FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-20167
NORTH COUNTRY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 South Cedar Street, Manistique, Michigan 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 341-8401
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |X|
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant, based on a per share price of $25.00 as of
March 1, 1999, was $161,373,424 (common stock, no par value). As of March 1,
1999, there were outstanding 7,097,837 shares of the Company's Common Stock (no
par value).
Documents Incorporated by Reference: Portions of the Company's 1998 Annual
Report to Shareholders are incorporated by reference into Part II of this
Report.
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 20, 1999 are incorporated by reference into Part III of this
Report.
<PAGE>
PART I
ITEM 1: Business
North Country Financial Corporation (the "Registrant" or "Company") was
incorporated under the laws of the state of Michigan on December 16, 1974. The
Company changed its name from "First Manistique Corporation" to "North Country
Financial Corporation" on April 14, 1998. The Registrant owns all of the
outstanding stock of its banking subsidiary, North Country Bank and Trust
("Bank"). The Registrant also owns all of the outstanding stock of two nonbank
subsidiaries: First Manistique Agency, an insurance agency which sells annuities
as well as life and health insurance and First Rural Relending Company, a
nonprofit relending company. The Bank represents the principal asset of the
Registrant. The Registrant and its subsidiary bank are engaged in a single
industry segment, commercial banking, broadly defined to include commercial and
retail banking and trust activities along with other permitted activities
closely related to banking, namely credit life and accident and health
insurance.
The Registrant became a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Act"), on April 1, 1976, when it acquired
First Northern Bank and Trust ("First Northern"). On May 1, 1986, Manistique
Lakes Bank merged with First Northern, with the survivor being First Northern.
The Registrant acquired all of the outstanding stock of the Bank of Stephenson
on February 8, 1994, in exchange for cash and common stock. The Bank of
Stephenson was operated as a separate banking subsidiary of the Registrant until
September 30, 1995, when it was merged into First Northern with First Northern
being the survivor. First Northern acquired a substantial portion of the banking
assets and assumed a substantial portion of the banking liabilities of Newberry
State Bank on December 8, 1994, in exchange for cash. First Northern acquired
the fixed assists and assumed the deposits of the Rudyard Branch of First of
America Bank on September 15, 1995, in exchange for cash. The Registrant
acquired all of the outstanding stock of South Range State Bank ("South Range")
on January 31, 1996, in exchange for cash and notes. On August 12, 1996, First
Northern and South Range changed their names to North Country Bank and Trust and
North Country Bank, respectively. The Registrant acquired all of the outstanding
stock of UP Financial Inc., the parent holding company of First National Bank of
Ontonagon ("Ontonagon"). Upon completion of the latter acquisition, Ontonagon
was merged into North Country Bank with North Country Bank being the survivor.
North Country Bank was operated as a separate banking subsidiary of the
Registrant until March 10, 1998, when it was merged into North Country Bank and
Trust with North Country Bank and Trust being the survivor.
The Bank is engaged in the general commercial banking business, providing a full
range of loan and deposit products. These banking services include customary
retail and commercial banking services, including checking and savings accounts,
time deposits, interest bearing transaction accounts, safe deposit facilities,
real estate mortgage lending, commercial lending, commercial and governmental
lease financing, direct and indirect consumer financing, and trust services.
The principal source of revenue for the Registrant is interest and fees on loans
and investments. The sources of income for the three most recent years are as
follows:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans................. $37, 283,850 $34,525,569 $26,785,141
Investment income.......................... 717,122 1,065,458 1,501,589
Other interest income...................... 496,987 373,010 437,396
Noninterest income......................... 2,650,903 1,638,216 1,360,453
</TABLE>
The Bank's primary market areas are the areas within a radius of 30 miles from
its various offices, primarily in the Upper Peninsula of Michigan. The Bank also
has branch offices in Traverse City and in Gaylord in Michigan's Lower
Peninsula. North Country Bank and Trust is headquartered in Manistique,
Michigan. The executive offices and mailing address are located at 130 South
Cedar Street, Manistique, Michigan 49854. North Country Bank and Trust maintains
offices in Schoolcraft, Delta, Machinac, Luce, Alger, Menominee, Dickinson,
Marquette, Baraga, Chippewa, Houghton, Iron, Gogebic, Ontonagon, Otsego and
Grand Traverse Counties. North Country Bank and Trust operates 30 branch
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offices, provides drive-in convenience at 21 branch locations, and has automatic
teller machines operating at 16 locations. North Country Bank and Trust has no
foreign offices.
As of December 31, 1998, the North Country Bank and Trust employs approximately
161 full-time employees.
Banking is a highly competitive business. The Bank competes primarily with
financial institutions in its market areas for loans and deposits. In its
market, namely the Upper Peninsula of Michigan, the Bank maintains the second
largest deposit base, or approximately 15% of the deposit market share. There
are approximately 20 banking and savings institutions and 31 credit unions with
offices in the Upper Peninsula of Michigan.
In addition to other banks, the Bank also competes for loans and deposits with
savings and loan associations, credit unions, investment firms, and large
national retailers, and competes for deposits with money market funds. In order
to successfully compete, management has developed a sales and service culture,
stresses and rewards quality customer service, and designs products to meet the
needs of the customer. The Bank also utilizes its ability to sell loans in the
secondary market.
The Bank makes mortgage, commercial, and installment loans to customers
primarily in the Upper Peninsula of Michigan. Fees may be charged for these
services. Historically, the Bank has predominantly sold its secondary market
conforming residential mortgage loans. The Bank also finances commercial and
governmental leases throughout the country. The leases are originated by
unrelated entities and the Bank reviews the credit quality of each lease before
entering into a financing agreement.
The Registrant is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet financial needs of its customers. These
financial instruments include commitments to make loans, unused lines of credit,
and standby letters of credit. The Registrant's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument is
represented by the contractual amount of those instruments. The Registrant
follows the same credit policy to make such commitments as it uses for
on-balance-sheet items.
The Registrant had the following fixed and variable rate commitments outstanding
at December 31 (in thousands):
<TABLE>
1998 1997
Fixed Variable Fixed Variable
<S> <C> <C> <C> <C>
Outstanding Letter of Credit................ $14,869 $2,214
Unused Lines of Credit...................... $ 2,782 $63,452 $2,964 $20,311
Loan Commitments Outstanding................ $11,235 $53,372 $19,652
</TABLE>
Fixed rates on unused lines of credit ranged from 9% to 18% at December 31,
1998.
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower and may include real estate, vehicles, business assets, deposits,
and other items.
The Bank supports the growth of the service industry, with its year round resort
and related businesses, gaming, forestry, restaurants, farming, fishing, and
many other activities important to growth in the Upper and Lower Peninsula. The
economy of the market areas of the Bank is affected by summer and winter tourism
activities and, accordingly, the Bank experiences seasonal consumer and
commercial deposit growth, with substantial growth increases from May to
September.
There are no material concentrations of credit to, nor have other material
portions of the Bank's deposits been received from, a single person, industry,
or group.
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In 1993, North Country Bank and Trust joined the Federal Home Loan Bank of
Indianapolis. The Federal Home Loan Bank of Indianapolis provides an additional
source of liquidity and long-term funds. Membership in the Federal Home Loan
Bank also provides access to additional advantageous lending programs. The
Community Investment Program makes advances to be used for funding
community-oriented mortgage lending, and the Affordable Housing Program grants
advances to fund lending for long-term low and moderate income owner occupied
and affordable rental housing at subsidized interest rates.
The Bank regularly assesses its ability to raise funds through the issuance of
certificates of deposit in denominations of $100,000 or more in the local and
regional market area and has established conservative guidelines for the total
funding to be provided by these deposits. The Bank is also using the Internet to
attract certifictes of deposits in denominations of $100,000 or more. These
large denomination deposits were slightly more than 6% of total deposits at
December 31, 1998. The Bank also uses federal funds purchased from correspondent
banks and the Federal Reserve Bank to respond to deposit fluctuations and
temporary loan demands.
As of December 31, 1998, the Bank had no material risks attendant to foreign
sources. See "Interest Rate and Foreign Exchange Risk Management" section in
Management's Discussion and Analysis for details on the Registrant's foreign
account activity. Compliance with federal, state, and local statutes and/or
ordinances relating to the protection of the environment is not expected to have
a material effect upon the Bank's capital expenditures, earnings, or competitive
position.
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 such
statutes and regulations. A change in applicable laws or regulations may have a
material effect on the Company, the Bank and the business 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 Commissioner of the Michigan Financial Institutions Bureau ("Commissioner"),
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.
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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 Commissioner deems the Bank's capital to be
impaired, the Commissioner 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 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 Commissioner
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 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.
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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 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 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 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 securities 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 by it 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 company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which can only be funded in ways that weakened the bank company'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
FDIC. 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 is authorized to issue preferred stock
but it has no current plans to issue any such preferred stock.
The Bank
General. The Bank is a Michigan banking corporation and its deposit
accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a
BIF-insured Michigan chartered bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Michigan banks, and the FDIC, 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.
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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 1998, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category.
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 during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Commissioner Assessments. Michigan banks are required to pay supervisory
fees to the Commissioner to fund the operations of the Commissioner. The amount
of supervisory fees paid by a bank is based upon the bank's total assets, as
reported to the Commissioner.
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.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20% of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063% of deposits while BIF members pay 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 FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, such as
the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total 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, FDIC
regulations provide that higher 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. As a
condition to regulatory approval of the Bank's formation, the Bank was required
to have an initial capitalization sufficient to provide a ratio of Tier 1
capital to total estimated assets of at least 8% at the end of the third year of
operation.
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:
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<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, 1998, 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 profits 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
profits 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 Commissioner, 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. The 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 FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of 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,
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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 FDIC regulations, FDIC-insured
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 FDIC
regulations, also prohibits FDIC-insured 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 FDIC 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 FDIC 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 FDIC).
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 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
-8-
<PAGE>
Commissioner, (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 Commissioner, (i) the acquisition by a Michigan-chartered bank of one or
more branches (not comprising all or substantially all of the assets) of an
FDIC-insured bank, savings bank or savings and loan association located in
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, or U.S. territories or protectorates, 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.
-9-
<PAGE>
SELECTED STATISTICAL INFORMATION
The following statistical information is presented in response to the Securities
and Exchange Commission's "Guide 3 Statistical Disclosures by Bank Holding
Companies."
I. A&B Distribution of Assets, Liabilities, and Stockholders' Equity
The following table details the key components of net interest income,
the average daily balance sheet for each year--including the components
of earning assets and supporting liabilities--the related interest
income on a fully tax equivalent basis and interest expense, as well as
the average rates earned and paid on these assets and liabilities. The
following table sets forth average consolidated balance sheet data and
average yield and rate data on a tax equivalent basis for the years
ended December 31:
-10-
<PAGE>
<TABLE>
Year ended December 31,
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earnings assets:
Loans(1)(2)(3) $403,563 $39,206 9.71% $352,079 $35,567 10.10% $277,464 $27,675 9.97%
Taxable investment securities 7,577 686 9.05% 14,801 1,030 6.96% 22,164 1,422 6.42%
Nontaxable investment securities(2) 1,000 47 4.70% 900 53 5.89% 1,344 121 9.00%
Other investments 9,776 497 5.08% 7,009 373 5.32% 10,356 437 4.22%
--------- ------ ----- -------- ------- ----- -------- ------- -----
Total 421,916 40,436 9.58% 374,789 37,023 9.88% 311,328 29,655 9.53%
Noninterest earning assets:
Cash and due from banks 17,128 11,800 13,056
Premises & equipment - net 17,994 15,797 13,172
Other assets 15,687 13,266 10,688
Less: Allowance from loan loss (6,178) (4,999) (3,815)
-------- -------- --------
Total 466,547 410,653 344,429
======= ======== ========
LIABILITIES &
STOCKHOLDERS' EQUITY Interest bearing liabilities:
Savings deposits 209,864 7,271 3.46% 156,167 5,593 3.58% 148,412 5,391 3.63%
Time deposits 150,685 9,259 6.14% 159,244 9,040 5.68% 114,585 6,233 5.44%
Short-term and other borrowings 22,247 1,285 5.78% 21,604 1,265 5.86% 14,864 1,050 7.06%
--------- ------- ----- -------- ------- ----- -------- ----- -----
Total 382,796 17,815 4.65% 337,015 15,898 4.72% 277,861 12,674 4.56%
Non-interest bearing liabilities:
Demand deposits 41,393 35,285 32,194
Other liabilities 1,521 1,993 3,406
Stockholders' equity 40,837 36,360 30,968
-------- -------- -------
Total 466,547 410,653 344,429
======= ======= =======
Net interest income 22,621 21,125 16,981
Rate spread 4.93% 5.15% 4.96%
Net interest margin 5.36% 5.64% 5.45%
</TABLE>
-11-
<PAGE>
(1) For purposes of these computations, non-accruing loans are included in
the daily average loan amounts outstanding.
(2) The amount of interest income on nontaxable investment securities and
loans has been adjusted to its fully tax equivalent.
(3) Interest income on loans includes loan fees.
I.C Interest Income and Expense Volume and Rate Change
An analysis of the changes in net interest income from period-to-period
is presented in the following table. The analysis highlights the
relative effect of the changes in interest income and expense due to
changes in the average balances of earning assets and interest-bearing
liabilities and changes in interest rates.
<TABLE>
Analysis of Changes in Net Interest Income
For Year Ended December 31
(Fully taxable equivalent, in thousands)
1998 Compared to 1997 1997 Compared to 1996
----------------------- ---------------------
Amount of Amount of
Increase(Decrease) Increase(Decrease)
Due to (1) Due to (1)
------------ -----------
Volume Rate Net Volume Rate Net
------ ------ ----- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earnings assets:
Loans (2) $ 5,043 $ (1,404) $ 3,639 $ 7,527 $ 365 $ 7,892
Taxable investment securities (596) 252 (344) (525) 133 (392)
Nontaxable investment
Securities (2) 5 (11) (6) (62) (6) (68)
Other investments 141 (17) 124 (331) 267 (64)
-------- --------- -------- -------- -------- --------
Total interest earning assets 4,593 (1,180) 3,413 6,609 759 7,368
-------- --------- -------- -------- -------- --------
LIABILITIES &
STOCKHOLDERS' EQUITY Interest bearing liabilities:
Savings deposits $ 1,866 $ (188) $ 1,678 $ 274 $ (72) $ 202
Time deposits (502) 721 219 2,522 285 2,807
Short-term and other borrowingss 37 (17) 20 344 (129) 215
-------- --------- -------- -------- -------- --------
Total interest bearing liabilities $ 1,401 $ 516 $ 1,917 $ 3,140 $ 84 $ 3,224
-------- --------- -------- -------- -------- --------
Net change in net interest income $ 3,192 $ (1,696) $ 1,496 $ 3,469 $ 675 $ 4,144
======== ========= ======== ======== ======== ========
</TABLE>
(1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(2) The amount of interest income on nontaxable loans and investment
securities has been adjusted to its fully taxable equivalent.
-12-
<PAGE>
II.A. Investment Portfolio
The following table presents the carrying value of investment securities at
each respective year end.
<TABLE>
Investment Securities
As of December 31,
(In thousands)
AVAILABLE FOR SALE
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury and federal agency $ 4,692 $ 7,743 $ 12,569
State and political subdivisions 1,021 830 917
Other securities $ 2,852 1,530 1,705
---------- ---------- -----------
TOTAL $ 8,565 $ 10,103 $ 15,191
========== ========== ===========
</TABLE>
II.B. Relative Maturities and Weighted Average Interest Rates
The following table presents the maturity schedule of securities held
and the weighted average yield of those securities, as of December 31,
1998. Mortgaged backed securities are included with other securities
stratified by maturity dates. Registrant holds no securities with one
issuer in which the aggregate carrying value of the securities exceeds
ten percent of stockholders' equity.
<TABLE>
Maturities of Investment Securities
As of December 31, 1998
(Fully taxable equivalent, in thousands)
WEIGHTED
U.S. TREASURY STATE & POLITICAL OTHER AVERAGE
& FEDERAL AGENCY SUBDIVISIONS SECURITIES YIELD (1)
---------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
One year or less 503 -0- -0- 4.59%
One through five years -0- -0- -0- -
Five through 10 years 3,532 -0- -0- 6.85%
Over 10 years 657 1,021 2,852 7.71%
</TABLE>
(1) Weighted average yield includes the effect of tax-equivalent adjustments
using a 34% tax rate.
-13-
<PAGE>
III.A. Type of Loans
The following table sets forth the major categories of loans
outstanding for each category at December 31 for each year indicated
(in thousands).
<TABLE>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $219,027 $ 181,683 $ 141,555 $ 107,054 $ 94,515
Real estate - construction 11,924 10,940 13,897 2,235 1,283
Real estate - mortgage 97,415 95,543 80,592 58,434 58,797
Consumer 23,160 26,795 31,156 29,918 28,574
Leases 60,194 57,558 47,686 23,867 --
--------- ------------ ------------ ------------ -----------
TOTAL $411,720 $ 372,519 $ 314,886 $ 221,508 $183,169
======== =========== =========== =========== ========
</TABLE>
Included in the above totals are approximately $4.1 million of loans to
Canadian obligors.
To the extent the Company utilizes lease financing for its customers, the
leases are accounted for as loans.
III.B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the remaining maturity of total loans
outstanding for the categories shown at December 31, 1998, based on
scheduled principal repayments. The amounts due after one year are
classified according to the sensitivity to changes in interest rates.
<TABLE>
Maturity and Rate Sensitivity of Selected Loans
As of December 31, 1998
(In Thousands)
Commercial, Financial
and Agricultural Construction
<S> <C> <C>
In one year or less.............................. $ 52,068 $ 8,178
After one year but within five years
Variable interest rates..................... 71,446 1,331
Fixed interest rates........................ 50,662 2,415
After five years:
Variable interest rates..................... 30,294 --
Fixed interest rates........................ 14,557 --
--------- ----------
Total............................................ $219,027 $11,924
======== =======
</TABLE>
-14-
<PAGE>
III.C. Risk Elements
The following table presents a summary of non-performing assets.
<TABLE>
As of December 31,
(In thousands)
Non-Performing Assets and Problem Loans
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Nonaccrual loans $2,174 $1,956 $ 49 $ 579 none
Accruing loans past due 90 days or more 1,238 698 68 1,439 142
Restructured loans none none none none none
Interest income that would have been
recorded under original terms 207 93 none none none
Interest income recorded during period none none none none none
</TABLE>
III.D. Other Interest Bearing Assets.
None
-15-
<PAGE>
IV.A. Summary of Loan Loss Experience.
Additional information relative to the allowance for loan losses is
presented in the following table. This table summarizes loan balances
at the end of each period and daily average balances, changes in the
allowance for loan losses arising from loans charged off, recoveries on
loans previously charged off by loan category, and additions to the
allowance for loan losses through provisions charged to expense.
Factors which influence management's judgment in determining the
provision for loan losses each period include establishing specified
loss allowances for selected loans (including large loans, nonaccrual
loans, and problem and delinquent loans) and consideration of
historical loss information and local economic conditions.
<TABLE>
Additional Information Relative to Allowance for Loan Losses
As of December 31,
(In Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance of allowance for
possible loan losses of
beginning of period $ 5,600 $ 4,591 $ 3,137 $ 2,350 $ 917
Loans charged off:
Commercial, financial, and
agricultural 406 351 1,012 90 92
Real estate-construction - - - - -
Real estate-mortgage 31 37 8 - 34
Consumer 368 413 357 252 149
Leases - - - 98 -
--------- --------- --------- --------- ---------
TOTAL LOANS CHARGED OFF 805 801 1,377 440 275
--------- --------- --------- --------- ---------
Recoveries of loans previously
charged off:
Commercial, financial and
agricultural 48 2 67 336 9
Real estate-construction - - - - -
Real estate-mortgage - 7 - 22 -
Consumer 70 77 55 98 4
Leases - 27 - - -
--------- --------- --------- --------- ---------
TOTAL RECOVERIES 118 113 122 456 193
--------- --------- --------- --------- ---------
Net loans charged off 687 688 1,255 (16) 82
Provisions charged to expense 1,199 1,398 2,424 771 330
Allowance from acquisitions - 299 285 - 1,185
--------- --------- --------- --------- ---------
BALANCE AT END OF PERIOD $ 6,112 $ 5,600 $ 4,591 $ 3,137 $ 2,350
========= ========= ========= ========= =========
Total loans outstanding at end of period $411,720 $372,519 $314,996 $221,507 $183,169
Average total loans outstanding for
the year $403.563 $352,079 $277,464 $202,570 $137,444
Ratio of net charge-offs during period
to average loans outstanding 0.17% 0.20% 0.45% -0.01% 0.96%
</TABLE>
-16-
<PAGE>
IV.B. Allocation of Allowance for Loan Losses
The allocation of the allowance for loan losses for the years ended
December 31 is shown on the following table.
<TABLE>
Allocation of the Allowance for Loan Losses
As of December 31,
(In Thousands)
1998 1997 1996 1995 1994
------ ------ ------ ------ -----
% of Loans % of Loans % of Loans % of Loans % of Loans
In Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 1,789 53.2% $ 2,873 48.8% $ 2,356 45.0% $ 583 48.3% $ 655 51.6%
Real estate-
construction 65 2.9% - 2.9% - 4.4% - 1.0% - 0.7%
Real estate-mortgage 622 23.7% 99 25.6% 81 25.6% 59 26.4% 270 32.1%
Consumer 229 5.6% 416 7.2% 341 9.9% 112 13.5% 125 15.6%
Leases 880 14.6% 350 15.5% 287 15.1% 23 10.8% - -
Unallocated 2,507 N/A 1,862 N/A 1,526 N/A 2,360 N/A 1,300 N/A
-------- ------ ------- ------ -------- ---- ----- ---- ------ ----
$ 6,112 100.0% $ 5,600 100.0% $ 4,591 100% $3,137 100% $2,350 100%
======== ====== ======= ====== ======== ==== ====== ==== ====== ====
</TABLE>
V. Deposits.
The following table represents the maturities of time certificates of
deposits and other time deposits of $100,000 or more.
<TABLE>
Maturity of COD's Greater than
$100,000
As of December 31, 1998
(In Thousands)
<S> <C>
3 months or less $ 6,966
Over 3 months through 6 months 4,019
Over 6 months through 12 months 6,698
Over 12 months 7,936
--------
Total $25,619
========
</TABLE>
Approximately $6.4 million of total deposits are from Canadian customers.
VI. Return on Equity and Assets
The various ratios are disclosed in Item 6, "Selected financial Data."
VII. Short-Term Borrowings
The Company's short-term borrowings consist only of federal funds
purchased. Following are the balances of federal funds purchased as of
December 31 of each year shown.
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C>
$ -0- $ 1,195,000 $ 5,000,000
</TABLE>
-17-
<PAGE>
ITEM 2: Properties
The Registrant conducts business from 30 banking and administrative offices. Of
these, 21 are owned in fee simple covering approximately 95,000 square feet, and
nine are leased covering approximately 15,000 square feet. The Registrant's
headquarters, which were remodeled in 1996, are located at 130 South Cedar
Street, Manistique, Michigan 49854. This facility is used for centralized
support services and corporate administration. Other owned and leased properties
are banking branches. All of the facilities are believed to be in good condition
and adequate to meet the Registrant's present needs.
ITEM 3: Legal Proceedings
As the date hereof, there were no material pending legal proceedings, other than
routine litigation incidental to the business of banking to which the Registrant
or any of its subsidiaries is a party of or which any of its properties is the
subject.
ITEM 4: Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1998 to a vote of
the Registrant's stockholders.
ADDITIONAL ITEM - EXECUTIVE OFFICERS
<TABLE>
Name Age Position
<S> <C> <C>
Ronald G. Ford 51 Chairman, President and C.E.O. of Registrant,
Director of North Country Bank and Trust, and
Director of Registrant
John Lindroth 43 Vice Chairman and Director of North Country
Bank and Trust and Director of the Registrant
Michael C. Henricksen 56 Chairman and Director of the Registrant and
Director of North Country Bank and Trust
Thomas G. King 46 Vice Chairman and Director of the Registrant
and Director of North Country Bank and Trust
Sherry L. Littlejohn 38 President and C.O.O. of North Country Bank
and Trust and Executive Vice President of the
Registrant
</TABLE>
The foregoing officers serve at the pleasure of the Board of Directors and are
appointed by the Board annually. There are no arrangements or understandings
between any officer and any other person pursuant to which the officer was
elected.
-18-
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K and the documents incorporated
herein by reference which are not statements of historical fact (including
statements in the future tense and those which include terms such as "believe,"
"will," "expect," and "anticipate") contain forward-looking statements that
involve risks and uncertainties. The Company's actual future results could
materially differ from those discussed. Factors that could cause or contribute
to such differences include, but are not limited to, acceptance of new products
and services, the Company's future lending and collection experience, the
effects of acquisitions, competition from other institutions, changes in the
banking industry and its regulation, needs for technological change, and other
factors including those discussed in Item 1 above in this Report and in the
Management's Discussion and Analysis in Item 7, as well as those discussed
elsewhere in this Report and the documents incorporated herein by reference.
PART II
ITEM 5: Market for Registrant's Common Stock and Related Security Holder Matters
There is no active market for the Registrant's common stock and there is no
published information with respect to its market price. There are occasional
direct sales by shareholders of which the Registrant's common stock has sold at
a premium to book value. From January 1, 1997, through December 31, 1998, there
were, so far as the Registrant's management knows, approximately 178 sales of
shares of the Registrant's common stock, involving a total of approximately
183,265 shares. The price was reported to management in most of these
transactions, and management has no way of confirming the prices which were
reported. During this period, the highest price known to be paid was $23.00 per
share in the last quarter of 1998, and the lowest price was $11.00 in the first
quarter of 1997. To the knowledge of management, the last sale of common stock
occurred on March 17, 1999, at a price of $25.00. As of March 1, 1999, there
were 1,816 shareholders of record of the Registrant's common stock.
The following table sets forth the range of high and low sales prices of the
Registrant's common stock during 1997 and 1998, based on information made
available to management. Although management is not aware of any transactions at
higher or lower prices, there may have been transactions at prices outside the
ranges listed in the table. All share prices reflect the 3-for-1 stock split
effective August 25, 1998.
<TABLE>
Sales Price Per Share
1998 1997
---- ----
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $19.00 $16.34 $11.00 $11.00
Second Quarter $20.67 $19.06 $12.34 $11.67
Third Quarter $22.00 $20.67 $16.34 $15.67
Fourth Quarter $23.00 $22.00 $16.34 $16.34
</TABLE>
The holders of the Registrant's common stock are entitled to dividends when, as
and if declared by the Board of Directors of the Registrant out of funds legally
available for that purpose. Dividends have been paid on a quarterly basis. In
determining dividends, the Board of Directors considers the earnings, capital
requirements and financial condition of the Registrant and its subsidiary bank,
along with other relevant factors. The Registrant's principal source of funds
for cash dividends is the dividends paid by the subsidiary bank. The ability of
the Registrant and the subsidiary bank to pay dividends is subject to regulatory
restrictions and requirements.
-19-
<PAGE>
The following table presents cash dividends paid by quarter for 1998 and 1997
(as adjusted to reflect the 3-for-1 stock split effective August 25, 1998):
<TABLE>
Dividends Paid
1998 1997
<S> <C> <C>
First Quarter $ .0438 $ .0408
Second Quarter .0446 .0417
Third Quarter .0450 .0425
Fourth Quarter .0450 .0429
</TABLE>
-20-
<PAGE>
ITEM 6: Selected Financial Data
<TABLE>
For the Year ended December 31,
(In thousands except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $ 38,498 $ 35,964 $ 28,724 $ 22,100 $ 13,798
Interest expense (17,815) (15,898) (12,674) (9,561) (6,053)
--------- ---------- ---------- --------- ---------
Net interest income 20,683 20,066 16,050 12,539 7,745
Net security gains (losses) 44 (60) (8) (10) 75
Provision for loan losses (1,199) (1,398) (2,424) (771) (330)
Other income 2,606 1,698 1,368 1,373 1,037
Other expenses (16,603) (14,797) (11,609) (9,368) (6,101)
--------- ---------- ----------- --------- ---------
Income before income taxes 5,531 5,509 3,377 3,754 2,426
Cumulative effect of change
in accounting for income taxes 13
Provisions for income taxes (970) (1,403) (543) (1,084) (458)
---------- ---------- ---------- --------- ---------
Net income $ 4,561 $ 4,106 $ 2,834 $ 2,670 $ 1,968
========== ========== ========== ========= =========
Per Share Data:
Net income - Basic $ 0.65 $ 0.58 $ 0.43 $ 0.42 $ 0.38
Net income - Diluted 0.64 0.57 0.43 0.42 0.38
Cash dividends 0.17 0.16 0.14 0.14 0.07
Book value 5.54 5.13 4.60 3.96 3.57
Ratios based on net income:
Return on average equity 11.18% 11.29% 9.15% 11.65% 14.26%
Return on average assets 0.98% 1.00% 0.82% 1.00% 1.01%
Dividend payout ratio 27.43% 28.79% 32.11% 31.97% 17.77%
Shareholders' average equity
as a percent of average assets 8.75% 8.85% 8.99% 8.57% 7.11%
Financial Condition:
Assets 471,381 421,434 367,160 282,791 253,098
Loans 411,720 372,519 314,886 221,507 183,168
Securities 8,565 10,103 15,191 25,645 35,796
Deposits 404,961 360,549 305,939 244,407 223,436
Other borrowings 23,270 19,628 20,441 10,087 3,552
Shareholders' equity 39,469 36,592 32,386 25,006 22,483
</TABLE>
-21-
<PAGE>
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Incorporated by reference to the Management's Discussion and Analysis in the
Company's 1998 Annual Report to Shareholders and contained in Exhibit 13 to this
Report on Form 10-K.
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk and foreign exchange risk. The Company has limited
agricultural-related loan assets and therefore has minimal significant exposure
to changes in commodity prices. Any impact that changes in foreign exchanges
rates and commodity prices would have on interest rates are assumed to be
insignificant.
Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. The Company derives its income primarily
from the excess of interest collected on its interest-earning assets over the
interest paid on its interest-bearing liabilities. The rates of interest the
Company 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, the Company is exposed to lower profitability if it cannot
adapt to interest rate changes. Accepting interest rate risk can be an important
source of profitability and shareholder value; however, excess levels of
interest rate risk could pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to the Company's safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Company's interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity. In evaluating the quantitative level of
interest rate risk the Company assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and asset equity.
The table below measures current maturity levels of interest-earning assets and
interest-bearing liabilities, along with average stated rates and estimated fair
values at December 31, 1998:
-22-
<PAGE>
<TABLE>
Principal/Notional Amount Maturing in:
Fair
Value
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets
Federal funds sold $ 6,048 - - - - - $ 6,048 $ 6,048
Average interest rate 5.1% - - - - - 5.1%
Fixed interest rate
securities 502 8,063 8,565 8,565
Average interest rate 0% - - - - 7.3% 6.4%
Equity securities 3,145 - - - - - 3,145 3,145
Average interest rate 8.3% - - - - - 8.3%
Fixed interest rate loans 37,250 19,707 21,701 40,727 - 61,232 180,607 182,682
Average interest rate 8.7% 8.5% 8.8% 8.0% - 7.0% 8.2%
Variable interest rate loans 35,527 14,724 9,498 17,642 28,275 125,447 231,113 231,927
Average interest rate 9.4% 9.5% 9.4% 9.2% 9.1% 8.6% 8.9%
Rate Sensitive Liabilities
Savings, money market
and interest-bearing
demand $213,792 - - - - - 213,792 213,792
Average interest rate 1.8% - - - - - 1.8%
Time deposits 106,043 26,484 12.846 3,710 - - 149,093 150,466
Average interest rate 5.4% 5.8% 5.8% 5.6% - - 5.7%
Fixed interest rate other
borrowings 604 643 686 736 789 6,026 9,482 8,592
Average interest rate 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9%
Variable interest rate -
other borrowings 3,788 - - - - 10,000 13,788 13,788
Average interest rate 5.2% - - - - 5.5% 5.4%
</TABLE>
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of variables, including: the growth,
composition and levels of loans, deposits, and other earning assets and
interest-bearing liabilities economic and competitive conditions; potential
changes in lending, investing and deposit strategies; customer preferences; and
other factors.
-23-
<PAGE>
ITEM 8: Financial Statements
Incorporated by reference to the Registrant's Consolidated Financial Statements
for the years ended December 31, 1998, 1997 and 1996 in the Company's 1998
Annual Report to Shareholders and contained in Exhibit 13 to this Report on Form
10-K.
ITEM 9: Changes in and Disagreements With Accountants and Financial Disclosure
There have been no disagreements with Accountants.
PART III
ITEM 10: Directors and Executive Officers of the Registrant
The information set forth on page 2, under the caption "Information About
Directors and Director Nominees" of the Registrant's definitive Proxy Statement
dated March 1, 1999, is hereby incorporated by reference.
ITEM 11: Executive Compensation
Information relating to compensation of the Registrant's executive officers and
directors is contained on pages 3 - 7, under the captions "Remuneration of
Directors" and "Compensation of Executive Officers," in the Registrant's
definitive Proxy Statement dated March 1, 1999, and is incorporated herein by
reference.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of certain beneficial owners and
management is contained on page 8, under the caption "Ownership of Common Stock"
in the Registrant's definitive Proxy Statement dated March 1, 1999, and is
incorporated herein by reference.
ITEM 13: Certain Relationships and Related Transactions
Information relating to certain relationships and related transactions is
contained on page 7, under the caption "Indebtedness of and Transactions With
Management" in the Registrant's definitive Proxy Statement dated March 1, 1999,
and is incorporated herein by reference.
-24-
<PAGE>
PART IV
ITEM 14 - Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) Financial Statements.
1. The following documents are filed as part of Item 8 of this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December
31, 1998, 1997, and 1996
Consolidated Statements of Changes in Shareholders Equity for
the years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
2. Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
3. The following exhibits are filed as part of this report:
Reference is made to the exhibit index which follows the
signature page of this report.
The Registrant will furnish a copy of any exhibits listed on
the Exhibit Index to any shareholder of the Registrant without
charge upon written request of Sherry L. Littlejohn, First
Manistique Corporation, 130 South Cedar Street, P.O. Box 369,
Manistique, Michigan 49854.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the
Registrant filed no Current Reports on Form 8-K.
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, dated March 19, 1999.
NORTH COUNTRY FINANCIAL CORPORATION
/s/ Ronald G. Ford
Ronald G. Ford
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Sherry L. Littlejohn
Sherry L. Littlejohn
Executive Vice President, Chief Operating Officer and
Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 19, 1999, by the following persons on
behalf of the Registrant and in the capacities indicated. Each director of the
Registrant, whose signature appears below, hereby appoints Ronald G. Ford and
Michael C. Henricksen, and each of them severally, as his attorney-in-fact, to
sign in his name and on his behalf, as a director of the Registrant, and to file
with the Commission any and all Amendments to this Report on Form 10-K.
Signature
/s/ Stanley J. Gerou II
Stanley J. Gerou II - Director C. Ronald Dufina - Director
/s/ Thomas G. King
Thomas G. King - Director Michael C. Henricksen - Director
/s/ John Lindroth /s/ John P. Miller
John Lindroth - Director John P. Miller - Director
/s/ Ronald G. Ford
Charles B. Beaulieu - Director Ronald G. Ford - Director
/s/ Sherry Littlejohn
Bernard A. Bouschor - Director Sherry Littlejohn - Director
-26-
<PAGE>
EXHIBIT INDEX
Number Exhibit
3(a) Amendment to Restated Articles of Incorporation. Previously filed as
an Exhibit to the Registrant's Registration statement on Form S-2
(Registration No. 333-06017). Here incorporated by reference.
3(b) Restated Articles of Incorporation. Previously filed as an exhibit to
Registrant's Report on Form 10-K for the year ended December 31, 1995.
Here incorporated by reference.
3(c) Amended and Restated Bylaws. Previously filed as an exhibit to the
Registrant's Report on Form 10-K for the year ended December 31, 1995.
Here incorporated by reference.
4(a) Dividend Reinvestment Plan. Previously filed as an exhibit to the
Registrant's Registration Statement on Form F-3 (Registration No.
033-61533). Here incorporated by reference.
4(b) A specimen stock certificate of the Registrant's Common Stock filed as
exhibit to Registrant's Registration Statement on Form S-2
(Registration No. 333-06017). Here incorporated by reference.
10(a) Stock Option Plan. Previously filed in the Registrant's definitive
proxy statement for its annual meeting of shareholders held April 21,
1994. Here incorporated by reference.
10(b) North Country Financial Corporation Executive and Board Member
Restricted Stock Plan. Previously filed in the Registrant's definitive
proxy statement for its annual meeting of shareholders held April 18,
1995. Here incorporated by reference.
10(c) Employment Contract between North Country Bank and Trust and Ronald G.
Ford. Previously filed as an exhibit to Registrant's Report on Form
10-K for the year ended December 31, 1995. Here incorporated by
reference.
10(d) Amendment to Employment Contract between North Country Bank and Trust
and Ronald G. Ford. Previously filed as an exhibit to Registrant's
Report on Form 10-K for the year ended December 31, 1996. Here
incorporated by reference.
10(e) Deferred Compensation, Deferred Stock, and Current Stock Purchase Plan
for Nonemployee Directors. Previously filed in the Registrant's
definitive proxy statement for its annual meeting of shareholders held
April 23, 1996. Here incorporated by reference.
10(f) North Country Financial Corporation Stock Compensation Plan.
Previously filed as an exhibit to the Registrant's definitive proxy
statement for its annual meeting of shareholders to be held April 15,
1997. Here incorporated by reference.
10(g) North Country Financial Corporation 1997 Directors' Stock Option Plan.
Previously filed as an exhibit to Registrant's definitive proxy
statement for its annual meeting of shareholders held April 15, 1997.
Here incorporated by reference.
13 1998 Annual Report to Shareholders. This exhibit, except for those
portions expressly incorporated by reference in this filing, is
furnished for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this filing.
21 Subsidiaries of the Registrant. Filed herewith.
23. Consent of Independent Public Accountants.
27 Financial Data Schedule - year ended December 31, 1998. Filed
herewith.
-27-
<PAGE>
EXHIBIT 13
North
Country
Financial
Corporation
1998
Annual
Report
<PAGE>
Mission Statement
NORTH COUNTRY FINANCIAL CORPORATION
NORTH COUNTRY BANK AND TRUST
FIRST NORTHERN SERVICES CORPORATION
FIRST MANISTIQUE AGENCY CORPORATION
FIRST RURAL RELENDING CORPORATION
NCB REAL ESTATE COMPANY
MISSION STATEMENT
NORTH COUNTRY BANK AND TRUST OR PRECEDENT HAS BEEN AN INDEPENDENT BANK SINCE
1934. OUR MISSION IS TO SERVE OUR TRADING AREA WITH QUALITY FINANCIAL SERVICES
AND PRODUCTS. TO PROVIDE FOR PROFITABILITY WHICH WILL ENHANCE THE LIFESTYLES OF
OUR CUSTOMERS, SHAREHOLDERS AND EMPLOYEES. TO CONTINUE TO GROW, AND MAINTAIN
EXCELLENCE AND PROVIDE OUR TRADING AREA WITH INNOVATIVE BANKING SERVICES.
AS AN INDEPENDENT COMMUNITY BANK, WE WILL STRIVE TO FOSTER ECONOMIC VITALITY AND
CIVIC WELL BEING IN THE COMMUNITIES WE SERVE. IT IS OUR BELIEF THAT A STRONG
COMMUNITY IS A PREREQUISITE TO A STRONG BANK. BASED ON OUR BELIEF THAT AS A
"COMMUNITY" BANK WE BEST SERVE OUR SHAREHOLDERS, CUSTOMERS AND COMMUNITIES, IT
IS OUR INTENTION TO MAINTAIN THE INDEPENDENCE OF NORTH COUNTRY BANK AND TRUST.
<PAGE>
Table of Contents
Table of Contents
To Our Shareholders............................................................1
Comparative Highlights.........................................................2
Five Year Comparisons..........................................................3
Report of Independent Auditors.................................................6
Consolidated Balance Sheets....................................................7
Consolidated Statements of Income..............................................8
Consolidated Statements of Changes in Shareholders' Equity.....................9
Consolidated Statements of Cash Flows.........................................10
Notes to Consolidated Financial Statements....................................13
Selected Financial Data.......................................................43
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................44
Directors.....................................................................56
<PAGE>
To Our Shareholders
Dear Shareholder:
Growth is a proud tradition of North Country Financial Corporation. For
another consecutive year, assets, deposits, net loans, shareholders'
equity, book value per share, net income and dividends paid to our
shareholders have all increased.
The market value of your North Country Financial Corporation stock has
increased almost 32.95% during the last year. The continued appreciation of
your stock brings us one step closer to our long-term goal of 18% return on
beginning equity.
We continue to be a leader in the financial industry in Northern Michigan.
Internally, we have continued to improve the efficiency of our consolidated
loan administration and credit departments. To provide more effective
customer service, we have improved our central call center and have
provided our call center professionals with superior training to assist any
customer. Personal bankers and relationship bankers are in place at each
office to give customers personalized service for all their financial
needs.
Externally, we have expanded our current business operations once again in
1998 to include two new branches, located in Escanaba and Gaylord. Our
market presence will be further expanded early in 1999 with the addition of
two new branch acquisitions in the lower peninsula. In addition to branch
expansion, we continue to seek new business opportunities that will result
in increased market share, value added services for our customers, and
increased shareholder value.
On March 10, 1998, North Country Bank and North Country Bank and Trust
merged. All offices across the Upper Peninsula were named North Country
Bank and Trust. Our shareholders voted in 1998 to change the corporation
name to North Country Financial to more closely identify the corporation
with its bank subsidiary North Country Bank and Trust. This was
particularly important as we continue to expand our market area.
On behalf of the Board of Directors, we express our appreciation to you,
our shareholders, for your continued confidence. Together we can achieve
the extraordinary.
_______________________ __________________________ _________________
Ronald G. Ford Michael C. Henricksen Thomas G. King
President and C.E.O. Chairman Vice-Chairman
1.
<PAGE>
Comparative Highlights
<TABLE>
BALANCE SHEET STATISTICS 1998 1997 % Change
<S> <C> <C> <C>
Assets $471,380,858 $421,434,370 11.85%
Deposits 404,961,333 360,548,685 12.32
Net Loans 405,608,135 366,919,003 10.54
Shareholders' Equity 39,469,365 36,592,073 7.86
Shares of Stock Outstanding 7,130,760 7,138,470 (0.11)
Book Value per Share 5.54 5.13 7.99
</TABLE>
<TABLE>
OPERATING STATISTICS
<S> <C> <C> <C>
Total Income $41,148,862 $37,602,253 9.43%
Total Operating Expenses 35,617,742 32,093,177 10.98
Net Income 4,561,190 4,105,659 11.10
Basic Earnings Per Share 0.65 0.58 12.07
Diluted Earnings Per Share 0.64 0.57 12.28
</TABLE>
DIVIDEND SUMMARY
(Cash Dividend paid per Common Share)
<TABLE>
Quarter Ending
<S> <C> <C>
March 31 .04 .04
June 30 .04 .04
September 30 .04 .04
December 31 .05 .04
</TABLE>
The above summary should be read in connection with the related
consolidated financial statements and notes included elsewhere in this report.
BUSINESS OF THE CORPORATION
North Country Financial Corporation is a registered bank holding company
formed under the Bank Holding Company Act of 1956, as amended. The principal
assets of the Corporation are its ownership of all the outstanding capital stock
of North Country Bank and Trust, Manistique, Michigan, First Manistique Agency
Corporation, First Northern Services Corporation, First Rural Relending
Corporation and NCB Real Estate Company. The subsidiary bank is engaged in the
commercial banking business and provides a full range of banking services. First
Manistique Agency is engaged in the selling of insurance. First Northern
Services operates a real estate appraisal business. First Rural Relending is a
non profit lending corporation. NCB Real Estate Company owns several properties
used by North Country Bank & Trust.
FORM 10-K
A copy of the Annual Report to the Securities and Exchange Commission on
Form 10-K is available without charge by writing Shirley Young, North Country
Financial Corporation, P.O. Box 369, Manistique, Michigan 49854.
MARKET SUMMARY
The common stock of North Country Financial Corporation has been traded in
private sales since October 1976. The Corporation has approximately 1,786
shareholders of record, as of January 22, 1999.
2.
<PAGE>
Five Year Comparisons
ASSETS
Total assets on a consolidated basis increased by 11.85% in
[GRAPHIC OMITTED] 1998 to a record $471,380,858. Total assets have increased
over $218,000,000 since the end of 1994, an increase of 86%
in four years.
LOANS
Total net loans increased 10.54% to $405,608,135 in 1998.
Loan demand is strong and our primary lending objective
[GRAPHIC OMITTED] continues to be one of selecting the highest quality
credits. Total loan losses have remained at an acceptable
level, and we continue to maintain a loan loss allowance
above regulatory guidelines. The allowance for loan losses
totaled $6,112,334 at the end of 1998, an increase of over
$500,000 over 1997. We expect strong loan demand to
continue, with the majority being commercial and business
loans, which represent 67.8% of the loan portfolio.
DEPOSITS
Total deposits increased by 12.32% to $404,961,333. In 1998,
[GRAPHIC OMITTED] we paid our depositors interest of more than $16,500,000
which goes back into our regional economy.
3.
<PAGE>
Five Year Comparisons
INVESTMENT SECURITIES
Our portfolio of debt and equity securities decreased 15.22%
[GRAPHIC OMITTED] during 1998 to $8,565,282. This decrease is based on our
strategy to employ more of our resources in the loan
portfolio in order to maximize the earnings on our assets
and the return to the shareholder.
SHAREHOLDERS' EQUITY
During 1998, $2,877,292 was added to shareholders' equity,
[GRAPHIC OMITTED] increasing total equity by 7.86%. In addition, cash
dividends of $0.17 per share, or $1,251,224, were paid to
our shareholders, an increase of 5.86% over 1997. Book value
per share increased to $5.54 compared to $5.13 at the end of
1997.
NET INCOME
Net income for 1998 was $4,561,190. Basic earnings per share
[GRAPHIC OMITTED] increased to $0.65 in 1998 from $0.58 in 1997, a 12.07%
increase.
4.
<PAGE>
Report of Independent Auditors
INDEPENDENT AUDITOR'S REPORT
TO THE SHAREHOLDERS OF THE
NORTH COUNTRY FINANCIAL CORPORATION
MANISTIQUE, MICHIGAN
5.
<PAGE>
Report of Independent Auditors
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
North Country Financial Corporation
Manistique, Michigan
We have audited the accompanying consolidated balance sheets of North Country
Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The consolidated
statements of income, changes in shareholders' equity and cash flows for the
year ended December 31, 1996, were audited by other auditors whose report dated
February 14, 1997, expressed an unqualified opinion on those statements.
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 1998 and 1997 financial statements referred to above present
fairly, in all material respects, the financial position of North Country
Financial Corporation and Subsidiaries at December 31, 1998 and December 31,
1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
January 29, 1999
Appleton, Wisconsin
6.
<PAGE>
Consolidated Balance Sheets
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
ASSETS
1998 1997
<S> <C> <C>
Cash and due from banks $ 16,592,703 $ 9,338,168
Federal funds sold 6,047,743 1,805,000
------------- -------------
Cash and cash equivalents 22,640,446 11,143,168
Investment securities available for sale - Stated at fair value 8,565,282 10,102,893
Total loans 411,720,469 372,518,549
Allowance for loan losses (6,112,334) (5,599,546)
------------- -------------
Net loans 405,608,135 366,919,003
Premises and equipment 17,938,058 17,477,345
Other assets 16,628,937 15,791,961
------------- -------------
TOTAL ASSETS $ 471,380,858 $ 421,434,370
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 42,076,502 $ 33,353,597
Interest-bearing deposits 362,884,831 327,195,088
------------- -------------
Total deposits 404,961,333 360,548,685
Short-term borrowings -0- 1,195,000
Other borrowings 23,270,161 19,628,178
Other liabilities 3,679,999 3,470,434
------------- -------------
Total liabilities 431,911,493 384,842,297
------------- -------------
Shareholders' equity:
Preferred stock - No par value:
Authorized 500,000 shares,
no shares outstanding
Common stock - No par value:
Authorized - 18,000,000 shares
Issued and outstanding - 7,130,760
and 7,138,470 shares
at December 31, 1998 and 1997, respectively 19,436,025 19,916,026
Retained earnings 19,989,247 16,679,281
Accumulated other comprehensive income (deficit) 44,093 (3,234)
-------------- -------------
Total shareholders' equity 39,469,365 36,592,073
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 471,380,858 421,434,370
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
7.
<PAGE>
Consolidated Statements of Income
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 37,283,850 $ 34,525,569 $ 26,785,141
Interest on investment securities:
Taxable 685,870 1,030,414 1,421,952
Tax-exempt 31,252 35,044 79,637
Other interest income 496,987 373,010 437,396
------------ ------------ ------------
Total interest income 38,497,959 35,964,037 28,724,126
------------ ------------ ------------
Interest expense:
Deposits 16,530,463 14,633,670 11,647,491
Short-term borrowings 1,552 33,062 21,511
Other borrowings 1,283,214 1,231,323 1,005,083
------------ ------------ ------------
Total interest expense 17,815,229 15,898,055 12,674,085
------------ ------------ ------------
Net interest income 20,682,730 20,065,982 16,050,041
Provision for loan losses 1,199,725 1,398,201 2,424,480
------------ ------------ ------------
Net interest income after provision for loan losses 19,483,005 18,667,781 13,625,561
------------ ------------ ------------
Other income:
Service fees 1,478,376 1,220,028 757,909
Net security gains (losses) 44,504 (60,163) (7,899)
Other operating income 1,128,023 478,351 610,443
------------ ------------ ------------
Total other income 2,650,903 1,638,216 1,360,453
------------ ------------ ------------
Other expenses:
Salaries and employee benefits 6,567,566 5,898,110 5,130,808
Occupancy expense 2,426,418 2,212,311 1,921,540
Other operating expenses 7,608,804 6,686,500 4,556,182
------------ ------------ ------------
Total other expenses 16,602,788 14,796,921 11,608,530
------------ ------------ ------------
Income before provision for income taxes 5,531,120 5,509,076 3,377,484
Provision for income taxes 969,930 1,403,417 543,300
------------ ------------ ------------
Net income $ 4,561,190 $ 4,105,659 $ 2,834,184
============ ============ ============
Earnings per share:
Basic $ 0.65 $ 0.58 $ 0.43
============ ============ ============
Diluted $ 0.64 $ 0.57 $ 0.43
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
8.
<PAGE>
Consolidated Statements of
Changes in Shareholders' Equity
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Income (Deficit) Total
<S> <S> <C> <C> <C> <C>
Balance, January 1, 1996 6,320,691 $13,195,269 $11,831,455 $(19,847) $25,006,877
Net income 2,834,184 2,834,184
Other comprehensive
deficit:
Net unrealized loss on
securities available for
sale (229,681) (229,681)
-----------
Total comprehensive income 2,604,503
Cash dividends ($.14 per
share) (910,003) (910,003)
Issuance of common stock 770,511 5,684,185 5,684,185
------------ ----------- ---------- ---------- -----------
Balance, December 31,
1996 7,091,202 18,879,454 13,755,636 (249,528) 32,385,562
Net income 4,105,659 4,105,659
Other comprehensive
income:
Net unrealized gain on
securities available for
sale 246,294 246,294
-----------
Total comprehensive income 4,351,953
Cash dividends ($.16
per share) (1,182,014) (1,182,014)
Issuance of common stock 104,439 1,868,178 1,868,178
Retirement of common
stock (57,171) (831,606) (831,606)
------------ ----------- ---------- ---------- -----------
Balance, December 31,
1997 7,138,470 19,916,026 16,679,281 (3,234) 36,592,073
Net income 4,561,190 4,561,190
Other comprehensive
income:
Net unrealized gain on
securities available for
sale 47,327 47,327
-----------
Total comprehensive income 4,608,517
Cash dividends ($.17
per share) (1,251,224) (1,251,224)
Issuance of common stock 87,667 1,316,638 1,316,638
Retirement of common
stock (95,377) (1,796,639) (1,796,639)
------------ ----------- ----------- -------- -----------
Balance, December 31,
1998 7,130,760 $19,436,025 $19,989,247 $ 44,093 $39,469,365
============ =========== =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
9.
<PAGE>
Consolidated Statements of Cash Flows
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $4,561,190 $ 4,105,659 $ 2,834,184
---------- ----------- ------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 1,199,725 1,398,201 2,424,480
Credit for deferred income taxes (269,982) (322,707) (404,200)
Provision for depreciation and net
amortization 2,073,285 1,988,487 2,433,469
Proceeds from loan sales 21,525,436 6,803,965 6,121,420
Loans originated for sale (21,415,349) (6,745,114) (6,076,247)
(Gains) losses on sales of:
Loans held for sale (110,087) (58,851) (45,173)
Securities (44,504) 60,163 7,899
Premises, equipment and other real estate (102,787) 27,624 10,000
Change in other assets 1,783,700 1,029,093 (699,274)
Change in other liabilities 185,184 (163,100) 316,778
---------- ----------- -----------
Total adjustments 4,824,621 4,017,761 4,089,152
---------- ----------- -----------
Net cash provided by operating activities 9,385,811 8,123,420 6,923,336
---------- ----------- -----------
Cash flows from investing activities:
Net decrease in interest-bearing deposits
in other financial institutions -0- 534,622 2,231,458
Payment for purchases of securities:
Available for sale (7,419,512) (2,114,281) (7,595,025)
Equity (110,922) (843,500) (1,625,800)
Proceeds from sale of securities:
Available for sale 3,810,310 9,824,063 11,542,876
Equity 10,000 327,300 -0-
Proceeds from maturities of securities:
Available for sale 2,329,647 2,173,899 9,224,050
Held to maturity -0- -0- 835,049
Net increase in loans (40,349,652) (38,423,930) (67,589,084)
Proceeds from sale of premises, equipment,
and other real estate 1,364,248 434,693 69,000
Capital expenditures (2,526,058) (3,496,436) (2,795,067)
Net cash provided from acquisitions -0- 32,054 723,993
---------- ----------- -----------
Net cash used in investment activities (42,891,939) (31,551,516) (54,978,550)
---------- ----------- -----------
</TABLE>
10.
<PAGE>
Consolidated Statements of Cash Flows (Continued)
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
Cash flows from financing activities:
<S> <C> <C> <C>
Net increase in deposits $ 44,412,648 $ 27,169,826 $ 27,962,963
Net increase (decrease) in short-term
borrowings (1,195,000) (3,805,000) 5,000,000
Proceeds from other borrowings 10,500,000 7,842,577 10,293,013
Principal payments on other borrowings (6,858,017) (8,655,178) (2,302,820)
Proceeds from issuance of common stock 1,191,638 1,868,178 5,684,185
Retirement of common stock (1,796,639) (831,606) -0-
Dividends paid (1,251,224) (1,182,014) (910,003)
------------- ------------- ------------
Net cash provided by financing activities 45,003,406 22,406,783 45,727,338
------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents 11,497,278 (1,021,313) (2,327,876)
Cash and cash equivalents at beginning 11,143,168 12,164,481 14,492,357
------------- ------------- ------------
Cash and cash equivalents at end $ 22,640,446 $ 11,143,168 $ 12,164,481
============= ============= ============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 18,077,148 $ 15,561,189 $ 12,547,840
Income taxes 1,241,050 1,955,760 1,214,508
Noncash investing and financing activities:
Transfer of foreclosures from loans to
other real estate 460,795 356,856 -0-
Issuance of notes payable to South Range
State Bank's former shareholders -0- -0- 2,362,851
</TABLE>
11.
<PAGE>
Consolidated Statements of Cash Flows (Continued)
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
1997 1996
<S> <C> <C>
Assets and liabilities acquired in acquisitions:
Interest-bearing deposits $ -0- $ 1,088,000
Premises and equipment 969,437 1,409,480
Acquisition intangibles 2,099,287 1,584,000
Loans - Net 19,954,774 26,760,657
Securities 4,488,326 3,800,350
Other assets 134,863 673,454
Deposits (27,440,283) (32,868,918)
Other liabilities (238,458) (808,165)
</TABLE>
See accompanying notes to consolidated financial statements.
12.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of North Country Financial Corporation (the
"Corporation") and Subsidiaries conform to generally accepted accounting
principles and prevailing practices within the banking industry. Significant
accounting policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and its wholly owned subsidiaries, North Country Bank & Trust (the "Bank"),
Rural Relending, and other minor subsidiaries, after elimination of intercompany
transactions and accounts. During 1998, North Country Bank, a wholly-owned
subsidiary of the Corporation, was merged into the Bank.
Nature of Operations
The Corporation's and the Bank's revenues, operating income, and assets are
primarily from the banking industry. Rural Relending is in the business of
generating loans for commercial entities. Loan customers are mainly located in
Michigan's Upper Peninsula. In addition, a significant portion of its commercial
loan portfolio consists of leases to commercial and government entities which
are secured by equipment and vehicles. These leases are dispersed geographically
throughout the country.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, non-interest-bearing deposits in correspondent banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
13.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities
The Corporation's investment securities are classified in two categories and
accounted for as follows:
Securities available for sale - Securities available for sale consist of
investment securities not classified as securities held to maturity.
These securities are stated at fair value. Unrealized holding gains and
losses, net of tax, on securities available for sale are reported as
accumulated other comprehensive income within shareholders' equity until
realized.
Securities held to maturity - Investment securities for which the
Corporation has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized in interest income using the interest
method over the period to maturity.
Gains and losses on the sale of securities are determined using the
specific-identification method.
Loans Held for Sale
Loans held for sale represent originations of fixed-rate, first mortgage loans
recorded at cost. The loans are sold at fair value shortly after origination
based on an agreement with an outside mortgage company.
Interest Income and Fees on Loans
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all unpaid
accrued interest is reversed. Loan-origination fees are credited to income when
received, as capitalization of the fees and related costs would not have a
material effect on the overall consolidated financial statements.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to commercial
loans which have been judged to be impaired. A loan is impaired when, based on
current information, it is probable that the Corporation will not collect all
amounts due in accordance with the contractual terms of the loan agreement.
These specific allowances are based on discounted cash flows of expected future
payments using the loan's initial effective interest rate or the fair value of
the collateral if the loan is collateral dependent.
14.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Corporation continues to maintain a general allowance for loan losses for
loans not considered impaired. The allowance for loan losses is maintained at a
level which management believes is adequate to provide for possible loan losses.
Management periodically evaluates the adequacy of the allowance using the
Corporation's past loan loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
factors. This evaluation is inherently subjective since it requires material
estimates that may be susceptible to significant change.
Other Real Estate
Other real estate is carried at the lower of cost or fair value, less estimated
sales costs.
Premises and Equipment
Premises and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of premises and
equipment are reflected in income. Depreciation is computed on the straight-line
method and is based on the estimated useful lives of the assets.
Acquisition Intangibles
The Corporation's intangible assets include the value of ongoing customer
relationships (core deposits) and the excess of cost over the fair value of net
assets acquired (goodwill) arising from the purchase of a financial institution
and the acquisition of certain assets and the assumption of certain liabilities
of other financial institutions. Core deposit intangibles are amortized to
income over a 10-year period on an accelerated basis, and goodwill is amortized
on a straight-line basis over periods ranging from 15 to 25 years.
Advertising Costs
Advertising costs are expensed as incurred.
Earnings Per Common Share
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential common shares
issuable under stock options. Earnings and dividends per share are restated for
all stock splits through the date of issue of the financial statements.
15.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(deficit). Other comprehensive income (deficit) includes unrealized gains and
losses on securities available for sale which are recognized as a separate
component of equity, accumulated other comprehensive income (deficit). The
accounting standard that requires reporting comprehensive income first applies
for 1998, with prior information restated to be comparable.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences are expected to
reverse. Deferred tax expense (benefit) is the result of changes in the deferred
tax asset and liability.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded
in the consolidated financial statements when they become payable.
Future Accounting Change
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. The statement is
effective for fiscal years beginning after June 15, 1999. Management, at this
time, cannot determine the effect adoption of this statement may have on the
consolidated financial statements of the Corporation as the accounting for
derivatives is dependent on the amount and nature of derivatives in place at the
time of adoption.
16.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
17.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income," which was issued in June 1997. In accordance with this
statement, the Corporation reports those items defined as comprehensive income
in the statement of changes in shareholders' equity. The adoption of SFAS No.
130 did not have an impact on the Corporation's financial position or results of
operations.
Effective January 1, 1998, the Corporation adopted SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information," which was issued in
June 1997. This statement establishes new standards for reporting information
about operating segments in annual and interim financial statements. The
standard also requires descriptive information about the way operating segments
are determined, the products and services provided by the segments, and the
nature of differences between reportable segment measurements and those used for
the consolidated enterprise. The disclosure requirements had no impact on the
Corporation's financial position or results of operations.
NOTE 3 - ACQUISITIONS
During the period of 1996 through 1998, the Corporation completed two
acquisitions. The acquisitions have been accounted for under the purchase method
of accounting. Accordingly, the assets, liabilities, and results of operations
are included in the Corporation's consolidated financial statements as of and
subsequent to the respective acquisition dates. Following is a summary of the
acquisitions. Note 9 provides information regarding acquisition intangibles and
the amortization thereof. Additional information regarding assets acquired and
liabilities assumed is presented on the accompanying consolidated statements of
cash flows.
<TABLE>
Assets
Acquired Resulting
Acquisition (Excludes Acquisition
Cost Intangibles) Intangibles
(In Thousands)
<S> <C> <C> <C>
On February 4, 1997, acquired 100% of the
outstanding stock of U.P. Financial, Inc. in
exchange for cash $ 4,298 $ 29,763 $ 2,099
On January 31, 1996, acquired 100% of the
outstanding stock of South Range State Bank in
exchange for cash and notes 4,310 35,623 1,584
</TABLE>
18.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $6,643,000 are restricted at December
31, 1998, to meet the reserve requirements of the Federal Reserve System.
NOTE 5 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities available
for sale as of December 31 are as follows:
<TABLE>
1998
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 4,645,681 $ 47,473 $ 933 $ 4,692,221
Obligations of states and
political subdivisions 999,922 20,968 -0- 1,020,890
Mortgage-related securities 2,852,872 -0- 701 2,852,171
------------ ----------- --------- ------------
Total investment securities
available for sale $ 8,498,475 $ 68,441 $ 1,634 $ 8,565,282
============ =========== ========= ============
</TABLE>
19.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
1997
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 7,758,368 $ 6,394 $ 22,292 $ 7,742,470
Obligations of states and
political subdivisions 833,248 509 3,826 829,931
Mortgage-related securities 394,081 575 2,354 392,302
Other securities 1,122,096 16,094 -0- 1,138,190
------------ ----------- --------- -----------
Total investment securities
available for sale $ 10,107,793 $ 23,572 $ 28,472 $10,102,893
============ =========== ========= ===========
</TABLE>
Included in other assets are equity securities totaling $3,145,222 and
$3,044,300 at December 31, 1998 and 1997, respectively. Equity securities are
reported at the lower of cost or market.
Following is a summary of the proceeds from sales of investment securities
available for sale, as well as gross gains and losses for the years ended
December 31:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Proceeds from sale of investment securities $ 3,810,310 $ 10,151,363 $ 11,542,876
Gross gains on sales 65,255 -0- 30,905
Gross losses on sales 20,751 60,163 38,804
</TABLE>
20.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of investment securities available
for sale at December 31, 1998, by contractual maturity, are shown below.
Contractual maturities will differ from expected maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
Amortized
Estimated
Cost Fair
Value
<S> <C> <C>
Due after one month through three months $ 503,441 $ 502,509
Due after five years through ten years 3,521,476 3,532,401
Due after ten years 1,620,686 1,678,201
------------ ------------
5,645,603 5,713,111
Mortgage-related securities 2,852,872 2,852,171
------------ ------------
Total $ 8,498,475 $ 8,565,282
============ ============
</TABLE>
The carrying value of securities pledged to secure public deposits, treasury
deposits, and repurchase agreements was $1,002,800 and $3,595,938 as of December
31, 1998 and 1997, respectively.
NOTE 6 - LOANS
The composition of loans at December 31 follows:
<TABLE>
1998 1997
<S> <C> <C>
Commercial, financial, and agricultural $ 219,026,672 $ 181,682,624
Commercial and governmental leases 60,194,795 57,557,615
1-4 family residential real estate 97,415,442 95,542,880
Consumer 23,159,913 26,795,585
Construction 11,923,647 10,939,845
-------------- --------------
Total loans $ 411,720,469 $ 372,518,549
============== ==============
</TABLE>
21.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LOANS (CONTINUED)
An analysis of the allowance for loan losses for the years ended December 31
follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Balance, January 1 $ 5,599,546 $ 4,590,938 $ 3,137,315
Allowance from acquisitions -0- 299,295 285,000
Provision for loan losses 1,199,725 1,398,201 2,424,480
Recoveries on loans 118,408 112,712 121,890
Loans charged off (805,345) (801,600) (1,377,747)
------------ ------------ -------------
Balance, December 31 $ 6,112,334 $ 5,599,546 $ 4,590,938
============ ============ =============
</TABLE>
Information regarding impaired loans follows:
<TABLE>
1998 1997
<S> <C> <C>
Year-end loans with allowance for loan losses
allocated $ 6,072,978 $ 6,933,060
Amount of the allowance allocated 873,014 923,014
</TABLE>
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Average investment in impaired loans during
the year $ 6,155,323 $ 6,709,911 $ 2,914,955
Interest income recognized during impairment 667,599 223,500 99,215
Cash-basis interest income recognized 301,840 212,699 98,098
</TABLE>
The subsidiary bank in the ordinary course of banking business grants loans to
the Corporation's executive officers and directors including their families and
firms in which they are principal owners. Activity in such loans during 1998 is
summarized below.
Substantially all loans to executive officers and directors were made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.
<TABLE>
<S> <C>
Loans outstanding, January 1, 1998 $ 12,638,848
New loans 11,879,836
Repayment (12,114,768)
---------------
Loans outstanding, December 31, 1998 $ 12,403,916
===============
</TABLE>
22.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 follow:
<TABLE>
1998 1997
<S> <C> <C>
Land $ 1,679,904 $ 1,643,792
Buildings and improvements 14,787,615 14,284,318
Furniture, fixtures, and equipment 9,224,753 7,929,563
------------- -------------
Totals 25,692,272 23,857,673
Less - Accumulated depreciation and amortization 7,754,214 6,380,328
------------- -------------
Net book value $ 17,938,058 $ 17,477,345
============= =============
</TABLE>
Depreciation and amortization of premises and equipment charged to operating
expenses amounted to $1,381,015 in 1998, $1,222,939 in 1997 and $1,436,612 in
1996.
NOTE 8 - OTHER REAL ESTATE
Included in other assets is other real estate totaling $449,537 and $397,861 at
December 31, 1998 and 1997, respectively. There is no allowance for losses on
other real estate. Other real estate expenses totaled $87,139, $104,408 and
$9,489 for 1998, 1997, and 1996, respectively.
NOTE 9 - ACQUISITION INTANGIBLES
Intangible assets, which were acquired through acquisitions, consist of the
following as of December 31 (net of amortization):
<TABLE>
1998 1997
<S> <C> <C>
Goodwill $ 3,571,067 $ 3,904,720
Core deposit intangible 2,338,354 2,794,364
------------- ------------
Total acquisition intangibles $ 5,909,421 $ 6,699,084
============= ============
</TABLE>
Amortization expense related to the acquisition intangibles was $789,663,
$719,071 and $593,220 for the years ended December 31, 1998, 1997, and 1996,
respectively.
23.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DEPOSITS
The distribution of deposits at December 31 is as follows:
<TABLE>
1998 1997
<S> <C> <C>
Non-interest-bearing demand deposits $ 42,076,502 $ 33,353,597
Savings, money market, and interest-bearing demand deposits 213,791,523 159,279,613
Time deposits 149,093,308 167,915,475
-------------- ---------------
Total deposits $ 404,961,333 $ 360,548,685
============== ===============
</TABLE>
Time deposits of $100,000 or more were $25,619,255 and $26,827,133 at December
31, 1998 and 1997, respectively. Interest expense on time deposits of $100,000
or more was $1,543,612, $1,606,273 and $1,085,714 for the years ended December
31, 1998, 1997, and 1996, respectively.
NOTE 11 - SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased of $1,195,000 at
December 31, 1997. There were no short-term borrowings at December 31, 1998.
NOTE 12 - OTHER BORROWINGS
Other borrowings consist of the following at December 31:
<TABLE>
1998 1997
<S> <C> <C>
Federal Home Loan Bank:
Fixed-rate advance at 7.37%, maturing April 15, 2004 $ 159,731 $ 186,049
Fixed-rate advance at 7.59%, maturing May 17, 2004 281,657 327,828
Fixed-rate advance at 6.50%, maturing October 17, 2005 2,535,401 2,778,351
Fixed-rate advance at 7.06%, maturing May 15, 2006 4,630,742 4,822,898
Fixed-rate advance at 5.96%, maturing June 29, 1998 2,000,000
Fixed-rate advance at 5.97%, maturing July 28, 1998 2,000,000
Fixed-rate advance at 5.98%, maturing August 27, 1998 1,000,000
Adjustable-rate advance, maturing May 20, 1999,
5.20% and 5.82% at December 31, 1998 and 1997 3,000,000 3,000,000
Adjustable-rate advance, maturing June 23, 2008,
5.49% at December 31, 1998 10,000,000
---------- ----------
20,607,531 16,115,126
</TABLE>
24.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - OTHER BORROWINGS (CONTINUED)
<TABLE>
1998 1997
<S> <C> <C>
Farmers Home Administration:
$2,000,000 fixed-rate line of credit agreement with
Farmers Home Administration, maturing August 24,
2024, interest payable at 1% $ 1,874,857 $ 1,937,740
Other borrowings:
Unsecured variable rate notes payable to South Range
State Bank's former stockholders, maturing in three
equal annual installments beginning February 1,
1997, 5.04% at December 31, 1998 and 1997 787,773 1,575,312
------------ -------------
Total other borrowings $ 23,270,161 $ 19,628,178
============ =============
</TABLE>
Maturities of other borrowings outstanding at December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 4,392,165
2000 642,792
2001 686,079
2002 734,547
2003 788,567
Thereafter 16,026,011
-------------
$ 23,270,161
=============
</TABLE>
The Federal Home Loan Bank borrowings are collateralized by a blanket collateral
agreement on the Bank's residential mortgage loans, U.S. Government and agency
securities, and by the Federal Home Loan Bank stock owned by the Bank.
Prepayment of the advances is subject to the provisions and conditions of the
credit policy of the Federal Home Loan Bank of Indianapolis in effect as of
December 31, 1998. The Farmers Home Administration borrowing is collateralized
by loans totaling $1,693,308, originated and held by the Corporation's wholly
owned subsidiary, Rural Relending, and guaranteed by the Corporation.
25.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES
The components of the federal income tax provision for the years ended December
31 follow:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Current tax expense $ 1,239,912 $ 1,726,124 $ 947,500
Deferred tax credit (269,982) (322,707) (404,200)
------------- ------------ ------------
Total provision for income taxes $ 969,930 $ 1,403,417 $ 543,300
============= ============ ============
</TABLE>
Included in the total provision for income taxes are expenses (credits) of
$15,131, $(20,455) and $(2,686) for the years ended December 31, 1998, 1997, and
1996, respectively, related to security transactions.
Deferred income taxes are provided for the temporary differences between the
financial reporting and tax bases of the Corporation's assets and liabilities.
The major components of net deferred tax assets at December 31 are as follows:
<TABLE>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,844,183 $ 1,679,962
Deferred compensation 366,290 285,274
Unrealized loss on securities available for sale -0- 1,666
------------ ------------
Total deferred tax assets 2,210,473 1,966,902
------------ ------------
Deferred tax liabilities:
Depreciation (777,689) (742,041)
Intangibles (285,986) (389,711)
Unrealized gain on securities available for sale (22,714) -0-
Other (43,332) -0-
------------ ------------
Total deferred tax liabilities (1,129,721) (1,131,752)
------------ ------------
Net deferred tax asset $ 1,080,752 $ 835,150
============ ============
</TABLE>
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Tax expense at statutory rate $ 1,880,581 $ 1,873,086 $ 1,148,345
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,127,726) (603,836) (539,365)
Other 217,075 134,167 (65,680)
----------- ----------- ------------
Provision for income taxes $ 969,930 $ 1,403,417 $ 543,300
=========== =========== ============
</TABLE>
26.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RETIREMENT PLAN
The Corporation has established a 401(k) profit-sharing plan. Employees who have
completed one year of service and attained the age of 18 are eligible to
participate in the plan. Eligible employees can elect to have a portion, not to
exceed 15%, of their annual compensation paid into the plan. In addition, the
Corporation may make discretionary contributions into the plan. Retirement plan
contribution expense charged to operations totaled $200,267, $105,267 and
$120,126 for 1998, 1997, and 1996, respectively.
NOTE 15 - DEFERRED COMPENSATION PLANS
As an incentive to retain key members of management and directors, the
Corporation has two deferred compensation plans.
Benefits under one of the plans is based on the number of years the key members
have served the Corporation. A liability is recorded on a present value basis
and discounted using current market rates. The liability may change depending
upon changes in long-term interest rates. The liability at December 31, 1998 and
1997, for vested benefits under this plan, was $1,098,267 and $841,236,
respectively. The Corporation maintains life insurance policies on the plan
participants. Death benefits received from the life insurance policies will be
used to offset the obligations under the plan. The cash surrender value of these
policies was $899,087 and $781,040 at December 31, 1998 and 1997, respectively.
The Corporation sponsors a deferred stock compensation plan for directors.
Directors are allowed to defer their director's fees under the plan. The
deferred compensation is computed as stock equivalents as the compensation is
earned. Directors receive the deferred compensation in the form of common stock
upon retirement. The liability relating to this plan was $219,100 and $141,700
at December 31, 1998 and 1997, respectively.
Deferred compensation expense for the plans was $316,041, $175,000 and $105,950
for 1998, 1997, and 1996, respectively.
27.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SHAREHOLDERS' EQUITY
Earnings per share are based upon the weighted average number of shares
outstanding, restated to reflect the three-for-one stock splits on August 25,
1998 and April 29, 1996. The following shows the computation of the basic and
diluted earnings per share for the years ended December 31:
<TABLE>
Weighted
Average
Number of Earnings Per
Net Income Shares Share
<S> <C> <C> <C>
1998
Earnings per share - Basic $ 4,561,190 7,038,909 $ 0.65
=======
Effect of stock options - Net 64,693
Effect of deferred stock compensation 16,614
------------ -----------
Earnings per share - Diluted $ 4,561,190 7,120,216 $ 0.64
============ =========== =======
1997
Earnings per share - Basic $ 4,105,659 7,131,354 $ 0.58
=======
Effect of stock options - Net 11,700
Effect of deferred stock compensation 12,723
------------ -----------
Earnings per share - Diluted $ 4,105,659 7,155,777 $ 0.57
============ =========== =======
1996
Earnings per share - Basic $ 2,834,184 6,544,878 $ 0.43
=======
Effect of stock options - Net 37,326
Effect of deferred stock compensation 5,601
------------ -----------
Earnings per share - Diluted $ 2,834,184 6,587,805 $ 0.43
=========== =========== =======
</TABLE>
Effective August 25, 1998 and April 29, 1996, the Board of Directors of the
Corporation approved three-for-one stock splits. All references to the number of
shares of common stock in the consolidated financial statements and footnotes
thereto have been restated for these stock splits.
28.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SHAREHOLDERS' EQUITY (CONTINUED)
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Management believes, as of December 31, 1998, the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the subsidiary bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
subsidiary bank's category.
29.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SHAREHOLDERS' EQUITY (CONTINUED)
The Corporation's actual and required capital amounts and ratios as of December
31 are as follows:
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
1998
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-
weighted assets):
Greater than or
Consolidated $37,881,000 10.7% equal to $28,397,000 8.0% N/A
North Country Bank Greater than or Greater than or
& Trust $37,083,000 10.9% equal to $27,160,000 8.0% equal to $33,950,000 10.0%
Tier I capital (to risk- weighted assets):
Greater than or
Consolidated $33,423,000 9.4% equal to $14,199,000 4.0% N/A
Greater than or Greater than or
North Country Bank & Trust $32,816,000 9.7% equal to $13,580,000 4.0% equal to $20,370,000 6.0%
Tier I capital (to average assets):
Greater than or
Consolidated $33,423,000 7.2% equal to $18,532,000 4.0% N/A
Greater than or Greater than or
North Country Bank & Trust $32,816,000 7.2% equal to $18,360,000 4.0% equal to $22,950,000 5.0%
1997
Total capital (to risk-
weighted assets):
Greater than or
Consolidated $33,794,000 10.8% equal to $24,954,000 8.0% N/A
Greater than or Greater than or
North Country Bank & Trust $27,909,000 11.1% equal to $20,158,000 8.0% equal to $25,197,000 10.0%
Greater than or Greater than or
North Country Bank $ 6,169,000 10.6% equal to $4,649,000 8.0% equal to $5,812,000 10.0%
Tier I capital (to risk- weighted assets):
Greater than or
Consolidated $29,895,000 9.6% equal to $12,477,000 4.0% N/A
Greater than or Greater than or
North Country Bank & Trust $24,739,000 9.8% equal to $10,079,000 4.0% equal to $15,118,000 6.0%
Greater than or Greater than or
North Country Bank $ 5,441,000 9.4% equal to $2,324,000 4.0% equal to $3,487,000 6.0%
Tier I capital (to average assets):
Greater than or
Consolidated $29,895,000 7.2% equal to $16,684,000 4.0% N/A
Greater than or Greater than or
North Country Bank & Trust $24,739,000 7.3% equal to $13,504,000 4.0% equal to $16,880,000 5.0%
Greater than or Greater than or
North Country Bank $ 5,441,000 7.1% equal to $3,074,000 4.0% equal to $3,843,000 5.0%
</TABLE>
30.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SHAREHOLDERS' EQUITY (CONTINUED)
The Bank is restricted by banking regulations from making dividend distributions
above prescribed amounts. At December 31, 1998, the Bank could have paid
$9,829,000 of additional dividends to the Corporation without prior regulatory
approval.
NOTE 17 - STOCK OPTION PLANS
The Corporation adopted two stock option plans in 1997, one for officers and
employees and one for nonemployee directors. A total of 600,000 shares were made
available for grant under these plans. The Corporation also sponsors an
additional employee and director stock option plan. A total of 148,500 shares
were made available for grant under this plan.
Options under all of the plans are granted at the discretion of a committee of
the Corporation's Board of Directors. Options to purchase shares of the
Corporation's stock are granted at a price equal to the market price of the
stock at the date of grant. The committee, within guidelines of no less than six
months and no greater than ten years, as established under the plans, determines
the vesting of the options when they are granted.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes methodology. The following assumptions were made in estimating
fair value for options granted for the years ended December 31:
<TABLE>
1998 1997
<S> <C> <C>
Dividend yield 1.00% 1.25%
Risk-free interest rate 4.72% 5.14%
Weighted average expected life (years) 7.0 7.0
Expected volatility 10.04% 11.45%
</TABLE>
The weighted average fair value of options granted as of their grant date, using
the assumptions shown above, was computed at $0.39 per share for options granted
in 1998 and $0.37 per share for options granted in 1997. No options were granted
in 1996.
31.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLANS (CONTINUED)
No compensation cost has been recognized for the plans. Had compensation cost
been determined on the basis of fair value, net income and earnings per share
would have been reduced for the years ended December 31, as follows:
<TABLE>
1998 1997
Net income:
<S> <C> <C>
As reported $ 4,561,190 $ 4,105,659
============ ============
Pro forma $ 4,550,149 $ 4,100,889
============ ============
Earnings per share - Basic:
As reported $ 0.65 $ 0.58
============ ============
Pro forma $ 0.65 $ 0.57
============ ============
Earnings per share - Diluted:
As reported $ 0.64 $ 0.57
============ ============
Pro forma $ 0.63 $ 0.57
============ ============
</TABLE>
Following is a summary of stock option transactions for the years ended December
31:
<TABLE>
Number of Shares
1998 1997 1996
<S> <C> <C> <C>
Outstanding at beginning of year 198,759 75,600 108,000
Granted during the year 163,200 153,309
Exercised during the year (at prices
ranging from $3.67 to $15.00 per share) (30,064) (30,150) (32,400)
-------------- ------------- -----------
Outstanding at end of year 331,895 198,759 75,600
============== ============= ===========
Weighted average exercise price per share
at end of year $ 16.97 $ 12.51 $ 4.14
============== ============= ===========
Available for grant at end of year 883,491 1,046,691 -0-
============== ============= ===========
</TABLE>
32.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLANS (CONTINUED)
Options granted during 1998 were granted at prices of $19.00 and $20.33. Options
granted in 1997 were granted at a price of $15.00. Under these plans, options
expire ten years after the date of grant.
Following is a summary of the options outstanding at December 31, 1998:
<TABLE>
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life-Years Price Number Price
<S> <C> <C> <C> <C> <C>
$4.17 to $15.00 168,695 8.1 $ 13.07 168,695 $ 13.07
$19.00 13,200 9.3 19.00 -0- -0-
$20.33 150,000 9.5 20.33 -0- -0-
------- --- -------- ------- -------
331,895 8.8 $ 16.97 168,695 $ 13.07
======= === ======== ======= =======
</TABLE>
NOTE 18 - OTHER COMPREHENSIVE INCOME (DEFICIT)
Other comprehensive income (deficit) components and related taxes were as
follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Unrealized holding gains and (losses) on
available for sale securities $ 116,212 $ 313,010 $ (355,901)
Less reclassification adjustments for gains
and (losses) later recognized in income 44,504 (60,163) (7,899)
--------- --------- ----------
Net unrealized gains and (losses) 71,708 373,173 (348,002)
Tax effect 24,381 126,879 (118,321)
--------- --------- ----------
Other comprehensive income (deficit) $ 47,327 $ 246,294 $ (229,681)
========= ========= ==========
</TABLE>
33.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SEGMENT INFORMATION
North Country Financial Corporation, through the branch network of its
subsidiary, North Country Bank & Trust, provides a broad range of financial
services to individuals and companies in northern Michigan. These services
include demand, time and savings deposits; lending and lease financing; credit
card servicing; ATM processing and cash management. While the Corporation's
chief decision makers monitor the revenue streams of the various Corporation
products and services, operations are managed and financial performance is
evaluated on a Corporation-wide basis. Accordingly, all of the Corporation's
banking operations are considered by management to be aggregated in one
reportable operating segment.
NOTE 20 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheets.
The Corporation's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
These commitments at December 31 are as follows:
<TABLE>
1998 1997
<S> <C> <C>
Commitments to extend credit $ 128,059,000 $ 39,992,000
Standby letters of credit 14,869,000 2,214,000
Credit card commitments 2,782,000 2,935,000
------------- -------------
$ 145,710,000 $ 45,141,000
============= =============
</TABLE>
34.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. 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 drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The commitments are
structured to allow for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the
Corporation's subsidiary and serviced by other companies. These commitments are
unsecured.
Contingencies
In the normal course of business, the Corporation is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Concentration of Credit Risk
The Corporation's subsidiary banks grant residential, commercial, agricultural,
and consumer loans throughout Michigan's Upper Peninsula. Due to the diversity
of locations, the ability of debtors to honor their contracts is not tied to any
particular economic sector.
35.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments:
Cash and cash equivalents - The carrying values approximate the fair values
for these assets.
Investment securities - Fair values are based on quoted market prices where
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
residential mortgage, and other consumer. The fair value of loans is
calculated by discounting scheduled cash flows using discount rates
reflecting the credit and interest rate risk inherent in the loan.
The methodology in determining fair value of nonaccrual loans is to average
them into the blended interest rate at 0% interest. This has the effect of
decreasing the carrying amount below the risk-free rate amount and
therefore discounts the estimated fair value.
Impaired loans are measured at the estimated fair value of the expected
future cash flows at the loan's effective interest rate or the fair value
of the collateral for loans which are collateral dependent. Therefore, the
carrying values of impaired loans approximate the estimated fair values for
these assets.
36.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposit liabilities - The fair value of deposits with no stated maturity,
such as non-interest-bearing demand deposits and savings, is equal to the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is based on the discounted value of contractual
cash flows applying interest rates currently being offered on similar
certificates.
Short-term and other borrowings - Rates currently available for debt with
similar terms and remaining maturities are used to estimate the fair value
of existing debt. The fair value of borrowed funds due on demand is the
amount payable at the reporting date.
Off-balance-sheet instruments - The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the current interest
rates, and the present creditworthiness of the counterparties. Since this
amount is immaterial, no amounts for fair value are presented.
The following table presents information for financial instruments at December
31:
<TABLE>
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 22,640 $ 22,640 $ 11,143 $ 11,143
Investment securities 11,711 11,711 13,147 13,147
Total loans 411,720 372,519
Allowance for loan losses (6,112) (5,600)
--------- ---------- --------- --------
Net loans 405,608 414,609 366,919 374,057
--------- ---------- --------- --------
Total financial assets $ 439,959 $ 448,960 $ 391,209 $398,347
========= ========== ========= ========
Financial liabilities:
Deposits $ 404,961 $ 406,334 $ 360,549 $361,138
Short-term and other borrowings 23,270 22,380 20,823 19,146
--------- ---------- --------- --------
Total financial liabilities $ 428,231 $ 428,714 $ 381,372 $ 380,284
========= ========== ========= ========
</TABLE>
37.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Limitations - Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. Fair value estimates
are based on existing on- and off-balance-sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include premises and equipment, other assets, and other liabilities.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
NOTE 22 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Details of other operating expenses in the consolidated statements of income are
as follows for the years ended December 31:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Forms and supplies $ 391,093 $ 498,635 $ 538,863
Amortization of acquisition intangibles 789,663 719,071 593,220
Legal and consulting fees 553,078 448,324 371,344
Data processing 1,566,382 853,841 245,722
Telephone 656,354 304,760 213,775
Courier costs 546,473 162,117 103,229
Other 3,105,761 3,699,752 2,490,029
---------- ----------- -----------
$7,608,804 $ 6,686,500 $ 4,556,182
========== =========== ===========
</TABLE>
38.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
ASSETS
1998 1997
<S> <C> <C>
Cash and cash equivalents $ 999,979 $ 1,152,760
Investment in subsidiaries 38,802,583 36,789,622
Other assets 1,057,482 789,668
----------- ------------
TOTAL ASSETS $40,860,044 $ 38,732,050
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 602,906 $ 564,665
Other borrowings 787,773 1,575,312
----------- ------------
Total liabilities 1,390,679 2,139,977
Total shareholders' equity 39,469,365 36,592,073
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $40,860,044 $ 38,732,050
=========== ============
</TABLE>
39.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
1998 1997 1996
Income:
<S> <C> <C> <C>
Dividends received from subsidiaries $ 3,250,000 $ 4,377,878 $ 400,000
Net security losses -0- (41,888) -0-
Other 31,809 9,317 3,600
------------ ------------ -----------
Total income 3,281,809 4,345,307 403,600
------------ ------------ -----------
Expenses:
Salaries and benefits 142,329 270,038 152,365
Interest 95,272 123,191 254,077
Other 595,284 398,325 352,638
------------ ------------ -----------
Total expenses 832,885 791,554 759,080
------------ ------------ -----------
Income (loss) before credit for income
taxes and equity in undistributed net
income of subsidiaries 2,448,924 3,553,753 (355,480)
Credit for income taxes (146,632) (258,964) (120,863)
------------ ------------ -----------
Income (loss) before equity in undistributed
net income of subsidiaries 2,595,556 3,812,717 (234,617)
Equity in undistributed net income of
subsidiaries 1,965,634 292,942 3,068,801
------------ ------------ -----------
Net income $ 4,561,190 $ 4,105,659 $ 2,834,184
============ ============ ===========
</TABLE>
40.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
1998 1997 1996
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 4,561,190 $ 4,105,659 $ 2,834,184
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Loss on sale of equity securities -0- 41,888 -0-
Gain on sale of premise and equipment (31,600) -0- -0-
Provision for depreciation and
amortization 4,872 -0- 8,000
Equity in undistributed net income
of subsidiaries (1,965,634) (292,942) (3,068,801)
Change in other assets (111,636) (487,485) (120,599)
Change in accrued expenses 38,241 402,536 162,129
------------ ------------ ------------
Total adjustments (2,065,757) (336,003) (3,019,271)
------------ ------------ ------------
Net cash provided by (used in) operating
activities 2,495,433 3,769,656 (185,087)
------------ ------------ ------------
Cash flows from investing activities:
Investment in subsidiaries -0- (4,052,914) (4,810,280)
Payment for purchase of equity
securities (110,922) -0- (359,188)
Proceeds from sales of equity
securities 10,000 317,300 -0-
Proceeds from sale of premise and equipment 100,000 -0- -0-
Capital expenditures (3,528) -0- -0-
------------ ------------ ------------
Net cash used in investing activities (4,450) (3,735,614) (5,169,468)
============ ============ ============
</TABLE>
41.
<PAGE>
Notes to Consolidated Financial Statements
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
1998 1997 1996
Cash flows from financing activities:
<S> <C> <C> <C>
Proceeds from other borrowings $ -0- $ -0- $ 5,262,851
Principal payments on other
borrowings (787,539) (787,539) (2,900,000)
Proceeds from issuance of
common stock 1,191,638 1,868,178 5,684,185
Retirement of common stock (1,796,639) (831,606) -0-
Dividends paid (1,251,224) (1,182,014) (910,003)
---------- ------------ ------------
Net cash provided by (used in)
financing activities (2,643,764) (932,981) 7,137,033
---------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents (152,781) (898,939) 1,782,478
Cash and cash equivalents at beginning 1,152,760 2,051,699 269,221
---------- ------------ -------------
Cash and cash equivalents at end $ 999,979 $ 1,152,760 $ 2,051,699
========== ============ =============
</TABLE>
42.
<PAGE>
Selected Financial Data
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
<TABLE>
Year ended December 31,
1998 1997 1996 1995 1994
(Thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 38,498 $ 35,964 $ 28,724 $ 22,100 $ 13,798
Interest expense (17,815) (15,898) (12,674) (9,561) (6,053)
--------- --------- --------- ---------- ---------
Net interest income 20,683 20,066 16,050 12,539 7,745
Net security gains (losses) 45 (60) (8) (19) 75
Other income 2,606 1,698 1,368 1,373 1,037
Provision for loan losses (1,200) (1,398) (2,424) (771) (330)
Other expenses (16,603) (14,797) (11,609) (9,368) (6,101)
--------- --------- --------- ---------- --------
Income before income taxes 5,531 5,509 3,377 3,754 2,426
Provision for income taxes (970) (1,403) (543) (1,084) (458)
--------- --------- --------- ---------- ---------
Net income $ 4,561 $ 4,106 $ 2,834 $ 2,670 $ 1,968
========= ========= ========= ========== =========
Total assets $ 471,381 $ 421,434 $ 367,160 $ 282,791 $ 253,098
Long term liabilities 23,270 19,628 20,441 10,088 3,553
Total equity 39,469 36,592 32,386 25,007 22,483
Per Share Data: *
Net income $ 0.65 $ 0.58 $ 0.43 $ 0.42 $ 0.38
Cash dividends $ 0.17 $ 0.16 $ 0.14 $ 0.14 $ 0.07
</TABLE>
* Adjusted for 3 for 1 stock splits on May 1, 1994, April 29, 1996 and August
25, 1998
43.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
NORTH COUNTRY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
HIGHLIGHTS
For North Country Financial Corporation ("the Corporation"), 1998 was a year of
continued growth. The Corporation grew approximately 12 percent. During 1998,
the Corporation added two new offices in Escanaba and Gaylord. Plans are
currently under way to continue the expansion into new and developing market
areas by adding additional branches in 1999 .
At December 31, 1998, the Corporation had total assets of $471 million, an
increase of $50 million from December 31, 1997. The current year increase in
assets represents 100% growth generated internally. In 1997, the acquisition of
U.P. Financial had accounted for approximately 54% of the growth, with the
remaining 46% being generated internally. During 1998, outstanding loan balances
increased 10.52% or $39 million to $412 million. Of the total increase in loans,
$37 million, or 94.87% came from an increase in the commercial, financial and
agricultural loan portfolios.
The growth in 1998 continues the trend which has developed over the past four
years. From 1994 through 1998, assets grew by a total of $218 million or 86%,
with approximately 36% of this growth occurring due to acquisitions. During the
same period, loans grew over 124%, with nearly 55% of this growth being
internally generated.
Earnings have also continued to increase from 1997 to 1998. Net income was $4.6
million, $4.1 million, and $2.8 million for 1998, 1997, and 1996, respectively.
Return on average shareholders' equity was 11.18%, 12.06%, and 10.12%, for 1998,
1997, and 1996, respectively. The decrease in return on average shareholders'
equity is mainly attributable to the Corporation purchasing its own stock in an
effort to increase shareholders' value. Basic and diluted earnings per share
have continued to increase during this three-year period. Basic earnings per
share were $0.65 in 1998, $0.58 in 1997, and $0.43 in 1996, an increase of
12.07% from 1997 and 51.16% from 1996. This significant increase in earnings per
share is a result of growth in earnings with a small decrease in outstanding
stock due to the buy back of stock. In prior years, the Corporation has issued
stock for acquisitions. The consolidated operations of the Corporation in 1998
provided improved profitability through more efficient operations.
44.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Growth remains an important element of the Corporation's strategy and selective
bank and branch acquisitions may continue to occur. However, management
anticipates the rate of asset growth in the next few years will be somewhat
slower than recently experienced. The Corporation's banking offices are
currently located in Michigan's Upper Peninsula and northern Lower Peninsula, an
area which covers a large geographic area and has a low population density.
Because of the nature of this market area, the cost of operating the
Corporation's banking network is higher than the average for banking companies
the same size as the Corporation. Management's primary focus in the near future
is to increase the operating efficiency of its banking network by increasing the
average deposit level per branch, increasing lending capabilities in each local
market, and closely monitoring and controlling operating costs.
FINANCIAL CONDITION
Loans
Loans represented 87.34% of total assets at the end of 1998, compared to 88.39%
at the end of 1997. The loan to deposit ratio decreased slightly dropping from
103.32% at December 31, 1997 to 101.67% at December 31, 1998. Loans provide the
most attractive earning asset yield available to the Corporation and management
believes that the trained personnel and controls are in place to successfully
manage a growing loan portfolio. Accordingly, management intends to continue to
maintain loans at the highest level which is consistent with maintaining
adequate liquidity.
Following is a summary of the Corporation's loan balances at December 31:
<TABLE>
Percent
1998 1997 Change
<S> <C> <C> <C>
Commercial real estate $ 82,207 $ 86,052 (4.47)
Commercial, financial, and agricultural 136,820 95,631 43.07
Leases:
Commercial 20,097 11,094 81.15
Governmental 40,098 46,464 (13.70)
1 - 4 family residential real estate 97,415 95,543 1.96
Consumer 23,160 26,795 (13.57)
Construction 11,923 10,940 8.99
--------- --------- -------
Total $ 411,720 $ 372,519 10.52%
========= ========= =======
</TABLE>
45.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation has five major categories of lending activities. Four
categories, commercial real estate, commercial, residential real estate, and
consumer, are generally with customers in Michigan, primarily in the Upper
Peninsula. The fifth major lending line, commercial and governmental leasing,
takes place on a nationwide basis. As shown in the table above, the amount of
outstanding loans increased in the commercial loan and commercial leasing
categories in 1998. Management feels these categories will continue to grow in
the future, with the level of consumer lending continuing to decrease.
The Corporation finances commercial and governmental leases throughout the
country. Management visits all originators twice a year to review their
operations and credit controls. Management is working to diversify its sources
of lease paper. Management closely reviews the credit quality of each proposed
lease before entering into a financing agreement. Such reviews may include
visits to major equipment vendors which produce the equipment to be leased or to
the lease customers, including governmental organizations. The lease agreements
are strictly financing; while the Corporation has access to the underlying
equipment as collateral, there is no interest in the residual value to the
equipment. As illustrated in the table above, most of the leasing activity is to
state and local governmental units, including Native American organizations.
Management continues to aggressively pursue leases. The makeup of the lease
portfolio has remained substantially the same from 1995 through 1997. In 1998,
commercial leases increased significantly as the Corporation pursued business in
this lending arena. Commercial leases at December 31, 1998 were 4.9% of total
loans compared to 3.0% in 1997. Interest income from certain of the governmental
leases is exempt from federal income taxes.
For the year, commercial loans increased by $37.34 million or by 20.55%. The
most prominent type of financing remains hospitality and tourism related
industries. Tourism related financing represents $60.27 million, or 27.5%, of
the commercial loan portfolio. The growth represents a continual business
development by the Relationship Bankers and their ability to penetrate growth
markets such as Marquette and Sault Ste. Marie. The rest of the commercial loan
portfolio is diversified in such categories as gaming, forestry, and farming.
Real estate lending on 1-4 family residences makes up the second largest portion
of the loan portfolio. This past year, real estate loans grew by 1.96% or by
$1.87 million to $97.42 million. Approximately 79% of these loans are adjustable
rate products that have an annual interest adjustment. These loans typically
have a maximum adjustment of two percentage points annually and five percentage
points over the life of the loan. The Corporation has increased its mortgage
banking activities in 1998 to maintain adequate asset/liability risk factors.
Loans made and sold to the secondary market totaled $21.42 million compared to
$6.75 million in 1997. These loans are sold but servicing is retained as it
provides the Corporation with a source of noninterest income and a means of
maintaining customer contact.
The other large portion of the loan portfolio is consumer loans. This segment of
the loan portfolio represents $23.16 million dollars of the loan portfolio. In
1998, consumer loans dropped by $3.64 million or 13.57%. This represents the
direction management has taken to minimize risk associated with consumer
lending. Underwriting standards have become more strict to insure that credit
risk is minimized.
This past year, the Allowance for Loan/Lease Losses reached 1.48% or $6.11
million. This represents a continual effort by management to provide for any
loan/lease losses that may occur. Management's direction will be to continually
focus on the Allowance so that the Corporation is properly reserved for the risk
associated with the loan portfolio.
46.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
As mentioned in previous reports, the Corporation entered into a Settlement
Agreement outside of the Bankruptcy Court proceedings on November 21, 1996 with
Resort Funding, Inc. ("RFI"). Since this time covenants and payments on this
credit have occurred as agreed. Taking in consideration the modest interest rate
(3%) for the 24 months remaining, and the fact that payments are interest only
with the principal due in two years, the loan to RFI has a present value of
$3,257,939 as of December 31, 1998. The Bank has allocated $423,489 of its
Allowance for Loan and Lease towards this credit. The financial strength of RFI
was substantially upgraded in 1997 when a creditor converted $25 million of debt
into stock of RFI. This gave RFI approximately $31 million of equity, reducing
1997 year-end debt-to-equity ratio of 27:1, down to 3:1. As of December 31,
1998, RFI has maintained its repayment schedule as agreed and has shown
significant improvement in the overall financial condition of the Company.
Management continues to monitor the credit regularly.
The Corporation's success in maintaining credit quality is demonstrated in the
following table:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Allowance to total loans at end of year 1.48% 1.50% 1.46%
Net charge-offs $ 687 $ 689 $ 1,256
Net charge-offs to average outstanding loans 0.17% 0.20% 0.45%
Net charge-offs to beginning allowance balance 12.28% 15.01% 40.03%
Nonaccrual loans 2,174 1,956 -0-
Loans 90 days or more delinquent
(excluding nonaccrual loans) $ 1,238 $ 698 $ 68
</TABLE>
Management analyzes the allowance for loan losses in detail on a monthly basis
to ensure that losses inherent in the portfolio are properly recognized. In
addition to the input of lending officers, management uses an external loan
review contractor to examine large commercial real estate, lease, and commercial
loan relationships. An internal loan review function is also in place, with a
primary objective of reviewing loans below the scope established by management
for the external contractor.
Investments
During 1998, the Corporation's total investments decreased $1.53 million, from
$10.10 million to $8.57 million. This decrease was primarily the result of an
increase in the Corporation's outstanding loans. Because of the higher yield
associated with funds invested in loans (as discussed above), management's
desire is to maintain a minimum balance in the investment portfolio. The amount
to be maintained will be the minimum which will allow us to meet our pledging
requirements. Most of the portfolio is invested in U.S. Treasury and agency
securities, which have little credit risk and are highly liquid. The Corporation
classifies all securities as available for sale, in order to maximize our
ability to react to changing market conditions.
47.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Deposits
Deposit growth has been a key element of the Corporation's expansion strategy.
Total deposits at December 31, 1998, were $404.96 million, compared to $360.55
million at the end of 1997. Additional growth has occurred at branch locations
opened in 1997 and 1998. The most significant impact on the growth of deposits
is in the savings, money market and interest-bearing demand deposit category.
This increase is directly attributable to the newly offered "Preferred Checking"
account, which as of December 31, 1998, paid interest at a rate of 5.25% on
balances over $10,000. Deposits over $100,000 consist primarily of stable,
governmental balances, and balances from retail customers. There were no
brokered deposits at December 31, 1998, and management has no current plans to
solicit such deposits.
The Corporation is constantly looking for stable sources of deposits. One
innovative approach is the premium-based certificate of deposit program.
Customers can elect to receive one of several products in place of cash payments
for interest on term certificates. The Corporation offers firearms, golf clubs,
diamond jewelry, and grandfather clocks under these programs. The most
successful and long-standing of the programs is the firearm program, which is
offered to sportsmen nationally. Under this program, the Corporation records the
cost of the product given as a discount from the face amount of the certificate
of deposit and recognizes interest expense on the effective interest method over
the life of the certificate. Total certificates of deposits outstanding under
this program were approximately $1.63 million and $2.61 million at December 31,
1998 and 1997, respectively.
Another nontraditional source of deposits is the Corporation's CANSAVE program.
CANSAVE accounts are savings accounts denominated in Canadian dollars. These
accounts are offered in the Sault Ste. Marie banking offices and had total
balances of $6.4 million in U.S. dollars at December 31, 1998. Such accounts are
available only to Canadian citizens who are attracted to such accounts due to
very low interest rates paid by domestic Canadian banks.
Borrowings
As previously discussed, the Corporation's branching network is a relatively
high cost network in comparison to peer banking companies. Accordingly, the
Corporation continues to use alternative funding sources to provide funds for
lending activities. Other borrowings increased in 1998 with a balance of $23.27
million at the end of 1998, compared to $19.63 million in 1997. At December 31,
1998, $20.61 million of the borrowings were from the Federal Home Loan Bank of
Indianapolis. From time-to-time, alternative sources of funding can be obtained
at interest rates which are competitive with, or lower than, retail deposit
rates and with inconsequential administrative costs. Management anticipates that
such borrowings will continue to be a significant part of the overall funding
mix of the Corporation.
Liquidity
The Corporation's sources of liquidity include principal payments on loans and
investments, sales of securities available for sale, sales of loans held for
sale, deposits from customers, borrowings from the Federal Home Loan Bank, other
bank borrowings, and the issuance of common stock. The Corporation has ready
access to significant sources of liquidity on an almost immediate basis.
Management anticipates no difficulty in maintaining liquidity at the levels
necessary to conduct the Corporation's day-to-day business activities.
48.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Summary
Earnings have continued to increase from 1997 to 1998 as a direct result of the
Corporation's asset growth. Net income was $4.6 million, $4.1 million, and $2.8
million for 1998, 1997, and 1996, respectively. Net income for 1998 was 11.10%
greater than in 1997, while assets grew by 11.85% over the same period. Basic
earnings per share were $0.65 in 1998, $0.58 in 1997, and $0.43 in 1996, an
increase of 12.07% in 1998. The increase in basic earnings per share is a result
of the combination of the Corporation's continued earnings growth and
improvements in operations in 1998, particularly at locations acquired over the
past several years, and the repurchase of Corporation stock during 1998.
Net interest income is the primary source of earnings growth, increasing to
$20.68 million in 1998, from $20.07 million and $16.05 million in 1997 and 1996,
respectively. The majority of this increase is attributable to the increase in
volume in the lending arena coupled with a decease in overall deposit rates.
Noninterest income kept pace with the asset growth in 1998, increasing 61.82% to
$2.65 million. A significant increase in service fee income from demand and
savings products and an increase in gains on the sales of loans and investments
accounted for the growth in 1998. This is a significant improvement over 1997
where noninterest income increased only slightly in comparison to 1996.
Management feels income from noninterest sources will become a more significant
component of the Corporation's earnings due to the expectation that the net
interest margin may begin to decrease in the future due to competitive
pressures. As a result of this expectation, management instituted policies in
1997 designed to maximize fees collected for services provided to customers.
The increase in noninterest expense to $16.60 million in 1998 from $14.80
million and $11.61 million in 1997 and 1996, only slightly exceeded total asset
growth. The increase in noninterest expense was 12.20% compared to total asset
growth of 11.85%. In 1997, noninterest expense increased 27.47% over 1996
compared to total asset growth of 14.78%. Management continues to focus on
reducing noninterest expense in an effort to improve the efficiency of the
Corporation's operations.
Net Interest Income
The Corporation continues to emphasize the lending function as a primary source
of interest income. The decreasing rates in the lending arena in 1998 had a
significant impact on the Corporation's net interest income and net interest
margin. Net interest income as a percentage of total interest income was 53.7%,
55.8%, and 55.9%, in 1998, 1997, and 1996, respectively. Net interest margin was
5.34%, 5.63%, and 5.45%, for the same periods.
Interest income from loans represented 96.85% of total interest income in 1998,
compared to 96.00% in 1997, and 93.25% in 1996. The total amount of interest
income and the yield on total earning assets is heavily impacted by the results
from lending activities. The yield on earning assets was 9.52%, 9.86%, and 9.53%
in 1998, 1997, and 1996, respectively. This decrease was directly attributable
to the declining rates in the lending area, with the yield on loans decreasing
from 10.10% in 1997 to 9.71% in 1998.
49.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Total interest expense was $17.82 million in 1998, compared to $15.90 million
and $12.67 million in 1997 and 1996, for an increase of 12.06% since 1997 and
40.56% since 1996. While other sources of funding are beginning to become an
important part of the Corporation's funding strategy, interest expense on
deposits still represented 92.79% of total interest expense in 1998. The yield
on interest-bearing liabilities was 4.65%, 4.73%, and 4.56% in 1998, 1997, and
1996, respectively.
While overall cost of funds decreased, reflective of the declining rate
environment, the costing side of the balance sheet has not declined in
proportion to that of the earning side. This is apparent in the continued
decrease or shrinking of the net interest margin. In response to the declining
net interest margin, the Corporation intends to continue to focus on the
origination of higher yielding loan products, in addition to reviewing current
rates paid on deposit products in an effort to reduce interest expense. Both of
the above mentioned steps would lead to an improved interest margin and,
correspondingly, improved profitability.
Provision for Loan Losses
The Corporation maintains the allowance for loan losses at a level considered
adequate to cover losses inherent in the portfolio. The Corporation records a
provision for loan losses necessary to maintain the allowance at that level
after considering factors such as loan charge-offs and recoveries, changes in
the mix of loans in the portfolio, loan growth, and other economic factors more
fully described in Note 1 to the accompanying consolidated financial statements.
The reduction in the provision for loan losses to $1.20 million in 1998 is a
result of stable net charge-offs and overall improvement in the quality of the
loan portfolio. The decrease in the provision for loan losses, to $1.40 million
in 1997 from $2.42 million in 1996, was primarily a result of settlement and
restructuring of loans with the Bennett Funding Group (discussed above). The
allowance for loan losses decreased in 1998 to 1.48% of total loans, compared to
1.50% at December 31, 1997.
Noninterest Income
Noninterest income was $2.65 million, $1.64 million, and $1.36 million in 1998,
1997, and 1996, respectively. The principal source of noninterest income is
service charges on deposit accounts. In 1998, such fees were $1.48 million, a
21.18% increase over the amount recorded in 1997. In 1998, fees on deposit
accounts kept pace with overall asset growth. This is an improvement over past
years since the institutions acquired had lower fee structures than the
Corporation. In 1997, management put into place controls and procedures to help
ensure the Corporation maximizes its fees for services rendered. The increase
noted above is the realization of these changes.
Noninterest Expense
Noninterest expense has steadily increased from 1996 through 1998. The increase
since 1997 in this category was 11.36% for salaries and benefits and 9.67% for
occupancy expenses. These increases were less than the Corporation's asset
growth, over the same period, with a downward trend for annual increases over
the three-year period ending December 31, 1998. While annual increases in these
expenses are expected, a primary objective of management is to hold the rate of
increase in these categories below future asset growth. Management believes that
significant efficiencies have been obtained with further improvements coming in
the future as management continues its outsourcing of back room operations.
50.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation underwent a significant internal restructuring process in 1997
and 1998. Management not only reduced total full-time equivalents by 50, but
also centralized three key departments of the Corporation's sales and service
environment: the credit department, the operations department and the call
center. The result is a more focused and effective team built to serve its
customer's needs. As a result of this process, the Corporation will be able to
provide better customer service and have more cost-effective operations. This
transition has effectively reduced total operating expenses of the Corporation
in comparison to asset growth.
The application of purchase accounting to acquisitions created two intangible
assets, the core deposit intangible and goodwill, which are being amortized as
described in the notes to the consolidated financial statements. This expense
did not exist prior to the acquisitions. The amortization of acquisition
intangibles was $0.80 million in 1998, compared to $0.72 million in 1997 and
$0.59 million in 1996.
Federal Income Taxes
The provision for income taxes is 17.54% of income before income tax in 1998,
compared to 25.47% in 1997 and 16.09% in 1996. The difference between these
rates and the federal corporate income tax rate of 34% is primarily due to
tax-exempt interest earned on loans and investments.
INTEREST RATE AND FOREIGN EXCHANGE RATE RISK MANAGEMENT
Management actively manages the Corporation's interest rate risk. In the
relatively low interest rate environment which has been in place the last few
years, borrowers have generally tried to extend the maturities and repricing
periods on their loans and place deposits in demand, or very short-term
accounts. Management has taken various actions to offset the imbalance which
those tendencies would otherwise create. In general, management tries to write
commercial and real estate loans at variable rates or, when forced to offer
fixed rates due to competitive pressures, write fixed rate loans for relatively
short terms. Conversely, management has attempted to offer deposit products
designed to steer depositors to longer periods. Management has generally been
successful, with approximately 65% of loans repricing within one year and
approximately 29% of certificates of deposit maturing over one year.
Beyond general efforts to shorten loan pricing periods and extend deposit
maturities, management can manage interest rate risk by the maturity periods of
securities purchased, selling securities available for sale, and borrowing funds
with targeted maturity periods, among others. Also, the rate of interest rate
changes can impact the actions taken since the speed of change affects various
borrowers and depositors differently.
51.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Presented below is the Corporation's GAP table at December 31, 1998. This table
treats all money market accounts (approximately $52 million) as immediately
repriceable. Management considers the GAP acceptable.
<TABLE>
GAP Table
(In Thousands)
1 - 90 91 - 180 181 - 365 1 - 2 2 - 5 Over 5
Days Days Days Years Years Years Total
Earning assets
<S> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 6,048 $ 6,048
Securities 504 $ 3,001 $ 1 $ 2 $ 6 $ 5,051 8,565
Loans 168,027 41,039 57,887 19,664 62,331 62,772 411,720
-------- -------- -------- -------- -------- -------- -------
Total earning assets 174,579 44,040 57,888 19,666 62,337 67,823 426,333
Interest-bearing liabilities
Savings, NOW, and
money market
accounts 170,981 42,811 213,792
Certificates of deposit 35,582 35,755 33,986 26,489 16,556 725 149,093
Other borrowings 13,788 3,274 267 579 2,012 3,350 23,270
-------- -------- -------- -------- -------- -------- -------
Total interest-bearing
liabilities 220,351 39,029 34,253 27,068 18,568 46,886 386,155
======== ======== ======== ======== ======== ======== ========
GAP $(45,772) $ 5,011 $ 23,635 $ (7,402) $ 43,769 $ 20,937 $ 40,178
======== ======== ======== ======== ======== ======== ========
Cumulative GAP $(45,772) $(40,761) $(17,126) $(24,528) $ 19,241 $ 40,178 $ 40,178
======== ======== ======== ======== ======== ======== ========
</TABLE>
The Corporation provides foreign exchange services, makes loans to, and accepts
deposits from, Canadian customers primarily at its banking office in Sault Ste.
Marie, Michigan. To protect against foreign exchange risk, the Corporation
monitors the volume of Canadian deposits it takes in and then invests these
Canadian deposits in Canadian commercial loans. As of December 31, 1998, the
Corporation had excess Canadian liabilities of approximately $6.5 million (or
$4.2 million in U.S. dollars). Management anticipates this spread to decrease in
early 1999 as the Canadian loans are expected to increase faster than deposits.
Management feels the exposure to short-term foreign exchange risk is minimal and
at an acceptable level for the Corporation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Corporation currently does not enter into futures,
forwards, swaps or options. However, the Corporation is party to financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments
involve to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and may require collateral from the borrower if
deemed necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.
52.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Commitments to extend credit and standby letters of credit are not recorded as
an asset or liability by the Corporation until the instrument is exercised.
The Corporation's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximize income. Management realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and a simulation model. The Corporation has no market risk
sensitive instruments held for trading purposes. At December 31, 1998 and 1997,
it appears the Corporation's market risk is reasonable.
CAPITAL
It is the policy of the Corporation to maintain capital at a level consistent
with both safe and sound operations and proper leverage to generate an
appropriate return on shareholders' equity. Capital formation has been key to
the Corporation's growth. During 1998, the Corporation raised $1.19 million in
capital through the issuance of common stock. Net income exceeded cash dividends
by $3.31 million in 1998, $2.92 million in 1997, and $1.92 million in 1996. In
addition, $373,000, $355,000, and $254,000 of the cash dividends were reinvested
in the Corporation through the dividend reinvestment program in 1998, 1997, and
1996, respectively. The issuance of shares, retained income, and the dividend
reinvestment program increased shareholder's equity by $2.88 million since
December 31, 1997 and $7.08 million since December 31, 1996. Management believes
that significant demand for the Corporation's common stock exists in its market
area, and that the capital required to take advantage of expansion opportunities
is available in the local market, to the extent that such capital cannot be
internally generated.
As a banking company, the Corporation is required to maintain certain levels of
capital under government regulation. There are several measurements of
regulatory capital and the Corporation is required to meet minimum requirements
under each measurement. The Federal banking regulators have also established
capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective
action in the event an institution becomes financially troubled.
Regulatory capital is not the same as shareholders' equity reported in the
accompanying consolidated financial statements. Certain assets cannot be
considered assets for regulatory purposes. The Corporation's acquisition
intangibles are examples of such assets.
53.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Presented below is a summary of the Corporation's consolidated capital position
in comparison to regulatory requirements:
<TABLE>
Tier 1
Risk-Based Total
Leverage Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Regulatory minimum 4.0% 4.0% 8.0%
Regulatory designation as well-capitalized 5.0% 6.0% 10.0%
The Corporation:
December 31, 1998 7.2% 9.4% 10.7%
December 31, 1997 7.2% 9.6% 10.8%
</TABLE>
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note 1 to the accompanying consolidated financial statements for a
discussion of accounting pronouncements issued by the Financial Accounting
Standards Board which the Corporation is not required to implement until periods
subsequent to December 31, 1998.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and results of operations in historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Corporation's operations. Nearly all the assets and liabilities of the
Corporation are financial, unlike industrial or commercial companies. As a
result, the Corporation's performance is directly impacted by changes in
interest rates, which are indirectly influenced by inflationary expectations.
The Corporation's ability to match the interest sensitivity of its financial
assets to the interest sensitivity of its financial liabilities tends to
minimize the effect of changes in interest rates on the Corporation's
performance. Changes in interest rates do not necessarily move to the same
extent as changes in the price of goods and services.
NEW DEVELOPMENTS
As briefly mentioned in the Letter to the Shareholders, the Corporation
continues to seek and develop new and existing business opportunities. In the
coming year, the Corporation will be engaging in the following exciting new
developments:
The Corporation will be completing a Trust Preferred Stock offering in the
amount of $15 million. Amounts raised through this offering will be used to
support capital and growth of the Corporation.
54.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation will also finalize the formation of a new company in the
Denver, Colorado area known as North Country Securities, Inc. This company
will primarily be involved in the offering of municipal securities and
municipal lease financing.
Completion of two branch acquisitions will also be finalized in 1999. The
addition of the Kaleva and Mancelona branches will increase the
Corporation's deposit base by approximately $20,000,000.
Finally, the Corporation will be entering into a partnership with a newly
formed banking institution located in Grand Rapids, Michigan. As a 20%
shareholder in this new venture, the Corporation will benefit in the
long-term growth and earnings this investment can provide.
YEAR 2000 COMPLIANCE
Because many computerized systems use only two digits to record the year in date
fields (for example, the year 1998 is recorded as 98), such systems may not be
able to accurately process dates ending in the year 2000 and after. The effects
of the issue will vary from system to system and may adversely affect the
ability of a financial institution's operations as well as its ability to
prepare financial statements.
Corporation management has developed and the Board of Directors has approved a
comprehensive Year 2000 Compliance Plan. The plan consists of five phases:
awareness, assessment, renovation, validation and implementation. The
Corporation has an internal task force to assess Year 2000 compliance by the
Corporation, its vendors, and major deposit and loan customers. In addition, the
Bank has been contacting commercial borrowers about Year 2000 compliance to
avoid any negative impact on the quality of the loan portfolio.
To date, the Corporation has spent approximately $225,000 on Year 2000
compliance and expect to spend an additional $500,000 to complete this work.
The Corporation presently anticipates that it will complete its Year 2000
assessment and remediation by April of 1999. However, there can be no assurance
that the Corporation will be successful in implementing its Year 2000
remediation plan according to the anticipated schedule. In addition, the
Corporation may be adversely affected by the inability of other companies whose
systems interact with the Corporation to become Year 2000 compliant.
The Bank's core processing applications are provided by a third party vendor,
LASCO Development Corporation (LASCO). The Corporation receives regular
correspondence from LASCO which documents the status of their Year 2000
compliance. The Corporation has been advised that LASCO software has been
successfully tested for Year 2000 compliance.
Although the Corporation expects its internal systems to be Year 2000 compliant
as described above, the Corporation has prepared a contingency plan that
specifies what it plans to do if important internal or external systems are not
Year 2000 compliant in a timely manner.
Management does not anticipate that the Corporation will incur material
operating expenses or be required to invest heavily in additional computer
system improvements to be Year 2000 compliant. Nevertheless, the inability of
the Corporation to successfully address Year 2000 issues could result in
interruptions in the Corporation's business and have a material adverse effect
on the Corporation's results of operations.
55.
<PAGE>
Officers and Directors
NORTH COUNTRY FINANCIAL CORPORATION
Michael C. Henricksen, Chairman
Thomas G. King, Vice Chairman
Ronald G. Ford, President and Chief Executive Officer
Sherry L. Littlejohn, Executive Vice President, Chief Operating Officer
and Treasurer
Paulette M. Demers, Secretary
NORTH COUNTRY FINANCIAL CORPORATION BOARD OF DIRECTORS
CHARLES B. BEAULIEU
Owner, Beaulieu's Funeral Home
C. RONALD DUFINA
Balsam Shop, Inc., Ramas, Inc., HRD, Inc., Island Leasing, Inc.,
Mackinac Island Hospitality, Inc.
RONALD G. FORD
President and Chief Executive Officer, North Country Financial Corporation,
First Manistique Agency Corporation, First Northern Services Corporation,
First Rural Relending Corporation
Chairman and Chief Executive Officer, North Country Bank and Trust
STANLEY J. GEROU II
Owner, Days Inn & Comfort Inn (Munising),
Gerou Excavating
MICHAEL C. HENRICKSEN
Owner, Satellite Services
THOMAS G. KING
President of Top of Lake Investment Company
JOHN D. LINDROTH
President, Superior State Agency, Inc.
JOHN P. MILLER
Owner, Peoples Store Co., Inc.
BERNARD A. BOUSCHOR
Tribal Chairman, Sault Tribe of Chippewa Indians
SHERRY L. LITTLEJOHN
President and Chief Operating Officer, North Country Bank and Trust
56.
<PAGE>
Officers and Directors
NORTH COUNTRY BANK AND TRUST
Chairman, Ronald G. Ford, President and Chief Executive Officer,
North Country Financial Corporation,
First Manistique Agency Corporation, First Northern Services Corporation
First Rural Relending Corporation; Chief Executive Officer,
North Country Bank and Trust
Vice Chairman, John D. Lindroth, President, Superior State Agency, Inc.
Sherry L. Littlejohn, President and Chief Operating Officer,
North Country Bank and Trust
Robert Arfstrom, Owner, Arfstrom Pharmacy
Paul W. Arsenault, Owner, Concepts Consulting
Bernard A. Bouscher, Tribal Chairman, Sault Tribe of Chippewa Indians
C. Ronald DuFina, Balsam Shop, Inc., Ramas, Inc., HRD, Inc.,
Island Leasing, Inc.,
Mackinac Island Hospitality, Inc.
Stanley J. Gerou II, Owner, Days Inn & Comfort Inn (Munising), Gerou Excavating
Michael C. Henricksen, Owner, Satellite Services
Wesley Hoffman, Attorney, (Partner in the law firm of Barstow, Selsor, Hoffman)
G. David Jukuri, Owner, Century 21 Agency
Thomas G. King, Owner, President of Top of Lake Investment Company
John P. Miller, Owner, Peoples Store Co., Inc.
Richard A. Paidl, Manager- Stephenson Marketing Association
FIRST MANISTIQUE AGENCY CORPORATION
Ronald G. Ford, President & CEO
Sherry L. Littlejohn, Executive Vice President & COO
Paulette M. Demers, Secretary-Treasurer
FIRST NORTHERN SERVICES CORPORATION
Ronald G. Ford, President & CEO
Sherry L. Littlejohn, Executive Vice President & COO
Paulette M. Demers, Secretary-Treasurer
FIRST RURAL RELENDING CORPORATION
Ronald G. Ford, President & CEO
Sherry L. Littlejohn, Executive Vice President & COO
Paulette M. Demers, Secretary-Treasurer
NCB REAL ESTATE COMPANY
Ronald G. Ford, President & CEO
Sherry L. Littlejohn, Executive Vice President & COO
Paulette M. Demers, Secretary-Treasurer
COMMUNITY BANK BOARD DIRECTORS
Sault Ste. Marie
Carol Brawley Edward Graves Theodore Haapala
Anthony Bosbous Timothy Lukenda
Copper Country
Robert Nara Lawrence Julio Glen Tolksdorf
Dell Harma John Hawley Steve Vairo
57.
<PAGE>
FINANCIAL AFFILIATES
North Country Bank and Trust
Sherry L. Littlejohn, President and Chief Operating Officer
906-341-8401 or 1-800-236-2219
SHAREHOLDER INFORMATION
For information or to assist with questions, please
contact Shirley Young at
906-341-8401 or 1-800-236-2219
DIVIDEND REINVESTMENT PLAN
Shareholders may acquire additional shares of
North Country Financial Corporation stock free of
service charges. For information, please contact
Shirley Young
906-341-8401 or 1-800-236-2219
STOCK TRANSFER AGENT
For questions regarding transfer of stock, please
contact Shirley Young at 906-341-8401 or 1-800-236-2219 or
Registrar & Transfer Company at 1-800-866-1340
EXECUTIVE OFFICES
130 South Cedar Street
P.O. Box 369
Manistique, Michigan 49854
906-341-8401
WORLD WIDE WEB SITE
http://www.ncbt.com
58.
<PAGE>
Exhibit 21 - Subsidiaries of Registrant
North County Bank and Trust - 100% owned
Incorporated as a Michigan Banking Corporation
130 South Cedar Street
Manistique, MI 49854
First Manistique Agency - 100% owned
Incorporated as a Michigan Corporation
130 South Cedar Street
Manistique, MI 49854
First Rural Relending Company- 100% owned
Incorporated as a Michigan Corporation
130 South Cedar Street
Manistique, MI 49854
<PAGE>
Exhibit 23 - Consent of Independent Public Accountants
Indepedent Auditor's Consent
We consent to the incorporation by reference in the Registration Statement on
Form S-3 (No. 33-61533) of North Country Financial Corporation (f/k/a First
Manistique Corporation) of our report dated January 29, 1999, relating to the
consolidated balance sheet of North Country Financial Corporation and
Subsidiares as of December 31, 1998, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the year then ended,
which report is included in the December 31, 1998, annual report on Form 10-K of
North Country Financial Corporation and to the continued reference to our firm
as experts in the prospectus which is a part of the Registration Statement.
/s/Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
Appleton, Wisconsin
March 29, 1999
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