock entitled to vote in the election of directors, voting as
a single class, including the affirmative vote of the holder's of not less than
two-thirds of such stock not owned directly or indirectly by any interested
shareholder; provided, however, that such amendment or repeal or inconsistent
provision may be approved by a majority vote of such shareholders at any meeting
of the shareholders duly called and held where such amendment has been
recommended for approval by a majority of the Continuing Directors.
These amendment provisions could render it more difficult to remove
management or for person seeking to affect a merger or otherwise gain control of
the Company. These amendment requirements could, thus, adversely affect the
potential realizable value of shareholder's investments.
Item 12. Indemnification of Directors and Officers.
INDEMNIFICATION MATTERS AND LIMITATION OF LIABILITY
The Company's Articles and Bylaws require the Company to indemnify its
directors and executive officers to the fullest extent permitted by law in
connection with any actual or threatened proceedings in which such persons are a
witness or which is brought against them in their capacity as a director,
officer, employee, agent, or fiduciary of the Company or any entity which such
persons serve at the request of the Company.
The MBCA provides a detailed statutory framework addressing the
indemnification of directors, officers, employees and agents against liabilities
and expenses from legal proceedings brought against them by reason of their
status or service in their respective corporate capacities. The MBCA
distinguishes between indemnification in actions threatened or made by third
parties and actions threatened or made by or in the right of a corporation. A
corporation is permitted to grant indemnification for actual and reasonable
expenses (including attorneys' fees), judgments, fines and settlement amounts as
a result of actions, suits or proceedings threatened or made by third parties.
With respect to actions brought by or in the right of the corporation, a
corporation may only provide indemnification for actual and reasonable expenses
(including attorneys' fees) and settlement amounts. Also, under the MBCA,
indemnification may be mandatory or discretionary. Indemnification of expenses
is mandatory to the extent that a person has been successful in defending any
action. In situations where indemnification is not mandatory, a corporation is
permitted to indemnify its personnel upon a determination that such person or
persons acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation or its shareholders and, in a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. This determination may be made by a majority of a quorum of
disinterested directors, a committee of disinterested directors, independent
legal counsel, all independent directors not a party to the action, or the
shareholders. In the event an individual is found liable to the corporation as a
result of a claim brought by or in the right of the corporation, the
determination must be by the court where the action is litigated or another
court of competent jurisdiction. The MBCA also authorizes the advancement of
litigation expenses upon the receipt of an undertaking by the individual to
repay such expenses if it is ultimately determined that the individual is not
entitled to indemnification.
The Company's Articles also limit the personal liability of directors for
monetary damages with respect to claims by the Company or its shareholders
resulting from certain negligent acts or omissions. Under Michigan law,
directors owe certain fiduciary duties to the corporation which they serve and
its shareholders, including the duty of care (which requires a director to make
informed and well-reasoned business decisions) and the duty of loyalty (which
requires a director to act in good faith and in the best interests of the
corporation and its shareholders). The Company's Articles
-37-
<PAGE>
provide the Company's directors with protection against personal monetary
liability for breaches of their duty of care, including negligence or gross
negligence, in the performance of their duties as directors. However, directors
of the Company remain liable for (a) the amount of a financial benefit received
to which the director was not entitled; (b) intentional infliction of harm on
the Company or its shareholders; or (c) intentional criminal acts. Also, the
Articles do not absolve directors of liability under Section 551(1) of the MBCA,
which proscribes the unlawful declaration of dividends, or other distributions
of assets to shareholders, the unlawful purchase of shares of the Company's
securities and the making of an unlawful loan to an officer, director or
employee of the Company. If the MBCA is amended in the future to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the directors of the Company will be eliminated
or limited to the fullest extent permitted by the MBCA, as so amended, without
further action or approval by the shareholders, unless shareholder approval is
required by the amending legislation. While the Articles provide directors with
protection from awards of monetary damages for breaches of their duty of care,
it does not eliminate a director's duty of care. The Articles have no effect on
the availability of equitable remedies such as an action to enjoin or rescind a
transaction involving a breach of duty; however, in some circumstances as a
practical matter, equitable remedies may be of limited utility. In addition, the
Articles apply only to claims against a director arising out of his or her role
as a director; it does not apply to his or her acts or omissions in any other
capacity, such as an officer, or to his or her responsibilities under other
laws, such as federal securities laws. Also, the Restated do not apply to
actions by third parties with no relationship to the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
-38-
<PAGE>
Item 13. Financial Statements and Supplementary Data.
CONTENTS
REPORT OF INDEPENDENT AUDITORS............................................... 40
CONSOLIDATED BALANCE SHEETS.................................................. 41
CONSOLIDATED STATEMENTS OF INCOME............................................ 42
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY................... 43
CONSOLIDATED STATEMENTS OF CASH FLOWS........................................ 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................... 46
-39-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lenawee Bancorp, Inc.
Adrian, Michigan
We have audited the accompanying consolidated balance sheets of Lenawee Bancorp,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of income, changes in shareholders' equity and cash flows for each of the years
ended December 31, 1999, 1998 and 1997. 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 Lenawee Bancorp,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years ended December 31, 1999, 1998 and 1997 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 25, 2000, except for
Note 4, for which the date is
February 16, 2000
-40-
<PAGE>
LENAWEE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,309,898 $ 8,261,918
Federal funds sold 2,200,000 5,450,000
Commercial paper - 4,989,596
------------- -------------
Total cash and cash equivalents 9,509,898 18,701,514
Securities available for sale 23,024,175 29,418,472
Federal Home Loan Bank stock, at cost 2,503,700 2,503,700
Federal Reserve Bank stock, at cost 360,000 360,000
Loans receivable, net of allowance for loan losses:
$4,646,484 - 1999, $2,181,749 - 1998 192,720,533 156,271,847
Loans held for sale 758,651 2,864,345
Premises and equipment, net 6,521,024 6,605,704
Accrued interest receivable 1,576,279 1,694,135
Mortgage servicing asset 1,335,419 1,098,116
Other assets 1,593,829 895,831
------------- -------------
Total assets $ 239,903,508 $ 220,413,664
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 36,686,950 $ 33,717,972
Interest bearing 162,519,459 152,172,979
------------- -------------
Total deposits 199,206,409 185,890,951
Borrowed funds 16,176,754 10,625,614
Accrued interest payable 643,831 556,498
Other liabilities 1,101,253 995,201
------------- -------------
Total liabilities 217,128,247 198,068,264
Common stock subject to repurchase obligation in ESOP 4,326,300 3,697,800
Shareholders' equity
Common stock and paid-in capital, no par
value: 3,000,000 shares authorized; shares
issued and outstanding: 852,410 - 1999; 425,390 - 1998 10,430,303 10,999,709
Retained earnings 8,352,940 7,424,937
Accumulated other comprehensive income,
net of tax (334,282) 222,954
------------- -------------
Total shareholders' equity 18,448,961 18,647,600
------------- -------------
Total liabilities and shareholders' equity $ 239,903,508 $ 220,413,664
============= =============
</TABLE>
See accompanying notes to financial statements.
-41-
<PAGE>
LENAWEE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 16,025,062 $ 15,291,800 $ 14,538,552
Taxable securities 1,222,553 1,290,115 1,666,453
Nontaxable securities 309,750 281,254 199,544
Federal funds sold 118,244 277,178 238,428
Dividend income 221,937 222,597 217,050
Other 25,184 154,327 69,029
------------- ------------- -------------
Total interest and dividend income 17,922,730 17,517,271 16,929,056
Interest expense
Deposits 5,693,930 6,262,000 6,351,573
Federal Home Loan Bank advances 463,671 801,050 1,126,055
Other 154,620 142,565 108,793
------------- ------------- -------------
Total interest expense 6,312,221 7,205,615 7,586,421
------------- ------------- -------------
Net interest income 11,610,509 10,311,656 9,342,635
Provision for loan losses 2,560,000 239,000 245,000
------------- ------------- ------------
Net interest income after provision for
loan losses 9,050,509 10,072,656 9,097,635
Noninterest income
Service charges and fees 778,625 616,119 580,640
Net gains on loan sales 1,032,371 1,994,470 789,898
Loan servicing fees, net of amortization 113,222 (144,808) 161,964
Other 313,044 384,707 236,083
------------- ------------- ------------
2,237,262 2,850,488 1,768,585
Noninterest expense
Salaries and employee benefits 5,034,569 5,090,788 4,140,912
Occupancy and equipment 1,677,784 1,585,721 1,518,713
Insurance 63,851 118,223 105,531
Printing, postage and supplies 327,807 333,148 289,740
Professional and outside services 208,566 362,345 299,936
State and other taxes 169,032 172,052 153,989
Mobile banking costs 236,246 224,325 240,260
Receivable financing services 282,372 187,126 119,485
Other 994,229 838,942 763,714
------------- ------------- ------------
8,994,456 8,912,670 7,632,280
------------- ------------- ------------
Income before income taxes 2,293,315 4,010,474 3,233,940
Income tax expense 730,537 1,350,000 1,101,700
------------- ------------- ------------
Net income $ 1,562,778 $ 2,660,474 $ 2,132,240
============= ============= ============
Basic earnings per share $ 1.83 $ 3.13 $ 2.51
======== ========= ==========
Diluted earnings per share $ 1.83 $ 3.12 $ 2.51
======== ========= ==========
</TABLE>
See accompanying notes to financial statements.
-42-
<PAGE>
LENAWEE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
Common Accumulated
Stock and Other Total
Paid-In Retained Comprehensive Shareholders'
Capital Earnings Income Equity
------- -------- ------ ------
<S> <C> <C> <C> <C>
Balance January 1, 1997 $ 12,035,728 $ 3,711,102 $ (25,859) $ 15,720,971
Comprehensive income:
Net income 2,132,240 2,132,240
Unrealized gains/losses on securities 231,921
Reclassifications for realized (gains)/losses 12,250
Tax effect (82,965)
----------- -----------
Total other comprehensive income 161,206 161,206
----------- -----------
Total comprehensive income 2,293,446
-----------
Change in common stock subject to repurchase (260,700) (260,700)
Retirement of stock - 4,336 shares (189,013) (189,013)
Stock options exercised-issuance of
630 common shares 24,638 24,638
Proceeds from sale of stock - 1,368 shares 57,718 57,718
Cash dividends - $.60 per share (509,652) (509,652)
----------- ----------- ----------- ------------
Balance December 31, 1997 11,668,371 5,333,690 135,347 17,137,408
Comprehensive income:
Net income 2,660,474 2,660,474
Unrealized gains/losses on securities 132,738
Tax effect (45,131)
----------- -------------
Total other comprehensive income 87,607 87,607
----------- -------------
Total comprehensive income 2,748,081
-------------
Change in common stock subject to repurchase (761,300) (761,300)
Retirement of stock - 1,088 shares (27,200) (27,200)
Stock options exercised-issuance of
1,920 common shares 41,138 41,138
Proceeds from sale of stock - 3,148 shares 78,700 78,700
Cash dividends - $.67 per share (569,227) (569,227)
------------ ---------- ------------ -------------
Balance December 31, 1998 10,999,709 7,424,937 222,954 18,647,600
Comprehensive income:
Net income 1,562,778 1,562,778
Unrealized gains/losses on securities (848,818)
Reclassifications for realized gains/losses 4,520
Tax effect 287,062
------------ -------------
Total other comprehensive income (557,236) (557,236)
------------ -------------
Total comprehensive income 1,005,542
-------------
Change in common stock subject to repurchase (628,500) (628,500)
Retirement of stock - 1,026 shares (36,936) (36,936)
Proceeds from sale of stock - 2,656 shares 96,030 96,030
Cash dividends - $.75 per share (634,775) (634,775)
------------- ------------- -------------- ---------------
Balance December 31, 1999 $ 10,430,303 $ 8,352,940 $ (334,282) $ 18,448,961
============= ============= ============== ===============
</TABLE>
See accompanying notes to financial statements.
-43-
<PAGE>
LENAWEE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,562,778 $ 2,660,474 $ 2,132,240
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 709,035 749,603 685,786
Provision for loan losses 2,560,000 239,000 245,000
Net amortization and accretion on securities
available for sale 116,787 72,446 35,888
Amortization of mortgage servicing rights 257,597 397,391 123,026
Loans originated for sale (47,554,219) (102,921,516) (36,344,318)
Proceeds from sales of mortgage loans 49,491,958 103,889,773 36,498,981
Net gains on sales of mortgage loans (1,032,371) (1,994,470) (789,898)
Net change in:
Deferred loan origination fees (92,717) 60,964 85,775
Accrued interest receivable 117,856 (43,629) 124,061
Other assets (235,246) 353,691 892,799
Accrued interest payable 87,333 (117,783) 48,597
Other liabilities 106,052 142,391 164,056
------------- ------------- -------------
Net cash from operating activities 6,094,843 3,488,335 3,901,993
Cash flows from investing activities Proceeds from:
Maturities, calls and principal payments on
securities available for sale 9,699,134 11,684,767 6,647,115
Sales of securities available for sale 7,674,558 - 9,002,934
Sales of portfolio loans 1,483,725 10,424,013 3,481,411
Purchases of:
Securities available for sale (11,945,000) (17,164,219) (8,670,078)
Stock in Federal Home Loan Bank - - (184,300)
Premises and equipment (634,714) (1,028,051) (1,224,588)
Net increase in loans (39,916,902) (8,113,718) (16,031,997)
Recoveries on loans charged-off 61,823 37,259 34,485
------------- ------------ -------------
Net cash from investing activities (33,577,376) (4,159,949) (6,945,018)
</TABLE>
(Continued)
-44-
<PAGE>
LENAWEE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 13,315,458 $ 10,917,507 $ 15,649,027
Net change in other borrowed funds 5,551,140 (5,719,901) (6,589,458)
Repurchase of common stock (36,936) (27,200) (189,013)
Issuance of common stock 96,030 78,700 57,718
Exercise of stock options - 41,138 24,638
Dividends paid and fractional shares (634,775) (569,227) (509,652)
------------- -------------- ---------------
Net cash from financing activities 18,290,917 4,721,017 8,443,260
------------- -------------- ---------------
Net change in cash and cash equivalents (9,191,616) 4,049,403 5,400,235
Cash and cash equivalents at beginning of year 18,701,514 14,652,111 9,251,876
------------- -------------- ---------------
Cash and cash equivalents at end of year $ 9,509,898 $ 18,701,514 $ 14,652,111
============= ============== ===============
Supplemental schedule of noncash activities Transfer from:
Loans to foreclosed real estate $ 160,811 $ 239,144 $ 488,874
Portfolio loans to loans held for sale - 2,065,245 -
Loans held for sale to portfolio loans 679,146 - -
Cash paid for:
Interest $ 6,521,024 $ 7,323,398 $ 7,537,824
Income taxes 1,215,000 1,602,000 1,152,275
</TABLE>
See accompanying notes to consolidated financial statements.
-45-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Lenawee Bancorp, Inc., its wholly-owned subsidiary, Bank of Lenawee,
and its wholly-owned subsidiary, Lenawee Financial Services, (together referred
to as "the Company"). All significant intercompany balances and transactions
have been eliminated in consolidation.
Nature of Operations, Industry Segments and Concentrations of Credit Risk: The
Company is a one-bank holding company which conducts limited business
activities. The Bank performs the majority of business activities.
The Bank provides a full range of banking services to individuals, agricultural
businesses, commercial businesses and light industries located in its service
area. It maintains a diversified loan portfolio, including loans to individuals
for home mortgages, automobiles and personal expenditures, and loans to business
enterprises for current operations and expansion. The Bank offers a variety of
deposit products, including checking, savings, money market, individual
retirement accounts and certificates o deposit. While the Company's chief
decision maker monitors the revenue stream of various Company products and
services, operations are managed and financial performance is evaluated on a
Company wide basis. Accordingly, all of Company's banking operations are
considered by management to be aggregated into one operating segment.
The principal market for the Bank's financial services are the Michigan
communities in which the Bank is located and the areas immediately surrounding
these communities. The Bank serves these markets through nine offices located in
Lenawee, Hillsdale and Washtenaw Counties in Michigan.
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 fair values of
securities and other financial instruments are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand
deposits with other financial institutions, federal funds sold and commercial
paper with original maturities of 90 days or less. Cash flows are reported, net,
for customer loan and deposit transactions, securities sold under agreements to
repurchase with original maturities of 90 days or less and U.S. Treasury demand
notes.
(Continued)
-46-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
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 in other comprehensive income
and shareholders' equity, net of tax. Trading securities are bought principally
for sale in the near term, and are reported at fair value, with unrealized gains
and losses included in earnings. Securities are written down to fair value when
a decline in fair value is not temporary. Other securities such as Federal Home
Loan Bank and Federal Reserve Bank stock are carried at cost.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest and dividend income, adjusted by amortization
of purchase premiums and discounts, is included in earnings.
Loans Held for Sale: Loans held for sale are reported at the lower of cost or
market value in aggregate. Net unrealized losses are recorded in a valuation
allowance by charges to income.
Loans Receivable: Loans receivable are reported at the principal balance
outstanding, net of unearned interest, deferred loan fees and costs, and an
allowance for loan losses. 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 the loan is impaired or payments are past due over 90 days,
unless the loan is both well secured and in the process of collection. Payments
received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Estimating the risk of loss and
the amount of loss on any loan is necessarily subjective. Accordingly,
management estimates the allowance balance required based on past loan loss
experience, known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgement, should be charged-off. A problem loan is charged-off by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
(Continued)
-47-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans and on an individual loan
basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using a combination of
straight-line and accelerated methods with useful lives ranging from 10 to 40
years for buildings and improvements, and 3 to 10 years for furniture and
equipment. These assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur. Major improvements are capitalized.
Servicing Rights: Servicing rights represent both purchased rights and the
allocated value of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
Other Real Estate Owned: Real estate properties acquired in collection of a loan
receivable are recorded at fair value at acquisition. Any reduction to fair
value from the carrying value of the related loan is accounted for as a loan
loss. 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 other expense. Other real estate owned amounts to $255,000 and
$341,000 at December 31, 1999 and 1998.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
(Continued)
-48-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Benefit Plans: A defined benefit pension plan covers substantially all
employees, with benefits based on years of service and compensation prior to
retirement. Pension expense is the net of service and interest cost, return on
plan assets, and amortization of gains and losses not immediately recognized.
Profit-sharing and 401(k) plan expense is the amount contributed as determined
by Board decision.
Expense for employee compensation under stock option plans is reported only if
options are granted below market price at grant date. Proforma disclosures of
net income and earnings per share are provided as if the option's fair value had
been recorded using an option pricing model.
Income Taxes: Income tax expense is the total 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 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.
Earnings and Dividends Per Share: Basic earnings per common share is based on
net income divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per common share shows the dilutive effect
of any additional potential common shares. Earnings and dividends per common
share are restated for all stock splits and stock dividends, including the
two-for-one splits declared in 1999 and 1998.
Stock Dividends: Dividends issued in stock are reported by transferring the
market value of the stock issued from retained earnings to common stock and
additional paid-in capital. Fractional shares are paid in cash for all stock
dividends.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes the net change in
unrealized appreciation (depreciation) on securities available for sale, net of
tax, which is also recognized as a separate component of shareholders' equity.
The accounting standard that requires reporting comprehensive income first
applied for 1998, with prior information restated to be comparable.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans, which are not recorded in
the financial statements.
(Continued)
-49-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Continued)
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are now such matters that will have
a material effect on the financial statements.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on-and off-balance-sheet
financial instruments does not include the value of anticipated future business
or values of assets and liabilities not considered financial instruments.
Reclassifications: Some items in the prior year financial statements have been
reclassified to conform with the current year presentation.
NOTE 2 - SECURITIES
Year-end securities available for sale were as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury and
U.S. Government agencies $ 7,400,712 $ - $ (231,465) $ 7,169,247
Obligations of states and
political subdivisions 9,473,289 24,091 (120,895) 9,376,485
Corporate notes 559,139 - (12,920) 546,219
Mortgage-backed securities 6,097,524 - (165,300) 5,932,224
------------- ----------- ------------- -------------
$ 23,530,664 $ 24,091 $ (530,580) $ 23,024,175
============= =========== ============= =============
</TABLE>
(Continued)
-50-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 2 - SECURITIES (Continued)
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury and
U.S. Government agencies $ 12,696,682 $ 86,443 $ (9,075) $ 12,774,050
Obligations of states and
political subdivisions 9,014,078 221,651 (4,175) 9,231,554
Corporate notes 1,831,724 12,457 - 1,844,181
Mortgage-backed securities 5,538,179 34,459 (3,951) 5,568,687
-------------- ----------- ----------- -------------
$ 29,080,663 $ 355,010 $ (17,201) $ 29,418,472
============== =========== =========== =============
</TABLE>
Contractual maturities of debt securities at year-end 1999 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
<TABLE>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 2,519,811 $ 2,517,046
Due from one to five years 11,987,913 11,734,759
Due from five to ten years 2,225,416 2,152,249
Due after ten years 700,000 687,897
-------------- --------------
17,433,140 17,091,951
Mortgage-backed securities 6,097,524 5,932,224
-------------- --------------
$ 23,530,664 $ 23,024,175
============== ==============
</TABLE>
Sales of securities available for sale were:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales $ 7,674,558 $ - $ 9,002,934
Gross gains from sales 5,785 - 9,998
Gross losses from sales (10,305) - (22,248)
</TABLE>
In addition to Federal Home Loan Bank (FHLB) stock, securities having an
amortized cost of approximately $13,107,000 and $17,373,000 at year-end 1999 and
1998 were pledged to secure FHLB advances, public deposits, securities sold
under agreements to repurchase and U.S. Treasury demand notes. Except as
indicated, total securities of any state (including all its political
subdivisions) were less than 10% of shareholders' equity. At year-end 1999 and
1998, the amortized cost of securities issued by the state of Michigan and all
its political subdivisions totaled $7,210,000 and $6,100,000 with an estimated
market value of $7,174,000 and $6,272,000.
(Continued)
-51-
<PAGE>
NOTE 3 - LOANS RECEIVABLE
Year-end loans receivable are as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Commercial $ 103,569,923 $ 78,347,516
Agricultural 31,754,542 34,103,673
Real Estate Mortgage 17,203,006 9,548,272
Real Estate Construction 9,934,302 7,462,111
Consumer 34,846,379 29,025,876
---------------- -------------
Gross loans receivable 197,308,152 158,487,448
Deferred loan origination fees/costs, net 58,865 (33,852)
Allowance for loan losses (4,646,484) (2,181,749)
---------------- -------------
Net loans receivable $ 192,720,533 $ 156,271,847
================ =============
</TABLE>
Certain directors and executive officers of the Company, including associates of
such persons, were loan customers of the Company during 1999 and 1998. A summary
of aggregate related party loan activity for loans aggregating $60,000 or more
to any related party is as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Balance at January 1 $ 3,062,973 $ 4,895,617
New loans 3,304,811 7,226,060
Repayments (3,560,342) (9,088,533)
Other changes - 29,829
-------------- --------------
Balance at December 31 $ 2,807,442 $ 3,062,973
============== ==============
</TABLE>
Other changes include adjustments for persons included in one reporting period
that are not reported in the other reporting period.
(Continued)
-52-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 2,181,749 $ 1,964,473 $ 1,761,117
Loan charge-offs (157,088) (58,983) (76,129)
Loan recoveries 61,823 37,259 34,485
------------- ------------ ------------
Net loan charge-offs (95,265) (21,724) (41,644)
------------- ------------ ------------
Provision for loan losses 2,560,000 239,000 245,000
------------- ------------ ------------
Ending balance $ 4,646,484 $ 2,181,749 $ 1,964,473
============= ============ ============
</TABLE>
Impaired loans were as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Year-end loans with no allowance for
loan losses allocated $ 95,000 $ 19,000 $ 94,000
Year-end loans with allowance for loan
losses allocated 2,979,000 52,000 52,000
Amount of the allowance allocated 2,352,000 52,000 52,000
Average of impaired loans during the year 155,000 118,000 148,000
Interest income recognized during
impairment 13,000 14,000 13,000
Cash-basis interest income recognized - - -
</TABLE>
Subsequent to December 31, 1999, the Company became aware of circumstances which
occurred in 1999, involving loans to a single borrower in which the Bank had
purchased a participating interest from another financial institution. As a
result of these circumstances, management has concluded that a loss is probable
and, accordingly, has recorded an additional provision for loan losses of $2.3
million for 1999 on loans outstanding of approximately $2.9 million. In
addition, these loans are considered to be impaired at December 31, 1999.
(Continued)
-53-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5 - LOAN SERVICING
Loans serviced for others are not reported as assets. These loans totaled
$181,102,000 and $140,816,000 at year-end 1999 and 1998. Related escrow balances
were $285,000 and $267,000 at year-end 1999 and 1998.
Activity for capitalized mortgage servicing rights was as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Servicing rights:
Beginning of year $ 1,098,116 $ 518,945 $ 262,300
Additions 494,900 976,562 379,671
Amortization (257,597) (397,391) (123,026)
------------ ----------- -----------
End of year $ 1,335,419 $ 1,098,116 $ 518,945
============ =========== ===========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment consist of:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Land $ 499,668 $ 450,794
Buildings and improvements 6,986,070 6,579,586
Furniture and equipment 5,281,617 5,214,140
--------- ------------
Total cost 12,767,355 12,244,520
Accumulated depreciation (6,246,331) (5,638,816)
---------- ------------
$ 6,521,024 $ 6,605,704
============ ============
</TABLE>
Depreciation expense was $709,035, $749,603 and $685,786 in 1999, 1998 and 1997,
respectively.
NOTE 7 - DEPOSITS
At year-end 1999, stated maturities of time deposits were as follows, for the
years ending December 31:
<TABLE>
<S> <C>
2000 $ 32,327,954
2001 19,352,871
2002 10,617,211
2003 15,324,315
2004 9,038,808
-------------
$ 86,661,159
=============
</TABLE>
(Continued)
-54-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 7 - DEPOSITS (Continued)
Time deposits exceeding $100,000 were $30,059,000 and $23,733,000 at year-end
1999 and 1998.
At year-end 1999, stated maturities of time deposits exceeding $100,000 were as
follows:
<TABLE>
<S> <C>
In 3 months or less $ 13,893,000
Over 3 through 6 months 6,225,000
Over 6 through 12 months 4,012,000
Over 12 months 5,929,000
--------------
$ 30,059,000
==============
</TABLE>
Related party deposits were $1,806,000 and $1,945,000 at year-end 1999 and 1998.
NOTE 8 - BORROWED FUNDS
Securities Sold Under Agreements to Repurchase
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Amount outstanding at year-end $ 2,002,363 $4,154,069
Weighted average interest rate at year-end 4.61% 3.55%
Average daily balance during the year $ 3,444,358 $3,309,287
Weighted average interest rate during the year 3.71% 4.28%
Maximum month-end balance during the year $ 5,143,802 $4,400,263
</TABLE>
Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances totaled $14,174,391 and $6,471,545 at
year-end 1999 and 1998. The advances have fixed interest rates ranging from
5.880% to 6.040% at year-end 1999 and a fixed rate of 6.04% at year-end 1998.
Pursuant to collateral agreements with the Federal Home Loan Bank, in addition
to Federal Home Loan stock, advances are secured under a blanket lien
arrangement by qualified 1-to-4 family mortgage loans and U.S. Government agency
securities with a carrying value of approximately $38,465,000 and $19,625,000 at
year-end 1999 and 1998.
At year-end 1999, scheduled principal reductions on these advances were as
follows for the years ending December 31:
<TABLE>
<S> <C>
2000 $ 8,321,521
2001 347,886
2002 376,412
2003 407,278
2004 440,675
Thereafter 4,280,619
-------------
Total FHLB advances $ 14,174,391
=============
</TABLE>
(Continued)
-55-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9 - INCOME TAXES
Income tax expense consists of:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ 1,464,775 $ 1,260,805 $ 1,200,789
Deferred (734,238) 89,195 (99,089)
-------------- ------------ --------------
Total $ 730,537 $ 1,350,000 $ 1,101,700
============== ============ ==============
</TABLE>
Income tax expense calculated at the statutory federal income tax rate of 34%
differs from actual income tax expense as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory rates $ 779,727 $ 1,363,561 $ 1,099,540
Increase (decrease) from:
Tax-exempt securities income (106,804) (97,848) (71,052)
Non-deductible interest expense 7,070 8,614 19,193
Other, net 50,544 75,673 54,019
----------- ------------ ------------
$ 730,537 $ 1,350,000 $ 1,101,700
=========== ============ ============
</TABLE>
Year-end deferred tax assets and liabilities consist of:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses $ 1,381,031 $ 543,021 $ 469,147
Net deferred loan fees 200,584 185,377 164,152
Net unrealized losses on
securities available for sale 172,205 - -
Other 37,173 46,064 46,350
------------- ----------- ------------
Total deferred tax assets 1,790,993 774,462 679,649
------------- ----------- ------------
Deferred tax liabilities
Depreciation (322,849) (293,444) (306,351)
Net unrealized gains on securities
available for sale - (114,855) (69,724)
Mortgage servicing rights (454,042) (373,359) (176,444)
------------- ----------- ------------
Total deferred tax liabilities (776,891) (781,658) (552,519)
------------- ----------- ------------
Net deferred tax asset (liability) $ 1,014,102 $ (7,196) $ 127,130
============= =========== ============
</TABLE>
(Continued)
-56-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic earnings per
share and diluted earnings per share computations for the years ended is
presented below:
<TABLE>
Basic earnings per share 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income available to common
shareholders $ 1,562,778 $ 2,660,474 $ 2,132,240
============ ============ ============
Weighted average common shares
outstanding 852,509 850,118 848,372
============ ============ ============
Basic earnings per share $ 1.83 $ 3.13 $ 2.51
========= ======= ========
Diluted earnings per share
Net income available to common
shareholders $ 1,562,778 $ 2,660,474 $ 2,132,240
============ ============ ============
Weighted average common shares
outstanding 852,509 850,118 848,372
Add: Dilutive effects of exercise of
stock options 1,857 1,468 2,516
------------ ------------ ------------
Weighted average common and dilutive
potential common shares outstanding 854,366 851,586 850,888
============ ============ ============
Diluted earnings per share $ 1.83 $ 3.12 $ 2.51
========= ======= ========
</TABLE>
NOTE 11 - EMPLOYEE BENEFITS
Defined Benefit Plan
Information about the pension plan was as follows.
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation $ 1,334,322 $ 1,146,268
Service cost 127,921 111,178
Interest cost 100,871 86,414
Actuarial loss 32,357 26,526
Benefits paid (35,950) (36,064)
------------ -----------
Ending benefit obligation 1,559,521 1,334,322
Change in plan assets, at fair value:
Beginning plan assets 1,142,109 1,007,624
Actual return 40,090 13,565
Employer contribution 185,667 156,984
Benefits paid (35,950) (36,064)
------------ -----------
Ending plan assets 1,331,916 1,142,109
------------ -----------
Funded status at year-end (227,605) (192,213)
Unrecognized net actuarial loss 217,323 149,856
Unrecognized transition obligation 16,423 20,528
Unrecognized prior service cost 13,517 16,226
------------ -----------
Prepaid (accrued) benefit cost $ 19,658 $ (5,603)
============ ===========
</TABLE>
(Continued)
-57-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11 - EMPLOYEE BENEFITS (Continued)
The components of pension expense and related actuarial assumptions were as
follows.
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 127,921 $ 111,178 $ 115,465
Interest cost 100,871 86,414 70,008
Expected return on plan assets (78,756) (61,124) (65,167)
Amortization of prior service cost 2,709 2,709 2,709
Amortization of transition obligation 4,105 4,105 4,105
Recognized net actuarial (gain) loss 3,556 - -
----------- ---------- -----------
Net pension expense $ 160,406 $ 143,282 $ 127,120
=========== ========== ===========
Discount rate on benefit obligation 7.5% 7.5% 7.5%
Long-term expected rate of return
on plan assets 8.0% 8.0% 8.0%
Rate of compensation increase 5.0% 5.0% 5.0%
</TABLE>
ESOP and 401(k) Plan
The Company maintains an employee stock ownership plan (ESOP) covering
substantially all employees. The ESOP is designed to enable employees to acquire
common stock of the Company. The cost of the ESOP is funded through
contributions to an Employee Stock Ownership Trust in amounts determined
annually by the Board of Directors. Shares of common stock acquired by the ESOP
are to be allocated to each participating employee and held until the employee's
termination, retirement or death. There were no cash contributions to the ESOP
for 1999, 1998 and 1997.
At year-end 1999 and 1998, the ESOP held 98,325 and 51,358 shares of the
Company's stock, all of which is allocated to employees. Upon distribution of
shares to a participant, the participant has the right to require the Company to
purchase shares at the most recent appraised value in accordance with the terms
and conditions of the plan. As such, these shares are not classified in
shareholders' equity as permanent equity. The shares held by the ESOP
approximated $4,326,300 and $3,697,800 at year-end 1999 and 1998.
The ESOP plan includes a 401(k) provision. Employees may elect to contribute up
to 15% of their salaries, and the Company will match 100% of the contribution up
to 2% of the eligible salaries. Expense relating to the 401(k) provision was
$57,600, $57,622 and $50,400 in 1999, 1998 and 1997.
(Continued)
-58-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11 - EMPLOYEE BENEFITS (Continued)
Stock Option Plan
SFAS No. 123, Accounting for Stock-Based Compensation requires proforma
disclosures for companies that do not adopt its fair value accounting method for
stock-based compensation. Accordingly, the following proforma information
presents net income and basic and diluted earnings per share had the fair value
method been used to measure compensation cost for stock options. The exercise
price of options granted is equivalent to the market value of underlying stock
at the grant date. Accordingly, no compensation expense was actually recognized
for stock options in 1999, 1998 and 1997.
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income as reported $ 1,562,778 $ 2,660,474 $ 2,132,240
Proforma net income 1,533,382 2,639,183 2,121,333
Reported earnings per common share
Basic $ 1.83 $ 3.13 $ 2.51
Diluted 1.83 3.12 2.51
Proforma earnings per common share
Basic 1.80 3.10 2.50
Diluted 1.79 3.10 2.49
</TABLE>
The fair value of options granted is estimated using option pricing models,
using the following weighted average information:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest risk 5.10% 5.53% 5.77%
Expected option life 8 years 8 years 10 years
Expected stock price volatility Nominal Nominal Nominal
Expected dividends 1.86% 1.20% 1.20%
</TABLE>
The weighted average fair value of stock options granted was $7.09, $4.57 and
$4.66 for 1999, 1998 and 1997. At year-end 1999, options outstanding had a
weighted average remaining life of 8.0 years.
In future years, as additional options are granted, the proforma effect on net
income and earnings per share may increase.
(Continued)
-59-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 11 - EMPLOYEE BENEFITS (Continued)
Stock option plans are used to reward directors and certain executive officers
and provide them with an additional equity interest. Options are issued for 10
year periods and vest over five years. Information about options available for
grant and options granted follows:
<TABLE>
Weighted-
Average
Available Options Exercise
For Grant(1) Outstanding(1) Price(1)
<S> <C> <C> <C>
Balance at January 1, 1997 45,320 7,480 $ 18.53
Options issued (5,800) 5,800 20.69
Options exercised - (1,260) 19.56
-------- ------- -------
Balance at December 31, 1997 39,520 12,020 19.46
Options issued (6,340) 6,340 25.00
Options exercised - (1,920) 21.43
-------- ------- -------
Balance at December 31, 1998 33,180 16,440 21.37
Options issued (5,720) 5,720 36.00
Option exercised - - -
-------- ------- -------
Balance at December 31, 1999 27,460 22,160 $ 25.14
======== ======= =======
</TABLE>
(1) Restated for a two-for-one stock split in 1998 and 1999.
Options exercisable at year-end are as follows:
<TABLE>
Weighted-
Average
Number of Exercise
Options Price
------- -----
<S> <C> <C>
1999 9,964 $ 22.25
1998 4,908 19.82
1997 2,340 18.95
</TABLE>
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
At year-end 1999 and 1998, reserves of $2,895,000 and $2,269,000 were required
as deposits with the Federal Reserve or as cash on hand. These reserves do not
earn interest.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
involve, to varying degrees, credit and interest-rate risk in excess of the
amount reported in the financial statements.
(Continued)
-60-
<PAGE>
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
The Company has the following commitments outstanding at year-end:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Commitments to extend credit $ 56,996,000 $ 43,660,000
Credit card arrangements 2,185,000 1,733,000
Standby letters of credit 514,000 656,000
-------------- --------------
$ 59,695,000 $ 46,049,000
============== ==============
</TABLE>
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit, and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party.
NOTE 13 - PARENT CORPORATION CONDENSED
The Company's primary source of funds to pay dividends to shareholders is the
dividends it receives from the Bank. The Bank is subject to certain restrictions
on the amount of dividends it may declare without prior regulatory approval.
Accordingly, in 2000, the Bank may distribute to the Company, in addition to
2000 net profits, approximately $2,839,000 in dividends without prior approval
from regulatory agencies.
Following are condensed parent corporation financial statements.
(Continued)
-61-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 13 - PARENT CORPORATION CONDENSED (Continued)
<TABLE>
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $ 417,928 $ 180,638
Securities available for sale 938,133 1,062,853
Investment in subsidiary 21,395,761 21,023,180
Other 23,439 78,729
------------ -------------
Total assets $ 22,775,261 $ 22,345,400
============ =============
Liabilities and Shareholders' Equity
Common stock subject to repurchase obligation in ESOP $ 4,326,300 $ 3,697,800
Shareholders' equity 18,448,961 18,647,600
------------ -------------
Total liabilities and shareholders' equity $ 22,775,261 $ 22,345,400
============ =============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividends from subsidiary $ 600,000 $ 700,000 $ 1,250,000
Interest on securities 43,596 43,835 17,442
Other income - - 6,588
Other expenses (15) (2,742) (11,135)
----------- ------------ ------------
Income before equity in undistributed income
of subsidiary bank 643,581 741,093 1,262,895
Equity in undistributed net income of
subsidiary 919,197 1,919,381 869,345
----------- ------------ ------------
Net income $ 1,562,778 $ 2,660,474 $ 2,132,240
=========== ============ ============
</TABLE>
(Continued)
-62-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 13 - PARENT CORPORATION CONDENSED (Continued)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 1,562,778 $2,660,474 $ 42,132,240
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of
subsidiary (919,197) (1,919,381) (869,345)
Net amortization of investment securities 3,627 3,035 1,298
Other 60,763 (10,322) (53,519)
------------- ---------- ------------
Net cash from operating activities 707,971 733,806 1,210,674
Investing Activities
Activity in available for sale securities
Maturities and calls 105,000 - -
Purchases - (113,177) (777,788)
------------- ---------- ------------
Net cash from investing activities 105,000 (113,177) (777,788)
Financing Activities
Repurchase of common stock (36,936) (27,200) (189,013)
Issuance of common stock 96,030 78,700 57,718
Exercise of stock options - 41,138 24,638
Dividends paid and fractional shares (634,775) (569,227) (509,652)
------------- ---------- ------------
Net cash from financing activities (575,681) (476,589) (616,309)
------------- ---------- ------------
Net change in cash and cash equivalents 237,290 144,040 (183,423)
Beginning cash and cash equivalents 180,638 36,598 220,021
------------- ---------- ------------
Ending cash and cash equivalents $ 417,928 $ 180,638 $ 36,598
============= ========== ============
</TABLE>
(Continued)
-63-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to approximate fair
value for cash and cash equivalents, demand and savings deposits, short-term
borrowings, accrued interest, and variable rate loans or deposits that reprice
frequently and fully. Securities fair values are based on quoted market prices
or, if no quotes are available, on the rate and term of the security and on
information about the issuer. For fixed rat loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, the fair
value is estimated by discounted cash flow analysis using current market rates
for the estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable. Fair value of loans held for sale is based on market
estimates. Fair value of mortgage servicing rights is estimated using discounted
cash flows based on current market interest rates. The fair value of long-term
borrowings is based on currently available rates for similar financing. The fair
value of other financial instruments and off-balance-sheet items approximate
cost and are not considered significant to this presentation.
The estimated year-end fair values of financial instruments were:
<TABLE>
1 9 9 9 1 9 9 8
------- -------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
-----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,509,898 $ 9,510,000 $ 18,701,514 $ 18,702,000
Securities available for sale 23,024,175 23,024,000 29,418,472 29,419,000
Stock in Federal Home Loan Bank 2,503,700 2,504,000 2,503,700 2,504,000
Stock in Federal Reserve Bank 360,000 360,000 360,000 360,000
Loans, net 192,720,533 192,344,000 156,271,847 156,047,000
Loans held for sale 758,651 759,000 2,864,345 2,864,000
Accrued interest receivable 1,576,279 1,576,000 1,694,135 1,694,000
Mortgage servicing rights 1,335,419 1,335,000 1,098,116 1,098,000
Financial liabilities:
Demand and savings deposits $ (112,545,250) $ (112,545,000) $ (108,184,976) $ (108,185,000)
Time deposits (86,661,159) (87,189,000) (77,705,975) (78,265,000)
Short-term borrowings (10,323,884) (10,324,000) (4,154,069) (4,154,000)
Long-term borrowings (5,852,870) (5,859,000) (6,471,545) (6,580,000)
</TABLE>
(Continued)
-64-
<PAGE>
LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 15 - REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, 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. Failure
to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: 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.
The Company and Bank were categorized as well capitalized at year-end. Actual
and required capital levels (in millions) and ratios were:
<TABLE>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
1999
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)
Consolidated $ 25.0 12.3% $ 16.2 8.0% $ 20.3 10.0%
Bank $ 24.3 12.1% 16.1 8.0% 20.1 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $ 22.4 11.1% 8.1 4.0% 12.2 6.0%
Bank $ 21.7 10.8% 8.0 4.0% 12.1 6.0%
Tier 1 capital (to average assets)
Consolidated $ 22.4 9.6% 9.4 4.0% 11.7 5.0%
Bank $ 21.7 9.3% 9.3 4.0% 11.7 5.0%
1998
Total capital (to risk weighted assets)
Consolidated $ 24.3 13.8% $ 14.1 8.0% $ 17.6 10.0%
Bank $ 23.0 13.1% $ 14.1 8.0% $ 17.6 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated $ 22.1 12.6% $ 7.0 4.0% $ 10.6 6.0%
Bank $ 21.0 11.8% $ 7.0 4.0% $ 10.6 6.0%
Tier 1 capital (to average assets)
Consolidated $ 22.1 9.9% $ 9.0 4.0% $ 11.2 5.0%
Bank $ 21.0 9.3% $ 8.9 4.0% $ 11.1 5.0%
</TABLE>
(Continued)
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LENAWEE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137, requires derivative instruments be carried at fair
value on the balance sheet. The statement continues to allow derivative
instruments to be used to hedge various risks and sets forth specific criteria
to be used to determine when hedge accounting can be used. The statement also
provides for offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in earnings in the
same period; however, any changes in fair value or cash flow that represent the
ineffective portion of a hedge are required to be recognized in earnings and
cannot be deferred. For derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in earnings.
The adoption of SFAS No. 133 as amended becomes effective beginning January 1,
2001 and is not expected to have a material impact on the Company's financial
position or results of operations.
(Continued)
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Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There has been no in change independent accounting firms, retained by the
Company to audit its consolidated financial statements, in the two most recent
fiscal years.
Item 15. Financial Statements and Exhibits.
A. The following financial statements of the Company are filed as part of
this Registration Statement:
1. Consolidated Balance Sheets as of December 31, 1999 and 1998.
2. Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.
3. Consolidated Statements of Changes in Stockholders Equity for the
years ended December 31, 1999, 1998 and 1997.
4. Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.
5. Notes to Consolidated Financial Statements.
B. The exhibits listed on the exhibit index at page 69 are filed as a
part of this Registration Statement.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Form 10 Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
LENAWEE BANCORP, INC.
By /s/ Patrick K. Gill
Patrick K. Gill, President
Date: April 28, 2000
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EXHIBIT INDEX
Exhibit Description Page No.
3.1 Articles of Incorporation of Lenawee Bancorp, Inc., as amended
3.2 Bylaws of Lenawee Bancorp., Inc., as amended
4 Form of Registrant's Stock Certificate
10.1 Lenawee Bancorp, Inc. Stock Option Plan, as amended
10.2 Employment Agreement dated February 22, 1999, and amended February 22,
2000, between Bank of Lenawee and Patrick K. Gill
10.3 Supplemental Executive Retirement Agreement dated December 19, 1997,
between Bank of Lenawee and Allan W. Brittain
10.4 Consulting Agreement dated January 1, 1998, between Bank of Lenawee
and Allan W. Brittain
21 Subsidiaries of Registrant
27 Financial Data Schedule
-69-
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
(AS AMENDED)
OF
LENAWEE BANCORP, INC.
The following Articles of Incorporation are executed by the undersigned for
the purpose of forming a profit corporation pursuant to the provisions of Act
284, Public Acts of 1972, as amended:
ARTICLE I
The name of the Corporation is Lenawee Bancorp, Inc.
ARTICLE II
The purpose, or purposes, for which the Corporation is organized is to
engage in the business of a bank holding company to be registered under the Bank
Holding Company Act of 1956, being 12 U.S.C. sections 1841 to 1850 and, without
in any way being limited by the foregoing specific purpose, to engage in any
activity within the purposes for which corporations may be organized under the
Business Corporation Act of Michigan.
ARTICLE III
The total authorized capital stock is 3,000,000 shares of a single class of
common stock. Each such share shall be equal to every other such share.
ARTICLE IV
The address of the initial registered office is 135 E. Maumee Street,
Adrian, Michigan 49221. The mailing address is Box 486, Adrian, Michigan 49221.
The name of the initial resident agent is Allan F. Brittain.
ARTICLE V
When a compromise or arrangement, or a plan of reorganization of the
Corporation, is proposed between the Corporation and its creditors, or any class
of them, or between the Corporation and its shareholders, or any class of them,
a court of equity jurisdiction within the
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<PAGE>
state, on application of the Corporation, a creditor or shareholder thereof, or
a receiver appointed for the Corporation, may order a meeting of the creditors,
or class of creditors, or of the shareholders, or class of shareholders, to be
affected by the proposed compromise, arrangement, or reorganization, to be
summoned in such manner as the court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors, or
of the shareholders to be affected by the proposed compromise, arrangement, or
reorganization, agree to a compromise or arrangement or to a reorganization of
the Corporation as a consequence of the compromise or arrangement, the
compromise or arrangement and the reorganization, if sanctioned by the court to
which the application has been made, shall be binding on all the creditors or
class of creditors, or on all the shareholders or class of shareholders, and
also on the Corporation.
ARTICLE VI
No director of the Corporation shall be personally liable to the
Corporation or any of its shareholders for monetary damages for a breach of
fiduciary duty as a director. However, this Article VI shall not eliminate or
limit the liability of a director for any breach of duty, act or omission for
which the elimination or limitation of liability is not permitted by the
Michigan Business Corporation Act, as amended from time to time. No amendment,
alteration, modification, repeal or adoption of any provision in these Articles
of Incorporation inconsistent with this Article VI shall have any effect to
increase the liability of any director of the Corporation with respect to any
act or omission of such director occurring prior to such amendment, alteration,
modification, repeal or adoption.
ARTICLE VII
Directors and executive officers of the Corporation shall be indemnified as
of right to the fullest extent now or hereafter permitted by law in connection
with any actual or threatened civil, criminal, administrative or investigative
action, suit or proceeding (whether brought by or in the name of the
Corporation, a subsidiary or otherwise) in which a director or executive officer
is a witness or which is brought against a director or executive officer in his
or her capacity as a director, officer, employee, agent or fiduciary of the
Corporation or of any corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise which the director or executive officer was
serving at the request of the Corporation. Persons who are not directors or
executive officers of the Corporation may be similarly indemnified in respect of
such service to the extent authorized at any time by the Board of Directors of
the Corporation. The Corporation may purchase and maintain insurance to protect
itself and any such director, executive officer or other person against any
liability asserted against him or her and incurred by him or her in respect of
such service whether or not the Corporation would have the power to indemnify
him or her against such liability by law or under the provisions of this
Article. The provisions of this Article shall be applicable to actions, suits or
proceedings, arising from acts or omissions occurring after the filing of these
Articles of Incorporation with the Corporation Division of the Michigan
Department of Commerce, and to directors, executive officers and other persons
who have ceased to render such service, and shall inure to the benefit of the
heirs, executors and administrators of the directors, executive officers and
other persons referred to in this Article.
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<PAGE>
The right of indemnity provided pursuant to this Article shall not be exclusive
and the Corporation may provide indemnification to any person, by agreement or
otherwise, on such terms and conditions as the Board of Directors may approve.
Any agreement for indemnification of any director, executive officer, employee
or other person may provide indemnification rights which are broader than or
otherwise different from those set forth in, or provided pursuant to, or in
accordance with, this Article. Any amendment, alteration, modification, repeal
or adoption of any provision in the Articles of Incorporation inconsistent with
this Article VII shall not adversely affect any indemnification tight or
protection of a director or executive officer of the Corporation existing at the
time of such amendment, alteration, modification, repeal or adoption.
ARTICLE VIII
BOARD OF DIRECTORS
Section 1. Authority and Size of Board. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors. The number of directors of the Corporation that shall constitute the
Board of Directors shall be determined from time to time by resolution adopted
by the affirmative vote of:
A. At least eighty percent (80%) of the Board of Directors, and
B. A majority of the Continuing Directors (as hereinafter defined).
Section 2. Classification of Board and Filling of Vacancies. Subject to
applicable law, the directors shall be divided into three (3) classes, each
class to be as nearly equal in number as possible. The term of office of
directors of the first class shall expire at the annual meeting of shareholders
to be held in 1993 and until their respective successors are duly elected and
qualified or their resignation or removal. The term of office of directors of
the second class shall expire at the annual meeting of shareholders to be held
in 1994 and until their respective successors are duly elected and qualified or
their resignation or removal. The term of office of directors of the third class
shall expire at the annual meeting of shareholders to be held in 1995 and until
their respective successors are duly elected and qualified or their resignation
or removal. Subject to the foregoing, at each annual meeting of shareholders,
commencing at the annual meeting to be held in 1993, the successors to the class
of directors whose term shall then expire shall be elected to hold office for a
term expiring at the third succeeding annual meeting and until their successors
shall be duly elected and qualified or their resignation or removal. Any
vacancies in the Board of Directors for any reason, and any newly created
directorships resulting from any increase in the number of directors, may be
filled only by the Board of Directors, acting by an affirmative vote of a
majority of the Continuing Directors (as hereinafter defined) and an eighty
percent (80%) majority of all of the directors then in office, although less
than a quorum, and any director so chosen shall hold office until the next
election of the class for which the director was chosen and until his successor
shall be duly elected and qualified or his resignation or removal. No decrease
in the number of directors shall shorten the term of any incumbent director.
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<PAGE>
Section 3. Removal of Directors. Notwithstanding any other provisions of
these Articles of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by law or
by these Articles of Incorporation or the Bylaws of the Corporation), any one or
more directors of the Corporation may be removed at any time, with or without
cause, but only by either (i) the affirmative vote of a majority of the
Continuing Directors and at least eighty percent (80%) of the Board of Directors
or (ii) the affirmative vote, at a meeting of the shareholders called for that
purpose, of the holders of at least eighty percent (80%) of the voting power of
the then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (the "Voting Stock") voting together as a
single class.
Section 4. Certain Definitions. For the purposes of this Article VIII:
A. A "person" shall mean any individual, firm, corporation or other
entity.
B. "Interested Shareholder" shall mean any person (other than the
Corporation, any Subsidiary or the Incorporator of the Corporation, or any
person who is or was the beneficial owner of ten percent (10%) or more of
the Common Stock of the Bank of Lenawee or any person who is or was the
beneficial owner of ten percent (10%) or more of the Common Stock of the
Corporation prior to the acquisition of the Bank of Lenawee) who or which:
(i) is the beneficial owner, directly or indirectly, of ten
percent (10%) or more of the voting power of the outstanding Voting
Stock; or
(ii) is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of ten percent (10%) or more
of the voting power of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares
of voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act
of 1933.
C. A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates has
(a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
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<PAGE>
otherwise, or (b) the right to vote pursuant to any agreement,
arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
D. For the purposes of determining whether a person is an Interested
Shareholder pursuant to paragraph B of this Section 4, the number of shares
of Voting Stock deemed to be outstanding shall include shares deemed owned
through application of paragraph C of this Section 4 but shall not include
any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
E. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on the date these
Articles of Incorporation are filed with the Corporation Division of the
Michigan Department of Commerce.
F. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Shareholder set forth in paragraph B of this Section 4, the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
G. "Continuing Director" means each member of the first Board of
Directors of the Corporation (the "Board") and any member of the Board who
is unaffiliated with the Interested Shareholder and was a member of the
Board prior to the time that the Interested Shareholder became an
Interested Shareholder, and any successor of a Continuing Director who is
unaffiliated with the Interested Shareholder and is recommended to succeed
a Continuing Director by a majority of Continuing Directors then on the
Board.
Section 5. Powers of Continuing Directors. A majority of the Continuing
Directors of the Corporation shall have the power and duty to determine, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article VIII, including without limitation (i)
whether a person is an Interested Shareholder, (ii) the number of shares of
Voting Stock beneficially owned by any person and (iii) whether a person is an
Affiliate or Associate of another; and the good faith determination of a
majority of the Continuing Directors on such matters shall be conclusive and
binding for all the purposes of this Article VIII.
Section 6. Amendment, Repeal, etc. Notwithstanding any other provisions of
these Articles of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that a lesser percentage may be specified by law, these
Articles of Incorporation or the Bylaws of the
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<PAGE>
Corporation), the affirmative vote of the holders of eighty percent (80%) or
more of the then outstanding Voting Stock, voting together as a single class,
shall be required to amend, repeal or adopt any provisions inconsistent with
this Article VIII of these Articles of Incorporation; provided, however, that
the preceding provisions of this Section 6 shall not be applicable to any
amendment to this Article VIII of these Articles of Incorporation, and such
amendment shall require only such affirmative vote as is required by law and any
other provisions of these Articles of Incorporation, if such amendment shall
have been approved by a majority of the Continuing Directors.
ARTICLE IX
BOARD EVALUATION OF CERTAIN OFFERS
Section 1. Matters to be Evaluated. The Board of Directors of this
Corporation shall not approve, adopt or recommend any offer of any person or
entity, other than the Corporation, to make a tender or exchange offer for any
capital stock of the Corporation, to merge or consolidate the Corporation with
any other entity or to purchase or otherwise acquire all or substantially all of
the assets or business of the Corporation unless and until the Board of
Directors shall have first evaluated the offer and determined that the offer
would be in compliance with all applicable laws and that the offer is in the
best interests of the Corporation and its shareholders. In connection with its
evaluation as to compliance with laws, the Board of Directors may seek and rely
upon an opinion of legal counsel independent from the offeror and it may test
such compliance with laws in any state or federal court or before any state or
federal administrative agency which may have appropriate jurisdiction. In
connection with its evaluation as to the best interests of the Corporation and
its shareholders, the Board of Directors shall consider all factors which it
deems relevant, including without limitation: (i) the adequacy and fairness of
the consideration to be received by the Corporation and/or its shareholders
under the offer considering historical trading prices of the Corporation's
stock, the price that might be achieved in a negotiated sale of the Corporation
as a whole, premiums over trading prices which have been proposed or offered
with respect to the securities of other companies in the past in connection with
similar offers and the future prospects for this Corporation and its business;
(ii) the potential social and economic impact of the offer and its consummation
on this Corporation, its employees, customers and vendors; and (iii) the
potential social and economic impact of the offer and its consummation on the
communities in which the Corporation and any subsidiaries operate or are
located.
Section 2. Amendment. Repeal, etc. Notwithstanding any other provision of
these Articles of Incorporation or the Bylaws of the Corporation to the contrary
(and notwithstanding the fact that a lesser percentage may be specified by law,
these Articles of Incorporation or the Bylaws of the Corporation), the
affirmative vote of the holders of eighty percent (80%) or more of the
outstanding shares of capital stock entitled to vote for the election of
directors, voting together as a single class, shall be required to amend, repeal
or adopt any provision inconsistent with this Article IX; provided, however,
that this Article IX shall be of no force or effect if the proposed amendment,
repeal or other action has been recommended for approval by at least eighty
percent (80%) of all directors then holding office.
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<PAGE>
ARTICLE X
APPROVAL OF BUSINESS COMBINATIONS
The shareholder vote required to approve Business Combinations (hereinafter
defined) shall be as set forth in this Article X.
Section 1. Higher Vote for Business Combinations. In addition to any
affirmative vote required bylaw or these Articles of Incorporation, and except
as otherwise expressly provided in Section 3 of this Article X:
A. any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (i) any Interested Shareholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself
an Interested Shareholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Shareholder; or
B. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions in any 12-month
period) to or with any Interested Shareholder or any Affiliate of any
Interested Shareholder of any assets of the Corporation or any Subsidiary
having, measured at the time the transaction or transactions are approved
by the board of directors of the Corporation, an aggregate Fair Market
Value as of the end of the Corporation's most recently ended fiscal quarter
of 10% or more of its net worth; or
C. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any equity securities of
the Corporation or any Subsidiary (or any securities convertible into
equity securities of the Corporation or any Subsidiary) to any Interested
Shareholder or any Affiliate of an Interested Shareholder in exchange for
cash, securities or other property (or a combination thereof) having an
aggregate Fair Market Value of 5% or more of the total market value of the
outstanding shares of the Corporation; or
D. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Shareholder or any Affiliate of any Interested Shareholder, or in which
anything other than cash will be received by an Interested Shareholder or
any Affiliate of any Interested Shareholder; or
E. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class
of equity or convertible securities of the Corporation or any Subsidiary
which is directly or indirectly owned by any Interested Shareholder or any
Affiliate of any Interested Shareholder; shall require the affirmative vote
of the holders of at least ninety percent
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<PAGE>
(90%) of the voting power of the then outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors
(the "Voting Stock"), voting together as a single class, including the
affirmative vote of the holders of not less than two-thirds (2/3) of the
outstanding Voting Stock not owned directly or indirectly by any Interested
Shareholder or an Affiliate or Associate of the Interested Shareholder.
Such affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage may be specified, by law,
in any other Article of these Articles of Incorporation or in any agreement
with any national securities exchange or otherwise.
Section 2. Definition of "Business Combination." The term "Business
Combination" as used in this Article X shall mean any transaction which is
referred to in any one or more of paragraphs A through E of Section 1.
Section 3. When Higher Vote is Not Required. The provisions of Section 1 of
this Article X shall not be applicable to any particular Business Combination,
and such Business Combination shall require only such affirmative vote as is
required by law and any other provision of these Articles of Incorporation, if
in the case of a Business Combination that does not involve any cash or other
consideration being received by the Shareholders of the Corporation, solely in
their capacities as Shareholders, the condition specified in the following
paragraph A is met, or if in the case of any other Business Combination, the
conditions specified in either of the following paragraphs A or B are met
A. Approval by Continuing Directors. The Business Combination shall
have been approved by a majority of the Continuing Directors (as
hereinafter defined).
B. Price and Procedure Requirements. All of the following shall have
been met:
(i) The aggregate amount of the cash and the Fair Market Value
(as hereinafter defined) as of the date of the consummation of the
Business Combination (the "Consummation Date") of the consideration
other than cash to be received per share by holders of Common Stock in
such Business Combination shall be an amount at least equal to the
higher of the following (it being intended that the requirements of
this paragraph B(i) shall be required to be met with respect to all
shares of Common Stock outstanding, whether or not the Interested
Shareholder has previously acquired any shares of the Common Stock):
(a) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of Common Stock
acquired by it (1) within the two-year period immediately prior
to the first public announcement of the proposal of the Business
Combination (the "Announcement Date") or (2) in the transaction
in which it became an Interested Shareholder, whichever is
higher, pins, interest compounded annually from the date on which
the Interested Shareholder became an
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<PAGE>
Interested Shareholder through the Consummation Date at the prime
rate of interest of Citibank, NA. (or other major bank
headquartered in New York City selected by a majority of the
Continuing Directors) from time to time in effect in New York
City, less the aggregate amount of any cash dividends paid, and
the Fair Market Value of any dividends paid in other than cash,
per share of Common Stock from the date on which the Interested
Shareholder became an Interested Shareholder through the
Consummation Date in an amount up to but not exceeding the amount
of such interest payable per share of Common Stock; or
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or the Determination Date (as hereinafter
defined), whichever is higher.
(ii) The consideration to be received by holders of outstanding
Voting Stock shall be in cash or in the same form as the Interested
Shareholder has previously paid for shares of Voting Stock. If the
Interested Shareholder has paid for shares of Voting Stock with
varying forms of consideration, the form of consideration for such
Voting Stock shall be either cash or the form used to acquire the
largest number of shares of Voting Stock previously acquired by it.
(iii) After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business
Combination: (a) there shall have been (1) no reduction in the annual
rate of dividends paid on the Common Stock (except as necessary to
reflect any subdivision of the Common Stock), except as approved by a
majority of the Continuing Directors, and (2) an increase in such
annual rate of dividends as necessary to reflect any reclassification
(including any reverse stock split), recapitalization, reorganization
or any similar transaction which has the effect of reducing the number
of outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the Continuing
Directors; and (b) such Interested Shareholder shall have not become
the beneficial owner of any additional shares of Voting Stock except
as part of the transaction which results in such Interested
Shareholder becoming an Interested Shareholder.
(iv) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit, directly or indirectly (except proportionately as a
Shareholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages
provided by the Corporation.
(v) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to all Shareholders of the Corporation at
least 30 days prior to the Consummation
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Date (whether or not such proxy or information statement is required
to be mailed pursuant to such Act or subsequent provisions).
(vi) There shall have elapsed five (5) years from the
Determination Date to the Consummation Date.
Section 4. Certain Definitions. For the purpose of this Article X:
A. A "person" shall mean any individual, firm, Corporation or other
entity.
B. "Interested Shareholder" shall mean any person (other than the
Corporation, any Subsidiary or the Incorporator of the Corporation, or any
person who is or was the beneficial owner of ten percent (10%) or more of
the Common Stock of the Bank of Lenawee or any person who is or was the
beneficial owner of ten percent (10%) or more of the Common Stock of the
Corporation prior to the acquisition of the Bank of Lenawee by the
Corporation) who or which:
(i) is the beneficial owner, directly or indirectly, of ten
percent (10%) or more of the voting power of the outstanding Voting
Stock; or
(ii) is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of ten percent (10%) or more
of the voting power of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act
of 1933.
C. A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates has
(a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (b)the right to vote pursuant to any agreement, arrangement or
understanding; or
(iii) which are beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or
Associates has any
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agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Voting Stock.
D. For the purposes of determining whether a person is an Interested
Shareholder pursuant to paragraph B of this Section 4, the number of shares
of Voting Stock deemed to be outstanding shall include shares deemed owned
through application of paragraph C of this Section 4 but shall not include
any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon the exercise of conversion
rights, warrants or options, or otherwise.
E. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on the date of
filing of these Articles of Incorporation with the Corporation Division of
the Michigan Department of Commerce.
F. "Subsidiary" means any Corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Shareholder set forth in paragraph B of this Section 4, the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
G. "Continuing Director" means any member of the Board of Directors of
the Corporation (the "Board") who is unaffiliated with the Interested
Shareholder and was a member of the Board prior to the time that the
Interested Shareholder became an Interested Shareholder, and any successor
of a Continuing Director who is unaffiliated with the Interested
Shareholder and is recommended to succeed a Continuing Director by a
majority of Continuing Directors then on the Board.
H. "Fair Market Value" means: (i) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the date
in question of a share of such stock on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or, if such stock is not
listed on such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the
30-day period preceding the date in question on the National Association of
Securities Dealers, Inc., Automated Quotations System or any system then in
use, or if no such quotations are available, the fair market value on the
date in question of a share of such stock as determined by a majority of
the Continuing Directors in good faith; and (ii) in the case of property
other than cash or stock, the fair market value of such property on the
date in question as determined by a majority of the Continuing Directors in
good faith.
I. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in paragraph
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B(i) of Section 3 of this Article X shall include the shares of Common
Stock retained by the holders of such shares.
J. "Determination Date" shall mean the date of which the Interested
Shareholder first became an Interested Shareholder.
Section 5. Powers of Continuing Directors. A majority of the Continuing
Directors of the Corporation shall have the power and duty to determine, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article X, including without limitation (A)
whether a person is an Interested Shareholder, (B) the number of shares of
Voting Stock beneficially owned by any person, (c) whether a person is an
Affiliate or Associate of another, (D) whether the requirements of paragraph B
of Section 3 have been met with respect to any Business Combination, (E) whether
the assets which are the subject of any Business Combination have an aggregate
Fair Market Value of 10% or more of the Corporation's net worth, and (F) whether
the consideration to be received for the issuance or transfer of securities by
the Corporation or any Subsidiary in any Business Combination has an aggregate
Fair Market Value of 5% or more of the total Fair Market Value of the
outstanding shares of the Corporation; and the good faith determination of a
majority of the Continuing Directors on such matters shall be conclusive and
binding for all the purposes of this Article X.
Section 6. No Effect on Fiduciary Obligations of Interested Shareholders.
Nothing contained in this Article X shall be construed to relieve the Board of
Directors or any Interested Shareholder from any fiduciary obligation imposed by
law.
Section 7. Application of Chapter 7A of Michigan Business Corporation Act.
The Corporation shall not be governed by Chapter 7A of Act No. 284 of the Public
Acts of 1972, as amended, of the State of Michigan, unless the Board of
Directors, by a majority vote of the Continuing Directors, elects to have the
Corporation governed by such Chapter 7A.
Section 8. Amendment Repeal, etc. Notwithstanding any other provisions of
these Articles of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that a lesser percentage may be specified by law, these
Articles of Incorporation or the Bylaws of the Corporation), the affirmative
vote of the holders of ninety percent (90%) or more of the voting power of the
shares of the then outstanding Voting Stock, voting together as a single class,
including the affirmative vote of the holders of not less than two-thirds (2/3)
of the Voting Stock not owned directly or indirectly by any Interested
Shareholder, shall be required to amend, repeal, or adopt any provisions
inconsistent with this Article X of these Articles of Incorporation; provided,
however, that the preceding provisions of this Section 8 shall not be applicable
to any amendment to this Article X of these Articles of Incorporation, and such
amendment shall require only affirmative vote as is required by law and any
other provisions of these Articles of Incorporation, if such amendment shall
have been approved by a majority of the Continuing Directors.
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ARTICLE XI
The name and address of the Incorporator are: Allan F. Brittain, 135 East
Maumee Street, Adrian, Michigan 49221.
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Exhibit 3.2
BYLAWS
OF
LENAWEE BANCORP, INC.
A Michigan Corporation
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of the corporation shall be
located at the address specified in the Articles of Incorporation or at such
other place as may be determined by the Board of Directors if notice thereof is
filed with the State of Michigan.
1.2 Other Offices. The business of the corporation may be transacted at
such locations other than the registered office, within or outside the State of
Michigan, as the Board of Directors may from time to time determine or as the
business of the corporation may require.
ARTICLE II
CAPITAL SHARES
2.1 Share Certificates. Certificates representing shares of the corporation
shall be in such form as is approved by the Board of Directors. Certificates
shall be signed in the name of the corporation by the Chairman of the Board of
Directors, the President or a Vice President, and may also be signed by another
officer of the corporation, and shall be sealed with the seal of the
corporation, if one is adopted. If an officer who has signed a certificate
ceases to be such officer before the certificate is issued, it may be issued by
the corporation with the same effect as if he or she were such officer at the
date of issue.
2.2 Replacement of Lost or Destroyed Certificates. If a share certificate
is lost or destroyed, no new certificate shall be issued in place thereof until
the corporation has received such assurances, representations, warranties, or
guarantees from the registered holder as the Board of Directors, in its sole
discretion, deems advisable and until the corporation receives such
indemnification against any claim that may be made on account of the lost or
destroyed certificate, or the issuance of any new certificate in place thereof,
including an indemnity bond in such amount and with such sureties, if any, as
the Board of Directors, in its sole discretion, deems advisable. Any new
certificate issued in place of any lost or destroyed certificate shall be
plainly marked "duplicate" upon its face.
2.3 Transfer of Shares; Shareholder Records. Capital shares of the
corporation shall be transferable only upon the books of the corporation. The
old certificates shall be surrendered to the corporation by delivery to the
person in charge of the transfer books of the corporation, or
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to such other person as the Board of Directors may designate, properly endorsed
for transfer and the old certificates shall be cancelled before a new
certificate is issued. The corporation shall keep records containing the names
and addresses of all shareholders, the number, class, and series of shares held
by each, and the date when they respectively became holders of record thereof at
its registered office. The corporation shall be entitled to treat the person in
whose name any share, right, or option is registered as the owner thereof for
all purposes, including voting and dividends, and shall not be bound to
recognize any equitable or other claim, regardless of any notice thereof, except
as may be specifically required by the laws of the State of Michigan.
2.4 Rules Governing Share Certificates. The Board of Directors shall have
the power and authority to make such rules and regulations as they may deem
expedient concerning the issue, transfer, and registration of share
certificates.
2.5 Record Date for Share Rights. The Board of Directors may fix in advance
a date not exceeding sixty (60) days preceding the date of payment of any
dividend or other distribution, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital shares shall go into
effect, as a record date for the determination of the shareholders entitled to
receive payment of any such dividend or other distribution, or any such
allotment of rights, or to exercise rights with respect to any such change,
conversion, or exchange of capital shares and, in such case, only shareholders
of record on the date so fixed shall be entitled to receive payment of such
dividend or other distribution, or allotment of rights, or exercise such rights,
as the case may be, notwithstanding the transfer of any shares on the books of
the corporation after such record date. If the Board of Directors shall fail to
fix a record date, the record date for the purposes specified herein shall be
the close of business on the date on which the resolution of the Board of
Directors relating thereto is adopted.
2.6 Dividends. The Board of Directors, in its discretion, may from time to
time declare and direct payment of dividends or other distributions upon the
corporation's outstanding shares out of funds legally available for such
purposes which may be payable in cash or other property permitted by law.
In addition to the declaration of dividends or other distributions provided
in the preceding paragraph of this Section 2.6, the Board of Directors, in its
discretion, may from time to time declare and direct payment of a dividend in
shares of this corporation, upon its outstanding shares, in accordance with and
subject to the provisions of the Business Corporation Act of Michigan.
2.7 Redemption of Control Shares. Control shares acquired in a control
share acquisition, with respect to which no acquiring person statement has been
filed with the corporation, shall, at any time during the period ending 60 days
after the last acquisition of control shares or the power to direct the exercise
of voting power of control shares by the acquiring person, be subject to
redemption by the corporation. After an acquiring person statement has been
filed with the corporation and after the meeting at which the voting rights of
the control shares acquired in a control shares acquisition are submitted to the
shareholders, the shares shall be subject to redemption by the Corporation
unless the shares are accorded full
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voting rights by the shareholders as provided in Section 798 of the Michigan
Business Corporation Act. Redemptions of shares pursuant to this bylaw shall be
at the fair value of the shares pursuant to procedures adopted by the Board of
Directors of the corporation.
2.8 Control Shares - Definitions. The terms "control shares," "control
share acquisition," "acquiring person statement," "acquiring person" and "fair
value" as used in these bylaws, shall have the meaning ascribed to them,
respectively, in Chapter 7B (known as the Stacey, Bennett, and Randall
Shareholder Equity Act) of the Michigan Business Corporation Act; however, for
purposes of these bylaws and for all other purposes, the acquisition of shares
of common stock of the Corporation by a person upon the conversion of that
person's shares of common stock of Bank of Lenawee into shares of the
Corporation's common stock pursuant to the terms of the consolidation agreement
between Bank of Lenawee and LSB Bank shall not be deemed to be a "control share
acquisition," and shares of the corporation's common stock thus acquired by a
person shall be excluded in determining whether that person may thereafter have
acquired any "control shares."
ARTICLE III
SHAREHOLDERS
3.1 Place of Meetings. Meetings of shareholders shall be held at the
registered office of the corporation or at such other place, within or outside
the state of Michigan, as may be determined from time to time by the Board of
Directors; provided, however, that if a shareholders meeting is to be held at a
place other than the registered office, the notice of the meeting shall
designate such place.
3.2 Annual Meeting. Annual meetings of shareholders for election of
directors and for such other business as may come before the meeting shall be
held on the third Thursday of April in each year, but if such day is a legal
holiday, then the meeting shall be held on the first business day following, at
such time as may be fixed by the Board of Directors, or at such other date and
time within the four (4) months next succeeding the end of the corporation's
fiscal year as may be designated by the Board of Directors and stated in the
notice of the meeting. If the annual meeting is not held on the date specified,
the Board of Directors shall cause the meeting to be held as soon thereafter as
convenient.
3.3. Special Meetings. Special meetings of shareholders may be called by
the Chairman of the Board, the President, or the Secretary and shall be called
by one of them pursuant to resolution thereof by the Board of Directors, or upon
receipt of a request in writing, stating the purpose or purposes thereof, and
signed by shareholders of record owning a majority of the issued and outstanding
voting shares of the corporation.
3.4 Record Date for Notice and Vote. The Board of Directors may fix in
advance a date not more than sixty (60) nor less than ten (10) days before the
date of a shareholders meeting as the record date for the purpose of determining
shareholders entitled to notice of and to vote at the meeting or adjournments
thereof or to express consent or to dissent from a proposal without a meeting.
If the Board of Directors fails to fix a record date as provided in this Section
3.4, the record date for determination of shareholders entitled to notice of or
to vote at a
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shareholders meeting shall be the close of business on the day on which notice
is given or, if no notice is given, the day next preceding the day on which the
meeting is held, and the record date for determining shareholders entitled to
express consent or to dissent from a proposal without a meeting shall be the
close of business on the day on which the resolution of the Board of Directors
relating to the proposal is adopted.
3.5 Notice of Meetings. Written notice of the time, place, and purpose of
any shareholders meeting shall be given to shareholders entitled to vote thereat
not less than ten (10) nor more than sixty (60) days before the date of the
meetings. Such notice may be given either by delivery in person to shareholders
or by mailing such notice to shareholders at their addresses as the same appear
in the records of the corporation; provided, however, that attendance of a
person at a shareholders meeting, in person or by proxy, constitutes a waiver of
notice of the meeting, except when the shareholder attends the meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
3.6 Voting Lists. The corporation's officer or the agent having charge of
its share transfer books shall prepare and certify a complete list of the
shareholders entitled to vote at a shareholders meeting or any adjournment
thereof, which list shall be arranged alphabetically within each class and
series and shall show the address of, and number of shares held by, each
shareholder. The list shall be produced at the time and place of the
shareholders meeting and be subject to inspection, but not copying, by any
shareholder at any time during the meeting for the purpose of determining who is
entitled to vote at the meeting. If for any reason the requirements with respect
to the shareholder list specified in this Section 3.6 have not been complied
with, any shareholder, either in person or by proxy, who in good faith
challenges the existence of sufficient votes to carry any action at the meeting,
may demand that the meeting be adjourned and the same shall be adjourned until
the requirements are complied with; provided, however, that failure to comply
with such requirements does not affect the validity of any action taken at the
meeting before such demand is made.
3.7 Voting. Except as may be otherwise provided in the Articles of
Incorporation, each shareholder entitled to vote at a shareholders meeting, or
to express consent or dissent without a meeting, shall be entitled to one vote,
in person or by written proxy, for each share entitled to vote held by such
shareholder, provided, however, that no proxy shall be voted after three (3)
years from its date unless the proxy provides for a longer period. A vote may be
cast either orally or in writing as announced or directed by the person
presiding at the meeting prior to the taking of the vote. When an action other
than the election of directors is to be taken by vote of the shareholders, it
shall be authorized by a majority of the votes cast by the holders of shares
entitled to vote thereon, unless a greater plurality is required by the express
provisions of the Michigan Business Corporation Act or the Articles of
Incorporation. Except as otherwise expressly required by the Articles of
Incorporation, directors shall be elected by a plurality of the votes cast at an
election.
3.8 Quorum. Except as may be otherwise provided in the Articles of
Incorporation, shares equaling a majority of all of the voting shares of the
corporation issued and outstanding, represented in person or by proxy, shall
constitute a quorum at a meeting. Meetings at which
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less than a quorum is represented may be adjourned by a vote of a majority of
the shares present to a future date without further notice other than the
announcement at such meeting and, when a quorum shall be present upon such
adjourned date, any business may be transacted which might have been transacted
at the meeting as originally called. Shareholders present in person or by proxy
at any shareholders meeting may continue to do business until adjournment,
notwithstanding the withdrawal of shareholders to leave less than a quorum.
3.9 Conduct of Meetings. The officer who is to preside at meetings of
shareholders pursuant to Article V of these Bylaws, or his or her designee,
shall determine the agenda and the order in which business shall be conducted
unless the agenda and the order of business have been fixed by the Board of
Directors. Such officer or designee shall call meetings of shareholders to order
and shall preside unless otherwise determined by the affirmative vote of a
majority of all the voting shares of the corporation issued and outstanding. The
secretary of the corporation shall act as secretary of all meetings of
shareholders, but in the absence of the secretary at any shareholders meeting,
or his or her inability or refusal to act as secretary, the presiding officer
may appoint any person to act as secretary of the meeting.
3.10 Inspector of Elections. The Board of Directors may, in advance of a
shareholders meeting, appoint one or more inspectors to act at the meeting or
any adjournment thereof. In the event inspectors are not so appointed, or an
appointed inspector falls to appear or act, the person presiding at the
shareholders meeting may, and on request of a shareholder entitled to vote
thereat, shall, appoint one or more persons to fill such vacancy or vacancies or
to act as inspector. The inspector(s) shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine challenges and questions arising
in connection with the right to vote, count, and tabulate votes, ballots, or
consents, determine the results, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE IV
DIRECTORS
4.1 Board of Directors. Except as may otherwise be provided in the Articles
of Incorporation or these Bylaws, the business and affairs of the corporation
shall be managed by a Board of Directors. The Board of Directors shall consist
of not less than eight (8) nor more than fourteen (14) members who need not be
shareholders. The Board of Directors shall be divided into three (3) classes,
each class to be as nearly equal in number as possible. The term of office of
directors of the first class shall expire at the annual meeting of shareholders
to be held in 1993 and until their respective successors are duly elected and
qualified or their resignation or removal. The term of office of directors of
the second class shall expire at the annual meeting of shareholders to be held
in 1994 and until their respective successors are duly elected and qualified or
their resignation or removal. The term of office of directors of the third class
shall expire at the annual meeting of shareholders to be held in 1995 and until
their resignation or removal. Subject to the foregoing, at each annual meeting
of shareholders, commencing at the annual meeting to be held in 1993, a number
of directors equal to the number of the class whose term expires at the time of
the meeting shall be elected to hold office until the third succeeding
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annual meeting. Directors shall serve until their respective terms expire and
their successors are elected and qualified or until their earlier resignation or
removal.
4.2 Nominations for Board. Nominations for the election of directors may be
made by the Board of Directors or by a shareholder entitled to vote in the
election of directors. A shareholder entitled to vote in the election of
directors, however, may make such a nomination only if written notice of such
shareholder's intent to do so has been given, either by personal delivery or by
United States mail, postage prepaid, and received by the corporation (a) with
respect to an election to be held at an annual meeting of shareholders, not
later than sixty (60) nor more than ninety (90) days prior to the first
anniversary of the preceding year's annual meeting (or, if the date of the
annual meeting is changed by more than twenty (20) days from such anniversary
date, within ten (10) days after the date the corporation mails or otherwise
gives notice of the date of such meeting), and (b) with respect to an election
to be held at a special meeting of shareholders called for that purpose, not
later than the close of business on the tenth (10th) day following the date on
which notice of the special meeting was first mailed to the shareholders by the
corporation.
Each shareholder's notice of intent to make a nomination shall set forth:
(i) the name(s) and address(es) of the shareholder who intends to make the
nomination and of the person or persons to be nominated; (ii) a representation
that the shareholder (a) is a holder of record of stock of the corporation
entitled to vote at such meeting, (b) will continue to hold such stock through
the date on which the meeting is held, and (c) intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination is to be made by the shareholder,
(iv) such other information regarding each nominee proposed by such shareholder
as would be required to be included in a proxy statement filed pursuant to
Regulation 14A promulgated under Section 14 of the Securities Exchange Act of
1934, as amended, as now in effect or hereafter modified, and (v) the consent of
each nominee to serve as a director of the corporation if so elected. The
corporation may require any proposed nominee to furnish such other information
as may reasonably be required by the corporation to determine the qualifications
of such proposed nominee to serve as a director.
No person shall be eligible for election as a director unless nominated (i)
by a shareholder in accordance with the foregoing procedure or (ii) by the Board
of Directors.
4.3 Resignation and Removal. A director may resign by written notice to the
corporation, which resignation is effective upon its receipt by the corporation
or at a subsequent time as set forth in the notice.
Notwithstanding any other provisions of these Bylaws or the Articles of
Incorporation of the corporation (and notwithstanding the fact that some lesser
percentage may be specified by law or by these Bylaws or by the Articles of
Incorporation of the corporation), any one or more directors of the corporation
may be removed at any time, with or without cause, but only by either (i) the
affirmative vote of a majority of the Continuing Directors (as defined in the
Articles of Incorporation of the corporation) and at least eighty percent (80%)
of the Board of Directors
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or (ii) the affirmative vote, at a meeting of the shareholders called for that
purpose, of the holders of at least eighty percent (80%) of the voting power of
the then outstanding shares of capital stock of the corporation entitled to vote
generally in the election of directors voting together as a single class.
4.4 Retirement of Directors and Appointment of Directors Emeritus. No
person shall be eligible for election or appointment to the Board of Directors
after he or she has attained the age of sixty-five (65) years. Any person who is
under the age of sixty-five (65) years at the time of his or her initial
election or appointment to the Board of Directors may, if re-elected thereafter,
continue to serve thereon until he or she reaches the age of seventy-two (72)
years. A director shall be automatically retired at the date of the annual
meeting following the date on which he or she reaches the age of seventy-two
(72) years. Any director who is subject to the foregoing automatic retirement
provision and who has reached the age of seventy-two (72) years may be elected
to serve as a director-emeritus by a vote of a majority of the directors at the
annual meeting of the Board of Directors pursuant to Section 4.6 of this Article
following the annual meeting of the shareholders at which such director's
automatic retirement pursuant to this Section became effective. A director
emeritus shall serve a term of one (1) year expiring at the next succeeding
meeting of the Board of Directors pursuant to Section 4.6 of this Article, and
may be re-elected to a term of one (1) year at each such meeting. A director
emeritus shall be permitted, at the pleasure of the Board of Directors, to
attend all meetings of the Board, participate in discussions and receive copies
of all reports submitted to the directors at or for use at such meetings. A
director emeritus shall not be entitled to vote or have any duties or powers as
a director of the corporation. A director emeritus shall receive no fees for
directors' meetings.
4.5 Vacancies and Increase in Number. Any vacancies in the Board of
Directors for any reason, and any newly created directorships resulting from any
increase in the number of directors, may be filled only by the Board of
Directors, acting by an affirmative vote of a majority of the Continuing
Directors (as defined in the Articles of Incorporation of the corporation) and
an eighty percent (80%) majority of all of the directors then in office,
although less than a quorum, and any director so chosen shall hold office until
the next election of the class for which the director was chosen and until his
successor shall be duly elected and qualified or his resignation or removal. No
decrease in the number of directors shall shorten the term of any incumbent
director.
4.6 Place of Meetings and Records. The directors shall hold their meetings
and maintain the minutes of the proceedings of meetings of shareholders, the
Board of Directors, and committees of the Board of Directors, if any, and keep
the books and records of account for the corporation in such place or places,
within or outside the State of Michigan, as the Board of Directors may from time
to time determine.
4.7 Annual Meetings. The annual meeting of the Board of Directors shall be
held, without notice other than this Section 4.7, at the same place and
immediately after the annual shareholders meeting. If such meeting is not so
held, whether because a quorum is not present or for any other reason, or if the
directors were elected by written consent without a meeting, the annual meeting
of the Board of Directors shall be called in the same manner as hereinafter
provided for special meetings of the Board of Directors.
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4.8 Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and place as shall from time to time be
determined by the Board. Any notice given of a regular meeting need not specify
the business to be transacted or the purpose of the meeting.
4.9 Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board or the President and shall be called by one
of them on the written request of any five (5) directors, upon at least two (2)
days written notice to each director, or twenty-four (24) hours notice, given
personally or by telephone or telegram. The notice does not need to specify the
business to be transacted or the purpose of the special meeting. Attendance of a
director at a special meeting constitutes a waiver of notice of the meeting,
except where a director attends the meeting for the express purpose of objecting
at the beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened.
4.10 Quorum and Vote. A majority of the members of the Board then in office
constitutes a quorum for the transaction of business and the vote of a majority
of the members present at any meeting at which a quorum is present constitutes
the action of the Board of Directors, unless the vote of a larger number is
specifically required by the Articles of Incorporation or these Bylaws. If a
quorum is not present, the members present may adjourn the meeting from time to
time and to another place, without notice other than announcement at the
meeting, until a quorum is present.
4.11 Action Without a Meeting. Any action required or permitted to be taken
pursuant to authorization voted at a meting of the Board of Directors, or any
committee thereof, may be taken without a meeting if, before or after the
action, all members of the Board of Directors, then in office, or such
committee, consent thereto in writing. The written consent shall be filed with
the minutes of the proceedings of the Board of Directors or committee and the
consent shall have the same effect as a vote of the Board of Directors or
committee for all purposes.
4.12 Report to Shareholders. The Board of Directors shall cause a financial
report of the corporation for the preceding fiscal year to be made and
distributed to each shareholder within four months after the end of each fiscal
year. The report shall include the corporation's statement of income, its
year-end balance sheet, and, if prepared by the corporation, its statement of
source and application of funds.
4.13 Corporate Seal. The Board of Directors may authorize a suitable
corporate seal, which seal shall be kept in the custody of the Secretary and
used by the Secretary.
4.14 Compensation of Directors. By resolution of the Board of Directors,
the directors may be paid their expenses, if any, of attendance at meetings of
the Board or of any committee of which they are a member. In addition thereto or
in lieu thereof, as determined by resolution of the Board of Directors, a
director may be paid a fixed sum for attendance at each meeting of the Board, or
of a committee thereof, or may be paid a stated salary for serving as a director
as well as an additional stated salary for serving on any committee of the
Board.
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4.15 Committees. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate an executive committee consisting of one
or more of the directors of the corporation. At all meetings of the executive
committee, a majority of the members of the committee shall constitute a quorum
and the act of a majority of the members present at any executive committee
meeting at which there is a quorum present shall be the act of the executive
committee. The executive committee, to the extent provided in said resolution or
in these Bylaws, shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the corporation and
may authorize the seal of the corporation to be affixed to all papers which may
require it. The Board may designate one or more other committees which shall
have such powers and duties as may be determined by the Board. All committees
shall keep regular minutes of their proceedings and report to the Board when
required. No committee shall have the power or authority to amend the Articles
of Incorporation, adopt an agreement of merger or consolidation, recommend to
the shareholders the sale, lease, or exchange of all or substantially all of the
corporation's property and assets, recommend to the shareholders a dissolution
of the corporation or a revocation of a dissolution, fill vacancies in the Board
of Directors, fix compensation of the directors for serving on the Board or on a
committee, amend these Bylaws, or declare a dividend or authorize the issuance
of shares unless the power to declare a dividend or to authorize the issuance of
shares is granted to such committee by specific resolution of the Board of
Directors.
4.16 Meeting Participation by Use of Communication Equipment. Members of
the Board of Directors, or of any committee designated by the Board, may
participate in a meeting of the Board or committee, as the case may be, by using
a conferee telephone or similar communications equipment by means of which all
persons participating in the meeting can communicate with each other.
Participation in a meeting pursuant to this Section 4.17 shall constitute
presence at the meeting.
ARTICLE V
OFFICERS
5.1 Officers. The officers of the corporation shall be a president, a
treasurer, and a secretary, all of whom shall be elected by the Board of
Directors. In addition, the Board of Directors may elect a chairman and one or
more vice presidents who shall also be officers of the corporation if elected.
Each officer shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal. None of the
officers of the corporation, other than the chairman, need be directors. The
officers shall be elected at the first meeting of the Board of Directors after
each annual shareholders meeting. Any two (2) or more offices may be held by the
same person, but an officer shall not execute, acknowledge, or verify any
instrument in more than one capacity if the instrument is required by law to be
executed, acknowledged, or verified by two (2) or more officers.
5.2 Other Officers and Agents. The Board of Directors may appoint such
other officers and agents as it may deem advisable, who shall hold their offices
for such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Board of Directors. The Board may, by
specific resolution, empower the chairman, the
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<PAGE>
president, or the executive committee, if such a committee has been designated
by the Board, to appoint such subordinate officers or agents and to determine
their powers and duties.
5.3 Removal. The chairman, president, any vice president, secretary, and
treasurer may be removed at any time, with or without cause, but only by the
affirmative vote of a majority of the whole Board of Directors. Any assistant
secretary or assistant treasurer, or subordinate officer or agent appointed
pursuant to Section 5.2, may be removed at any time, with or without cause, by
action of the Board of Directors or by the committee or officer, if any,
empowered to appoint such assistant secretary or assistant treasurer or
subordinate officer or agent.
5.4 Compensation of Officers. Compensation of officers for services
rendered to the corporation shall be established by the Board of Directors.
5.5 Chairman. The Chairman of the Board of Directors, if one be elected,
shall be elected by the directors from among the directors then serving. The
Chairman of the Board shall preside at all meetings of the shareholders and at
all meetings of the Board of Directors and shall perform such other duties as
may be determined by resolution of the Board of Directors including, if the
Board shall so determine, acting as the chief executive officer of the
corporation, in which case the Chairman shall have general supervision,
direction, and control of the business of the corporation and shall have the
general powers and duties of management usually vested in or incident to the
office of the chief executive officer of a corporation.
5.6 President. Unless the Board shall determine otherwise, the President
shall be the chief executive officer as well as the chief operating officer of
the corporation and shall have general supervision, direction, and control of
the business of the corporation as well as the duty and responsibility to
implement and accomplish the objectives of the corporation. In the absence or
nonelection of a chairman, the president shall preside at all meetings of
shareholders and at all meetings of the Board of Directors. The president shall
perform such other duties as may be assigned by the Board of Directors.
5.7 Vice Presidents. Each vice president shall have such power and shall
perform such duties as may be assigned by the Board of Directors and may be
designated by such special titles as the Board of Directors shall approve.
5.8 Treasurer The treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the corporation. The treasurer shall deposit
all money and other valuables in the name and to the credit of the corporation
in such depositories as may be selected by the Board of Directors. The treasurer
shall disburse the funds of the corporation as may be ordered by the Board of
Directors, or the chief executive officer, taking proper vouchers for such
disbursements. In general, the treasurer shall perform all duties incident to
the office of treasurer and such other duties as may be assigned by the Board of
Directors.
5.9 Secretary. The secretary shall give or cause to be given notice of all
meetings of shareholders and directors and all other notices required by law or
by these Bylaws; provided,
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however, that in the case of the secretary's absence, or refusal or neglect to
do so, any such notice may be given by any person so directed by the chief
executive officer or by the directors, or by the shareholders upon whose
requisition the meeting is called, as provided in these Bylaws. The secretary
shall record all the proceedings of meetings of shareholders and of the
directors in one or more books provided for that purpose and shall perform all
duties incident to the office of secretary and such other duties as may be
assigned by the Board of Directors.
5.10 Assistant Treasurers and Assistant Secretaries. Assistant treasurers
and assistant secretaries, if any shall be appointed, shall have such powers and
shall perform such duties as shall be assigned to them by the Board of Directors
or by the officer or committee who shall have appointed such assistant treasurer
or assistant secretary.
5.11 Bonds. If the Board of Directors shall require, the treasurer, any
assistant treasurer, or any other officer or agent of the corporation shall give
bond to the corporation in such amount and with such surety as the Board of
Directors may deem sufficient, conditioned upon the faithful performance of his
or her respective duties and offices.
ARTICLE VI
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
6.1 Contracts. The Board of Directors may authorize any officer, or
officers, or agent, or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation and such
authority may be general or confined to specific instances.
6.2 Loans. No loans shall be contracted on behalf of the corporation and no
evidences of indebtedness shall be issued in its name, unless authorized by a
resolution of the Board of Directors. Such authorization may be general or
confined to specific instances.
6.3 Checks. All checks, drafts, or other orders for the payment of money,
notes, or other evidences of indebtedness issued in the name of the corporation
shall be signed by such office; or officers, or agent, or agents, of the
corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
6.4 Deposits. All funds of the corporation, not otherwise employed, shall
be deposited to the credit of the corporation in such banks, trust companies, or
other depositories as the Board of Directors may select.
ARTICLE VII
MISCELLANEOUS
7.1 Fiscal Year. The fiscal year of this corporation shall be fixed by
resolution of the Board of Directors.
7.2 Notices. Whenever any written notice is required to be given under the
provisions of any law, the Articles of Incorporation, or by these Bylaws, it
shall not be construed or
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<PAGE>
interpreted to mean personal notice, unless expressly so stated, and any notice
so required shall be deemed to be sufficient if given in writing by mail
depositing the same in a Post Office box, postage prepaid, addressed to the
person entitled thereto at his or her address as it appears in the records of
the corporation. Such notice shall be deemed to have been given at the time and
on the day of such mailing. Shareholders not entitled to vote shall not be
entitled to receive notice of any meetings, except as otherwise provided by law
or these Bylaws.
7.3 Waiver of Notice. Whenever any notice is required to be given under the
provisions of any law, the Articles of Incorporation, or these Bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
7.4 Voting of Securities. Securities of another corporation, foreign or
domestic, standing in the name of this corporation, which are entitled to vote
may be voted, in person or by proxy, by the chairman or the president of this
corporation or by such other or additional persons as may be designated by the
Board of Directors.
7.5 Inconsistencies with Articles of Incorporation. In the event of any
inconsistency between any provision of these Bylaws and any provision of the
corporation's Articles of Incorporation, the Articles of Incorporation shall
control.
ARTICLE VIII
INDEMNIFICATION
Indemnification of directors, officers and others shall be made by the
corporation as provided in the Articles of Incorporation.
ARTICLE IX
AMENDMENTS
These Bylaws may be amended or repealed or new Bylaws adopted by a majority
vote of the Board of Directors at any regular or special meeting, without prior
notice of intent to do so, or by vote of the holders of a majority of the
outstanding voting shares of the corporation at any annual or special meeting if
notice of the proposed amendment, repeal, or adoption is contained in the notice
of the meeting.
As Adopted January 28, 1993
and Amended June 20, 1996
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<PAGE>
Exhibit 4
NUMBER SHARES
------ ------
ORGANIZED UNDER THE LAWS OF THE STATE OF
MICHIGAN
LENAWEE BANCORP, INC.
Authorized Capital 3,000,000 Shares of NO Par Value Each
This Certifies that ____________________________________________ is the owner of
__________________________________ fully paid and non-assessable Shares of the
Capital Stock of the above named Corporation transferable only on the books of
the Corporation by the holder hereof in person or by duly authorized Attorney
upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ____________ day of ____________ 19_____.
__________________________________ ______________________________
SECRETARY PRESIDENT
<PAGE>
CERTIFICATE
for
_____________________
SHARES
of
LENAWEE BANCORP, INC.
ISSUED TO
_____________________
DATED
For Value Received, ________________, hereby sell, assign and transfer unto
________________________________________________________________________________
_________________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint _______________________________________________________________ Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated __________________________ 19_____
In presence of _______________________________
<PAGE>
Exhibit 10.1
LENAWEE BANCORP, INC.
STOCK OPTION PLAN
(AS AMENDED)
ARTICLE I
Definitions
Section 1.1. Definitions. As used herein, the following terms shall have the
meaning set forth below, unless the context clearly requires otherwise:
(a) "Applicable Event" shall mean (i) the expiration of a tender offer or
exchange offer (other than an offer by the Company) pursuant to which
more than 50 percent of the Company's issued and outstanding stock has
been purchased, or (ii) the approval by the shareholders of the
Company of an agreement to merge or consolidate the Company with or
into another entity where the Company is not the surviving entity, or
an agreement to sell or otherwise dispose of all or substantially all
of the Company's assets (including a plan of liquidation).
(b) "Bank" shall mean the Bank of Lenawee.
(c) "Committee" shall mean a Committee consisting of the members of the
Board of Directors of the Company, who are not employees of the Bank
or the Company.
(d) "Company" shall mean Lenawee Bancorp, Inc.
(e) "Director" shall mean a member of the Board of Directors of the
Company and the Bank.
(f) "Effective Date" with respect to the Plan shall mean the date
specified in Section 2.3 as the Effective Date.
(g) "Fair Market Value" with respect to a share of Stock shall mean the
fair market value of the Stock, as determined by application of such
reasonable valuation methods as the Committee shall adopt or apply.
The Committee's determination of Fair Market Value shall be conclusive
and binding on the Company and the Optionee. The Committee shall take
into account the valuation performed for the employee stock ownership
plan maintained for the benefit of the employees of the Bank of
Lenawee.
(h) "Option" shall mean an option to purchase Stock granted pursuant to
the provisions of the Plan. Options granted under the Plan shall be
either Nonqualifled Stock Options or Incentive Stock Options. An
Incentive
<PAGE>
Stock Option shall mean an Option to purchase shares of Stock which is
designated as an Incentive Stock Option by the Committee and is
intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended. Nonqualified Stock Options shall
mean an Option to purchase shares of Stock which is not an Incentive
Stock Option.
(i) "Optionee" shall mean a Director, officer or employee of the Bank or
the Company to whom an Option has been granted.
(j) "Plan" shall mean the Lenawee Bancorp, Inc. Stock Option Plan, the
terms of which are set forth herein.
(k) "Plan Year"" shall mean the twelve month period beginning on the
Effective Date, and each twelve month period thereafter beginning on
the anniversary of the Effective Date.
(1) "Stock" shall mean the Common Stock of the Company or, in the event
that the outstanding shares of Stock are changed into or exchanged for
shares of a different stock or securities of the Company or some other
entity, such other stock or securities.
(m) "Stock Option Agreement" shall mean the agreement between the Company
and the Optionee under which the Optionee may purchase Stock pursuant
to the terms of the Plan.
ARTICLE II
The Plan
Section 2.1. Name. This plan shall be known as the "Lenawee Bancorp, Inc. Stock
Option Plan."
Section 2.2. Purpose. The purpose of the Plan is to advance the interests of the
Company and its stockholders by affording to Directors and executive officers of
the Company and the Bank an opportunity to acquire or increase their proprietary
interest in the Company by the grant to such persons of Options under the terms
set forth herein. By encouraging such persons to become owners of the Company,
the Company seeks to attract, motivate, reward and retain those highly competent
individuals upon whose judgment, initiative, leadership and efforts the success
of the Company depends.
Section 2.3. Effective Date and Term. The Plan was approved by the Board of
Directors of the Company on January 18, 1996, and shall be effective on February
1, 1996, as approved by a majority of the shareholders of the Company present in
person or by proxy at the meeting of the shareholders of the Company held on
April 18, 1996. The Plan shall terminate upon the fifth anniversary of the date
on which it is adopted by the Board of Directors.
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<PAGE>
ARTICLE III
Administration
Section 3.1. Administration.
(a) The Plan shall be administered by the Committee. Subject to the
express provisions of the Plan, the Committee shall have sole
discretion and authority to determine from time to time the
individuals to whom Options may be granted, the number of shares of
Stock to be subject to each Option, the period during which such
Option may be exercised, and the price at which said Option may be
exercised.
(b) Meetings of the Committee shall be held at such times and places as
shall be determined from time to time by the Committee. A majority of
the members of the Committee shall constitute a quorum for the
transaction of business, and the vote of a majority of those members
present at any meeting shall decide any question brought before the
meeting. In addition, the Committee may take any action otherwise
proper under the Plan by the affirmative vote, taken without a
meeting, of a majority of the members.
(c) No member of the Committee shall be liable for any act or omission of
any other member of the Committee or for any act of omission on his
own part, including, but not limited to, the exercise of any power or
discretion given to him under the Plan, except those resulting from
his own gross negligence or willful misconduct. All questions of
interpretations and application with respect to the Plan or Options
granted thereunder shall be subject to the determination, which shall
be final and binding, of a majority of the whole Committee.
(d) In addition, the Committee shall have the sole discretion and
authority to determine whether an Option shall be an Incentive Stock
Option or a nonqualified option, or both types of options, provided
that Incentive Stock Options may be granted only to persons who are
employees of the Company or the Bank.
Section 3.2. Company Assistance. The Company and the Bank shall supply full and
timely information to the Committee on all matters relating to eligible
employees, their employment, death, retirement, disability or other termination
of employment, and such other pertinent facts as the Committee may require. The
company and the Bank shall furnish the Committee with such clerical and other
assistance as necessary in the performance of its duties.
ARTICLE IV
Optionees
Section 4.1. Eligibility. Directors and executive officers of the Company and
the Bank shall be eligible to participate in the Plan. The Committee may grant
Options to any eligible individual subject to the provisions of Section 5.01.
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ARTICLE V
Shares of Stock Subject to Plan
Section 5.1. Grant of Options and Limitations.
(a) Initial Plan Year. For the initial Plan Year, the Committee shall
grant Options for up to 4000 shares of Stock, according to the
following schedule:
(1) Each person who is a Director not actively employed by the
Company as of the Effective Date shall receive Options for 150
shares of Stock;
(2) The Chairman of the Bank shall receive Options for 400 shares of
Stock;
(3) The President of the Bank shall receive Options for 100 shares of
Stock; and
(4) Such other individuals, excluding individuals identified in
Section 5.1(a)(1)(2) and (3), as are designated by the Committee
shall be eligible to receive Options for the number of shares of
Stock determined by the Committee provided, however, that the
total number of Options granted shall not exceed 4000.
(b) Subsequent years. For each subsequent Plan Year, Options shall be
granted according to the following schedule:
(1) Each person who is a Director not actively employed by the
Company as of the Effective Date shall receive Options for 150
shares of Stock;
(2) The Chairman of the Bank, the President of the Bank, and such
other individuals as are designated by the Committee shall be
eligible to receive Options for the number of shares of Stock
determined by the Committee.
(c) Stock Available for Options. Subject to adjustment pursuant to the
provisions of Section 5.3 hereof, the aggregate number of shares with
respect to which Options may be granted during the term of the Plan
shall not exceed 12,000. Shares with respect to which Options may be
granted may be either authorized and unissued shares or shares issued
and thereafter acquired by the Company.
Section 5.2. Options Under Plan. Shares of Stock with respect to which an Option
granted hereunder shall have been exercised shall not again be available for
grant hereunder. If Options granted hereunder shall expire, terminate or be
cancelled for any reason without being wholly exercised, new Options may not be
granted hereunder covering the number of shares to which such Option expiration,
termination or cancellation relates.
Section 5.3. Antidilution. The provisions of subsections (a) and (b) shall apply
in the event that the outstanding shares of Stock are changed into or exchanged
for a different number or kind of
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<PAGE>
shares or other securities of the Company or another entity by reason of any
merger, consolidation, reorganization, recapitalization, reclassification,
combination, stock split or stock dividend.
(a) The aggregate number and kind of shares subject to Options which may
be granted hereunder shall be adjusted appropriately.
(b) Where dissolution or liquidation of the Company or any merger or
combination in which the Company is not a surviving company is
involved, each outstanding Option granted hereunder shall, subject to
Section 6.8, terminate.
The foregoing adjustments and the manner of application of the foregoing
provisions shall be determined solely by the Committee, and any such adjustment
may provide for the elimination of fractional share interests.
ARTICLE VI
OPTIONS
Section 6.1. Option Grant and Agreement. Each Option granted hereunder shall be
evidenced by minutes of a meeting or the written consent of at least a majority
of the members of the Committee and by a written Stock Option Agreement dated as
of the date of grant and executed by the Company and the Optionee. The Stock
Option Agreement shall set forth such terms and conditions as may be determined
by the Committee consistent with the Plan.
Section 6.2. Option Price. The exercise price of the Stock subject to each
Option shall not be less than the Fair Market Value of the Stock on the date the
Option is granted.
Section 6.3. Option Grant and Exercise Periods. No Option may be granted after
the fifth anniversary of the Effective Date. The period for exercise of each
Option shall be determined by the Committee, but in no instance shall such
period extend beyond the tenth anniversary of the date of grant of the Option.
Section 6.4. Option Exercise.
(a) The Company shall not be required to sell or issue shares under any
Option if the issuance of such shares shall constitute or result in a
violation of the Optionee or the Company of any provisions of any law,
statute or regulation of any governmental authority. Specifically, in
connection with the Securities Act of 1933 (the "Act"), upon exercise
of any Option, the Company shall not be required to issue such shares
unless the Committee has received evidence satisfactory to it to the
effect that registration under the Act and applicable state securities
laws is not required, unless the offer and sale of securities under
the Plan is registered or qualified under the Act and applicable state
laws. Any determination in this connection by the Committee shall be
final, binding and conclusive. If shares are issued under any Option
without registrations under the Act or applicable state
5
<PAGE>
securities laws, the Optionee may be required to accept the shares
subject to such restrictions on transferability as may in the
reasonable judgment of the Committee be required to comply with
exemptions from registrations under such laws. The Company may, but
shall in no event be obligated to, register any securities covered
hereby pursuant to the Act or applicable state securities laws. The
Company shall not be obligated to take any other affirmative action in
order to cause the exercise of an Option or the issuance of shares
pursuant thereto to comply with any law or regulation of any
governmental authority.
(b) Subject to Section 6.4(c), and such terms and conditions as may be
determined by the Committee in its sole discretion upon the grant of
an Option, an Option may be exercised in whole or in part (but with
respect to whole shares only) and from time to time by delivering to
the Company at its principal office written notice of intent to
exercise the Option with respect to a specified number of shares.
(c) An Option shall be exercisable according to the following vesting
schedule:
20% after one year from grant
40% after two years from grant
60% after three years from grant
80% after four years from grant
100% after five years from grant
Provided, however, that upon the earlier of (i) the Optionee's 62nd
birthdate, (ii) the occurrence of an Applicable Event, (iii) the death
of the Optionee (iv) or total disability, all Options granted to the
Optionee shall be fully exercisable in accordance with the terms of
the Plan. For purposes of this paragraph an Optionee is totally
disabled if he is receiving disability benefits under the Social
Security Act as the result of a total and permanent disability, or is
determined to be totally disabled under any long-term disability plan
sponsored by the Bank or Company.
(d) Subject to such terms and conditions as may be determined by the
Committee in its sole discretion upon grant of any Option, payment for
the shares to be acquired pursuant to exercise of the Option shall be
made as follows:
(1) by delivering to the Company at its principal office a cashier's
or certified check, payable to the order of the Company, in the
amount of the Option price for the number of shares of Stock with
respect to which the Option is then being exercised; or
(2) by delivering to the Company at its principal office certificates
representing Stock, duly endorsed for transfer to the Company,
having an aggregate Fair Market Value as of the date of exercise
equal to the amount of the Option price, for the number of shares
of Stock with respect to which the Option is then being
exercised; or
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(3) by any combination of payments delivered pursuant to paragraphs
(d)(1) and (d)(2) above.
Section 6.5. Nontransferability of Option. No Option may be sold. pledged,
assigned or transferred in any manner otherwise than by will or the laws of
descent and distribution except to the extent provided in Section 6.6(b). During
the lifetime of an Optionee, Options shall be exercisable only to the extent
provided in Section 6.6(b).
Section 6.6. Effect of Termination of Employment or Death.
(a) If an Optionee's status as a Director or as an employee of the Company
or the Bank terminates for any reason, other than the death of the
Optionee, before the date of expiration of Options held by such
Optionee, such Options shall become null and void on the 30th day
following the date of such termination. An Optionee who terminates
employment with the Company or the Bank, but retains his status as a
Director is not considered terminated for purposes of this Section
6.6. The date of such termination shall be the date the Optionee
ceases to be a Director or an employee of the Company or the Bank.
(b) If an Optionee dies before the expiration of Options held by the
Optionee, such Options shall terminate on the earlier of (i) the date
of expiration of the Options, or (ii) one year following the date of
the Optionee's death. Subject to the foregoing limitations, in the
event of an Optionee's death, the Options may be exercised by any of
the following: (A) any person designated to exercise the Option after
the Optionee's death by means of a specific written designation
executed by the Optionee and filed with the Committee prior to the
Optionee's death; or if no such person has been designated, either by
(B) the executor or administrator or personal representative of the
estate of the deceased Optionee or (C) the person or persons to whom
an Option granted hereunder shall have been validly transferred by the
executor or the administrator or the personal representative of the
Optionee's estate. To the extent that such Options would otherwise be
exercisable under the terms of the Plan and the Optionee's Stock
Option Agreement, such exercise may occur at any time prior to the
termination date specified in the preceding sentence.
Section 6.7. Rights as Shareholder. An Optionee shall have no rights as a
shareholder with respect to any share subject to such Option prior to the
exercise of the Option and the purchase of such shares.
Section 6.8. Limited Rights. Within the earlier of (i) the occurrence of an
Applicable Event, or (ii) 30 days following the date on which the Company
obtains knowledge of and notifies an Optionee of an Applicable Event, an
Optionee shall have the right (without regard to the limitation on the exercise
of Options set forth in Section 6.4(c) of the Plan and similar limitations in
the Stock Option Agreement) to exercise options then held, or to surrender
unexercised Options in exchange for a cash amount. Such cash amount shall be
equal to the product of (1) the number of shares of Stock subject to the Option,
or portion thereof which is surrendered,
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multiplied by (2) the amount by which the highest price paid or to be paid per
share pursuant to an Applicable Event exceeds the exercise price.
ARTICLE VII
Termination, Amendment and Modification of Plan
Section 7.1. Termination. Board of Directors of the Company may at any time and
from time to time and in any respect amend, modify or terminate the Plan;
provided, however, that absent the approval of holders representing a majority
of the voting shares of stock of the Company, no such action may
(a) increase the total number of shares of Stock subject to the Plan,
except as contemplated in Section 5.3 hereof; or
(b) withdraw the administration of the Plan from the Committee; or
(c) change the terms by which an Option may be exercised, in whole or in
part, as described in Section 6.4 of this Plan; or
(d) change the limitation on the price at which Options may be granted
hereunder as provided by Section 6.2; or
(e) affect any Stock Option Agreement previously executed pursuant to the
Plan without the consent of the Optionee.
ARTICLE VIII
Miscellaneous
Section 8.1. Application of Funds. The proceeds received by the Company from the
sale of Stock pursuant to Options shall be used for general corporate purposes.
Section 8.2 Tenure. Nothing in the Plan or in any Option granted hereunder or in
any Stock Option Agreement relating thereto shall confer upon any Director, or
upon any officer or employee, the right to continue in such position with the
Company or the Bank.
Section 8.3. Other Compensation Plans. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or the Bank, nor shall the Plan preclude the Company or the Bank
from establishing any other forms of incentive or other compensation for
Directors, officers or employees of the Company or the Bank.
Section 8.4. No Obligation to Exercise Options. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.
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Section 8.5. Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
Section 8.6. Singular, Plural Gender. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun shall include
feminine.
Section 8.7. Headings, Etc., No Part of Plan. Headings of Articles and Sections
hereof are inserted for convenience of reference; they constitute no part of the
Plan.
Section 8.8. Governing Law. Except as otherwise required by law, the validity,
construction and administration of this Plan shall be determined under the Laws
in the State of Michigan.
Singed April 18, 1996
and Amended June 20, 1996 but Effective February 1, 1996
9
<PAGE>
Exhibit 10.2
LENAWEE BANCORP, INC./IBANK OF LENAWEE
(AS AMENDED)
The Board of Directors (the "Board") of Bank of Lenawee (the "Bank")
recognizes that your contributions to the past and future growth and success of
the Bank have been and will be substantial and the Board desires to assure the
Bank of your continued services for the benefit of the Bank.
This letter agreement ("Agreement") therefore sets forth the terms,
compensation and benefits which the Bank will provide to you.
Part I.
1. Term of Employment. Your employment by the Bank pursuant to this
Agreement will commence January 1, 1999 (the "Effective Date").
2. Position and Duties. You shall serve as President/CEO of the Bank and
shall have such commensurate responsibilities, duties and authority as
may be assigned by the Board. You shall devote substantially all your
time, energy and skill during reasonable business hours to the service
of the Bank.
3. Compensation and Related Matters. (a) Salary. During the period of
your employment, the Bank will pay you an annual base salary at a rate
of $150,000,00 per year, such salary to be paid in substantially equal
installments no less frequently than semi-monthly. Such annual salary
shall be subject to increase on each anniversary date of this
Agreement at the discretion of the Board of Directors, taking into
account your performance of your duties during the preceding year and
other relevant factors, and subject to the approval of the Board. You
will also be eligible to participate in any Bank-wide and/or Senior
Management level incentive plan as may be established by the Board.
(b) Stock Option Program You will be eligible to participate in the
Lenawee Bancorp, Inc. Stock Option Program, the amount of such option
to be determined each year of the Plan by the Board. In addition, you
will be awarded, as per part of your annual compensation 1,000 shares
of Lenawee Bancorp, Inc. stock, unrestricted, for the 2000 calendar
year. This award will be made as soon as administratively possible
after receipt of the annual independent stock valuation, but in no
event later than March 31st. (c) Vehicle. Effective January 1, 2000
the Bank will provide you with a vehicle, payments to be made by the
Bank. (d) Expenses. During the employment period, you will be
reimbursed for reasonable travel and other business expenses. In
addition, so long as you are not employed or affiliated with another
company, the Bank will continue to pay for those memberships, dues,
and subscriptions now being provided to you. (e) Employment Benefits.
Also during the employment period, the Bank will continue, on the same
basis as provided to its other employees, your present medical,
dental, life insurance, long-term disability insurance and personal
time off benefits. You will also continue to participate in the Bank's
pension plan and will continue to be eligible to participate in the
401(k) deferred compensation plan to the extent generally available to
Bank employees. You will be entitled to the
<PAGE>
same treatment under any generally applicable benefit, employment
policy or practice as any other member of Management. Those plans,
policies and practices that generally apply to other members of
Management will be referred to as your "Employment Benefits." Your
Employment Benefits may be modified from time to time after the date
hereof without violation of this Agreement if the changes apply
generally to other members of Management. The payments specified in #3
shall be considered compensation for determining your rights under the
Bank of Lenawee's pension plain. During the employment period you will
be provided with an appropriate office and an administrative
assistant. If you die prior to the date of your retirement, all
remaining payments under 3(a) and (c) shall terminate as of the date
of your death.
4. Termination of Employment. Your employment may be terminated in
accordance with any of the following paragraphs:
(a) Involuntary Termination. The Board may terminate your employment
at any time without cause. In such an event, you shall continue
to receive your full salary and benefits during any notice
period. The expiration of the notice period, if any, shall be
your "Date of Termination." Upon your Date of Termination; you
shall be entitled to those benefits provided under Section 5.
(b) Involuntary Termination for Cause. The Board may terminate your
employment for "Cause" with written notice setting forth the
cause for termination. "Cause" means a willful engaging in gross
misconduct materially and demonstrably injurious to the Bank.
"Willful" means an act or omission in bad faith and without
reasonable belief that such act or omission was in or not opposed
to the best interests of the Bank. The expiration of the Notice
Period, if any, is your "Date of Termination for Cause." Upon
your Date of Termination for Cause, you shall only be entitled to
those benefits provided under Section 6.
(c) Voluntary Termination. You may voluntarily terminate your
employment. In such an event, you shall continue to receive your
full salary and Employment Benefits during the Notice Period
provided you satisfactorily perform your duties during the Notice
Period unless relieved of those duties by the Bank. The
expiration of the Notice Period is your "Voluntary Date of
Termination." Upon your Voluntary Date of Termination, you shall
only be entitled to those benefits provided under Section 6.
(d) Voluntary Termination for Good Reason. You may terminate your
employment by notice setting forth a Good Reason for Termination
if the notice is delivered to the Board within 60 days following
the occurrence of any "Good Reason." "Good Reason" means a (i)
change in the duties of your position; (ii) substantial
alteration in the nature or statue of your responsibilities;
(iii) reduction in your base salary; (iv) changes in your
Employment Benefits. If you give notice of termination for Good
Reason, you shall continue to receive your full base salary and
Employment
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<PAGE>
Benefits during the Notice Period as in effect prior to the event
that is the Good Reason for termination. The expiration of the
Notice Period is your "Date of Termination." Upon your Date of
Termination, you shall be entitled to those benefits provided
under Section 5.
(e) Disability. If, as a result of your incapacity due to physical or
mental illness, you shall have been deemed "disabled" by the
institution appointed by the Bank to administer the Bank's
long-term disability income plan (or a successor plan) because
you shall have been absent from your duties with the Bank on a
fill-time basis for one year, and shall not have returned to
fill-time performance of your duties within thirty days after
written notice is given you, the Bank may terminate this
Agreement for "Disability."
(f) Retirement. Retirement shall mean the voluntary termination by
you of your employment for other than "Good Reason" (as defined
below) which termination qualifies as retirement in accordance
with the Bank's Pension Plan, as restated and amended, (the
"Pension Plan"), or in accordance with any retirement arrangement
established with your consent with respect to you; provided,
however, that no mandatory retirement, whether under the Pension
Plan or in accordance with any such other retirement arrangement,
shall constitute Retirement for purposes of this Agreement unless
you have previously consented thereto in writing. Upon your
Retirement, this Agreement shall be terminated.
5. Special Severance Benefits. If your employment with the Bank is
involuntarily terminated in accordance with Section 4(a) or you
voluntarily terminate your employment for Good Reason in accordance
with Section 4(d), then you shall receive the following benefits:
(a) Your base salary shall be continued in effect for a period of
twelve months from your Date of Termination (hereinafter called
your "Severance Pay Period"); provided that you may, at any time
during any Notice Period, request a single lump-sum payment of
the aggregate salary payable in accordance with this paragraph
5(a), such payment to be delivered to you within fourteen (14)
days of your Date of Termination;
(b) The Bank, if you so choose, will purchase your primary residence,
at a fair market value. The fair market value will be determined
by the average of two independent appraisers, one selected and
paid by you and one selected and paid by the Bank. Such payment
of' fair market value will be made within sixty (60) days of your
request. The offer to purchase your primary residence will be
valid for six months following your Date of Termination.
(c) Notwithstanding any provision to the contrary in the Lenawee
Bancorp, Inc. Stock Option Plan, or any like plan of Lenawee
Bancorp, Inc., or under the terms of any grant, award agreement
or form for exercising any right under the Plan, you shall have
the right:
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<PAGE>
(i) to exercise any stock option awarded to you without regard
to any waiting period required by the Plan or award
agreement (but subject to any waiting period required by
law) from the first day of your Notice Period until the
first to occur of the second anniversary of your Date of
Termination or the date the award expires by its terms; and
(ii) to the full and absolute ownership of any shares of stock
granted to you under the Plan or this Agreement, free of any
restriction on your right to transfer or otherwise dispose
of the shares (but subject to any restrictions imposed by
law), regardless of whether entitlement to the shares is
contingent or absolute by the terms of the grant; and the
Board shall take such action within thirty (30) days of your
Date of Termination as is necessary or appropriate to
eliminate any restriction on your ownership of, or your
right to sell or assign, any such shares; and further
provided that if the Board should fail or refuse to so act,
Lenawee Bancorp, Inc., in exchange for such shares, shall
pay you thirty (30) days after your Date of Termination, in
cash in a single lump sum an amount equal to the aggregate
fair market value of the shares during the Notice Period;
(d) Your Employment Benefits shall be continued during your Severance
Pay Period, subject to the right of the Bank to make any changes
to your Employment Benefits permitted in Section 3; provided,
however, that you shall not;
(i) accumulate vacation pay for periods after your Date of
Termination;
(ii) first qualify for short or long-term disability plan
benefits by reason of an accident or illness first
manifesting itself after your Date of Termination
(iii) be eligible to continue to make contributions to any
Internal Revenue Code 401(k) or Sec. 125 Plan maintained by
the Bank (or Lenawee Bancorp, Inc.) or qualify for a share
of any employer contribution made to any tax qualified
defined contribution plan (except as outlined specifically
in the Plan Document; or,
(iv) be eligible to accumulate service for pension plan purposes.
(e) You shall qualify for full COBRA health and dental benefit
continuation coverage upon the expiration of your Severance Pay
Period;
(f) You shall be entitled to full executive outplacement assistance
with an agency selected by the Bank
6. Benefits Upon Voluntary Termination or Termination for Cause. Upon
your Date of Termination for Cause in accordance with Section 4(b) or
your Voluntary Date
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<PAGE>
of Termination in accordance Section 4(o), all benefits under this
Agreement will be void. In such an event, you shall be eligible for
any benefits provided in accordance with the plans and practices of
the Bank which are applicable to employees generally.
7. Arbitration. Any dispute under this Agreement, including any dispute
as to Cause or Good Reason for Termination, shall be submitted to
binding arbitration subject to the rules of the American Arbitration
Association. Except as hereinafter provided, the Bank and you shall
each bear your own attorney's fees and shall share equally the cost of
arbitration. However, if you prevail in a challenge to the Bank's
determination of Cause, you shall be reimbursed by the Bank for any
reasonable costs or expenses incurred in such challenge including
reasonable attorney's fees and costs of arbitration.
8 Confidentiality. You will not disclose to any person or use for the
benefit of yourself or any other person any confidential or
proprietary information of the Bank without the prior written consent
of the Board. Upon your termination of employment, you will return to
the Bank all written or electronically stored memoranda, notes, plans,
records, reports or other documents of any kind or description
(including all copies in any form whatsoever) relating to the business
of the Bank
9. Conflicts of Interest. You agree for so long as you are employed by
the Bank to avoid dealings and situation which create the potential
for a conflict of interest with the Bank. In this regard you agree to
comply with the Bank's policy regarding conflicts of interest.
10. Covenant Not to Compete. During the term of the Agreement, and for a
period of one (1) year following the termination of your employment
for any reason other than as set forth in Section 4(b), you agree not
to be employed by, serve as director of, consultant to, or advisor to,
any business within a 75-mile radius, that engages either directly or
indirectly in the financial services/banking industry.
11. Change in Control. For purposes of this Agreement, a "Change in
Control" of the Bank shall be deemed to have occurred if there shall
be consummated any consolidation or merger of the Bank in which the
Bank is not the continuing or surviving corporation, or pursuant to
which shares of the Bank's holding company common stock would be
converted in whole or in part into cash, securities or other property,
other than a merger of the Bank in which the holders of the holding
company's common stock immediately prior to the merger have
substantially the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or, any sale,
lease, exchange or transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of the Bank, or
the shareholders of the holding company shall approve any plan or
proposal for the liquidation or dissolution of the Bank; or, at any
time during a period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the
Bank shall cease for any reason to constitute at least a majority
thereof unless the election or the
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<PAGE>
nomination for election by the Bank's shareholders of each new
director during such two-year period was approved by a vote of at
least two-thirds of the directors then still in office who were
directors at the beginning of such two-year period.
12. Successor's Binding Agreement. The Bank will require any successor
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets
of the Bank, by agreement in form and substance satisfactory to you
expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Bank would be required to
perform if no such succession had taken place. Failure of the Bank to
obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle you
to compensation from the Bank in the same amount and on the same terms
as you would be entitled hereunder if you terminated your employment
for Good Reason (whether or not you terminate your employment), except
that for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Bank" shall mean the Bank as
herein before defined and any successor to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in
this paragraph 11 or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law. If you received
payments pursuant to this paragraph 11 prior to termination of your
employment, you shall not be entitled to any benefits hereunder at the
time of any subsequent termination of your employment. This Agreement
shall inure to the benefit of and be enforceable by, your personal or
legal representatives, executors, administrators., successors, heirs,
distributees, devisees and legatees. If you should die while any
amounts would still be payable to you hereunder if you had continued
to live, all such amounts shall be paid in accordance with this
Agreement
13. Employment. In consideration of the foregoing obligations of the Bank,
you agree to be bound by the terms and conditions of this Agreement
and to remain in the employ of the Bank during any period, following
any public announcement by any person of any proposed transaction or
transactions which, if effected, would result in a Change of Control
of the Bank until a Change in Control of the Bank has taken place or,
in the opinion of the Board such person has abandoned or terminated
its efforts to effect a Change in Control of the Bank. Subject to the
foregoing, nothing contained in this Agreement shall impair or
interfere in any way with your right to terminate your employment or
the right of the Bank to terminate your employment with or without
Cause prior to a Change in Control of the Bank. Nothing contained in
this Agreement shall be construed as a contract of employment between
the Bank and you or as a right for you to continue in the employ of
the Bank, or as a limitation of the right of the Bank to discharge you
with or without Cause prior to a Change in Control of the Bank.
14. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by
United States registered mail, return receipt requested, postage
prepaid, addressed to the respective addresses set forth on the first
page of this Agreement, provided that all notices to the Bank should
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<PAGE>
be directed to the Chairman of the Board, the Corporate Secretary, or
to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
15. Indemnification. The Bank will indemnify you to the fullest extent
permitted by the laws of the State of Michigan and the by-laws of the
Bank as in effect on the date of this Agreement, in respect of all
your services rendered to the Bank prior to the Date of Termination.
You shall be entitled to the protection of any insurance policies the
Bank now or hereafter maintains generally for the benefit of its
Directors, Officers and Employees (but only to the extent of the
coverage afforded by the existing provisions of such policies) to
protect against all costs, charges and expenses whatsoever incurred or
sustained by you in connection with any action, suit or proceeding to
which you may be made a party by reason of your being or having been a
Director, Officer or Employee of the Bank during your employment
therewith.
16 Further Assurances. Each party hereto agrees to furnish and execute
such additional forms and documents, and to take such other action, as
shall be reasonable and customarily required in connection with the
performance of this Agreement or the payment of benefits hereunder.
17. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed
to in writing signed by you and such officer as may be specifically
designated by the Board of Directors of the Bank. No waiver by either
party hereto at any time of any breach by the other party hereto of,
or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior time.
No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The
validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Michigan.
If this Agreement correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to the Bank this Agreement which will then
constitute our agreement on this subject.
Signed February 2, 1999
And Amended February 22, 2000
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<PAGE>
Exhibit 10.3
SUPPLEMENTAL EXECUTIVE
RETIREMENT AGREEMENT
This Agreement is made the 19th day of December, l997, by and between BANK
OF LENAWEE, a Michigan banking corporation (the "Company") and ALLAN W. BRITTAIN
("Executive").
RECITALS
The Company desires to provide Executive with certain unfunded supplemental
retirement benefits, and
Executive desire to receive such benefits on the terms and conditions
described in this Agreement.
THEREFORE, for valuable consideration, the Company and Executive agree as
follows:
ARTICLE I
PURPOSE
1.1 This Agreement establishes a supplemental retirement plan (the "Plan")
for the purpose of providing Executive with retirement benefits in excess of
those benefits provided under the Bank of Lenawee Retirement plan (the
"Retirement Plan").
1.2 The Plan is intended to be an unfunded plan maintained primarily for
the purpose of providing deferred compensation for a select group of management
or highly compensated employees as described in Sections 231(a)(2), 301(a)(3)
and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
ARTICLE II
DEFINITIONS
Unless a different meaning is expressly assigned, all capitalized terms
used in this Plan have the same meaning as in the Retirement Plan. In addition,
the following terms shall have the following meanings unless the context in
which the term is used clearly indicates that another or different meaning is
intended:
2.1 "Adjusted Retirement Benefits" means the benefits in the form and
amount that the Executive or his Beneficiary would have received under the
Retirement Plan (as amended through December 31, 1997) on the fol1owing
assumptions:
(a) total Benefit Service shall be calculated as if Executive had
continued to work for the Company at Compensation of $117,000 per year
until the last business day prior to his Normal Retirement Date
(irrespective of his actual period of employment or the commencement date
of his benefits under the Retirement Plan);
<PAGE>
(b) Covered Compensation shall be calculated as if the Social Security
Wage Base had increased at the rate of 2% per year during the period
commencing January 1, 1997 and ending on Executive's Normal Retirement Date
(irrespective of his actual period of employment or the commencement date
of his benefits under the Retirement Plan).
(c) If Executive (or his Beneficiary) commences benefits under the
Retirement Plan within the 36-month period prior to Executive's Normal
Retirement Date, the early retirement reduction provided in Article IV,
Section 2(b) of the Retirement Plan shall 1b changed from 8% per year
(1/150 per month) to 7% per year in the computation of Adjusted Retirement
Benefits (but shall remain at 8% per year in the computation of Retirement
Benefits).
Adjusted Retirement Benefits shall be determined as of the date when Executive
(or his Beneficiary) actually commences benefits under the Retirement Plan.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Committee" means the administrative committee appointed and serving
from time to time under Article X of the Retirement Plan.
2.4 "Retirement Benefits" means benefits in the form and amount actually
payable to the Executive or his Beneficiary under the Retirement Plan.
2.5 The following terms are defined elsewhere in this Plan:
"Code"...............................................Sec. 1.2;
"Company"............................................Sec. 1.1;
"ERISA"..............................................Sec. 1.2;
"Plan"...............................................Sec. 1.1;
"Retirement Plan"....................................Sec. 1.1;
"Vested".............................................Sec. 4.1.
ARTICLE III
BENEFIT
3.1 The Executive's benefits under this Plan shall be his Adjusted
Retirement Benefits reduced by his Retirement Benefits. For an example showing
the computation of benefits under the Plan, see Exhibit A.
3.2 Any benefits payable to Executive under this Plan shall be paid at the
same times, in the same manner and form, and for the same duration as Retirement
Benefits paid to the Executive under the Retirement Plan (using the same
actuarial assumptions and adjustments).
3.3 If the Executive dies before benefits commence under the Retirement
Plan, a survivor benefit shall be payable under this Plan only if Executive has
a surviving spouse who is entitled to a benefit under Art. IV Sec. 5(d) of the
Retirement Plan. In that event, such spouse's survivor benefit under this Plan
shall be based on (A) minus (B), where:
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"(A)" represents the monthly survivor annuity that such surviving spouse
would have received commencing at the executive's Normal Retirement Date
under the Retirement Plan (as amended through December 31, 1997) on the
following assumptions:
(i) Total Benefit service shall be calculated as if Executive had
survived and continued to work for the Company at Compensation of $117,000
per year until the last business day prior to his Normal Retirement Date
(irrespective of his actual period of employment or the commencement date
of surviving spouse benefits under the Retirement Plan);
(ii) Covered Compensation shall be calculated as if the Social
Security Wage Base had increased at the rate of 2% per year during the
period commencing January 1, 1997 and ending on Executive's Normal
Retirement Date (irrespective of his actual period of employment or the
commencement date of surviving spouse benefits under the Retirement Plan);
(iii) If Executive (or his surviving spouse) commenced benefits under
the Retirement Plan within the 36-month period prior to Executive's Normal
Retirement Date, the early retirement reduction provided in Article IV,
Section 2(b) of the Retirement Plan shall be changed from 8% per year
(1/150 per month) to 7% per year in the computation of the spouse's
survivor benefit under this Plan (but shall remain at 8% per year in the
computation of her monthly survivor annuity under the Retirement Plan); and
"(B)" represents the amount of the monthly survivor annuity that such
surviving spouse is entitled to receive, commencing at the Executive's
Normal Retirement Date, under the Retirement Plan.
Such survivor benefit shall be payable at the same times, in the same
manner and form, and for the same duration as the spouse's survivor annuity
under Art. IV Sec. 5(d) of the Pension Plan, actuarially adjusted if the benefit
commences at a date other than the Executive's Normal Retirement Date. If such
survivor benefit commences prior to Executive's Normal Retirement Date, the
amount shall be reduced by 1/150 for each of the first 36 calendar months and by
1/300 for each additional calendar month by which the commencement date precedes
Executive's Normal Retirement Date.
3.4 If the Executive dies after benefits under this Plan commence, and if
his surviving spouse or other Beneficiary is entitled to receive a survivor
annuity under the Pension Plan, such Beneficiary shall receive a monthly
survivor benefit under this Plan commencing as of the first day of the month
following Executive's death. The monthly amount of survivor benefit shall be the
same percentage of the benefits that were being paid to Executive under this
Plan as the Beneficiary's survivor annuity percentage under the Pension Plan
(i.e. 50%, 66-2/3%, or 100%).
3.5 If the Executive is obligated to the Company as described in Section
9.6 at the time benefits first become payable to the Executive or his
Beneficiary under this Plan, then the initial monthly benefit payment(s), net of
required withholding taxes, shall be applied in
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reduction of such obligations until they are fully repaid. Only after such
benefits are fully repaid shall payments commence to the Executive or his
Beneficiary under this Plan.
ARTICLE IV
VESTING
4.1 Executive's entitlement to benefits under this Plan shall vest ratably
over a period of 60 months commencing January 1, 1998 and ending December 31,
2002, provided that - -
(a) he satisfactorily performs his duties as an employee and officer of
the Company through December 31, 1997, and
(b) thereafter, for a period of five years, he does not become employed as
an executive officer of any bank or other financial institution having
its main office in Lenawee County, Michigan (i.e., a "Competing
Executive").
However, executive may commence his Plan benefits at any time during such
60-month period on a fully-vested basis subject to retroactive adjustment under
Section 4.3 if he becomes a Competing Executive. Furthermore, if Executive dies
or becomes disabled prior to December 31, 2002, then (provided he had not become
a Competing Executive) his entitlement to benefits shall become fully vested on
the date of death or determination of such disability. Assuming Executive meets
condition (a) and does not become a Competing Executive on or before December
31, 2002, his Plan benefits shall become fully vested on December 31, 2002.
4.2 If Executive becomes a Competing Executive prior to December 31, 2002,
then he shall be entitled to only a fraction of the benefits payable under this
Plan. The fraction shall be based on "N" / 60 where "N" represents the number of
full calendar months elapsed between January 1, 1998, and the date on which
Executive becomes a Competing Executive (i.e., the "Competition Date"). Such
fraction shall be expressed as a percentage figure (rounded to the nearest whole
percent).
4.3 If Executive had commenced benefits under this Plan prior to the
"Competition Date," then his subsequent Plan benefits shall be reduced
actuarially to reflect the fact that his Plan benefits prior to the Competition
Date exceeded his vested percentage. (Actuarial adjustment shall be calculated
by the enrolled actuary who is engaged to value the Retirement Plan as of the
Competition Date, using (i) the GATT lump sum cash-out rate in effect on January
1 of the calendar year that includes the Competition Date and (ii) the G-83
unisex mortality table.)
Example: Assume Executive commences his Plan benefits on January 1,
1998, and becomes a Competing Executive on January 1, 2000. His vested
percentage is 24 / 60 - 40%. This percentage is applied retroactively
to the Plan benefits paid in 1998 and 1999. Thus his Plan benefits for
2000 and subsequent years will be reduced (i) to give effect to 40%
vesting and (ii) to reflect the actuarial value of the 60% excess
benefits received in 1998 and 1999.
4.4 As used in the Plan, "vested" refers to the right of the Executive or
his surviving spouse to receive benefits calculated pursuant to Section 3.1,
recognizing that the amount of such
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benefits may increase or decrease over time, depending on the various factors
taken into account in computing the benefits.
ARTICLE V
SOURCE OF PAYMENT
5.1 The benefits payable under this Plan shall be paid only from the
general funds of the Company, and the Executive and his Beneficiary shall be no
more than unsecured general creditors of the Company, with no special or prior
right to any assets of the Company for payment of any obligations hereunder.
Nothing contained in this Plan or elsewhere shall be deemed to create a trust or
escrow of any kind for the benefit of the Executive or any Beneficiary with
respect to any assets of the Company.
ARTICLE VI
WITHHOLDING
6.1 The Executive and (if applicable) his Beneficiary shall make
appropriate arrangements with the Company for the satisfaction of any federal,
state or local income tax withholding requirements and federal social security,
medicare, or other employment tax requirements applicable to the payment or
vesting of benefits. If no other arrangements are made, the Company may provide,
at its discretion, for such withholding and tax payments as may be required.
ARTICLE VII
ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee which shall have full
power, discretion and authority to interpret, construe and administer the Plan
and any part thereof, and the Committee's interpretation and construction
thereof, and actions thereunder, shall be binding and conclusive on all persons
for all purposes. All actuarial determinations shall be made by the actuary for
the Retirement Plan, and the Committee shall be entitled to rely on the good
faith determinations of such actuary. Decisions of the Committee shall be final
and binding on all parties who have an interest in the Plan.
ARTICLE VIII
CLAIMS AND DISPUTES
8.1 Claims for benefits under the Plan shall be made in writing to the
Committee. The Executive or Beneficiary may furnish the Committee with any
written material he/she believes necessary to perfect such claim.
8.2 A person whose claim for benefits under the Plan has been denied, or
his/her duly authorized representative, may request a review upon written
application to the Committee, may review pertinent documents, and may submit
issues and comments in writing. The claimant's written request for review must
be submitted to the Company within sixty (60) days after receipt by the claimant
of written notification of the denial of a claim. A decision by the Committee
shall be made promptly, and not later than sixty (60) days after the Committee's
receipt of a request for review, unless special circumstances require an
extension of time for proceeding, in
-5-
<PAGE>
which cases a decision shall be rendered as soon as possible, but not later than
one hundred twenty (120) days after receipt of the request for review. The
decision on review shall be in writing, shall include reasons for the decision,
may include specific reference to the pertinent provision of the Plan on which
the decision is based, and shall be written in a manner calculated to be
understood by the claimant.
8.3 Unless otherwise required by law, any controversy or claim arising out
of or relating to this Plan or the breach thereof shall be settled by binding
arbitration in the City of Adrian in accordance with the laws of the State of
Michigan by three arbitrators, one of whom shall be appointed by the Company,
one by the Executive (or in the event of his prior death, his
beneficiary(-ies)), and the third of whom shall be appointed by the first two
arbitrators. If the selected (third) arbitrator declines or is unable to serve
for any reason, the appointed arbitrators shall select another arbitrator. Upon
their failure to agree on another arbitrator, the jurisdiction of the Circuit
Court of Lenawee County, Michigan shall be invoked to make such selection. The
arbitration shall be conducted in accordance with the commercial arbitration
rules of the American Arbitration Association except as provided in Section 8.4
below. Judgment upon the award rendered by the arbitrators may be entered in any
court having jurisdiction thereof. Review by the arbitrators of any decision,
action or interpretation of the Board or Committee shall be limited to a
determination of whether it was arbitrary and capricious or constituted an abuse
of discretion, within the guidelines of Firestone Tire & Rubber Co. v. Bruch,
409 U.S. 101 (1989). In the event the Executive or his beneficiary shall retain
legal counsel and/or incur other costs and expenses in connection with
enforcement of any of the Executive's rights under this Plan, the Executive or
beneficiary shall not be entitled to recover from the Company any attorneys
fees, costs or expenses in connection with the enforcement of such rights
(including enforcement of any arbitration award in court) regardless of the
final outcome.
8.4 Any arbitration shall be conducted as follows:
(a) The arbitrators shall follow the commercial arbitration Rules of
the American Arbitration Association, except as otherwise provided herein.
The arbitrators shall substantially comply with the rules of evidence;
shall grant essential but limited discovery; shall provide for the exchange
of witness lists and exhibit copies; and shall conduct a pretrial and
consider dispositive motions. Each party shall have the right to request
the arbitrators to make findings of specific factual issues.
(b) The arbitrators shall complete their proceedings and render their
decision within 40 days after submission of the dispute to them, unless
both parties agree to an extension. Each party shall cooperate with the
arbitrators to comply with procedural time requirements and the failure of
either to do so shall entitle the arbitrators to extend the arbitration
proceedings accordingly and to impose sanctions on the party responsible
for the delay, payable to the other party. In the event the arbitrators do
not fulfill their responsibilities on a timely basis, either party shall
have the right to require a replacement and the appointment of new
arbitrators.
(c) The decision of the arbitrator shall be final and binding upon the
parties and accordingly a judgment by any Circuit Court of the State of
Michigan or any other court of competent jurisdiction may be entered in
accordance therewith.
-6-
<PAGE>
(d) The costs of the arbitration shall be borne equally by the parties
to such arbitration, except that each party shall bear its own legal and
accounting expenses relating to its participation in the arbitration.
(e) Every asserted claim to benefits or right of action by or on
behalf of any Executive, past, present, or future, or any spouse, child,
beneficiary or legal representative thereof, against the Company or any
Subsidiary arising out of or in connection with this Plan shall,
irrespective of the place where such right of action may arise or be
asserted, cease and be barred by the expiration of the earliest of: (i) one
year from the date of the alleged act or omission in respect of which such
right of action first arises in whole or in part, (ii) one year after the
Executive's termination of employment, or (iii) six months after notice is
given to or on behalf of the Executive of the amount of benefits payable
under this Plan.
ARTICLE IX
MISCELLANEOUS
9.1 Governing Law; Termination. This Plan shall be governed by and
construed, enforced, and administered in accordance with the laws of the State
of Michigan excluding any such laws which direct an application of the laws of
any other jurisdiction. Subject to Article VIII, the Company and the Committee
shall be subject to suit regarding the Plan only in the courts of the State of
Michigan, and the Company shall fully indemnify and defend the Board and the
Committee with respect to any actions relating to this Plan made in good faith
by such bodies or their members.
9.2 Prohibition of Assignment. The benefits provided under Article III of
this Plan may not be alienated, assigned, transferred, pledged or hypothecated
by any Executive, Beneficiary or other person, at any time, to any person
whatsoever. These benefits shall be exempt from the claims of creditors or other
claimants and from all orders, decrees, levies, garnishment or executions to the
fullest extent allowed by law.
9.3 Severability. The provisions of this Plan shall be deemed severable and
in the event any provision of this Plan is held invalid, void, or unenforceable,
the same shall not affect, in any respect whatsoever, the validity of any other
provision of this Plan. Furthermore, the Committee shall have the power to
modify such provision to the extent reasonably necessary to make the provision,
as so changed, both legal, valid and enforceable as well as compatible with the
other provisions of the Plan.
9.4 Interpretation. Titles and headings to the Articles of this Plan are
included for convenience only and shall not control the meaning or
interpretation of any provision of this Plan. Wherever reasonably necessary in
this Plan, pronouns or any gender shall be deemed synonymous, as shall singular
and plural pronouns.
9.5 Executive Cooperation. The Executive shall cooperate with the Company
by furnishing any and all information requested by the Company, and taking such
other relevant actions as may reasonably be required by the Company or Committee
for purposes of the Plan. If the Executive neglects or refuses so to cooperate,
the Company shall have no further
-7-
<PAGE>
obligation to such Executive or his beneficiaries under the Plan, and any Plan
benefits accrued prior to such neglect or refusal shall be forfeited.
9.6 Obligations to Company. If any Executive becomes entitled to payment of
benefits under this Plan, and if at such time the Executive has outstanding any
debt, obligation, or other liability representing an amount owing to the Company
or any of its Subsidiaries, then, as provided in Article V, such amounts owed
shall be an offset against the amount of benefits payable under this Plan.
9.7 Payment on Behalf of Executive or Beneficiary. In the event any amount
becomes payable under this Plan to Executive or a Beneficiary who, in the sole
judgment of the Committee, is considered by reason of physical or mental
condition to be unable to give a valid receipt therefor, the Committee may
direct that such payment be made to the legally appointed guardian or
conservator of the person or estate of Executive or the Beneficiary, to any
person with whom Executive or the Beneficiary resides, or to any person who has
custody of Executive or Beneficiary, without any duty to supervise or inquire
into the application of any funds so paid. Any payment made pursuant to such
determination shall constitute a full release and discharge of the Company and
its employees.
9.8 Notice. Any notice or filing required or permitted to be given under
this Plan shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail: (a) to the Company or the Committee at the
principal office of the Company, directed to the attention of the President of
the Company, and (b) to the Executive his last known home address on file with
the Company's personnel office. Such notice shall be deemed given as of the date
of delivery or, if delivery is made by mail, as of the date shown on the
postmark on the receipt for registration or certification. It shall be the
Executive's responsibility to inform the Company's personnel office, in writing,
of any change in his home address.
IN WITNESS WHEREOF, this Supplemental Executive Retirement Agreement has
been executed by the Executive and on behalf of the Company this 19th day of
December 1997.
EXECUTIVE:
/s/ Allan F. Brittain
Allan F. Brittain
BANK OF LENAWEE
ATTEST
By /s/ Patrick K. Gill
/s/ Pamela S. Fisher Patrick K. Gill,
President & CEO
-8-
<PAGE>
EXHIBIT A
EXAMPLE OF BENEFIT COMPUTATION:
Executive, who is married, decides to commence his retirement benefits at
age 62 in the form of a 50% joint and survivor retirement benefit. His accrued
Normal Retirement Benefit under the Retirement Plan is $1,200 per month if begun
at his Normal Retirement Date. However, there are actuarial reductions for
commencing benefits before age 65 and for his wife's survivor annuity, so his
Retirement Benefits (as defined in Section 2.3) will be $800 per month. If
Executive had worked until age 65 at compensation of $117,000 per year, his
Normal Retirement Benefit would be $2,000 per month. Applying the alternate
actuarial reductions specified in this Plan, his Adjusted Retirement Benefits
(as defined in Section 2.1) would be $1,400 per month, starting at age 62.
Executive's benefits under this Plan are determined by subtracting his
Retirement Benefits from his Adjusted Retirement Benefits; in other words $1,400
minus $800 = $600. His benefits under this Plan are, therefore, $______ per
month, starting at age 62. If Executive's wife survives him, her survivor
annuity under the Retirement Plan will be $400 per month and her survivor
benefit under this Plan will be $300 per month.
A-1
<PAGE>
Exhibit 10.4
CONSULTING AGREEMENT
This Agreement effective the 1st day of January, 1998, by and between BANK
OF LENAWEE, a Michigan banking corporation (the "Company") and ALLAN F. BRITTAIN
("Consultant").
RECITALS:
A. Consultant is an experienced banking executive who retired after many
years of service to Company, during which he gained extensive knowledge
concerning the Company and its business, and
B. Company desires to utilize, from time to time, the skill of Consultant
in business development, community relations and other matters; and Consultant
is willing to provide such services to Company pursuant to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises set forth in this
Agreement, the parties agree as follows:
1. Engagement. Company hereby engages the services of the Consultant as an
independent contractor. Company will provide appropriate office space and access
to support staff as needed.
2. Service. Upon reasonable request by Company, Consultant agrees to devote
a portion of his time, attention, skill, energies, and efforts in advising the
Company (as well as its parent corporation and any of their divisions or
affiliates) on matters within his knowledge and experience as well as acting on
behalf of Company in business development and community relations matters. At
the beginning of each calendar year the Board of Directors will be provided with
an outline of the general activities requested by Company, and Consultant will
keep the Board informed, on a quarterly basis, of the status of activities
performed. Except as provided in paragraph 14, the parties agree Consultant may
engage in other activities for compensation during the term of this Agreement,
so long as Consultant (without violating applicable non-disclosure agreements)
gives Company a reasonably detailed advance notice, pursuant to paragraph 19, of
proposed engagements for remuneration by anyone other than Company; provided
that Consultant shall decline any engagement that Company reasonably believes
would be adverse to Company, its parent corporation, or their divisions and/or
affiliates, provided Company so notifies Consultant within 14 days alter
receiving such advance notice.
3. Consultant's Discretion. Consultant agrees to furnish all services
reasonably requested by Company in furtherance of such projects as the parties
mutually agree that Consultant shall undertake, including (but not limited to)
those services identified in paragraph 2. Company recognizes, however, that it
thereby obtains no authority or right to direct or control Consultant's actions
and that Consultant assumes and retains full and complete discretion concerning
his hours, methods, procedures, and independent professional judgment in
undertaking and completion of such services.
<PAGE>
4. Compensation. Company agrees to pay Consultant a retainer of $50,000.00
per year during the term of this Agreement. Such retainer shall be payable in
monthly installments, on the first business day of each month, beginning January
1, 1998.
5. Expenses. If Consultant, at the request of Company, shall incur any
travel, entertainment or lodging expenses, or other expenses pre-approved by
Company, which Company has agreed to reimburse to Consultant, then he shall
itemize and document those expenses in a manner satisfactory to Company, and
Company shall then reimburse or pay such expenses within 30 days.
6. Taxes. Consultant agrees to furnish Company with his employer
identification number or Social Security number for purposes of filing Form
1099. Consultant agrees that he (and not Company) is responsible, as to himself,
for payment of any self-employment, income or other taxes attributable to his
services under this Agreement. Consultant also agrees that he (and not Company)
is responsible for withholding, Social Security, unemployment, and other taxes
and workers' compensation and other obligations of an employer-employee
relationship in connection with any individual(s) he may hire.
7. Non-Disclosure of Third-Party Information. Consultant shall not disclose
to Company nor use in the performance of Consultant's services for Company, any
information that Consultant knows to be the confidential information of a third
party.
8. Company Confidential Information. As used in this Agreement;
"confidential trade secret information of Company" means any of the following
(to the extent owned or held by Company, its parent corporation, and/or their
subsidiaries of affiliates): know-how, technology, processes and methods of
operation (except as published in publications circulated without restriction to
persons outside the employment of Company); manuals designated confidential;
lists of customers; customer requirements and habits; pricing of products and
services; information relating to Company's finances not publicly available; and
oral and written data relating to the business activity of Company which are
provided to its employees and agents under restricted access. It specifically is
understood and agreed that, in addition to the confidential trade secret
information described herein, Company may from time to time develop other
confidential trade secret information relating to its business.
9. Confidentiality. During and after the term of Consultant's services,
Consultant agrees to keep and maintain all confidential trade secret information
of Company confidential and shall make no use of any confidential trade secret
information of Company except in the performance of Consultant's services for
Company.
10. Inventions. Consultant may from time to time, during the performance of
his services provided under this Consulting Agreement, create or contribute to
the creation of, subject matter relating to Company's business which may be
protectable as a trade secret, and it is specifically understood that all such
subject matter shall be the sole and exclusive property of Company.
-2-
<PAGE>
11. Copyrights. Consultant may from time to time, during the performance of
his services provided under this Consulting Agreement, create or contribute to
the creation of copyrightable subject matter relating to Company's business, and
it is understood and agreed that such subject matter shall be incontrovertibly
deemed to be "works for hire", and Consultant hereby agrees to assign and hereby
assigns to Company all right, title and interest he may have, if any in such
subject matter; all right, title and interest in such subject matter shall be
the sole and exclusive property of Company including the right to register
copyright in such subject matter.
12. Assignment of Intellectual Property. Consultant agrees to promptly
disclose to Company all subject matter referred to in paragraphs 10 and 11
above, and agrees to promptly execute all documents necessary to perfect title
to such subject matter in Company and to execute all documents necessary for
Company to obtain (at its sole discretion) copyright protection for such subject
matter as applicable. Nothing in this paragraph shall be construed to obligate
Company to obtain copyright protection on any subject matter created in whole or
in part by Consultant. Consultant's obligations under this paragraph shall
survive termination of this Agreement as to all subject matter referred to in
paragraphs 10 and 11 that is created during the term of this Agreement
13. Limitations on Authority and Indemnification. Consultant shall have no
authority to bind Company by or to any obligation, agreement, promise, or
representation without first obtaining Company's President's prior written
approval. Consultant agrees to indemnify and hold harmless Company, its
subsidiaries, affiliates, employees, agents, shareholders officers and directors
against claims, obligations or liabilities, including court costs and attorneys'
fees, arising out of any unauthorized act or omission by Consultant which result
in Company's being (or being alleged to be) bound by or to any such obligation,
agreement, promise, or representation.
14. Term and Termination. This Agreement shall commence on the date hereof
and shall continue until July 1, 2002; provided this Agreement shall be deemed
immediately canceled upon the death or total and permanent disability of the
Consultant or if the Consultant enters into any employment or consulting
arrangements with any financial, banking, or savings and loan institution
located or doing business in Lenawee County. Notwithstanding anything herein to
the contrary, either party may terminate this Agreement upon 60 days' advance
written notice if the other party materially breaches this Agreement. Either
party has the right to attempt to cure such breach prior to termination of the
agreement, subject to arbitration as outlined in paragraph 18. Notwithstanding
any termination of this Agreement, those provisions which are stated herein to
survive termination of the Agreement shall continue to be binding upon Company
and/or the Consultant, as the case may be.
15. Delivery of Documents After Termination. Upon termination of
Consultant's services by either party for any reason, Consultant hereby agrees
to return to Company any and all books, records, reports, notes, and materials
of any nature or kind whatsoever furnished to Consultant, or developed by
Consultant, winch relate to the business of Company.
-3-
<PAGE>
16. Independent Contractor Relationship. Any other provision of this
Agreement to the contrary notwithstanding, this Agreement does not constitute a
hiring by either party nor does it constitute a contract of employment. The
parties' intention is that Consultant be an independent contractor and not an
employee of Company, and that Consultant retain sole and absolute discretion and
judgment in the manner and means of carrying out his consulting activities. This
Agreement shall not be construed as a partnership or joint venture and neither
party hereto shall be liable for any obligations incurred by the other party
except as expressly provided herein.
17. Best Efforts. Consultant agrees that he shall devote his best efforts,
energies, and skills to the discharge of his duties and responsibilities
hereunder.
18. Arbitration. Unless otherwise required by law, any controversy or claim
arising out of or relating to this Agreement or the breach thereof shall be
settled by binding arbitration in the City of Adrian in accordance with the laws
of the State of Michigan by three arbitrators, one of whom shall be appointed by
Company, one by the Consultant, and the third of whom shall be appointed by the
first two arbitrators. If the selected (third) arbitrator declines or is unable
to serve for any reason, the appointed arbitrators shall select another
arbitrator. Upon their failure to agree on another arbitrator, the Circuit Court
of Lenawee County, Michigan shall be petitioned to make such selection. The
parties shall equally share the costs of arbitration (including arbitrators'
fees), provided that each party shall pay the fees and expenses of its/his own
attorney. The arbitration shall be conducted in accordance with the commercial
arbitration rules of the American Arbitration Association except as provided
below. Judgment upon the award rendered by the arbitrators may be entered in any
Court having jurisdiction thereof. The arbitrators shall substantially comply
with the rule of evidence; shall grant essential but limited discovery; shall
provide for the exchange of witness lists and exhibit copies; and shall conducts
pretrial and consider dispositive motions. Each party shall have the right to
request the arbitrators to make findings of specific factual issues.
19. Notices. All notices, requests, demands and other communications
hereunder shall be delivered personally or sent by certified or registered mail,
postage paid, addressed to Company at:
Bank of Lenawee
Attn: Patrick K. Gill, President/CEO
135 East Maumee Street
Adrian, Michigan 49221
and addressed to Consultant at:
Mr. Allan F. Brittain
409 Dennis Street
Adrian, Michigan 49221
or at such other address as Company or Consultant may furnish the other in
writing. Notices shall be deemed effective on receipt.
-4-
<PAGE>
20. Binding Effect. The terms, covenants and provisions hereof shall extend
to and be binding upon the parties hereto, their heirs, personal representative,
assigns and successors in interest.
21. Non-Waiver. Waiver of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any subsequent breach.
22. Entire Agreement. This instrument contains the entire agreement of the
parties. It may be changed only by an agreement in writing signed by the party
against which the enforcement of any waiver, change, modification, extension or
discharge is sought.
23. Paragraph Headings. The paragraph headings of this Agreement are for
convenience of reference only and shall not limit or define the text thereof.
24. Severability. In the event that any one or more of the provisions of
this Agreement shall be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected thereby.
25. Governing Law. This Agreement shall be governed by the laws of the
State of Michigan.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement the day
and year first above written.
BANK OF LENAWEE
By /s/ Patrick K. Gill
Patrick K. Gill,
President & CEO
Consultant:
/s/ Allan F. Brittain
Allan F. Brittain
<PAGE>
Exhibit 21 - Subsidiaries of Registrant - 100% Owned
Bank of Lenawee (100% owned by subsidiary)
A Michigan banking corporation
135 East Maumee Street
Adrian, MI 49221-0486
Lenawee Financial Services, Inc. (100% owned subsidiary of Bank of Lenawee)
135 East Maumee Street
Adrian, MI 49221-0486
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