FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] 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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
3530 North Country Drive, Traverse City, Michigan 49684
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (231) 929-5600
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)
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. [ ]
The aggregate market value of the common stock held by
non-affiliates of the Registrant, based on a per share
price of $14.00 as of March 21, 2000, was $87.1
million. As of March 21, 2000, there were outstanding
6,995,067 shares of the Corporation's Common Stock (no
par value).
Documents Incorporated by Reference: Portions of the
Corporation's 1999 Annual Report to Shareholders are
incorporated by reference into Parts I and II of this
Report.
Portions of the Corporation's Proxy Statement for the
Annual Meeting of Shareholders to be held April 18,
2000 are incorporated by reference into Part III of
this Report.
<PAGE>
PART I
ITEM 1: BUSINESS
General
North Country Financial Corporation (the
"Registrant" or "Corporation") was incorporated under
the laws of the state of Michigan on December 16, 1974.
The Corporation 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 (the "Bank"). The Registrant
also owns all of the outstanding stock of five nonbank
subsidiaries: First Manistique Agency, an insurance
agency which sells annuities as well as life and health
insurance; First Rural Relending Company, a nonprofit
relending company; North Country Financial Group, a
corporation which provides tax-exempt lease/purchase
financing to municipalities; North Country Capital
Trust, a statutory business trust which was formed
solely for the issuance of trust preferred securities;
and NCB Real Estate Company, which owns several
properties used by the Bank. 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 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, 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 assets 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. On
February 4, 1997, the Registrant acquired all of the
outstanding stock of UP Financial Inc., the parent
holding company of First National Bank of Ontonagon
("Ontonagon"). 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. On
June 25, 1999, North Country Bank and Trust acquired
the fixed assets and assumed the deposits of the Kaleva
and Mancelona branches of Huntington National Bank in
exchange for cash. On July 23, 1999, North Country
Bank and Trust sold the fixed assets and deposits of
the Rudyard and Cedarville branches to Central Savings
Bank in exchange
<PAGE>
for cash. On January 14, 2000, North
Country Bank and Trust sold the fixed assets and
deposits of the Garden branch to First Bank, Upper
Michigan in exchange for cash.
The Corporation is headquartered in Traverse City,
Michigan. The executive offices and mailing address of
the Corporation are located at 3530 North Country
Drive, Traverse City, Michigan 49684.
The Bank is headquartered in Manistique, Michigan.
The Bank has 22 branch offices located in the Upper
Peninsula of Michigan and five branch offices located
in Michigan's Lower Peninsula. The Bank maintains
offices in Grand Traverse, Otsego, Manistee, Antrim,
Emmet, Schoolcraft, Menominee, Delta, Dickinson,
Hougton, Ontonagon, Baraga, Marquette, Luce, Alger,
Mackinac, and Chippewa counties. The Bank provides
drive-in convenience at 20 branch locations and has
automatic teller machines operating at 12 locations.
The Bank has no foreign offices.
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,
and direct and indirect consumer financing.
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 Corporation's
actual future results could materially differ from
those discussed. Factors that might cause actual
results to differ from the results discussed in forward-
looking statements include, but are not limited to:
* General economic conditions, either nationally or
the state in which the Corporation does business;
* Legislation or regulatory changes which adversely
affect the businesses in which the Corporation is
engaged;
* Changes in the interest rate environment which
reduce interest rate margins;
* Changes in securities markets with respect to the
market value of financial assets and the level of
volatility in certain markets such as foreign exchange;
* Significant increases in competition in the
banking and financial services industry resulting from
industry consolidation, regulatory changes and other
factors, as well as actions taken by particular
competitors;
* Changes in consumer spending, borrowing and
savings habits;
* Technological changes;
<PAGE>
* Acquisitions and unanticipated occurrences which
delay or reduce the expected benefits of acquisitions;
* The Corporation's ability to increase market share
and control expenses;
* The effect of compliance with legislation or
regulatory changes;
* The effect of changes in accounting policies and
practices;
* The costs and effects of unanticipated litigation
and of unexpected or adverse outcomes in such
litigation; and
* The factors discussed in Item 1 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.
All forward-looking statements contained in this
report are based upon information presently available
and the Corporation assumes no obligation to update any
forward-looking statements.
Principal Sources of Revenue
The principal source of revenue for the Registrant
is interest and fees on loans and investment income.
The sources of income for the three most recent years
are as follows (in thousands):
1999 1998 1997
Interest and fees on loans $40,457 $37,284 $34,526
Investment income 1,670 717 1,065
Other interest income 422 497 373
Noninterest income 3,538 2,651 1,638
Employees
As of December 31, 1999, the Corporation and its
subsidiaries employed in the aggregate approximately
180 employees, of which approximately 160 are full-time
employees.
Competition
Banking is a highly competitive business. 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.
<PAGE>
Business
The Bank makes mortgage, commercial, and
installment loans to customers throughout Michigan.
Fees may be charged for these services. Historically,
the Bank has predominantly sold its conforming
residential mortgage loans in the secondary market.
The Bank also finances commercial and governmental
leases throughout the country; the leases are
originated by unrelated entities or the Registrant's
subsidiary, North Country Financial Group. The Bank
reviews the credit quality of each lease before
entering into a financing agreement.
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 Michigan. 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 material portions of the Bank's deposits been
received from, a single person, industry, group, or
geographical location.
The Bank is a member of 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 also uses the Internet to
attract certificates of deposits in denominations of
$100,000 or more. These large denomination deposits
approximated 7.6% of total deposits at December 31,
1999.
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, 1999, the Bank had no material
risks attendant to foreign sources. See the "Interest
Rate Risk" and "Foreign Exchange Risk" sections in
Management's Discussion and Analysis of Financial
Condition and Results of Operation 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.
<PAGE>
Supervision and Regulation
As a registered bank holding company, the
Corporation is subject to regulation and examination by
the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") under the Bank Holding
Company Act, as amended (the "BHCA"). The Bank is
subject to regulation and examination by the Michigan
Financial Institutions Bureau and the FDIC.
Under the BHCA, the Corporation 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
Corporation 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 Corporation might
not do so absent such policy. In addition, there are
numerous federal and state laws and regulations which
regulate the activities of the Corporation, the Bank
and the nonbank subsidiaries, including requirements
and limitations relating to capital and reserve
requirements, permissible investments and lines of
business, transactions with affiliates, loan limits,
mergers and acquisitions, issuances of securities,
dividend payments, inter-affiliate liabilities,
extensions of credit and branch banking.
Federal banking regulatory agencies have
established capital adequacy rules which take into
account risk attributable to balance sheet assets and
off-balance sheet activities. All banks and bank
holding companies must meet a minimum total risk-based
capital ratio of 8%, of which at least one-half must be
comprised of core capital elements defined as Tier 1
capital (which consists principally of shareholders'
equity). The federal banking agencies also have
adopted leverage capital guidelines which banking
organizations must meet. Under these guidelines, the
most highly rated banking organizations must meet a
minimum leverage ratio of at least 3% Tier 1 capital to
total assets, while lower rated banking organizations
must maintain a ratio of at least 4% to 5%. Failure to
meet minimum capital requirements can initiate certain
mandatory - and possible additional discretionary -
actions by regulators that, if undertaken, could have a
direct material effect on the consolidated financial
statements. The risk-based and leverage standards
presently used by the Federal Reserve Board are minimum
requirements, and higher capital levels will be
required it warranted by the particular circumstances
or risk profiles of individual banking organizations.
The Federal Reserve Board has not advised the
Corporation of any specific minimum Tier 1 capital
leverage ratio applicable to it.
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' power
depends on whether the institution in question is "well
capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized,"
or "critically undercapitalized." To be well
capitalized under the regulatory framework, the Tier 1
capital ratio must meet or exceed 6%, the total capital
ratio must meet or exceed 10% and the leverage ratio
must meet or exceed 5%. At December 31, 1999 and 1998,
the most recent notification from the Federal Reserve
categorized the Corporation as well capitalized under
the regulatory framework for prompt corrective action.
There are no conditions or events since that
notification that management believes have changed the
Corporation's category. The Bank's risk-based
<PAGE>
capital and leverage ratios meet or exceed the defined
minimum requirements, and the Bank has been deemed well
capitalized as of December 31, 1999 and 1998.
Current federal law provides that adequately
capitalized and managed bank holding companies from any
state may acquire banks and bank holding companies
located in any other state, subject to certain
conditions. Banks are permitted to create interstate
branching networks in states that do not "opt out" of
interstate branching.
The laws and regulations to which the Corporation
is subject are constantly under review by Congress,
regulatory agencies and state legislatures. On
November 12, 1999, President Clinton signed important
legislation passed by Congress to overturn Depression-
era restrictions on affiliations by banking
organizations. This comprehensive legislation,
referred to as the Gramm-Leach-Bliley Act (the "Act"),
eliminates certain barriers to and restrictions on
affiliations between banks and securities firms,
insurance companies and other financial services
organizations. The Act provides for a new type of
"financial holding company" structure under which
affiliations among these entities may occur, subject to
the regulation of the Federal Reserve Board and
regulation of affiliates by the functional regulators,
including the Securities and Exchange Commission and
state insurance regulators. In addition, the Act
permits certain non-banking financial and financially
related activities to be conducted by operating
subsidiaries of a national bank. Under the Act, a bank
holding company may become certified as a financial
holding company by filing a notice with the Federal
Reserve Board, together with a certification that the
bank holding company meets certain criteria, including
capital, management and Community Reinvestment Act
requirements. The Act contains a number of provisions
allocating regulatory authority among the Federal
Reserve Board, other banking regulators, the Securities
and Exchange Commission and state insurance regulators.
In addition, the Act imposes strict new privacy
disclosure and "opt out" requirements regarding the
ability of financial institutions to share personal non-
public customer information with third parties.
Other important provisions of the Act permit
merchant banking and venture capital activities, and
insurance underwriting, to be conducted by a subsidiary
of a financial holding company, and municipal
securities underwriting activities to be conducted
directly by a national bank or by its subsidiary.
Under the Act, a financial holding company may engage
in a broad list of "financial activities," and any non-
financial activity that the Federal Reserve Board
determines is "complementary" to a financial activity
and poses no substantial risk to the safety and
soundness of depository institutions or the financial
system.
While certain provisions of the Act became
effective on November 12, 1999, other provisions are
subject to delayed effective dates, and in some cases,
will be implemented only upon the adoption by federal
regulatory agencies of rules prescribed by the Act.
The earnings and business of the Corporation and
the Bank are also affected by the general economic and
political conditions in the United States and abroad
and by the monetary and fiscal policies of various
federal agencies. The Federal Reserve Board impacts
the competitive conditions under which the Corporation
operates by determining the cost of funds obtained from
money market sources for lending and investing and by
exerting influence on interest rates and credit
conditions. In addition, legislative and economic
factors can be expected
<PAGE>
to have an ongoing impact on the competitive environment
within the financial services industry. The impact of
fluctuating economic conditions and federal regulatory
policies on the future profitability of the Corporation
and its subsidiaries cannot be predicted with certainty.
Selected Statistical Information
I. Distribution of Assets, Obligations, and
Shareholders' Equity; Interest Rates and Interest
Differential
The key components of net interest income, the
average daily balance sheet for each year - including
the components of earning assets and supporting
obligations - 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
obligations is contained under the caption
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the
Registrant's 1999 Annual Report, and is incorporated
herein by reference.
An analysis of the changes in net interest income
from period-to-period and the relative effect of the
changes in interest income and expense due to changes
in the average balances of earning assets and interest-
bearing obligations and changes in interest rates is
contained under the caption "Management's Discussion
and Analysis of Financial Condition and Results of
Operations" in the Registrant's 1999 Annual Report, and
is incorporated herein by reference.
II. Investment Portfolio
A. Investment Portfolio Composition
The following table presents the carrying value of
investment securities available for sale as of December
31 (in thousands):
1999 1998 1997
U.S. Treasury and federal agencies $ 9,392 $3,513 $7,743
State and political subdivisions 16,210 1,021 830
Corporate securities 3,008 1,290 1,138
Mortgage-related securities 14,733 2,852 392
------- ------- -------
TOTAL $43,343 $8,676 $10,103
Included in the December 31, 1999 investment
securities available for sale are $6.2 million of White
Mountain Apache Tribe Revenue Bonds Series 1999B.
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, 1999 (fully
taxable equivalent, in thousands):
<PAGE>
1 Year or Less 1-5 Years 5-10 Years Over 10 Years
U.S. Treasury and
federal agencies $2,844 $6,548
State and political
subdivisions $115 $ 585 $7,085 $8,425
Corporate securities 111 1,457 500 940
Mortgage-related
securities 22 14,711
Weighted average
yield (1) 8.20% 7.04% 8.09% 7.45%
(1) Weighted average yield includes the effect
of tax-equivalent adjustments using a 34% tax
rate.
III. Loan Portfolio
A. Type of Loans
The following table sets forth the major
categories of loans outstanding for each category at
December 31 (in thousands):
1999 1998 1997 1996 1995
Commercial, financial
and agricultural $258,592 $219,027 $181,683 $141,555 $107,054
Real estate - construction 12,539 11,923 10,940 13,897 2,235
Real estate - mortgage 107,751 97,415 95,543 80,592 58,434
Consumer 17,051 23,160 26,795 31,156 29,918
Leases 70,689 60,195 57,558 47,686 23,867
-------- -------- -------- -------- --------
TOTAL $466,622 $411,720 $372,519 $314,886 $221,508
Included in the December 31, 1999 totals are
approximately $6.5 million of commercial loans and
$100,000 of real estate mortgage loans to Canadian
obligors.
To the extent the Corporation utilizes lease
financing for its customers, the leases are accounted
for as loans.
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, 1999, based on scheduled
principal repayments (in thousands). The amounts due
after one year are classified according to the
sensitivity to changes in interest rates.
<PAGE>
Commercial, Real Estate
Financial and Construction
Agricultural
In one year or less $98,545 $11,463
After one year but within five years:
Variable interest rates 46,645 ---
Fixed interest rates 50,731 1,076
After five years:
Variable interest rates 52,656 ---
Fixed interest rates 10,015 ---
TOTAL $258,592 $12,539
C. Risk Elements
The following table presents a summary of non-
performing assets and problem loans as of December 31
(in thousands):
1999 1998 1997 1996 1995
Nonaccrual loans $ 95 $2,174 $1,956 $ 49 $ 579
Accruing loans past
due 90 days or more 2,452 1,238 698 68 1,439
Restructured loans --- --- --- --- ---
Interest income that
would have been recorded
under original terms 3 207 93 --- ---
Interest income
recorded during period --- --- --- --- ---
IV. Summary of Loan Loss Experience
A. Analysis of the Allowance for Loan Losses
Changes in the allowance for loan losses arise
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 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. The following table presents information
relative to the allowance for loan losses for the years
ended December 31 (in thousands):
<PAGE>
1999 1998 1997 1996 1995
Balance of allownce
for loan losses at
beginning of period $6,112 $5,600 $4,591 $3,137 $2,350
Loans charged off:
Commercial, financial
and agricultural 405 406 351 1,012 90
Real estate - construction -- -- -- -- --
Real estate - mortgage 74 31 37 8 --
Consumer 329 368 413 357 252
Leases -- -- -- -- --
TOTAL LOANS
CHARGED OFF 808 805 801 1,377 440
Recoveries of loans
previously charged off:
Commercial, financial
and agricultural 9 48 2 67 336
Real estate - construction -- -- -- -- --
Real estate - mortgage 10 -- 7 -- 22
Consumer 83 70 77 55 98
Leases -- -- 27 -- --
TOTAL RECOVERIES 102 118 113 122 456
Net loans charged off 706 687 688 1,255 (16)
Provisions charged to
expense 1,457 1,199 1,398 2,424 771
Allowance from
acquisitions -- -- 299 285 --
BALANCE AT END OF
PERIOD $6,863 $6,112 $5,600 $4,591 $3,137
Ratio of net charge-offs
during period to average
loans outstanding 0.16% 0.17% 0.20% 0.45% -0.01%
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 (in thousands). The percentages shown
represent the percent of each loan category to total
loans.
<PAGE>
<TABLE>
1999 1998 1997 1996 1995
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricutural $2,443 55.4% $1,789 53.2% $2,873 48.8% $2,356 45.0% $ 583 48.3%
Real estate -
construction 114 2.7% 65 2.9% -- 2.9% -- 4.4% -- 1.0%
Real estate -
mortgage 835 23.1% 622 23.7% 99 25.6% 81 25.6% 592 6.4%
Consumer 326 3.7% 229 5.6% 416 7.2% 341 9.9% 112 13.5%
Leases 1,049 15.1% 880 14.6% 350 15.5% 27 15.1% 23 10.8%
Unallocated 2,096 N/A 2,507 N/A 1,862 N/A 1,526 N/A 2,360 N/A
TOTAL $6,863 100% $6,112 100% $5,600 100% $4,591 100% $3,137 100%
</TABLE>
V. Deposits
At December 31, 1999, approximately $5.6 million
of total deposits are from Canadian customers.
The following table presents the maturities of
certificates of deposits and other time deposits of
$100,000 or more as of December 31, 1999 (in thousands):
3 months or less $ 5,123
Over 3 months through 6 months 3,979
Over 6 months through 12 months 7,708
Over 12 months 18,500
Total $35,310
VI. Return on Equity and Assets
Selected financial data of the Registrant is
contained in the Corporation's 1999 Annual Report and
is incorporated herein by reference.
See Item 6, "Selected Financial Data."
VII. Financial Instruments with Off-Balance Sheet Risk
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):
<PAGE>
1999 1998
Fixed Variable Fixed Variable
Outstanding letters of credit --- $14,425 --- $14,869
Unused lines of credit $9,294 73,939 $2,782 63,452
Loan commitments outstanding 7,127 45,420 11,235 53,372
Fixed rates on unused lines of credit and loan
commitments ranged from 5.15% to 18% at December 31, 1999.
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.
ITEM 2: PROPERTIES
The Registrant's headquarters are located at 3530
North Country Drive, Traverse City, Michigan 49684.
The headquarters location is owned by the Registrant
and not subject to any mortgage.
The Bank conducts business from 27 offices at
locations described below in Grand Traverse, Otsego,
Manistee, Antrim, Emmet, Schoolcraft, Menominee, Delta,
Dickinson, Hougton, Ontonagon, Baraga, Marquette, Luce,
Alger, Mackinac, and Chippewa counties. The
Corporation continually reviews the possibility of
applying for additional branch locations, depending on
management's assessment of market and economic
conditions, the availability of locations, and the
proximity of branches of competing institutions. The
following table lists each of the Bank's offices.
Traverse City Gaylord
3530 North Country Drive 145 North Otsego Avenue
Traverse City, MI 49684 Gaylord, MI 49735
Grand Traverse County Otsego County
Kaleva Mancelona
14429 Wuoksi Avenue 625 North Williams Street
Kaleva, MI 49645 Manxwlona, MI 49659
Manistee County Antrim County
Petoskey Manistique
3890 Charlevoix Avenue 130 South Cedar Street
Petoskey, MI 49770 Manistique, MI 49854
Emmet County Schoolcraft County
<PAGE>
Menominee Stephenson
1111 10th Street 245 Menominee Street
Menominee, MI 49858 Stephenson, MI 49887
Menominee County Menominee County
Escanaba Iron Mountain
837 North Lincoln Road 1890 South Stephenson Avenue
Escanaba, MI 49829 Iron Mountain, MI 49801
Delta County Dickinson County
South Range Ripley
47 Trimountain Avenue 106 Royce Road
South Range, MI 49963 Franklin Township, MI 49930
Houghton County Houghton County
Calumet Houghton
1175 Calumet Avenue 524 Sheldon Avenue
Calumet, MI 49913 Houghton, MI 49931
Houghton County Houghton County
Ontonagon L'anse
601 River Street 117 US Highway 41
Ontonagon, MI 49953 L'anse, MI 49946
Ontonagon County Baraga County
Marquette Main Marquette Presque Isle
300 North McClellan Street 1400 Presque Isle
Marquette, MI 49855 Marquette, MI 49855
Marquette County Marquette County
Newberry Main Newberry Hill
414 Newberry Avenue 2001 South Newberry Avenue
Newberry, MI 49868 Newberry, MI 49868
Luce County Luce County
Munising Curtis
301 East Superior Street 415 Main Street
Munising, MI 49862 Curtis, MI 49820
Alger County Mackinac County
Naubinway St. Ignace
US Highway 2 430 North State Street
Naubinway, MI 49762 St. Ignace, MI 49781
Mackinac County Mackinac County
<PAGE>
Mackinac Island Sault Main
21 Hoban Street 138 Ridge Street
Mackinac Island, MI 49781 Sault Ste. Marie, MI 49783
Mackinac County Chippewa County
Sault Cascade
4250 I-75 Business Spur
Sault Ste. Marie, MI 49783
Chippewa County
All of the above locations are designed for use
and operation as a bank, are well maintained, and are
suitable for current operations. Of the 27 branch
locations, 6 are leased and 21 are owned.
North Country Financial Group leases space in a
professional office building located at 1860 Blake
Street, Denver, Colorado 80202.
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 1999 to a vote of the Registrant's
stockholders.
Additional Item - Executive Officers
Name Age Position
Ronald G. Ford 52 Chairman and Chief Executive Officer
Sherry L. Littlejohn 39 President and Chief Operating Officer
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.
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCK HOLDER MATTERS
Market information pertaining to the Registrant's
common stock is contained under the caption "Market
Information" in the Registrant's 1999 Annual Report,
and is incorporated herein by reference.
The number of common shareholders of the
Registrant is contained under the caption "Market
Summary" on page 2 in the Registrant's 1999 Annual
Report, and is incorporated herein by reference.
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.
The cash dividends paid by quarter for 1999 and
1998 is included in the Corporation's 1999 Annual
Report under the caption "Comparative Highlights" and
is incorporated herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
Selected financial data of the Registrant is
contained in the Corporation's 1999 Annual Report and
is incorporated herein by reference.
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 Corporation's 1999
Annual Report to Shareholders.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Corporation's primary market risk exposure is
interest rate risk and, to a lesser extent, liquidity
risk and foreign exchange risk. The Corporation has no
market risk sensitive instruments held for trading
purposes. The Corporation 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.
<PAGE>
Interest rate risk is the exposure of the
Corporation's financial condition to adverse movements
in interest rates. The Corporation derives its income
primarily from the excess of interest collected on its
interest-earning assets over the interest paid on its
interest-bearing obligations. The rates of interest
the Corporation earns on its assets and owes on its
obligations generally are established contractually for
a period of time. Since market interest rates change
over time, the Corporation 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 Corporation's
earnings and capital base. Accordingly, effective risk
management that maintains interest rate risk at prudent
levels is essential to the Corporation'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 Corporation'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
Corporation 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
obligations, along with average stated rates and
estimated fair values at December 31, 1999 (in
thousands):
<TABLE>
Principal/Notional Amount Maturing in:
Fair Value
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
<S> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive
Assets
Interest-bearing
deposits $679 $679 $679
Average
interest rate 2.7% 2.7%
Fixed interest
rate securities $226 $136 $146 $146 $1,613 $41,076 $43,343 $43,343
Average
interest rate 5.4% 5.4% 5.4% 5.4% 6.5% 7.0% 7.0%
Federal Home
Loan Bank Stock $3,034 $3,034 $3,034
Average
interest rate 8.0% 8.0%
Fixed interest
rate loans $57,909 $1,968 $22,206 $24,669 $17,388 $65,174 $189,315 $183,620
Average
interest rate 8.2% 8.1% 8.5% 8.9% 8.5% 8.1% 8.3%
Variable interest
rate loans $73,676 $1,443 $22,422 $31,794 $25,801 $122,171 $277,307 $277,891
Average
interest rate 9.3% 9.3% 8.5% 9.2% 9.1% 9.2% 9.2%
<PAGE>
Rate Sensitive
Obligations
Savings, money
market and
interest-bearing
demand $267,027 $267,027 $267,027
Average
interest rate 3.8% 3.8%
Time deposits $103,794 $3,517 $24,414 $16,284 $3,269 $1,087 $152,365 $152,001
Average
interest rate 5.4% 5.1% 5.6% 5.5% 5.4% 5.6% 5.4%
Fixed interest
rate borrowings $17,643 $686 $734 $790 $1,986 $5,039 $26,878 $25,729
Average
interest rate 6.0% 6.3% 6.3% 6.3% 6.4% 5.2% 5.9%
Variable interest
rate-borrowings $20,000 $20,000 $20,000
Average
interest rate 5.6% 5.6%
Subordinated
debentures $12,450 $12,450 $12,450
Average
interest rates 8.6% 8.6%
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 obligations, and
economic and competitive conditions; potential changes
in lending, investing and deposit strategies; customer
preferences; and other factors.
ITEM 8: FINANCIAL STATEMENTS
Incorporated by reference to the Registrant's
Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997 in the Corporation's
1999 Annual Report to Shareholders.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information set forth under the caption
"Election of Directors" of the Registrant's definitive
Proxy Statement dated March 8, 2000, is hereby
incorporated by reference.
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
Information relating to compensation of the
Registrant's executive officers and directors is
contained under the captions "Remuneration of
Directors" and "Executive Compensation," in the
Registrant's definitive Proxy Statement dated March 8,
2000, 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
under the caption "Beneficial Ownership of Common
Stock" in the Registrant's definitive Proxy Statement
dated March 8, 2000, and is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and
related transactions is contained under the caption
"Indebtedness of and Transactions With Management" in
the Registrant's definitive Proxy Statement dated March
8, 2000, and is incorporated herein by reference.
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:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the
years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
<PAGE>
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, 3530 North Country Drive,
Traverse City, Michigan 49684.
(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.
<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 27, 2000.
NORTH COUNTRY FINANCIAL CORPORATION
/s/ Ronald G. Ford
- --------------------------
Ronald G. Ford
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below
on March 27, 2000, 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 Sherry L.
Littlejohn, 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/ Ronald G. Ford
- ---------------------------------- -------------------------------
Ronald G. Ford - Director, Chairman Stanley J. Gerou - Director
and Chief Executive Officer
(Principal Executive Officer)
/s/ Sherry L. Littlejohn /s/ Michael C. Henricksen
- ---------------------------------- -------------------------------
Sherry L. Littlejohn - Director, President, Michael C. Henricksen - Director
Chief Operating Officer and Treasurer
/s/ Kristine E. Hoefler /s/ Wesley Hoffman
- ---------------------------------- -------------------------------
Kristine E. Hoefler - Chief Financial Wesley Hoffman - Director
Officer (Principal Financial and
Accounting Officer)
- ---------------------------------- -------------------------------
Paul Arsenault - Director Thomas G. King - Director
/s/ John Lindroth
- --------------------------------- -------------------------------
Bernard A. Bouschor - Director John Lindroth - Director
/s/ John P. Miller
- --------------------------------- -------------------------------
C. Ronald Dufina - Director John P. Miller - Director
<PAGE>
EXHIBIT INDEX
Number Exhibit
3.1 Articles of Incorporation, as amended,
incorporated herein by reference to exhibit 3.1 of the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
3.2 Bylaws, as amended, incorporated herein by
reference to exhibit 3.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999.
10.1 Stock Option Plan, incorporated by reference
to the Registrant's definitive proxy
statement for its annual meeting of
shareholders held April 21, 1994.
10.2 Deferred Compensation, Deferred Stock, and
Current Stock Purchase Plan for Nonemployee
Directors.
10.3 North Country Financial Corporation Stock
Compensation Plan.
10.4 North Country Financial Corporation 1997
Directors' Stock Option Plan.
10.5 North Country Financial Corporation 2000
Stock Incentive Plan
10.6 Employment Contract dated July 1, 1994
between North Country Bank and Trust and
Ronald G. Ford, incorporated herein by
reference to exhibit 10(c) of the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.7 Amendment to Employment Contract dated July
26, 1996 between North Country Bank and Trust
and Ronald G. Ford, incorporated herein by
reference to exhibit 10(d) of the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
10.8 Second Amendment to Employment Agreement
dated August 18, 1999, between the
Corporation and Ronald G. Ford, incorporated
herein by reference to exhibit 10.2 of the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
10.9 Consulting Agreement dated September 15, 1999
between the Corporation and Ronald G. Ford,
incorporated herein by reference to exhibit
10.1 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1999.
<PAGE>
10.10 Management Continuity Agreement dated
May 22, 1996 between the Corporation and
Sherry Littlejohn incorporated herein by
reference to exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.11 First Amendment to Employment Contract
dated August 18, 1999 between the Corporation
and Sherry Littlejohn, incorporated herein by
reference to exhibit 10.4 of the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
10.12 North Country Financial Corporation
Supplemental Executive Retirement Plan,
incorporated herein by reference to exhibit
10.6 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1999.
10.13 Lease Agreement commencing March 1,
2000, by and among C. Ronald Dufina, Mary
McCourt Dufina and North Country Bank &
Trust.
13 1999 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.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule - year ended December 31, 1999.
MW379878_6.DOC
</TABLE>
DEFERRED COMPENSATION PLAN
FIRST MANISTIQUE CORPORATION
DEFERRED COMPENSATION, DEFERRED STOCK AND CURRENT
STOCK PURCHASE PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose. The First Manistique Corporation
Deferred Compensation, Deferred Stock and Current Stock
Purchase Plan for Non-Employee Directors ("Plan") has
been adopted to provide an opportunity for each non-
employee director of First Manistique Corporation
("FMC") and FMC subsidiaries to defer his or her
director fees or to increase, on a current basis, his
or her ownership of shares of FMC's common stock.
2. Eligibility. Each director of FMC or a
subsidiary of FMC which adopts this Plan ("Subsidiary
Bank") who is not an officer or employee of FMC or of
any Subsidiary Bank is eligible to participate in the
Plan ("Eligible Director").
3. Administration. The Plan shall be
administered by FMC's Corporate Executive Committee
(the "Plan Administrator"), who shall have the
authority to interpret the Plan and to adopt procedures
for implementing the Plan.
4. FMC Common Stock. The shares of stock
subject to purchase or the equivalent to be credited to
a participant's account under the Plan shall be the
shares of FMC's common stock (the "FMC Common Stock").
Shares issued and delivered to participants under the
Plan may be either newly issued shares or shares
purchased by FMC and reissued. Subject to adjustment
as described below, the maximum number of shares of
common stock that may be purchased or credited under
the Plan is 50,000. If FMC shall at any time increase
or decrease the number of its outstanding shares of FMC
Common Stock or change in any way the rights and
privileges of such shares by means of the payment of a
stock dividend or any other distribution upon such
shares payable in FMC Common Stock, or through a stock
split, subdivision, consolidation, combination,
reclassification, or recapitalization involving the FMC
Common Stock, or in case of the merger or consolidation
of FMC with or into another organization, then, in any
such event, the numbers, rights and privileges of the
shares issuable or credited under the Plan shall be
increased, decreased or changed in like manner as if
such shares had been issued and outstanding, fully
paid, and nonassessable at the time of such occurrence.
5. Compensation Affected by Participation in the
Plan. An Eligible Director may specify in his or her
Election to Participate that all, but not less than
all, of an Eligible Director's meeting fees, if any,
and all or part (in integral multiples of 25%) of an
Eligible Director's annual retainer fees that would
otherwise be payable in cash by FMC or a Subsidiary
Bank for his or her service for the calendar year
following the year in which an Election to Participate
is filed, or in the case of an Eligible Director who
files an Election to Participate between January 1 and
April 1, 1996, for that portion of the 1996 calendar
year following March 31, and for all subsequent
<PAGE>
calendar years while the Election to Participate
remains in effect, shall be subject to the terms of the
Plan ("Plan Fees").
6. Election to Participate. An Eligible
Director becomes a participant in the Plan by filing an
"Election to Participate" with the Plan Administrator
not later than (except as provided in the following
sentence) December 31 of the year preceding the
calendar year with respect to which the Eligible
Director wishes to commence participation in the Plan.
With respect to 1996 only, an Eligible Director may
become a participant in the Plan effective as of April
1, 1996, by filing an Election to Participate not later
than March 31, 1996. Once filed, the Election to
Participate shall continue to be effective (i) until
the participant ceases to be an Eligible Director, (ii)
until he or she files a subsequent Election to
Participate revising any of the terms of the last
election filed, or (iii) until he or she terminates an
Election to Participate in the Plan by written notice
to the Plan Administrator. Termination of
participation shall be effective immediately at the
time a participant ceases to be an Eligible Director.
Other terminations of participation and changes in
election shall be effective with respect to calendar
years commencing after the calendar year in which the
change in Election to Participate or termination notice
is given. An Eligible Director who has filed a notice
of termination of participation may thereafter elect to
begin participating for any subsequent calendar year or
years by filing a new Election to Participate. For all
participants who are directors of FMC, all Elections to
Participate must be made in compliance with Section 16
of the Securities Exchange Act of 1934, as amended
("Exchange Act") and the rules and regulations
promulgated thereunder.
7. Contents of Election to Participate. An
Election to Participate shall be made on a form
prescribed by the Plan Administrator. The Election to
Participate shall indicate the following: (i) the
participant's Plan Fees; (ii) one of the following
three accounts to which the participant wishes to have
his or her Plan Fees credited (a) the Current Stock
Purchase Account, (b) the Deferred Cash Investment
Account, or (c) the Deferred Stock Account; (iii) the
name or names of the participant's beneficiary or
beneficiaries; (iv) if the participant elects the
Deferred Stock Account or the Deferred Cash Investment
Account, whether distributions are to be in a lump sum
or in installments; and (v) if the participant has
selected the Deferred Stock Account, whether lump sum
distributions are to be made in cash, FMC Common Stock
or a combination thereof.
8. Credits to Account. On the last day of each
calendar quarter (the "Credit Date"), a participant
shall receive a credit to his or her account under the
Plan in an amount equal to the participant's Plan Fees
earned during that quarter (the "Credited Amount").
Except as otherwise specifically provided in this Plan,
transfers are not permitted between accounts.
9. Current Stock Purchase Account. If a
participant has in effect on a Credit Date an Election
to Participate specifying the Current Stock Purchase
Account, on that Credit Date, the Credited Amount will
be credited to a Current Stock Purchase Account for the
benefit of the participant and will be used, together
with any other cash credited to the account, to acquire
directly from FMC, at a price per share equal to Fair
Market Value on the Credit Date, as many whole shares
of FMC Common Stock as possible using the funds
credited to the Current Stock Purchase Account of that
participant. The shares will be issued and delivered
to the participant
<PAGE>
within five (5) business days after
the Credit Date. Any Credited Amount remaining in a
participant's account will be carried forward for
investment under the terms of the Plan at the next
Credit Date, unless a participant shall have terminated
his or her participation in the Plan in which case such
cash balance will be distributed to the terminated
participant. Notwithstanding the foregoing, no shares
of FMC Common Stock will be purchased for the Current
Stock Purchase Account of a participant, who is a
director of FMC, until the participant's Election to
Participate designating the Current Stock Purchase
Account has been in effect for at least six (6) months
prior to the relevant Credit Date.
10. Credits to Deferred Cash Investment Account.
If a participant has in effect on a Credit Date an
Election to Participate specifying the Deferred Cash
Investment Account, on that Credit Date, the Credited
Amount will be credited to a Deferred Cash Investment
Account for the benefit of the participant. In
addition, an "Appreciation Factor" (as herein defined)
will be credited on the Credit Date to the account as
to all funds that were credited to the account for the
entire quarter that ends on the Credit Date just as if
such funds had been invested during the quarter and
earning at the rate of the applicable Appreciation
Factor. Initially, the Appreciation Factor available
under the Plan will be a rate of interest equal to the
rate of interest paid by First Northern Bank & Trust on
its 6-month certificates of deposit issued on the
business day nearest the beginning of the quarter for
which the Appreciation Factor is to be credited. The
Appreciation Factor may be changed from time to time by
resolution of the FMC Board of Directors but it may not
exceed the prime rate of interest charged by First
Northern Bank & Trust.
11. Credits to Deferred Stock Account. If a
participant has in effect on a Credit Date an Election
to Participate specifying the Deferred Stock Account,
on that Credit Date, the Credited Amount will be
credited to the Deferred Stock Account for that
participant and shall be converted into "FMC Stock
Units" which shall be equal in number to the number of
shares (rounded to the nearest 100th of a share)
determined by dividing the Credited Amount by the Fair
Market Value of a share of FMC Common Stock on the
Credit Date. In addition, each time a dividend is paid
on FMC Common Stock, a participant shall receive a
credit to his or her Deferred Stock Account. The
amount of the dividend credit shall be a number of FMC
Stock Units equal to the number of shares (rounded to
the nearest 100th of a share) determined by multiplying
the dividend amount per share by the number of FMC
Stock Units credited to the participant's Deferred
Stock Account as of the record date for the dividend
and dividing the product by the Fair Market Value on
the dividend payment date. Notwithstanding the
foregoing, no FMC Stock Units shall be credited to the
Deferred Stock Account of a participant, who is a
director of FMC, until the participant's Election to
Participate designating the Deferred Stock Account has
been in effect for at least six (6) months prior to the
relevant Credit Date.
12. Distribution of Deferred Account Balances.
No amount credited to a participant's Deferred Cash
Investment Account or a participant's Deferred Stock
Account shall be distributed prior to the termination
of his or her service as an Eligible Director.
(a) Retirement-Deferred Cash Investment
Account. If a participant retires from service as
an Eligible Director, the participant's Deferred
Cash Investment Account
<PAGE>
shall be distributed to
the participant commencing as of January 15 of the
fiscal year of FMC which occurs after the end of
the year in which the participant retired from
service as an Eligible Director. Distribution of
the Deferred Cash Investment Account may be made
in a lump sum, in five (5) annual installments or
ten (10) annual installments, payable as of
January 15 of each year during the distribution
period, consistent with the participant's first
filed Election to Participate, unless the Plan
Administrator, in its sole discretion, approves of
a different distribution schedule requested by the
participant in a later filed Election to
Participate. A retired director's Deferred Cash
Investment Account balance during any distribution
period shall continue to be adjusted by an
Appreciation Factor just as if the director had
not retired. After adjusting the retired
director's Deferred Cash Investment Account by the
Appreciation Factor each year, the account balance
will be divided by the number of annual
installments yet to be paid or distributed to the
retired director and the quotient will be the
distribution to be made to the retired director at
that time.
(b) Retirement-Deferred Stock Account - Lump
Sum Distribution. Unless a participant has
elected pursuant to his or her Election to
Participate to receive payment of his or her
Deferred Stock Account in installments, FMC Stock
Units credited to the participant's Deferred Stock
Account shall be payable in full in cash or in
whole shares of FMC Common Stock (together with
cash in lieu of a fractional share), or in a
combination of cash and FMC Common Stock, as
elected in the participant's last filed Election
to Participate, on January 15 of the fiscal year
of FMC which occurs after the end of the fiscal
year in which the participant retired from service
as an Eligible Director. Amounts distributed in
cash, including cash in lieu of fractional shares,
shall be determined based upon the Fair Market
Value of FMC Common Stock on the day immediately
preceding the date of payment.
(c) Retirement-Deferred Stock Account-
Installment Distribution. If a participant has
elected pursuant to his or her Election to
Participate to have his or her Deferred Stock
Account paid in cash in annual installments, as of
January 15 following the year in which the
participant retired from service as an Eligible
Director, the cash equivalent of the FMC Stock
Units credited to the participant's Deferred Stock
Account shall be transferred to a Deferred Cash
Investment Account on behalf of the retired
director and distribution shall be made in
accordance with the provisions of this Plan
relating to distribution of Deferred Cash
Investment Accounts in installments. The cash
equivalent transferred to the Deferred Cash
Investment Account shall be determined by
converting the FMC Stock Units to a cash balance
by multiplying the number of shares deemed
credited as of December 31 of the year in which
the participant retired by the Fair Market Value
of FMC Common Stock on that date.
(d) Termination Other Than Retirement. If a
participant's service as an Eligible Director
terminates because of his or her death or for any
other reason, other than retirement, or if a
retired director dies following his or her
retirement while receiving distributions pursuant
to this Plan, the participant's entire account
balance shall be distributed as of the January 15
of FMC's fiscal year following the year in which the
<PAGE>
director died or his or her services as an
Eligible Director otherwise terminated, provided,
however, if this period is less than one (1) year,
the Plan Administrator, in its discretion, may
extend the time for final distribution up to a
period of twelve (12) months following the
director's death or other termination of service.
(e) Distributions to Beneficiaries. Each
participant shall have the right to designate a
beneficiary or beneficiaries to succeed to the
right to receive distributions of the
participant's account maintained under this Plan
in the event of a participant's death. If a
participant fails to designate a beneficiary, or
if the designated beneficiary dies without a
contingent beneficiary being designated,
distribution of the participant's account shall be
made to the participant's estate. No designation
of a beneficiary shall be valid unless in writing
signed by the participant, dated and filed with
the Plan Administrator. Designated beneficiaries
may be changed from time to time without consent
of any prior beneficiaries upon filing the
beneficiary portion of the Election to Participate
form with the Plan Administrator.
13. Nonassignability. No right to receive
payments under this Plan nor any shares of FMC Common
Stock credited to a participant's Current Stock
Purchase or Deferred Stock Account shall be assignable
or transferable by participant other than by will or
the laws of descent and distribution. The designation
of a beneficiary by a participant under this Plan does
not constitute a transfer.
14. Unfunded Plan. It is intended that this Plan
constitute an "unfunded plan" with respect to the
Deferred Cash Investment Accounts and the Deferred
Stock Accounts of the participants. FMC may authorize
the creation of trusts or other arrangements to meet
the obligations created under the Plan as long as FMC
determines that the existence of such trusts or other
arrangements is consistent with the "unfunded" status
of the Plan. Any liability of FMC to any person with
respect to any of the accounts established under the
Plan shall be based solely upon contractual obligations
that may be created pursuant to the Plan. No such
obligation of FMC shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of
FMC. Benefits payable under this Plan shall be an
unsecured obligation of FMC, and to the extent that any
person acquires a right to receive payments or
distributions from FMC under the Plan, such right will
be no greater than of any unsecured general creditor of
FMC.
15. Trust For Deferred Stock Account. If FMC so
chooses, it may, as to credits to the Deferred Stock
Accounts, make contributions in cash or in shares of
FMC Common Stock to a trust. Any cash contributions
shall be used by the trustee to purchase shares of FMC
Common Stock within ten (10) business days after the
deposit of the funds. The purchase of shares may be
made by the trustee in brokerage transactions or by
private purchase, including purchase from FMC. All
shares held by the trust shall be held in the name of
the trustee. All FMC Common Stock or cash held in a
trust shall be held on a commingled basis and shall be
subject to the claims of general creditors of FMC. All
FMC Common Stock held in any such trust shall be voted
by the trustee in its discretion.
<PAGE>
16. Fair Market Value Defined. As long as the
FMC Common Stock is not actively traded in any
recognized market, the term "Fair Market Value" as used
in this Plan shall mean the average price per share at
which shares of FMC Common Stock were bought and sold
during the three (3) preceding months in transactions
known to management involving 100 or more shares
between purchasers and sellers none of whom are
directors or officers of FMC or any subsidiary of FMC.
If the shares of FMC Common Stock are actively traded
in any recognized market, the "Fair Market Value" as
used in the Plan shall mean the average of the last
reported sales price of FMC Common Stock as of the
close of business for each of the last twenty (20)
trading days ending the day immediately preceding the
day as of which "Fair Market Value" is to be
determined.
17. Retirement Defined. As used in this Plan,
the terms "retirement" and "retire" shall mean
voluntary or involuntary resignation, termination of
service based upon attainment of a mandatory retirement
age or termination of service as a result of not being
reelected.
18. Rules of Construction. Headings are given to
the sections of the Plan solely as a convenience to
facilitate reference. The reference to any statute,
regulation or provision of law shall be construed to
refer to any amendment to or successor of such
provision of law. The Plan shall be construed and
interpreted in accordance with Michigan law. The Plan
is intended to be construed so that participation in
the Plan will be exempt from Section 16(b) of the
Exchange Act pursuant to regulations and
interpretations issued from time to time by the
Securities and Exchange Commission.
19. Withholding. No later than the date as of
which an amount first becomes includable in the gross
income of a participant for federal income tax purposes
with respect to any participation under the Plan, the
participant shall pay to FMC, or make arrangements
satisfactory to FMC regarding the payment of, any
federal, state, local or foreign taxes of any kind
required by law to be withheld with respect to such
amount.
20. Regulatory Restrictions. All certificates
for shares of FMC Common Stock or other securities
delivered under the Plan shall be subject to such stock
transfer orders and other restrictions as FMC may deem
advisable under the rules, regulations and other
requirements of FMC, any stock exchange or stock
market upon which the FMC Common Stock is then listed
or traded and any applicable Federal, state or foreign
securities law, and FMC may cause a legend or legends
to be placed on any such certificates to make
appropriate reference to such restrictions.
21. Amendment and Termination. The FMC Board of
Directors may at any time terminate, suspend or amend
this Plan. However, no such action shall be taken with
respect to Plan Fees credited to the account of a
participant under this Plan prior to the time of the
action unless the FMC Board of Directors determines
that the action would not be materially adverse to the
participants in the Plan. In addition, no amendment
may become effective until shareholder approval is
obtained if the amendment (i) except as expressly
provided in the Plan, increases the aggregate number of
shares of FMC Common Stock that are subject to the
Plan, (ii) materially increases the benefits accruing
to participants under the Plan, (iii) modifies the
eligibility
<PAGE>
requirements for participation in the Plan,
or (iv) requires approval by FMC's shareholders under
Section 16 of the Exchange Act or the rules or
regulations promulgated thereunder.
22. Effective Date of Plan. The Plan will become
effective on January 1, 1996; however, if the Plan is
not approved by a majority of the votes cast at a duly
held meeting of the FMC shareholders at which a quorum
representing a majority of all outstanding voting stock
is, either in person or by proxy, present and voting on
the Plan, on or before May 1, 1996, the Plan shall
terminate and be of no force or effect and any Plan
Fees credited to any accounts under the Plan will be
immediately distributed to the participants in
accordance with their interests in their respective
accounts.
FIRST MANISTIQUE CORPORATION
STOCK COMPENSATION PLAN
ARTICLE 1
ESTABLISHMENT AND PURPOSE OF THE PLAN
1.1 Establishment of the Plan. First Manistique
Corporation, a Michigan corporation (the "Company"),
hereby establishes a stock compensation plan to be
known as the "First Manistique Corporation Stock
Compensation Plan" (the "Plan"), as set forth in this
document. The Plan permits the granting of stock
options, restricted stock, and other stock-based awards
to key employees of the Company and its subsidiaries.
1.2 Purpose of the Plan. The purpose of the Plan
is to promote the long-term success of the Company for
the benefit of the Company's shareholders, through
stock-based compensation, by aligning the personal
interests of the Company's key employees with those of
its shareholders. The Plan is also designed to allow
key employees to participate in the Company's future,
as well as to enable the Company to attract, retain and
award such employees. Compensation related to Awards
under the Plan is generally intended to qualify as
"performance-based compensation" under Section 162(m)
of the Internal Revenue Code of 1986, as amended
("Code").
1.3 Term of Plan. No Awards shall be granted
pursuant to the Plan on or after the tenth anniversary
of the Effective Date ("Termination Date"), provided
that Awards granted prior to the Termination Date may
extend beyond that date.
ARTICLE 2
DEFINITIONS
For purposes of this Plan, the following terms
shall have the meanings set forth below:
2.1 Award means any award under this Plan of any
Options, Restricted Stock, Performance Shares or Other
Stock-Based Award.
2.2 Award Agreement means an agreement evidencing
the grant of an Award under this Plan. Awards under
the Plan shall be evidenced by Award Agreements that
set forth the details, conditions and limitations for
each Award, as established by the Committee and shall
be subject to the terms and conditions of the Plan.
2.3 Award Date means the date that an Award is
made, as specified in an Award Agreement.
2.4 Board means the Board of Directors of the Company.
<PAGE>
2.5 Change in Control is defined in Article 12.
2.6 Code means the Internal Revenue Code of 1986,
as amended.
2.7 Committee means the Committee, as specified
in Article 3, appointed by the Board to administer the
Plan, no members of which shall be eligible to receive
an Award pursuant to the Plan.
2.8 Common Stock means the Common Stock, no par
value per share, of the Company.
2.9 Disability means permanent and total
disability as determined under the rules and guidelines
established by the Committee for purposes of the Plan.
2.10 Effective Date means January 15, 1997.
2.11 Employee means a salaried employee (including
officers and directors who are also employees) of the
Company or a Subsidiary.
2.12 Fair Market Value means, as long as the
Common Stock is not actively traded in any recognized
market, the average price per share at which shares of
Common Stock were bought and sold during the three (3)
preceding months in transactions known to management of
the Company involving 100 or more shares between
purchasers and sellers none of whom are directors or
officers of the Company or any Subsidiary. If the
shares of Common Stock are actively traded in any
recognized market, the "Fair Market Value" as used in
the Plan shall mean the average of the last reported
sales price of Common Stock as of the close of business
for each of the last twenty (20) trading days ending
the day immediately preceding the day as of which "Fair
Market Value" is to be determined.
2.13 Incentive Stock Option or ISO means an option
to purchase shares of Common Stock granted under
Article 6, which is designated as an Incentive Stock
Option and is intended to meet the requirements of
Section 422 of the Code.
2.14 Non-Employee Director has the meaning set
forth in Rule 16b-3(b)(3)(i) or any successor
definition adopted by the Securities and Exchange
Commission.
2.15 Nonqualified Stock Option or NQSO means an
option to purchase shares of Common Stock, granted
under Article 6, which is not an Incentive Stock
Option.
2.16 Option means an Incentive Stock Option or a
Nonqualified Stock Option.
2.17 Option Price means the price at which a share
of Common Stock may be purchased by a Participant
pursuant to an Option, as determined by the Committee.
<PAGE>
2.18 Other Stock-Based Award means an Award under
Article 9 of this Plan that is valued in whole or in
part by reference to, or is payable in or otherwise
based on, Common Stock.
2.19 Participant means an Employee of the Company
or a Subsidiary who holds an outstanding Award granted
under the Plan.
2.20 Permitted Transferee means (i) the spouse, a
child, or a grandchild of a Participant (each an
"Immediate Family Member"), (ii) a trust for the
exclusive benefit of a Participant and/or one or more
Immediate Family Members, or (iii) a partnership or
limited liability company whose only partners or
members are a Participant and/or one or more Immediate
Family Members.
2.21 Performance Shares means an Award granted
under Article 8 of this Plan evidencing the right to
receive Common Stock or cash of an equivalent value at
the end of a specified performance period and upon
achievement of specified performance goals or
objectives.
2.22 Retirement (including Normal, Early and
Disability Retirement) means the termination of a
Participant's employment with the Company or a
Subsidiary with eligibility for normal, early or
disability retirement benefits under the terms of the
Company's profit sharing plan, as amended and in effect
at the time of such termination of employment.
2.23 Restricted Stock means an Award granted to a
Participant under Article 7 of this Plan.
2.24 Rule 16b-3 means Rule 16b-3 promulgated by
the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (the "Act"), as amended
from time to time or any successor rule.
2.25 Subsidiary means any corporation in which the
Company owns directly, or indirectly through
subsidiaries, at least fifty percent (50%) of the total
combined voting power of all classes of stock, or any
other entity (including, but not limited to,
partnerships and joint ventures) in which the Company
owns at least fifty percent (50%) of the combined
equity thereof.
2.26 Termination of Employment means the
termination of a Participant's employment with the
Company or a Subsidiary. A Participant employed by a
Subsidiary shall also be deemed to incur a Termination
of Employment if the Subsidiary ceases to be a
Subsidiary and the Participant does not immediately
thereafter become an Employee of the Company or another
Subsidiary.
<PAGE>
ARTICLE 3
ADMINISTRATION
3.1 The Committee. The Plan shall be
administered by a Committee designated by the Board
consisting of not less than three (3) directors who
shall be appointed from time to time by the Board, each
of whom shall qualify as a Non-Employee Director.
Initially, the Committee shall consist of all directors
of the Company who are Non- Employee Directors.
3.2 Committee Authority. Subject to the
Company's Articles of Incorporation, Bylaws and the
provisions of this Plan, the Committee shall have full
authority to grant Awards to key Employees of the
Company or a Subsidiary. Awards may be granted singly,
in combination, or in tandem. The authority of the
Committee shall include the following:
(a) To select the key Employees of the
Company or a Subsidiary to whom Awards may be
granted under the Plan;
(b) To determine whether and to what extent
Options, Restricted Stock, Performance Shares and
Other Stock-Based Awards, or any combination
thereof are to be granted under the Plan;
(c) To determine the number of shares of
Common Stock to be covered by each Award;
(d) To determine the terms and conditions of
any Award Agreement, including, but not limited
to, the Option Price, any vesting restriction or
limitation, any vesting schedule or acceleration
thereof, or any forfeiture restrictions or waiver
thereof, regarding any Award and the shares Common
Stock relating thereto, based on such factors as
the Committee shall determine in its sole
discretion;
(e) To determine whether, to what extent and
under what circumstances grants of Awards are to
operate on a tandem basis and/or in conjunction
with or apart from other cash compensation
arrangement made by Company other than under the
terms of this Plan;
(f) To determine under what circumstances an
Award may be settled in cash, Common Stock, or a
combination thereof; and
(g) To determine to what extent and under
what circumstances shares of Common Stock and
other amounts payable with respect to an Award
shall be deferred.
The Committee shall have the authority to adopt,
alter and repeal such administrative rules, guidelines
and practices governing the Plan as it shall, from time
to time, deem advisable, to interpret the terms and
provisions of the Plan and any Award issued under the
Plan (including any Award Agreement) and to otherwise
supervise the administration of the Plan. However, the
Committee shall take no action which will impair any
Award previously granted under the Plan or cause the
Plan or the Award not to meet the requirements of Rule
16b-3. A majority of the Committee shall constitute a
quorum, and the acts of a majority of a quorum at any
meeting, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be
<PAGE>
the valid acts of the Committee. The interpretation and
construction by the Committee of any provisions of the
Plan or any Award granted under the Plan shall be final
and binding upon the Company, the Board and
Participants, including their respective theirs,
executors and assigns. No member of the Board or the
Committee shall be liable for any action or
determination made in good faith with respect to the
Plan or an Award granted hereunder.
ARTICLE 4
COMMON STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 12.1,
the maximum aggregate number of shares of Common Stock
which may be issued under this Plan shall not exceed
200,000 shares, which may be either unauthorized and
unissued Common Stock or issued Common Stock reacquired
by the Company ("Plan Shares"). The number of Plan
Shares shall be reduced by any Shares of Common Stock
which are covered by, or issued pursuant to, options
granted under the First Manistique Corporation 1997
Directors' Stock Option Plan. Determinations as to the
number of Plan Shares that remain available for
issuance under the Plan shall be made in accordance
with such rules and procedures as the Committee shall
determine from time to time, which shall be consistent
with the requirements of Rule 16b-3 and such
interpretations thereof. If an Award expires
unexercised or is forfeited, cancelled, terminated or
settled in cash in lieu of Common Stock, the shares of
Common Stock that were theretofore subject (or
potentially subject) to such Award may again be made
subject to an Award Agreement; provided, however, that
any such shares subject to a forfeited or cancelled
Award shall not again be made subject to an Award
Agreement to any Participant who received, directly or
indirectly, any of the benefits of ownership of the
securities underlying such Award, excluding the right
to vote such shares.
ARTICLE 5
ELIGIBILITY
The persons who shall be eligible to receive
Awards under the Plan shall be such key Employees as
the Committee shall select from time to time. In
making such selections, the Committee shall consider
such factors as the Committee in its discretion shall
deem relevant. Participants may hold more than one
Award, but only on the terms and subject to the
restrictions set forth in the Plan and their respective
Award Agreements.
ARTICLE 6
STOCK OPTIONS
6.1 Options. Options may be granted alone or in
addition to other Awards granted under this Plan. Each
Option granted under this Plan shall be either an
Incentive Stock Option ("ISO") or a Nonqualified Stock
Option ("NQSO").
6.2 Grants. The Committee shall have the
authority to grant to any Participant one or more
Incentive Stock Options, Nonqualified Stock Options, or
both types of Options. To the extent that any Option
does not qualify as an Incentive Stock Option (whether
because of its
<PAGE>
provisions or the time or manner of its
exercise or otherwise), such Option or the portion
thereof which does not qualify shall constitute a
separate Nonqualified Stock Option.
6.3 Incentive Stock Options. Anything in the
Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section
422 of the Code, or, without the consent of the
Participants affected, to disqualify any Incentive
Stock Option under such Section 422. An Incentive
Stock Option shall not be granted to an individual who,
on the date of grant, owns stock possessing more than
ten percent (10%) of the total combined voting power of
all classes of stock of the Company. The aggregate
Fair Market Value, determined on the Award Date of the
shares of Common Stock with respect to which one or
more Incentive Stock Options (or other incentive stock
options within the meaning of Section 422 of the Code,
under all other option plans of the Company) granted on
or after January 1, 1987, that are exercisable for the
first time by a Participant during any calendar year
shall not exceed the $100,000 limitation imposed by
Section 422(d) of the Code.
6.4 Terms of Options. Options granted under the
Plan shall be evidenced by Award Agreements in such
form as the Committee shall, from time to time approve,
which Agreement shall comply with and be subject to the
following terms and conditions:
(a) Option Price. The Option Price per
share of Common Stock purchasable under an Option
shall be determined by the Committee at the time
of grant but shall be not less than one hundred
percent (100%) of the Fair Market Value of the
Common Stock at the Award Date.
(b) Option Term. The term of each Option
shall be fixed by the Committee, but no Option
shall be exercisable more than ten (10) years
after the date the Option is granted.
(c) Exercisability. Except as provided in
Section 12.2, no Option shall be exercisable in
either in whole or in part prior to the first
anniversary of the Award Date. Thereafter, an
Option shall be exercisable at such time or times
and subject to such terms and conditions as shall
be determined by the Committee and set forth in
the Award Agreement. If the Committee provides
that any Option is exercisable only in
installments, the Committee may at any time waive
such installment exercise provisions, in whole or
in part, based on such factors as the Committee
may determine.
(d) Method of Exercise. Subject to whatever
installment exercise and waiting period provisions
apply under subsection (c) above, Options may be
exercised in whole or in part at any time during
the term of the Option, by giving written notice
of exercise to the Company specifying the number
of shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase
price in such form as the Committee may accept.
Notwithstanding the foregoing, an Option shall not
be exercisable with respect to less than 100
shares of Common Stock unless the remaining shares
covered by
<PAGE>
an Option are fewer than 100 shares.
If and to the extent determined by the Committee
in its sole discretion at or after grant, payment
in full or in part may also be made in the form of
Common Stock owned for at least six months by the
Participant (and for which the Participant has
good title free and clear of any liens and
encumbrances) or Restricted Stock, or by reduction
in the number of shares issuable upon such
exercise based, in each case, on the Fair Market
Value of the Common Stock on the last trading date
preceding payment as determined by the Committee
(without regard to any forfeiture restrictions
applicable to Restricted Stock). No shares of
stock shall be issued until payment has been made.
A Participant shall generally have the rights to
dividends or other rights of a shareholder with
respect to shares subject to the Option when the
optionee has given written notice of exercise, has
paid for such shares as provided herein, and, if
requested, has given the representation described
in Section 13.1 of the Plan. Notwithstanding the
foregoing, if payment in full or in part has been
made in the form of Restricted Stock, an
equivalent number of shares of Common Stock issued
on exercise of the Option shall be subject to the
same restrictions and conditions, and during the
remainder of the Restriction Period [as defined in
Section 7.3(a)], applicable to the shares of
Restricted Stock surrendered therefor.
(e) Nontransferability of Options. No
Option may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and
distribution, provided, however, a Nonqualified
Stock Option may be transferred, without
consideration, to a Permitted Transferee if the
Participant satisfies such conditions to the
transfer as may be required by the Committee. A
Permitted Transferee shall succeed to all rights
and benefits (except any right to further transfer
of the Option) and be subject to all obligations
and limitations applicable to the original
Participant. However, such rights and benefits
(except any right to further transfer of the
Option), and obligations and limitations shall be
determined as if the original Participant
continued to hold the Option, whereby provisions
of this Plan dealing with termination of
employment, retirement, disability or death of a
Participant will continue to refer to the original
Participant regardless of whether a Nonqualified
Stock Option has been transferred to a Permitted
Transferee. The Company shall have no obligation
to notify a Permitted Transferee of the
termination of employment, retirement, disability,
or death of a Participant. Further, all Options
shall be exercisable, during the Participant's
lifetime, only by such Participant, or, in the
case of a Nonqualified Stock Option, by a
Participant or a Permitted Transferee, as the case
may be. The designation of a person entitled to
exercise an Option after a person's death will not
be deemed a transfer.
(f) Termination of Employment for Reasons
other than Retirement, Disability, or Death. Upon
Termination of Employment for any reason other
than Retirement or on account of Disability or
death, each Option held by the Participant shall,
to the extent rights to purchase shares under such
Option have accrued at the date of such
Termination of Employment and shall not have been
fully exercised, be exercisable, in whole or in
part, at any time within a period of three (3)
months following Termination of Employment,
subject, however, to prior expiration of the term
of such Options and any other limitations on the
exercise of such Options in effect at the date of
exercise.
<PAGE>
(g) Termination of Employment for Retirement
or Disability. Upon Termination of Employment by
reason of Retirement or Disability, each Option
held by such Participant shall, to the extent
rights to purchase shares under the Option have
accrued at the date of such Retirement or
Disability and shall not have been fully
exercised, remain exercisable in whole or in part,
for a period of three (3) years following such
Termination of Employment, subject, however, to
prior expiration according to its terms and other
limitations imposed by the Plan. If the
Participant dies after such Retirement or
Disability, the Participant's Options shall be
exercisable in accordance with Section 6.4(h)
below.
(h) Termination of Employment for Death.
Upon Termination of Employment due to death, each
Option held by such Participant shall, to the
extent rights to purchase shares under the Options
have accrued at the date of death and shall not
have been fully exercised, be exercisable, in
whole or in part, by the personal representative
of the Participant's estate or by any person or
persons who shall have acquired the Option
directly from the Participant by bequest or
inheritance only under the following circumstances
and during the following periods: (i) if the
Participant dies while employed by the Company or
a Subsidiary, at any time within three (3) years
after his death, or (ii) if the Participant dies
during the extended exercise period following
Termination of Employment specified in Section
6.4(g), at any time within the longer of such
extended period or one (1) year after death,
subject, however, in any case, to the prior
expiration of the term of the Option and any other
limitation on the exercise of such Option in
effect at the date of exercise.
(i) Termination of Options. Any Option that
is not exercised within whichever of the exercise
periods specified in Sections 6.4(f), (g) or (h)
is applicable shall terminate upon expiration of
such exercise period.
(j) Purchase and Settlement Provisions. The
Committee may at any time offer to purchase an
Option previously granted, based on such terms and
conditions as the Committee shall establish and
communicate to the Participant at the time that
such offer is made.
ARTICLE 7
RESTRICTED STOCK
7.1 Awards of Restricted Stock. Shares of
Restricted Stock may be issued either alone or in
addition to other Awards granted under the Plan. The
Committee shall determine the eligible persons to whom,
and the time or times at which, grants of Restricted
Stock will be made, the number of shares to be awarded,
the price (if any) to be paid by the Participant, the
time or times within which such Awards may be subject
to forfeiture, the vesting schedule and rights to
acceleration thereof, and all other terms and
conditions of the Awards. The Committee may condition
the grant of Restricted Stock upon the achievement of
specific business objectives, measurements of
individual or business unit or Company performances, or
such other
<PAGE>
factors as the Committee may determine. The
provisions of Restricted Stock awards need not be the
same with respect to each Participant, and such Awards
to individual Participants need not be the same in
subsequent years.
7.2 Awards and Certificates. A prospective
Participant selected to receive a Restricted Stock
Award shall not have any rights with respect to such
Award, unless and until such Participant has executed
an Award Agreement evidencing the Award and has
delivered a fully executed copy thereof to the Company,
and has otherwise complied with the applicable terms
and conditions of such Award. Further, such Award
shall be subject to the following conditions:
(a) Acceptance. Awards of Restricted Stock
must be accepted within a period of 20 days (or
such shorter period as the Committee may specify
at grant) after the Award Date, by executing an
Award Agreement and by paying whatever price (if
any) the Committee has designated for such shares
of Restricted Stock.
(b) Legend. Each Participant receiving a
Restricted Stock Award shall be issued a stock
certificate in respect of such shares of
Restricted Stock. Such certificate shall be
registered in the name of such Participant, and
shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to
such Award, substantially in the following form:
"The transferability of this certificate
and the shares of stock represented hereby
are subject to the terms and conditions
(including forfeiture) of the First
Manistique Corporation Stock Compensation
Plan and related Award Agreement entered into
between the registered owner and the Company,
dated _______. Copies of such Plan and
Agreement are on file in the offices of the
Company, 130 South Cedar, Manistique,
Michigan 49854."
(c) Custody. The Committee may require that
the stock certificates evidencing such shares be
held in custody by the Company until the
restrictions thereon shall have lapsed, and that,
as a condition of any award of Restricted Stock,
the Participant shall have delivered a duly signed
stock power, endorsed in blank, relating to the
Common Stock covered by such Award.
7.3 Restrictions and Conditions. The shares of
Restricted Stock awarded pursuant to this Plan shall be
subject to the following restrictions and conditions:
(a) Restriction Period. Subject to the
provisions of this Plan and the Award Agreement,
during a period set by the Committee (the
"Restriction Period"), the Participant shall not
be permitted to sell, transfer, pledge, or assign
shares of Restricted Stock awarded under this
Plan. Subject to these limits, the Committee, in
its sole discretion, may provide for the lapse of
such restrictions in installments and may
accelerate or waive such restrictions in whole or
in part, based on service, performance and/or such
other factors or criteria as the Committee may
determine.
<PAGE>
(b) Rights as Shareholder. Except as
provided in this subsection (b) and subsection (a)
above, the Participant shall have, with respect to
the shares of Restricted Stock, all of the rights
of a holder of shares of Common Stock of the
Company including the right to receive any
dividends. The Committee, in its sole discretion,
as determined at the time of Award, may permit or
require the payment of dividends to be deferred.
If any dividends or other distributions are paid
in shares of Common Stock, such shares shall be
subject to the same restrictions on
transferability and forfeitability as the shares
of Restricted Stock with respect to which they
were paid.
(c) Termination of Employment. Subject to
the applicable provisions of the Award Agreement
and this Article 7, upon Termination of Employment
for any reason during the Restriction Period, all
Restricted Shares still subject to restriction
will vest or be forfeited in accordance with the
terms and conditions established by the Committee
as specified in the Award Agreement.
(d) Lapse of Restrictions. If and when the
Restriction Period expires without a prior
forfeiture of the Restricted Stock, the
certificates for such shares shall be delivered to
the Participant.
ARTICLE 8
PERFORMANCE SHARES
8.1 Award of Performance Shares. Performance
Shares may be awarded either alone or in addition to
other Awards granted under this Plan. The Committee
shall determine the eligible persons to whom and the
time or times at which Performance Shares shall be
awarded, the number of Performance Shares to be awarded
to any person, the duration of the period (the
"Performance Period") during which, and the conditions
under which, receipt of the Performance Shares will be
deferred, and the other terms and conditions of the
Award in addition to those set forth in Section 8.2, as
specified in the Award Agreement. The Committee may
condition the grant of Performance Shares upon the
achievement of specific business objectives,
measurements of individual or business unit or Company
performance, or such other factors or criteria as the
Committee shall determine. The provisions of the award
of Performance Shares need not be the same with respect
to each Participant, and such Awards to individual
Participants need not be the same in subsequent years.
8.2 Terms and Conditions. Performance Shares
awarded pursuant to this Article 8 shall be subject to
the following terms and conditions:
(a) Nontransferability. Subject to the
provisions of this Plan and the related Award
Agreement, Performance Shares may not be sold,
assigned, transferred, pledged or otherwise
encumbered during the Performance Period. At the
expiration of the Performance Period, share
certificates or cash of an equivalent value (as
the Committee may determine in its sole
discretion) shall be delivered to the Participant,
or his legal representative, in a number equal to
the shares covered by the Award Agreement.
<PAGE>
(b) Dividends. Unless otherwise determined
by the Committee at the time of Award, amounts
equal to any cash dividends declared during the
Performance Period with respect to the number of
shares of Common Stock covered by a Performance
Share Award will not be paid to the Participant.
(c) Termination of Employment. Subject to
the provisions of the Award Agreement and this
Article 8, upon Termination of Employment for any
reason during the Performance Period for a given
Award, the Performance Shares in question will
vest or be forfeited in accordance with the terms
and conditions established by the Committee at or
after grant.
(d) Accelerated Vesting. Based on service,
performance and/or such other factors or criteria
as the Committee may determine and set forth in
the Award Agreement, the Committee may, at or
after grant, accelerate the vesting of all or any
part of any award of Performance Shares and/or
waive the deferral limitations for all or any part
of such Award.
ARTICLE 9
OTHER STOCK-BASED AWARDS
9.1 Other Awards. Other Awards of Common Stock
and other Awards that are valued in whole or in part by
reference to, or are payable in or otherwise based on,
Common Stock ("Other Stock-Based Awards"), may be
granted either alone or in addition to or in tandem
with Options, Restricted Stock or Performance Shares.
Subject to the provisions of this Plan, the Committee
shall have authority to determine the persons to whom
and the time or times at which such Awards shall be
made, the number of shares of Common Stock to be
awarded pursuant to such awards, and all other
conditions of the Awards. The Committee may also
provide for the grant of Common Stock under such Awards
upon the completion of a specified performance period.
The provisions of Other Stock-Based Awards need not be
the same with respect to each Participant and such
Awards to individual Participants need not be the same
in subsequent years.
9.2 Terms and Conditions. Other Stock-Based
Awards made pursuant to this Article 9 shall be set
forth in an Award Agreement and shall be subject to the
following terms and conditions:
(a) Nontransferability. Subject to the
provisions of this Plan and the Award Agreement,
shares of Common Stock subject to Awards made
under this Article 9 may not be sold, assigned,
transferred, pledged, or otherwise encumbered
prior to the date on which the shares are issued,
or, if later, the date on which any applicable
restriction, performance or deferral period
lapses.
(b) Dividends. Unless otherwise determined by
the Committee at the time of Award, subject to the
provisions of this Plan and the Award Agreement,
the recipient of an Award under this Article 9
shall be entitled to receive, currently or on a
deferred stock
<PAGE>
basis, dividends or other
distributions with respect to the number of shares
of Common Stock covered by the Award.
(c) Vesting. Any Award under this Article 9
and any Common Stock covered by any such Award
shall vest or be forfeited to the extent so
provided in the Award Agreement, as determined by
the Committee, in its sole discretion.
(d) Waiver of Limitation. In the event of
the Participant's Retirement, Disability or death,
or in cases of special circumstances, the
Committee may, in its sole discretion, waive in
whole or in part any or all of the limitations
imposed hereunder (if any) with respect to any or
all of an Award under this Article 9.
(e) Price. Common Stock issued or sold
under this Article 9 may be issued or sold for no
cash consideration or such consideration as the
Committee shall determine and specify in the Award
Agreement.
ARTICLE 10
TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time amend, discontinue or
terminate this Plan or any part thereof (including any
amendment deemed necessary to ensure that the Company
may comply with any applicable regulatory requirement);
provided, however, that, unless otherwise required by
law, the rights of a Participant with respect to Awards
granted prior to such amendment, discontinuance or
termination, may not be impaired without the consent of
such Participant and, provided further, without the
approval of the Company's shareholders, no amendment
may be made which would (i) increase the aggregate
number of shares of Common Stock that may be issued
under this Plan (except by operation of Section 12.1);
(ii) change the definition of Employees eligible to
receive Awards under this Plan; (iii) decrease the
option price of any Option to less than one hundred
percent (100%) of the Fair Market Value on the date of
grant for an Option; (iv) extend the maximum option
period under Section 6.4(b) of the Plan; or (v) cause
the Plan not to comply with either Rule 16b-3, or any
successor rule under the Act, or Section 162(m) of the
Code. The Committee may amend the terms of any Award
theretofore granted, prospectively or retroactively,
but, subject to Section 12.2, no such amendment or
other action by the Committee shall impair the rights
of any Participant without the Participant's consent.
Awards may not be granted under the Plan after the
Termination Date, but Awards granted prior to such date
shall remain in effect or become exercisable pursuant
to their respective terms and the terms of this Plan.
ARTICLE 11
UNFUNDED PLAN
This Plan is intended to constitute an "unfunded"
plan for incentive and deferred compensation. With
respect to any payment not yet made to a Participant by
the Company, nothing contained herein shall give any
such Participant any rights that are greater than those
of a general creditor of the Company.
<PAGE>
ARTICLE 12
ADJUSTMENT PROVISIONS
12.1 Antidilution. Subject to the provisions of
this Article 12, if the outstanding shares of Common
Stock are increased, decreased, or exchanged for a
different number or kind of shares or other securities,
or if additional shares or new or different shares or
other securities are distributed with respect to such
shares of Common Stock or other securities, through
merger, consolidation, sale of all or substantially all
of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other distribution
with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment
may be made in (i) the maximum number and kind of
shares provided in Article 4 of the Plan, (ii) the
number and kind of shares or other securities subject
to the then outstanding Awards, and (iii) the price for
each share or other unit of any other securities
subject to the then outstanding Awards.
12.2 Change in Control. Notwithstanding Section 12.1,
upon the occurrence of a Change in Control, all Awards
then outstanding under the Plan will be fully vested
and exercisable and all restrictions will immediately
cease, unless, in the case of a transaction described
in clause (iii) or (iv) in the following definition of
Change in Control, provisions are made in connection
with such transaction for the continuance of the Plan
and the assumption of or the substitution for such
Awards of new Awards covering the stock of a successor
employer corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number
and kind of shares and prices. As used in this Plan,
"Change in Control" shall mean a change in control of
the Company of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Act; provided
that, for purposes of this Plan, a Change in Control
shall be deemed to have occurred if: (i) any Person
(other than the Company) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company
which represent 20% or more of the combined voting
power of the Company's then outstanding securities;
(ii) during any period of two (2) consecutive years,
individuals who at the beginning of such period
constitute the Board cease for any reason to constitute
at least a majority thereof, unless the election, or
the nomination for election, by the Company's
stockholders, of each new director is approved by a
vote of at least two-thirds (2/3) of the directors then
still in office who were directors at the beginning of
the period but excluding any individual whose initial
assumption of office occurs as a result of either an
actual or threatened election contest (as such term is
used in Rule 14a-11 of Regulation 14A promulgated under
the Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other
than the Board; (iii) there is consummated any
consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation
or pursuant to which shares of Common Stock are
converted into cash, securities or other property,
other than a merger of the Company in which the holders
of Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the
surviving corporation immediately after the merger;
(iv) there is consummated any consolidation or merger
of the Company in which the Company is the continuing
or surviving corporation in which the holders of Common
Stock immediately prior to the merger do not own at
least fifty percent (50%), or
<PAGE>
such greater percentage
as shall be set in any agreement with any Participant,
or more of the stock of the surviving corporation
immediately after the merger; (v) there is consummated
any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of
all, or substantially all, of the assets of the
Company; or (vi) the stockholders of the Company
approve any plan or proposal for the liquidation or
dissolution of the Company.
12.3 Adjustments by Committee. Any adjustments
pursuant to this Article 12 will be made by the
Committee, whose determination as to what adjustments
will be made and the extent thereof will be final,
binding, and onclusive. No fractional interest will be
issued under the Plan on account of any such
adjustments. Only cash payments will be made in lieu
of fractional shares.
ARTICLE 13
GENERAL PROVISIONS
13.1 Legend. The Committee may require each
person purchasing shares pursuant to an Award under the
Plan to represent to and agree with the Company in
writing that the Participant is acquiring the shares
without a view to distribution thereof. In addition to
any legend required by this Plan, the certificates for
such shares may include any legend which the Committee
deems appropriate to reflect any restrictions on
transfer.
All certificates for shares of Common Stock
delivered under the Plan shall be subject to such stock
transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and
other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Stock is
then listed, any applicable Federal or state securities
law, and any applicable corporate law, and the
Committee may cause a legend or legends to be put on
any such certificates to make appropriate reference to
such restrictions.
13.2 No Right to Employment. Neither this Plan
nor the grant of any Award hereunder shall give any
Participant or other Employee any right with respect to
continuance of employment by the Company or any
Subsidiary, nor shall there be a limitation in any way
on the right of the Company or any Subsidiary by which
an Employee is employed to terminate his or her
employment at any time.
13.3 Withholding of Taxes. The Company shall have
the right to deduct from any payment to be made
pursuant to this Plan, or to otherwise require, prior
to the issuance or delivery of any shares of Common
Stock or the payment of any cash hereunder, payment by
the Participant of, any Federal, state or local taxes
required by law to be withheld. Unless otherwise
prohibited by the Committee, each Participant may
satisfy any such withholding tax obligation by any of
the following means or by a combination of such means:
(a) tendering a cash payment; (b) authorizing the
Company to withhold from the shares otherwise issuable
to the Participant a number of shares having a Fair
Market Value as of the "Tax Date", less than or equal
to the amount of the withholding tax obligation; or (c)
delivering to the Company unencumbered shares owned by
the Participant having a Fair Market Value, as of the
Tax Date,
<PAGE>
less than or equal to the amount of the
withholding tax obligation. The "Tax Date" shall be
the date that the amount of tax to be withheld is
determined.
13.4 No Assignment of Benefits. No Option, Award
or other benefit payable under this Plan shall, except
as otherwise specifically provided in this Plan or as
otherwise specifically provided by law, be subject in
any manner to anticipation, alienation, attachment,
sale, transfer, assignment, pledge, encumbrance or
charge, and any attempt to anticipate, alienate,
attach, sell, transfer, assign, pledge, encumber or
charge, any such benefits shall be void, and any such
benefit shall not in any manner be liable for or
subject to the debts, contracts, liabilities,
engagements or torts of any person who shall be
entitled to such benefit, nor shall it be subject to
attachment or legal process for or against such person.
13.5 Governing Law. This Plan and actions taken
in connection herewith shall be governed and construed
in accordance with the laws and in the courts of the
state of Michigan.
13.6 Application of Funds. The proceeds received
by the Company from the sale of shares of Common Stock
pursuant to Awards granted under this Plan will be used
for general corporate purposes.
13.7 Rights as a Shareholder. Except as otherwise
provided in an Award Agreement, a Participant shall
have no rights as a shareholder of the Company until he
or she becomes the holder of record of Common Stock.
13.8 Cancellation of Prior Plans. Upon approval
of this Plan by the Board, all prior restricted stock
plans and all prior employee stock option plans shall
be cancelled, terminated, and of no further force or
effect, except insofar as any such prior plan relates
to restricted stock awards or options outstanding
immediately prior to approval of this Plan.
ARTICLE 14
SHAREHOLDER APPROVAL
The Plan shall be effective on the Effective Date
and shall be submitted for approval by the shareholders
of the Company at the Annual Meeting of Shareholders in
1997. If the shareholders do not approve the Plan, it,
and any action taken under the Plan, shall be void and
of no effect.
FIRST MANISTIQUE CORPORATION
1997 DIRECTORS' STOCK OPTION PLAN
Section 1. Establishment and Purpose.
First Manistique Corporation hereby establishes a
stock option plan to be named the First Manistique
Corporation 1997 Directors' Stock Option Plan, for
certain directors of the Company's banking
subsidiaries. The purpose of the Plan is: (i) to
provide a non-cash method of compensating directors
that will directly promote the interests of the
stockholders because the rewards made available to the
directors would be directly related to the banking
subsidiaries' returns on equity, and thereby indirectly
related to the Company's return on equity and the price
of its stock; and (ii) to aid the Company and its
subsidiaries in competing with other enterprises for
the services of new directors needed to help ensure the
Company's continued progress.
Section 2. Definitions.
(a) Act means the Securities Exchange Act of
1934, as amended from time to time.
(b) Administrator means the three most senior
executive officers f the Company.
(c) Authority means the shares of Stock
authorized for issuance pursuant to the Plan.
(d) Average Equity means the average equity of
the Subsidiary as computed in preparing the
audited annual financial statements of the
Company.
(e) Board of Directors means the Board of
Directors of the Company.
(f) Company means First Manistique Corporation, a
corporation organized and existing under the
laws of the State of Michigan.
(g) Eligible Director means a director of a
Subsidiary who is not otherwise an officer or
employee of the Company or of any Subsidiary.
If a person is a director of more than one
Subsidiary, such person shall, for purposes
of this Plan, be an Eligible Director only
with respect to the Subsidiary having the
largest amount of assets.
(h) Effective Date means the date this Plan is
approved by the Company's stockholders.
(i) Fair Market Value means, as long as the
Common Stock is not actively traded in any
recognized market, the average price per
share at which shares of Common Stock were
bought and sold during the three (3)
preceding months in transactions known to
management of the Company involving 100 or
more shares between purchasers and sellers
none of whom are directors or officers of the
Company or any Subsidiary. If the shares of
Common Stock are actively traded in any
<PAGE>
recognized market, the "Fair Market Value" as
used in the Plan shall mean the average of
the last reported sales price of Common Stock
as of the close of business for each of the
last twenty (20) trading days ending the day
immediately preceding the day as of which
"Fair Market Value" is to be determined.
(j) Grant Date means, with respect to each
Option, the day that an Eligible Director is
granted the Option.
(k) Net Income means the net income of a
Subsidiary as computed in preparing the
audited annual financial statements of the
Company.
(l) Option means an option granted under this
Plan to acquire Stock.
(m) Optionee means the person to whom an Option
is granted.
(n) Option Agreement means an Agreement issued to
each Eligible Director with respect to each
Option.
(o) Option Date means the first business day
after an annual meeting of Stockholders with
respect to each Option.
(p) Permitted Transferee means either (i) the
spouse, a child, or a grandchild of an
Optionee (each an "Immediate Family Member"),
(ii) a trust for the exclusive benefit of an
Optionee and/or one or more Immediate Family
Members, or (iii) a partnership or limited
liability company whose only partners or
members are an Optionee and/or one or more
Immediate Family Members.
(q) Plan means the First Manistique Corporation
1997 Directors' Stock Option Plan.
(r) Prior Year means the immediately preceding
fiscal year of the Company.
(s) Post-Death Representative(s) means the
executor(s) or administrator(s) of the
Optionee's estate or the person or persons to
whom the Optionee's rights under his or her
Option pass by Optionee's will or the laws of
descent and distribution.
(t) ROE means the percentage obtained by dividing
the Average Equity of a Subsidiary for a
fiscal year into the Net Income of the
Subsidiary for that fiscal year.
(u) Rule 16b-3 means Rule 16b-3 promulgated by
the Securities and Exchange Commission under
the Act, as amended from time to time or any
successor rule.
(v) Shares means shares of Stock.
<PAGE>
(w) Stock means authorized and unissued shares of
common stock, no par value, of the Company
and includes Shares which may be reacquired
by the Company.
(x) Subsidiary means any banking corporation in
which the Company owns directly, or
indirectly through subsidiaries, at least
fifty percent (50%) of the total combined
voting power of all classes of stock, or any
other entity (including, but not limited to,
partnerships and joint ventures) in which the
Company owns at least fifty percent (50%) of
the combined equity thereof.
Any dispute as to the meaning of Average Equity,
Net Income, or ROE shall be resolved by the independent
public accountants then serving the Company.
Section 3. Administration.
The Plan shall be administered on behalf of the
Company by the Administrator. The Administrator may
adopt, amend, and rescind from time to time such
administrative rules, and may take from time to time
such actions, with or without notice to affected
Optionees or Permitted Transferees, as the case may be,
as the Administrator may deem appropriate to implement
or interpret the provisions of this Plan or to exercise
any authority, discretion, or power explicitly or
implicitly granted to the Administrator under this
Plan, provided that no such rules or actions may be
inconsistent with the provisions of this Plan or Rule
16b-3, or any successor rule, under the Act (in the
case of Optionees affected thereby). The Administrator
may make rules or take action pursuant to this Section
by any appropriate means.
Section 4. Shares Reserved Under the Plan.
(a) The maximum number of Shares which may be
issued in connection with Options granted hereunder is
200,000, less any Shares which are covered by, or
issued pursuant to, awards granted under the First
Manistique Corporation Stock Compensation Plan (the
"Stock Compensation Plan"). At any time during the
existence of the Plan, there shall be reserved for
issuance upon the exercise of Options granted under the
Plan an amount of Stock (subject to adjustment as
provided in Section 10 hereof) equal to 200,000 Shares,
less (i) the total number of Shares issued pursuant to
all such exercises which shall have been made prior to
such time, and (ii) the total number of Shares issued
prior to such time pursuant to awards granted under the
Stock Compensation Plan.
(b) When an Option is granted, the total number
of Shares issuable upon complete exercise thereof shall
be charged against the maximum number of Shares of the
Authority. When the Option is exercised, no additional
charge shall be made against the Authority. If an
exercise price is paid in Shares owned by the Optionee
or the Permitted Transferee, as the case may be, such
Shares shall not be added to the Authority.
(c) If an Option terminates in whole in part, by
expiration or for any other reason except exercise of
such Option, the Shares previously charged to the
Authority upon grant of the Option shall be restored to
the Authority, and shall again be available for
issuance under the
<PAGE>
Authority, for as long as such
Authority continues, as if such Shares had never been
subject to an Option.
Section 5. Granting of Options.
Each person who is an Eligible Director on the
Option Date in 1998, and each person who is an Eligible
Director in each subsequent year on the Option Date,
shall receive an Option to acquire Shares at the Fair
Market Value on such date in accordance with the
following schedule:
* if the Subsidiary's ROE for the Prior Year was
less than 13%, No Shares;
* if the Subsidiary's ROE for the Prior Year was 13%
but less than 14%, 200 Shares;
* if the Subsidiary's ROE for the Prior Year was 14%
but less than 15%, 300 Shares;
* if the Subsidiary's ROE for the Prior Year was 15%
or greater, 400 Shares.
References in this Section 5 to Subsidiary relate to
the Subsidiary of which the Eligible Director served as
a director during the prior year.
Section 6. Terms of Options.
Notwithstanding any other provisions of the Plan,
each Option shall be evidenced by an Option Agreement,
which shall include the substance of the following
terms and conditions:
(a) The option price for each Share covered by an
Option shall be an amount equal to one
hundred percent (100%) of the Fair Market
Value of a Share on the Grant Date of such
Option.
(b) The Option by its terms shall not be
transferable by the Optionee otherwise than
by will or by the laws of descent and
distribution; provided, however, an Option
may be transferred, without consideration, to
a Permitted Transferee if the Optionee
satisfies such conditions to the transfer as
may be required by the Administrator. A
Permitted Transferee shall succeed to all
rights and benefits (except any right to
further transfer of the Option) and be
subject to all obligations and limitations
applicable to the original Optionee.
However, such rights and benefits (except any
right to further transfer of the Option), and
obligations and limitations shall be
determined as if the original Optionee
continued to hold the Option, whereby
provisions of this Plan dealing with
termination of service or death of an
Optionee will continue to refer to the
original Optionee regardless of whether an
Option has been transferred to a Permitted
Transferee. The Company shall have no
obligation to notify a Permitted Transferee
of the termination of
<PAGE>
service or death of an
Optionee. The designation of a beneficiary
entitled to exercise an Option upon the
Optionee's death does not constitute a
transfer. The Option shall be exercisable,
during the Optionee's lifetime, only by the
Optionee or a Permitted Transferee, as the
case may be.
(c) Options shall become fully exercisable on the
first anniversary of the Grant Date. No
Option shall be exercisable after the
expiration of ten years from the Grant Date.
Notwithstanding the foregoing, if the
Optionee dies before his or her service as a
director terminates, the Option shall be
exercisable as to all Shares, to the extent
not previously exercised.
(d) The Option shall not be exercisable after the
earlier of (i) the last day of the thirty-
sixth month after the month in which the
Optionee's service as a director terminates
for any reason or (ii) the expiration of ten
years from the Grant Date.
Section 7. No Right to Remain a Director.
The grant of an Option shall not create any right
in any person to remain as a director of the Company.
Section 8. Exercise of Option.
(a) An Option shall be exercisable only (1) upon
payment to the Company on the exercise date of cash in
the full amount of the option price of the Shares with
respect to which the Option is exercised, (2) upon
delivery to the Company on the exercise date of
certificates representing unencumbered Shares, owned by
the Optionee or the Permitted Transferee, as the case
may be, having a Fair Market Value, on the last trading
date preceding such exercise and delivery, equal to the
full amount of the purchase price of the Shares with
respect to which the Option is exercised, or (3) a
combination of (1) and (2), except that (i) any portion
of the exercise price representing a fraction of a
Share shall in any event be paid in cash, and (ii) no
Shares of Stock which have been held for less than six
months may be delivered in payment of the exercise
price of an Option. If and to the extent determined by
the Administrator, in its sole discretion, at or after
the Grant Date, payment in full or in part may also be
made by reduction in the number of Shares issuable upon
exercise of the Option based on the Fair Market Value
of the Stock on the last trading date preceding the
exercise.
(b) An Optionee or Permitted Transferee, as the
case may be, shall have none of the rights of a
stockholder with respect to Shares subject to the
Option until Shares are issued to the Optionee or
Permitted Transferee upon the exercise of an Option.
Section 9. General Provisions.
The Company shall not be required to issue or
deliver any certificate for Shares to an Optionee or
Permitted Transferee, as the case may be, upon the
exercise of an Option prior to:
<PAGE>
(a) If requested by the Company, the filing with
the Company by the Optionee, the Permitted
Transferee or the Optionee's Post-Death
Representative, as the case may be, of a
representation in writing that at the time of
such exercise it is their then present
intention to acquire the Shares being
purchased for investment and not for resale,
and/or the completion of any registration or
other qualification of such Shares under any
state or federal laws or rulings or
regulations of any governmental regulatory
body, which the Company shall determine to be
necessary or advisable; and
(b) The obtaining of any other consent, approval,
or permit from any state or federal
governmental agency which the Administrator
shall, in the Administrator's absolute
discretion upon the advice of counsel,
determine to be necessary or advisable.
Section 10. Adjustment Provisions.
In the event any stock dividend is declared upon
the Stock or in the event outstanding Shares of Stock
shall be changed into or exchanged for a different
number, class or kind of Shares of Stock or other
securities of the Company or another corporation,
whether by reason of a split or combination of shares,
recapitalization, reclassification, reorganization,
merger, consolidation, or otherwise, the maximum number
of Shares of Stock which may be charged against the
Authority shall be appropriately and proportionately
adjusted and in any such event a corresponding
adjustment shall be made changing the number, class or
kind of Shares of Stock or other securities which are
deliverable upon the exercise of any Option theretofore
granted without change in the total price applicable to
the unexercised portion of such Option, but with a
corresponding adjustment in the price for each Share or
other securities covered by the unexercised portion of
such Option. In the event the Company is merged,
consolidated, or reorganized with another corporation,
appropriate provision shall be made for the continuance
of outstanding Options with respect to shares of the
succeeding parent corporation following a merger, or
with respect to shares of the consolidated or
reorganized corporation in the case of a consolidation
or reorganization, and to prevent their dilution or
enlargement compared to the total shares issuable
therein in respect of the Stock. Adjustments under
this Section 10 shall be made in an equitable manner by
the Administrator, whose determination shall be
conclusive and binding on all concerned.
Section 11. Duration, Amendment, and Termination.
The Board of Directors may at any time terminate
the Plan or make such amendments thereto as it shall
deem advisable and in the best interests of the
Company, without further action on the part of the
Stockholders of the Company; provided, however, that no
such termination or amendment shall, without the
consent of the Optionee or Permitted Transferee, as the
case may be, adversely affect or impair the rights of
such Optionee or Permitted Transferee, as the case may
be, and provided further, that, unless the Stockholders
of the Company shall have first approved thereof, no
amendment of this Plan shall be made whereby: (a) the
total number of Shares which may be granted under the
Plan to all individuals, or to any of them, shall be
<PAGE>
increased, except by operation of the adjustment
provisions of Section 10 hereof; (b) the term of the
Options shall be extended; (c) the minimum option price
shall be decreased; or (d) the class of eligible
persons to whom options may be granted shall be
changed. The period during which Options may be
granted under the Authority shall terminate on the
tenth anniversary of the Effective Date, unless the
Plan earlier shall have been terminated as provided
above.
Section 12. Date of Granting Options.
All Options granted under the Plan shall be in
writing and shall be granted as of a Grant Date.
Section 13. Stockholder Approval.
The Plan is to be submitted for approval by the
Stockholders of the Company at the 1997 annual meeting
and shall be effective only upon receiving such
approval.
Section 14. Miscellaneous.
(a) Subject to the provisions of applicable federal
law, the Plan shall be administered, construed and
enforced according to the internal laws of the State of
Michigan, excluding its conflict of law rules, and
applicable federal law and in courts situated in the
State of Michigan.
(b) Transactions under this Plan are intended to
comply with applicable conditions for exemption under
Rule 16b-3. To the extent any provision of this Plan
or action by the Administrator fails to so comply, it
shall be deemed null and void, to the extent permitted
by law and deemed advisable by the Administrator.
(c) The invalidity of any particular provision
herein shall not invalidate all or any part of the
remainder of the Plan, but such remainder shall be and
remain valid in all respects as fully as the law will
permit.
NORTH COUNTRY FINANCIAL CORPORATION
2000 STOCK INCENTIVE PLAN
1. Objectives. The North Country Financial
Corporation 2000 Stock Incentive Plan is designed to
attract and retain certain selected key employees and
non-employee directors whose skills and talents are
important to the Company's operations, and reward them
for making major contributions to the success of the
Company. These objectives are accomplished by making
awards under the Plan, thereby providing Participants
with a proprietary interest in the growth and
performance of the Company.
2. Definitions.
(a) "Award" shall mean the grant of a Stock
Option to a Participant pursuant to such terms,
conditions, performance requirements, and
limitations as the Committee may establish in
order to fulfill the objectives of the Plan.
(b) "Award Agreement" shall mean an
agreement between North Country Financial
Corporation and a Participant that sets forth the
terms, conditions, performance requirements, and
limitations applicable to an Award.
(c) "Board" shall mean the Board of
Directors of North Country Financial Corporation.
(d) "Cause" shall mean termination of a
Participant's employment with the Company for (i)
any failure of the Participant to substantially
perform his duties with the Company (other than by
reason of illness) which occurs after the Company
has delivered to the Participant a demand
for performance which specifically identifies the
manner in which the Company believes the
Participant has failed to perform his duties, and
the Participant fails to resume performance of his
duties on a continuous basis within 14 days after
receiving such demand, (ii) the commission by the
Participant of any act of dishonesty or disloyalty
involving the Company or its business, or (iii)
the conviction of the Participant of a felony or
misdemeanor which, in the reasonable judgment of
the Committee, is substantially related to the
employee's position with the Company or
substantially impairs the Participant's ability to
perform his duties with the Company.
(e) "Change in Control" shall mean any of
the following:
(i) The acquisition by any individual,
entity or "group" (within the meaning of
Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended
(the "Exchange Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of thirty-three
percent (33%) or more of either (A) the then
outstanding shares of common stock of the
Company (the "Outstanding Company Common
Stock") or (B) the combined voting power of
the then outstanding voting securities of the
Company entitled to vote generally in the
election of directors (the "Outstanding
Company Voting Securities"); provided,
however, that the following acquisitions of
common stock shall not constitute a Change in
Control: (A) any acquisition directly from
the Company (excluding an acquisition by
virtue of the exercise of a conversion
privilege or by one person or a group of
persons acting in concert), (B) any
acquisition by the Company, (C) any
acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the
Company or any corporation controlled by the
Company or (D) any acquisition by any
corporation pursuant to a reorganization,
merger, statutory share exchange or
consolidation which would not be a Change in
Control under paragraph (iii) of this Section
2(e); or
(ii) During any period of two
consecutive years, individuals who at the
beginning of such period constitute the
entire Board shall cease for any reason to
constitute a majority thereof unless the
election, or the nomination for election by
the Company's stockholders, of each new
director was approved by a vote of at least
two-thirds of the directors then still in
office who were directors at the beginning of
the period.
(iii) Consummation of a reorganization,
merger, statutory share exchange or
consolidation, unless, following such
reorganization, merger, statutory share
exchange or consolidation, (A) more than two
thirds (2/3) of, respectively, the then
outstanding shares of common stock of the
corporation resulting from such
reorganization, merger, statutory share
exchange or consolidation and the combined
voting power of the then outstanding voting
securities of such corporation entitled to
vote generally in the election of directors
is then beneficially owned, directly or
indirectly, by all or substantially all of
the individuals and entities who were the
beneficial owners, respectively, of the
Outstanding Company Common Stock and
Outstanding Company Voting Securities
immediately prior to such reorganization,
merger, statutory share exchange or
consolidation in substantially the same
proportions as their ownership, immediately
prior to such reorganization, merger,
statutory share exchange or consolidation,
(B) no person (excluding the Company, any
employee benefit plan (or related trust) of
the Company or such corporation resulting
from such reorganization, merger, statutory
share exchange or consolidation and any
person beneficially owning, immediately prior
to such reorganization, merger, statutory
share exchange or consolidation, directly or
indirectly, thirty-three percent (33%) or
more of the Outstanding Company Common Stock
or Outstanding Voting Securities, as the case
may be) beneficially owns, directly or
indirectly, thirty-three percent (33%) or
more of, respectively, the then outstanding
shares of common stock of the corporation
resulting from such reorganization, merger,
statutory share exchange or consolidation or
the combined voting power of the then
outstanding voting securities of such
corporation, entitled to vote generally in
the election of directors and (C) at least a
majority of the members of the Board of the
corporation resulting from such
reorganization, merger, statutory share
exchange or consolidation were members of the
Board at the time of the execution of the
initial agreement providing for such
reorganization, merger or consolidation; or
(iv) Consummation of (A) a complete
liquidation or dissolution of the Company or
(B) the sale or other disposition of all or
substantially all of the assets of the
Company, other than to a corporation, with
respect to which following such sale or other
disposition, (1) more than two thirds (2/3)
of, respectively, the then outstanding shares
of common stock of such corporation and the
combined voting power of the then outstanding
voting securities of such corporation
entitled to vote generally in the election of
directors is then beneficially owned,
directly or indirectly, by all or
substantially all of the individuals and
entities who were the beneficial owners,
respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or
other disposition in substantially the same
proportion as their ownership, immediately
prior to such sale or other disposition, of
the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the
case may be, (2) no person (excluding the
Company and any employee benefit plan (or
related trust) of the Company or such
corporation and any person beneficially
owning, immediately prior to such sale or
other disposition, directly or indirectly,
thirty-three percent (33%) or more of the
Outstanding Company Common Stock or
Outstanding Company Voting Securities, as the
case may be) beneficially owns, directly or
indirectly, thirty-three percent (33%) or
more of, respectively, the then outstanding
shares of common stock of such corporation or
the combined voting power of the then
outstanding voting securities of such
corporation entitled to vote generally in the
election of directors and (C) at least a
majority of the members of the board of
directors of such corporation were members of
the Board at the time of the execution of the
initial agreement or action of the Board
providing for such sale or other disposition
of assets of the Company.
(f) "Code" shall mean the Internal Revenue
Code of 1986, as amended from time to time.
(g) "Committee" shall mean the Compensation
Committee of the Board of Directors of North
Country Financial Corporation which shall be
comprised of at least two non-employee directors.
(h) "Common Stock" shall mean the authorized
and issued or unissued no par value common stock
of North Country Financial Corporation.
(i) "Company" shall mean North Country
Financial Corporation and/or a subsidiary
including subsidiaries of subsidiaries and
partnerships and other business ventures in which
North Country Financial Corporation has a
significant equity interest, as determined in the
sole discretion of the Committee.
(j) "Fair Market Value" shall mean the
closing sale price of the Common Stock on the
Nasdaq National Market as reported in the Midwest
Edition of the Wall Street Journal for the date in
question, provided that, if no sales of Common
Stock were made on said exchange on that date,
"Fair Market Value" shall mean the closing sale
price of Common Stock as reported for the most
recent preceding day on which sales of Common
Stock were made on such exchange, or, failing any
such sales, such other price as the Committee may
determine in conformity with pertinent law and
regulations of the Treasury Department.
(k) "Participant" shall mean a current or
prospective employee or non-employee director of
the Company to whom an Award has been made under
the Plan.
(l) "Plan" shall mean the North Country
Financial Corporation 2000 Stock Incentive Plan.
(m) "Retirement" shall mean, in the case of
an employee, termination of employment with the
Company at the earlier of (i) after attaining age
65 or (ii) after attaining age 55 with ten years
of service with the Company or any predecessor in
interest to the Company. In the case of a non-
employee director, "Retirement" shall mean
termination of service on the board of directors
of the Company after at least three years of
service on the Company's Board.
(n) "Stock Option" shall mean a grant of a
right to purchase a specified number of shares of
Common Stock, the purchase price of which shall be
not less than 100% of Fair Market Value on the
date of grant. A stock option may be in the form
of a nonqualified stock option or an incentive
stock option ("ISO"). A nonqualified stock option
is an option that does not meet the criteria of an
ISO. An ISO, in addition to being subject to
applicable terms, conditions and limitations
established by the Committee, complies with
Section 422 of the Code which, among other
limitations, provides that the aggregate Fair
Market Value (determined at the time the option is
granted) of Common Stock for which ISOs are
exercisable for the first time by a Participant
during any calendar year shall not exceed
$100,000; that ISOs shall be priced at not less
than 100% of the Fair Market Value on the date of
the grant (110% in the case of a Participant who
is a 10% shareholder of the Company within the
meaning of Section 422 of the Code); and that ISOs
shall be exercisable for a period of not more than
ten years (five years in the case of a Participant
who is a 10% shareholder of the Company).
3. Eligibility. Current and prospective
employees and non-employee directors who provide
services to the Company are eligible for an Award under
the Plan if they hold, or will hold, positions of
responsibility and if their performance, in the
judgment of the Committee or the management of the
Company (if such responsibility is delegated pursuant
to Section 6 hereof), can have a significant effect on
the success of the Company.
4. Common Stock Available for Awards. Subject to
adjustment as provided in Section 14 hereof, the number
of shares that may be issued under the Plan for Awards
during the term of the Plan is 500,000 shares of Common
Stock, all of which may be in the form of incentive
stock options. Any shares subject to an Award which
are used in settlement of tax withholding obligations
shall be deemed not to have been issued for purposes of
determining the maximum number of shares available for
issuance under the Plan. Likewise, if any Stock Option
is exercised by tendering shares, either actually or by
attestation, to the Company as full or partial payment
for such exercise under this Plan, only the number of
shares issued net of the shares tendered shall be
deemed issued for purposes of determining the maximum
number of shares available for issuance under the Plan.
No individual shall be eligible to receive Awards
aggregating more than 50,000 shares of Common Stock
reserved under the Plan in any one calendar year,
subject to adjustment as provided in Section 14 hereof.
North Country Financial Corporation shall take whatever
actions are necessary to file required documents with
the U.S. Securities and Exchange Commission and any
other appropriate governmental authorities and stock
exchanges to make shares of Common Stock available for
issuance pursuant to Awards.
5. Administration. The Plan shall be
administered by the Committee, which shall have full
and exclusive power to interpret the Plan, to determine
which current and prospective employees and non-
employee directors are Participants, to grant waivers
of Award restrictions, to determine the provisions of
Award Agreements and to adopt such rules, regulations
and guidelines for carrying out the Plan as it may deem
necessary or proper.
6. Delegation of Authority. Except to the extent
prohibited by applicable law or the applicable rules of
a stock exchange, the Committee may delegate to the
chief executive officer and to other senior officers of
the Company its duties under the Plan pursuant to such
conditions or limitations as the Committee may
establish. Any such delegation may be revoked by the
Committee at any time.
7. Awards. The Committee shall set forth in the
related Award Agreement the terms, conditions,
performance requirements, and limitations applicable to
each Award including, but not limited to, vesting
requirements, conditions under which acceleration of
vesting will occur and achievement of specific business
objectives.
8. Stock Option Exercise. The price at which
shares of Common Stock may be purchased under a Stock
Option shall be paid in full at the time of the
exercise in cash or, if permitted by the Committee, by
means of tendering shares of Common Stock, which have
been held by the Participant for more than six months
and have not been used within the prior six-month
period to exercise an option, either directly or by
attestation, valued at Fair Market Value on the date of
exercise, or any combination thereof.
9. Tax Withholding. The Company shall have the
right to deduct applicable taxes from any Award payment
and withhold, at the time of delivery or vesting of
shares under the Plan, an appropriate number of shares
for payment of taxes required by law or to take such
other action as may be necessary in the opinion of the
Company to satisfy all obligations for withholding of
such taxes. The Company may defer making delivery with
respect to Common Stock obtained pursuant to an Award
hereunder until arrangements satisfactory to it have
been made with respect to any such withholding
obligation. If Common Stock is used to satisfy tax
withholding, such stock shall be valued based on the
Fair Market Value when the tax withholding is required
to be made.
10. Amendment or Termination of the Plan. The
Board may, at any time, amend or terminate the Plan;
provided, however, that
(a) subject to Section 14 hereof, no amendment
or termination may, in the absence of
written consent to the change by the
affected Participant (or, if the Participant
is not then living, the affected
beneficiary), adversely affect the rights of
any Participant or beneficiary under any
Award granted under the Plan prior to the
date such amendment is adopted by the Board;
and
(b) without further approval of the shareholders
of the Company, no amendment shall increase
the number of shares of Common Stock which
may be issued pursuant to Awards hereunder,
except for increases resulting from Section
14 hereof.
12. Termination of Employment. If the employment
of a Participant terminates, or a non-employee director
no longer serves on the Board, other than pursuant to
paragraphs (a) through (c) of this Section 12, all
unvested Awards shall immediately terminate and all
vested but unexercised, deferred or unpaid Awards shall
terminate 90 days after such termination of employment
or service, unless the Award Agreement provides
otherwise, and during such 90-day period shall be
exercisable only to the extent provided in the Award
Agreement. Notwithstanding the foregoing, if a
Participant's employment is terminated for Cause, to
the extent the Award is not effectively exercised or
has not vested prior to such termination, it shall
lapse or be forfeited to the Company immediately upon
termination. In all events, an Award will not be
exercisable after the end of its term as set forth in
the Award Agreement.
(a) Retirement. When a Participant's
employment or service terminates as a result of
Retirement, or early retirement with the consent
of the Committee, the Committee (in the form of an
Award Agreement or otherwise) may permit Awards to
continue in effect beyond the date of Retirement,
or early retirement, and/or the exercisability and
vesting of any Award may be accelerated.
(b) Resignation in the Best Interests of the
Company. When a Participant resigns from the
Company or the Board and, in the judgment of the
Committee, the acceleration and/or continuation of
outstanding Awards would be in the best interests
of the Company, the Committee may (i) authorize,
where appropriate, the acceleration and/or
continuation of all or any part of Awards granted
prior to such termination and (ii) permit the
exercise, vesting and payment of such Awards for
such period as may be set forth in the applicable
Award Agreement.
(c) Death or Disability of a Participant.
(i) In the event of a
Participant's death, the Participant's estate
or beneficiaries shall have a period
specified in the Award Agreement within which
to receive or exercise any outstanding Award
held by the Participant under such terms, and
to the extent, as may be specified in the
applicable Award Agreement. Rights to any
such outstanding Awards shall pass by will or
the laws of descent and distribution in the
following order: (a) to beneficiaries so
designated by the Participant; if none, then
(b) to a legal representative of the
Participant; if none, then (c) to the persons
entitled thereto as determined by a court of
competent jurisdiction. Subject to
subparagraph (iii) below, Awards so passing
shall be exercised or paid out at such times
and in such manner as if the Participant were
living.
(ii) In the event a Participant is
deemed by the Company to be disabled within
the meaning of the Company's group long-term
disability plan, or if the Company does not
have such a plan, Section 22(e)(3) of the
Code, the Award shall be exercisable for the
period, and to the extent, specified in the
Award Agreement. Awards and rights to any
such Awards may be paid to or exercised by
the Participant, if legally competent, or a
legally designated guardian or representative
if the Participant is legally incompetent by
virtue of such disability.
(iii) After the death or
disability of a Participant, the Committee
may in its sole discretion at any time (1)
terminate restrictions in Award Agreements
and (2) accelerate any or all installments
and rights.
(iv) In the event of uncertainty
as to interpretation of or controversies
concerning this paragraph (c) of Section 12,
the Committee's determinations shall be
binding and conclusive.
(d) No Employment Rights. The Plan shall
not confer upon any Participant any right with
respect to continuation of employment by the
Company or service on the Board, nor shall it
interfere in any way with the right of the Company
to terminate any Participant's employment or
service on the Board at any time.
13. Nonassignability. Except as provided in
subsection (c) of Section 12 and this Section 13, no
Award under the Plan shall be assignable or
transferable, or payable to or exercisable by anyone
other than the Participant to whom it was granted.
Notwithstanding the foregoing, the Committee (in the
form of an Award Agreement or otherwise) may permit
Awards, other than incentive stock options within the
meaning of Section 422 of the Code, to be transferred
to members of the Participant's immediate family, to
trusts for the benefit of the Participant and/or such
immediate family members, and to partnerships or other
entities in which the Participant and/or such immediate
family members own all the equity interests. For
purposes of the preceding sentence, "immediate family"
shall mean a Participant's spouse, issue, and spouses
of his issue.
14. Adjustments. In the event of any change in
the outstanding Common Stock of the Company by reason
of a stock split, stock dividend, combination or
reclassification of shares, recapitalization, merger,
or similar event, the Committee may adjust
proportionally (a) the number of shares of Common Stock
(i) reserved under the Plan, (ii) available for ISOs,
(iii) for which Awards may be granted to an individual
Participant, and (iv) covered by outstanding Awards
denominated in stock; (b) the stock prices related to
outstanding Awards; and (c) the appropriate Fair Market
Value and other price determinations for such Awards.
In the event of any other change affecting the Common
Stock or any distribution (other than normal cash
dividends) to holders of Common Stock, such adjustments
as may be deemed equitable by the Committee, including
adjustments to avoid fractional shares, shall be made
to give proper effect to such event. In the event of a
corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or
liquidation, the Committee shall be authorized to issue
or assume Stock Options, whether or not in a
transaction to which Section 424(a) of the Code
applies, by means of substitution of new Stock Options
for previously issued Stock Options or an assumption of
previously issued Stock Options.
15. Notice. Any notice to the Company required
by any of the provisions of the Plan shall be addressed
to the president of the Company in writing, and shall
become effective when it is received by his office.
17. Governing Law. The Plan and all
determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Michigan,
without giving effect to principles of conflicts of
laws, and construed accordingly.
18. Effective and Termination Dates. The
effective date of the Plan is February 16, 2000. The
Plan shall terminate on February 15, 2010 subject to
earlier termination by the Board pursuant to Section
11, after which no Awards may be made under the Plan,
but any such termination shall not affect Awards then
outstanding or the authority of the Committee to
continue to administer the Plan.
19. Other Benefit and Compensation Programs.
Payments and other benefits received by a Participant
pursuant to an Award shall not be deemed a part of such
Participant's regular, recurring compensation for
purposes of the termination, indemnity or severance pay
law of any country and shall not be included in, nor
have any effect on, the determination of benefits under
any other employee benefit plan, contract or similar
arrangement, unless the Committee expressly determines
otherwise.
LEASE AGREEMENT
This Lease Agreement made and entered into this _____
day of ________, 1999, by and between C. Ronald Dufina
and Mary McCourt-Dufina, of PO Box 495, Mackinac
Island, Michigan, herein referred to as "Lessor", and
North Country Bank & Trust, a Michigan Banking
Corporation, of 130 South Cedar, Manistique, Michigan,
herein referred to as "Lessee".
Witnesseth:
Whereas, Lessor is the owner of certain premises
located in the City of Mackinac Island, Mackinac
County, Michigan, and wishes to let the same; and
Whereas, Lessee desires to lease said premises from
Lessor; and
Whereas, the parties hereto desire to enter into a
lease agreement defining their respective rights,
obligations and liabilities relating to the premises,
and to one another;
Now, therefore, in consideration of the mutual
covenants and promises contained herein, it is agreed:
Section I: Description and Use of Premises
Lessor does hereby let to Lessee the following
generally described premises:
Certain premises located on the ground floor of that
building known as "The Balsam Shop" a/k/a "The Old
Village Inn", located on Parcel 2, Lot 105, Assessor's
Plat No.3, City of Mackinac Island, Michigan,
consisting of approximately 400 square feet and
referred to as "Balsam Unit No.3".
The demised premises are located on commercial property
presently zoned "C" Commercial, by virtue of Ordinance
No.278 of the Ordinances of the City of Mackinac
Island, and Lessee agrees to conduct its operations in
conformity therewith.
Section II: Term
The term of this lease shall be for a period of three
(3) years, commencing on March 1, 2000, and terminating
on February 28, 2003, unless sooner terminated by the
implementation of further provisions of this Agreement.
Lessee may renew this lease for two additional three-
year terms at an annual rent calculated according to
Section III of this lease. Lessee shall inform Lessor
in writing at least sixty (60) days prior to the
expiration of the term of this lease of Lessee's intent
to exercise this option.
<PAGE>
Section III: Rent
The rent for the first year of the term of this Lease
shall be the sum of Eighteen Thousand, Seven Hundred
Fifty-Two and 40/100 Dollars ($18,752.40), payable as
follows:
$3,125.40 on or before March 1, 2000;
$3,125.40 on or before Aprill, 2000;
$3,125.40 on or before May 1, 2000;
$3,125.40 on or before June 1, 2000;
$3,125.40 on or before July 1, 2000; and
$3,125.40 on or before August 1, 2000.
The annual rent for the remaining two years of the term
of this Lease shall be adjusted on March lst annually
in accordance with any change in the Consumer Price
Index, Midwest Urban Consumers (a/k/a North Central
Region) as of the preceding December 31, using December
31, 1999 as base 100.
Section IV: Repairs, Improvements and Maintenance
Lessor shall maintain and keep all exterior walls,
roofs, plumbing, and electrical in good repair.
Lessor shall provide snow removal service for the
demised premises, as well as the demised building's
roof(s), and sidewalks, as necessary.
Lessee shall provide for its own trash removal on a
regular basis, and shall maintain the demised premises
in a clean and presentable condition.
Section V: Taxes and Utilities
Lessor shall pay all real estate taxes and special
assessments on the demised premises; and
Lessee shall pay all personal property, business and
all other taxes assessed incident to the operation of
its business at the demised premises.
Lessor shall pay for water and sewer, and Lessee shall
pay for all other utilities supplied to the premises
utilized by Lessee.
Section VI: Insurance
Lessor shall keep the demised premises insured against
loss or damage by fire, to the extent of the full
insurable value thereof.
<PAGE>
Lessee may obtain and maintain, at its own expense, any
insurance which it desires covering its personal
property and contents situate on the demised premises.
Lessee shall maintain sufficient insurance to protect
both Lessor and Lessee from all claims of personal
injury, including death, whether such claims are made
under a Workers Compensation Act, or otherwise, which
may arise from its operations under this Lease, and
carry Lessor as an additional insured thereunder.
Section VII: Indemnification
Lessee hereby indemnifies and saves Lessor harmless
from and against loss, damage and liability, occasioned
by or growing out of Lessee's use and occupancy of the
demised premises.
Section VIII: Contingency
Lessee and Lessor mutually acknowledge that this Lease
Agreement is contingent upon the approval by the
Financial Institution Bureau and the Federal Deposit
Insurance Corporation of Lessee operating a branch bank
at the location of the demised premises. In the event
such approval cannot be reasonably obtained, then in
such event, this Lease Agreement shall be of no force
and effect.
Section IX: Lessor's Remedies
In the event Lessee shall breach any of the covenants
contained herein, Lessor may, at its option, direct a
written notice of default to Lessee at Lessee's
Manistique office, directing that said default be cured
within ten (10) days of the date of said notice.
Failure of Lessee to cure any such breach or default
may, at Lessor's election, terminate this Lease.
Termination pursuant to this provision shall cause
Lessee to immediately surrender and vacate the demised
premises to Lessor, and upon Lessee's failure to so
surrender and vacate, Lessor may initiate summary
proceedings in Michigan's 92nd District Court pursuant
to Chapter 57 of Michigan's Revised Judicature Act. In
addition to the foregoing, Lessor shall have an
entitlement to recover all costs, including actual
attorney fees expended in enforcing this provision.
Section X: Assignment and sub-let
Lessee shall not assign its interest under this Lease,
nor underlet the premises, or any portion thereof,
without the prior written approval of Lessor.
<PAGE>
Section XI: Governing Law
The provisions of this agreement, as well as the
association of the parties hereto, shall be governed by
the laws of the State of Michigan.
Section XII: Counterparts
This Lease may be executed in any number of
counterparts, each of which shall be deemed to be an
original and all of which together shall comprise but a
single document.
Section XIII: Corporate Approval
Lessee represents that it has approved the terms and
provisions of this Lease, and has authorized the
undersigned individual to execute this Lease for and on
behalf of said Corporation.
Section XIV: Binding Effect
This Lease, and all of the covenants, conditions and
provisions contained herein shall inure to the benefit
of and be binding upon the heirs, executors, successors
and assigns of the parties hereto.
In witness whereof, the parties hereto have executed
this Lease Agreement the day and year first written.
In the presence of: "Lessor":
/s/ Steven A. Cotton /s/ C. Ronald Dufina
- ------------------------ -------------------------
C. Ronald Dufina
/s/ Anne M. Myers /s/ Mary McCourt-Dufina
- ----------------------- -------------------------
Mary McCourt-Dufina
In the presence of: "Lessee":
North Country Bank & Trust, A Michigan
Banking Corporation
/s/ Kristine E. Hoefler /s/ Ronald G. Ford
- ----------------------- --------------------------
By: (print) Ronald G. Ford
Its: Chairman
By: (print)
Its:
<PAGE>
2/16/00
RE: Lease Agreement for ATM Machine Space
In addition to the lease agreement signed for the
period of March 1,2000 -February 28, 2003, for the
amount of $18,752.40. North Country Bank & Trust agrees
to pay to C. Ronald Dufina and Mary McCourt-Dufina,
$100.00 per month for a total of $1200.00 per year for
3 years, for the use of the ATM space in the Balsam
Shop, Mackinac Island, MI.
"Lessee"
North Country Bank and Trust,
A Michigan Banking Corporation
/s/ Ronald G. Ford
- ---------------------------
BY: (print) Ronald G. Ford
ITS: Chairman
Mission Statement
NORTH COUNTRY FINANCIAL CORPORATION
NORTH COUNTRY BANK AND TRUST
NORTH COUNTRY FINANCIAL GROUP
NORTH COUNTRY CAPITAL TRUST
FIRST RURAL RELENDING COMPANY
NCB REAL ESTATE COMPANY
FIRST MANISTIQUE AGENCY
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
Independent Auditor's Report 5
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 12
Selected Financial Data 32
Summary Quarterly Financial Information 33
Market Information 34
Management's Discussion and Analysis of Financial
Condition and Results of Operations 35
Officers and Directors 47
<PAGE>
To Our Shareholders
Dear Shareholder:
At North County Financial Corporation we are
proud of our growth over the past twenty-five
years. We have accomplished our goals of
increasing our assets, deposits, shareholders'
equity, book value per share, net income, and
dividends paid to our shareholders each and every
year during that time period.
While continuing to build our customer base in
Michigan's Upper Peninsula, our growth plans also
include expanding our presence in lower Michigan.
During 1999, we opened offices in Traverse City
and Petoskey and purchased banking offices in
Mancelona and Kaleva. These four offices
compliment the Gaylord office opened in 1998. To
further the growth, we are in the process of
opening an office in Cadillac and a second office
in Traverse City along with purchasing banking
offices in Alanson and Glen Arbor.
In addition to the new banking offices in lower
Michigan, the Board of Directors has approved the
move of the Corporation's headquarters to 3530
North Country Drive, Traverse City, Michigan.
This is an exciting move for the Corporation as
it will enhance the development of the lower
Michigan market and will provide additional
outlets for both our traditional and
nontraditional banking products.
Looking forward, we are taking steps to increase
the liquidity of North Country Financial
Corporation stock. To this end, the Corporation
anticipates that, by April 18, 2000, its stock
will be listed on The NASDAQ National Market
System under the symbol "NCFC".
We have historically seen a large demand for the
Corporation's stock due to our performance record
and our desire to be a leader in the financial
industry. Going on NASDAQ will increase our
exposure in the national market. Our stock will
be closely watched by brokers, and our financial
results will be compared on a more public basis
with other regional banking institutions. With
this national exposure, North Country Financial
Corporation stock may experience a degree of
short-term volatility.
On behalf of the Board of Directors, we express
our appreciation to you, our shareholders, for
your continued confidence. We ask for your
ongoing support as we enter the new millennium
and embrace the many challenges that await the
financial industry.
Respectfully,
/s/ Ronald G. Ford /s/ Michael C. Henricksen /s/ Thomas G. King
---------------------- --------------------------- ------------------
Ronald G. Ford Michael C. Henricksen Thomas G. King
Chairman, President and C.E.O. Vice Chairman Vice Chairman
<PAGE>
Comparative Highlights
BALANCE SHEET STATISTICS 1999 1998 % Change
Assets $568,441,837 $471,380,858 20.59%
Net Loans 459,758,248 405,608,135 13.35
Deposits 462,998,148 404,961,333 14.33
Shareholders' Equity 40,819,511 39,469,365 3.42
Shares of Stock Outstanding 7,000,176 7,130,760 (1.83)
Book Value per Share 5.83 5.54 5.23
OPERATING STATISTICS
Total Income $46,087,211 $41,148,862 12.00%
Total Expense 37,996,162 35,617,742 6.68
Income before Income Taxes 8,091,049 5,531,120 46.28
Net Income 6,355,549 4,561,190 39.34
Basic Earnings Per Share 0.90 0.65 38.46
Diluted Earnings Per Share 0.89 0.64 39.06
DIVIDEND SUMMARY
(Cash Dividend paid per Common Share)
Quarter Ending
March 31 .04 .04
June 30 .04 .04
September 30 .05 .04
December 31 .05 .05
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 of the
outstanding capital stock of North Country Bank and
Trust, North Country Financial Group, North Country
Capital Trust, First Rural Relending Company, and First
Manistique Agency. North Country Bank and Trust,
headquartered in Manistique, Michigan, provides a full
range of commercial and retail banking services to
customers in Michigan. North Country Bank and Trust
owns the outstanding stock of NCB Real Estate Company
which owns several properties used by the Bank. North
Country Financial Group provides tax-exempt
lease/purchase financing to municipalities. North
Country Capital Trust was formed solely for the
issuance of trust preferred securities. First Rural
Relending Company is a nonprofit lending corporation.
First Manistique Agency is engaged in the selling of
insurance.
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 Sherry Littlejohn, North Country
Financial Corporation, 3530 North Country Drive,
Traverse City, Michigan 49684.
MARKET SUMMARY
The common stock of North Country Financial Corporation
has been traded in private sales since October 1976.
The Corporation has approximately 2,055 shareholders of
record, as of January 31, 2000.
<PAGE>
Five Year Comparisons
ASSETS
[bar graph] Total assets on a
consolidated basis
increased by 20.59% in
1999 to $568,441,837.
Total assets have
increased over
$285,650,000 since the
end of 1995, an increase
of 101% in four years.
[bar graph] SECURITIES
Our portfolio of
securities increased
during 1999 to
$43,342,807. This
increase is based on our
strategy to invest excess
funds into higher earning
assets created by our
increased funding sources
until we are able to
redeploy such funds into
high quality, higher
yielding loan products.
[bar graph] LOANS
Total net loans increased
13.35% to $459,758,248 in
1999. Loan demand is
strong and our primary
lending objective
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 $6,863,367
at the end of 1999, an
increase of over $751,000
over 1998. We expect
strong loan demand to
continue, with the
majority being commercial
and business loans, which
represent 71% of the loan
portfolio.
<PAGE>
[bar graph] DEPOSITS
Total deposits increased
by 14.33% to
$462,998,148. In 1999,
we paid our depositors
interest of more than
$18,280,000 which goes
back into our regional
economy.
[bar graph] SHAREHOLDERS' EQUITY
During 1999, $1,350,146
was added to
shareholders' equity,
increasing total equity
by 3.42%. In addition,
cash dividends of $0.18
per share were paid to
our shareholders, an
increase of 5.88% over
1998. Book value per
share increased to $5.83
compared to $5.54 at the
end of 1998.
[bar graph] NET INCOME
Net income for 1999 was $6,355,549.
Basic earnings per share I increased
to $0.90 in 1999 from $0.65 in 1998,
a 38.46% increase.
<PAGE>
Independent Auditor's Report
INDEPENDENT AUDITOR'S REPORT
TO THE SHAREHOLDERS OF
NORTH COUNTRY FINANCIAL CORPORATION
TRAVERSE CITY, MICHIGAN
<PAGE>
Independent Auditor's Report
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
North Country Financial Corporation
Traverse City, Michigan
We have audited the accompanying consolidated balance
sheets of North Country Financial Corporation and
Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999.
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.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of North
Country Financial Corporation and Subsidiaries at
December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three
years in the period ended December 31, 1999, in
conformity with generally accepted accounting
principles.
/s/ Wipfli Ullrich Bertelson LLP
----------------------------------
Wipfli Ullrich Bertelson LLP
January 28, 2000
Appleton, Wisconsin
<PAGE>
Consolidated Balance Sheets
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 1999 and 1998
1999 1998
ASSETS
Cash and due from banks $26,159,675 $16,592,703
Federal funds sold -0- 6,047,743
Cash and cash equivalents 26,159,675 22,640,446
Interest-bearing deposits in other
financial institutions 679,096 -0-
Securities available for sale 43,342,807 8,676,204
Total loans 466,621,615 411,720,469
Allowance for loan losses (6,863,367) (6,112,334)
Net loans 459,758,248 405,608,135
Premises and equipment 19,117,811 17,938,058
Other assets 19,384,200 16,518,015
TOTAL ASSETS $568,441,837 $471,380,858
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 43,606,378 $ 42,076,502
Interest-bearing deposits 419,391,770 362,884,831
Total deposits 462,998,148 404,961,333
Borrowings 46,878,036 23,270,161
Other liabilities 5,296,142 3,679,999
Total liabilities 515,172,326 431,911,493
Guaranteed preferred beneficial interests
in the Corporation's subordinated debentures 12,450,000 -0-
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 - 7,000,176 and
7,130,760 shares at December 31, 1999
and 1998, respectively 16,418,081 19,436,025
Retained earnings 25,057,935 19,989,247
Accumulated other comprehensive
income (deficit) (656,505) 44,093
Total shareholders' equity 40,819,511 39,469,365
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $568,441,837 $471,380,858
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Income
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Interest income:
Interest and fees on loans $40,457,210 $37,283,850 $34,525,569
Interest on securities:
Taxable 1,437,755 685,870 1,030,414
Tax-exempt 232,262 31,252 35,044
Other interest income 421,879 496,987 373,010
Total interest income 42,549,106 38,497,959 35,964,037
Interest expense:
Deposits 18,281,860 16,530,463 14,633,670
Borrowings 1,651,276 1,284,766 1,264,385
Subordinated debentures 668,979 -0- -0-
Total interest expense 20,602,115 17,815,229 15,898,055
Net interest income 21,946,991 20,682,730 20,065,982
Provision for loan losses 1,456,544 1,199,725 1,398,201
Net interest income after provision
for loan losses 20,490,447 19,483,005 18,667,781
Other income:
Service fees 1,965,249 1,478,376 1,220,028
Net security gains (losses) -0- 44,504 (60,163)
Other operating income 1,572,856 1,128,023 478,351
Total other income 3,538,105 2,650,903 1,638,216
Other expenses:
Salaries and employee benefits 6,361,885 6,567,566 5,898,110
Occupancy expense 2,613,218 2,426,418 2,212,311
Forms and supplies 393,068 391,093 498,635
Amortization of acquisition intangibles 698,752 789,663 719,071
Legal and consulting fees 457,593 553,078 448,324
Data processing 1,369,647 1,566,382 853,841
Telephone 689,571 656,354 304,760
Courier costs 270,416 546,473 162,117
Other 3,083,353 3,105,761 3,699,752
Total other expenses 15,937,503 16,602,788 14,796,921
Income before provision for income taxes 8,091,049 5,531,120 5,509,076
Provision for income taxes 1,735,500 969,930 1,403,417
Net income $ 6,355,549 $ 4,561,190 $ 4,105,659
Earnings per share:
Basic $ 0.90 $ 0.65 $ 0.58
Diluted $ 0.89 $ 0.64 $ 0.57
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of
Changes in Shareholders' Equity
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Income (Deficit) Total
<S> <C> <C> <C> <C>
Balance, January 1, 1997 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 ($.17 per share) (1,251,224) (1,251,224)
Issuance of common stock 87,667 1,316,638 1,316,638
Retirement of common stock (95,377) (1,796,639) (1,796,639)
Balance, December 31, 1998 7,130,760 19,436,025 19,989,247 44,093 39,469,365
Net income 6,355,549 6,355,549
Other comprehensive deficit:
Net unrealized loss on
securities available for
sale (700,598) (700,598)
Total comprehensive income 5,654,951
Cash dividends ($.18 per share) (1,286,861) (1,286,861)
Issuance of common stock 22,407 480,036 480,036
Retirement of common stock (152,991) (3,497,980) (3,497,980)
Balance, December 31, 1999 7,000,176 $16,418,081 $25,057,935 $(656,505) $40,819,511
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Increase (decrease) in cash and
cash equivalents:
Cash flows from operating activities:
Net income $6,355,549 $4,561,190 $4,105,659
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 1,456,544 1,199,725 1,398,201
Provision for depreciation and
net amortization 2,246,864 2,073,285 1,988,487
Proceeds from loan sales 15,173,116 21,525,436 6,803,965
Loans originated for sale (15,145,844) (21,415,349) (6,745,114)
(Gains) losses on sales of:
Loans held for sale (27,272) (110,087) (58,851)
Securities -0- (44,504) 60,163
Premises, equipment and
other real estate (381,559) (102,787) 27,624
Branches (430,224) -0- -0-
Change in other assets (502,598) 1,513,718 706,386
Change in other liabilities 1,610,092 185,184 (163,100)
Total adjustments 3,999,119 4,824,621 4,017,761
Net cash provided by operating
activities 10,354,668 9,385,811 8,123,420
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits in other
financial institutions (679,096) -0- 534,622
Payment for purchases of securities
available for sale (38,875,142) (7,530,434) (2,957,781)
Proceeds from sale of securities
available for sale -0- 3,820,310 10,151,363
Proceeds from maturities of securities
available for sale 3,130,897 2,329,647 2,173,899
Net increase in loans (57,168,064) (40,349,652) (38,423,930)
Proceeds from sale of premises,
equipment, and other real estate 1,230,560 1,364,248 434,693
Capital expenditures (2,601,597) (2,526,058) (3,496,436)
Net cash paid for branch sales (10,001,320) -0- -0-
Net cash provided from acquisitions 15,503,748 -0- 32,054
Net cash used in investment activities (89,460,014) (42,891,939) (31,551,516)
<PAGE>
Consolidated Statements of Cash Flows (Continued)
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Cash flows from financing activities:
Net increase in deposits $51,439,723 $44,412,648 $27,169,826
Net increase (decrease) in
short-term borrowings -0- (1,195,000) (3,805,000)
Proceeds from borrowings 36,000,000 10,500,000 7,842,577
Principal payments on borrowings (12,392,125) (6,858,017) (8,655,178)
Net proceeds from issuance of
guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures 11,881,782 -0- -0-
Proceeds from issuance of common stock 480,036 1,191,638 1,868,178
Retirement of common stock (3,497,980) (1,796,639) (831,606)
Dividends paid (1,286,861) (1,251,224) (1,182,014)
Net cash provided by financing
activities 82,624,575 45,003,406 22,406,783
Net increase (decrease) in cash and
cash equivalents 3,519,229 11,497,278 (1,021,313)
Cash and cash equivalents at beginning 22,640,446 11,143,168 12,164,481
Cash and cash equivalents at end $26,159,675 $22,640,446 $11,143,168
Supplemental cash flow information:
Cash paid during the year for:
Interest $20,359,154 $18,077,148 $15,561,189
Income taxes 540,307 1,241,050 1,955,760
Noncash investing and financing
activities:
Transfer of foreclosures from loans
to other real estate 1,561,407 460,795 356,856
Assets and liabilities acquired in
acquisitions:
Premises and equipment 285,927 -0- 969,437
Acquisition intangibles 1,680,132 -0- 2,099,287
Loans - Net -0- -0- 19,954,774
Securities -0- -0- 4,488,326
Other assets 33 -0- 134,863
Deposits (17,462,948) -0- (27,440,283)
Other liabilities (6,892) -0- (238,458)
Assets and liabilities divested in
branch sales:
Premises and equipment (65,296) -0- -0-
Acquisition intangibles (369,857) -0- -0-
Deposits 10,865,856 -0- -0-
Other liabilities 841 -0- -0-
See accompanying notes to consolidated financial statements.
<PAGE>
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 and Trust (the
"Bank"), North Country Financial Group, North Country
Capital Trust, and other minor subsidiaries, after
elimination of intercompany transactions and accounts.
Nature of Operations
The Corporation's and the Bank's revenues and assets
are derived primarily from the banking industry. The
Bank's primary market area is Michigan. The Bank
provides to its customers commercial, real estate,
agricultural, and consumer loans, as well as a variety
of traditional deposit products. A significant portion
of the Bank's commercial loan portfolio consists of
leases to commercial and governmental entities which
are secured by various types of equipment. These
leases are dispersed geographically throughout the
country.
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.
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.
Securities
The Corporation's securities are classified and
accounted for as securities available for sale. These
securities are stated at fair value. Premiums and
discounts are recognized in interest income using the
interest method over the period to maturity.
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.
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.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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. The allowance does not include the
affects of expected losses related to future events or
future changes in economic conditions. This
evaluation is inherently subjective since it requires
material estimates that may be susceptible to
significant change. Loans are charged against the
allowance for loan losses when management believes the
collectibility of the principal is unlikely. In
addition, various regulatory agencies periodically
review the allowance for loan losses. These agencies
may require additions to the allowance for loan losses
based on their judgments of collectibility.
In management's opinion, the allowance for loan losses
is adequate to cover probable losses relating to
specifically identified loans, as well as probable
losses inherent in the balance of the loan portfolio
as of the balance sheet date.
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 over a 10-year period and
goodwill is amortized over periods ranging from 15 to
25 years.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
and deferred stock compensation agreements. Earnings
and dividends per share are restated for all stock
splits through the date of issue of the financial
statements.
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, net of tax, which are
recognized as a separate component of equity,
accumulated other comprehensive income (deficit).
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. As amended
by SFAS No. 137, the statement is effective for fiscal
years beginning after June 15, 2000. 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.
Reclassifications
Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform
to the 1999 presentation.
<PAGE>
NOTE 2 - ACQUISITIONS AND DIVESTURES
In February 1997, the Corporation acquired 100% of the
outstanding stock of U.P. Financial, Inc. in exchange
for cash with an acquisition cost of approximately
$4.3 million. The Corporation acquired assets
totaling approximately $29.8 million, with resulting
acquisition intangibles of $2.1 million.
In May 1999, the Corporation acquired branches in
Kaleva and Mancelona, Michigan from Huntington
National Bank. The Corporation assumed approximately
$17.5 million in deposits, and acquired approximately
$286,000 in premises and equipment, with resulting
acquisition intangibles of $1.7 million.
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. Note 7 provides information
regarding acquisition intangibles.
In addition to the acquisitions noted above, the
Corporation sold two of its branch offices in July of
1999 located in Rudyard and Cedarville in Michigan's
Upper Peninsula. Deposits of approximately $11 million
were sold in this transaction at a premium of
approximately $800,000. After consideration for
unamortized intangible assets related to such branches,
the transaction resulted in a net gain on sale of
approximately $430,000.
Additional information regarding assets and
liabilities acquired or divested in these transactions
is presented on the consolidated statements of cash
flows.
NOTE 3 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $6,722,000
and $6,643,000 were restricted at December 31, 1999
and 1998, to meet the reserve requirements of the
Federal Reserve System.
NOTE 4 -SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of
securities available for sale as of December 31 are as
follows:
1999
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. Treasury securities and
obligations of U.S.
government agencies $ 9,863,055 $ -0- $ 471,585 $ 9,391,470
Obligations of states and
political subdivisions 16,355,544 408,248 553,552 16,210,240
Corporate securities 3,049,302 -0- 41,008 3,008,294
Mortgage-related securities 15,069,611 -0- 336,808 14,732,803
Total securities available
for sale $44,337,512 $ 408,248 $ 1,402,953 $43,342,807
<PAGE>
NOTE 4 -SECURITIES AVAILABLE FOR SALE (Continued)
1998
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. Treasury securities and
obligations of U.S.
government agencies $ 3,503,441 $ 10,925 $ 933 $ 3,513,433
Obligations of states and
political subdivisions 999,922 20,968 -0- 1,020,890
Corporate securities 1,253,162 36,548 -0- 1,289,710
Mortgage-related securities 2,852,872 -0- 701 2,852,171
Total securities available
for sale $ 8,609,397 $ 68,441 $ 1,634 $ 8,676,204
Following is a summary of the proceeds from sales of
securities available for sale, as well as gross gains
and losses for the years ended December 31:
1999 1998 1997
Proceeds from sale of securities $ -0- $3,820,310 $10,151,363
Gross gains on sales -0- 65,255 -0-
Gross losses on sales -0- 20,751 60,163
The amortized cost and estimated fair value of
securities available for sale at December 31, 1999, by
contractual maturity, are shown below. Contractual
maturities may differ from expected maturities because
borrowers may have the right to call or prepay
obligations with or without call or prepayment
penalties.
Amortized Estimated
Cost Fair Value
Due in one year or less $ 225,922 $ 226,314
Due after one year through five years 2,054,644 2,041,784
Due after five years through ten years 10,205,000 10,429,466
Due after ten years 16,782,335 15,912,440
29,267,901 28,610,004
Mortgage-related securities 15,069,611 14,732,803
Total $44,337,512 $43,342,807
The amortized cost and estimated fair value of
securities pledged to secure public deposits, treasury
deposits, and repurchase agreements was $1,300,000 and
$1,237,544, respectively, as of December 31, 1999.
<PAGE>
NOTE 5 - LOANS
The composition of loans at December 31 follows:
1999 1998
Commercial, financial, and agricultural $258,592,253 $219,026,672
Commercial and governmental leases 70,689,452 60,194,795
1-4 family residential real estate 107,750,757 97,415,442
Consumer 17,050,573 23,159,913
Construction 12,538,580 11,923,647
Total loans $466,621,615 $411,720,469
An analysis of the allowance for loan losses for the
years ended December 31 follows:
1999 1998 1997
Balance, January 1 $6,112,334 $5,599,546 $4,590,938
Allowance from acquisition -0- -0- 299,295
Provision for loan losses 1,456,544 1,199,725 1,398,201
Recoveries on loans 102,141 118,408 112,712
Loans charged off (807,652) (805,345) (801,600)
Balance, December 31 $6,863,367 $6,112,334 $5,599,546
Information regarding impaired loans follows:
As of December 31:
1999 1998 1997
Investment in impaired loans $5,603,505 $6,072,978 $6,933,060
Impaired loans on non-accrual -0- 1,401,216 1,246,890
Amount of the allowance allocated 704,141 873,014 923,014
For the years ended December 31:
1999 1998 1997
Average investment in impaired loans $6,128,430 $6,155,323 $6,709,911
Interest income recognized during
impairment 298,314 316,103 211,553
Interest income that would have
been recognized on an accrual basis 369,468 667,599 223,510
Cash-basis interest income recognized 298,930 301,840 212,699
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 1999 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.
Loans outstanding, January 1, 1999 $12,403,916
New loans 10,450,034
Repayment (7,125,125)
Loans outstanding, December 31, 1999 $15,728,825
<PAGE>
NOTE 6 - PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 follow:
1999 1998
Land $ 2,895,841 $ 2,804,480
Buildings and improvements 15,053,633 13,663,039
Furniture, fixtures, and equipment 10,327,021 9,224,753
Totals 28,276,495 25,692,272
Less - Accumulated depreciation and amortization 9,158,684 7,754,214
Net book value $19,117,811 $17,938,058
Depreciation and amortization of premises and equipment
charged to operating expenses amounted to $1,522,512 in
1999, $1,381,015 in 1998 and $1,222,939 in 1997.
NOTE 7 - ACQUISITION INTANGIBLES
Included in other assets are intangible assets acquired
through acquisitions. Acquisition intangibles consist
of the following as of December 31 (net of
amortization):
1999 1998
Goodwill $3,668,383 $3,571,067
Core deposit intangible 2,933,773 2,338,354
Total acquisition intangibles $6,602,156 $5,909,421
NOTE 8- DEPOSITS
The distribution of deposits at December 31 is as
follows:
1999 1998
Non-interest-bearing demand deposits $ 43,606,378 $ 42,076,502
Savings, money market, and interest-bearing
demand deposits 267,026,981 213,791,523
Time deposits 152,364,789 149,093,308
Total deposits $462,998,148 $404,961,333
Time deposits of $100,000 or more were $35,309,624 and
$25,619,255 at December 31, 1999 and 1998,
respectively. Interest expense on time deposits of
$100,000 or more was $1,357,153, $1,543,612 and
$1,606,273 for the years ended December 31, 1999, 1998
and 1997, respectively.
<PAGE>
NOTE 8- DEPOSITS (CONTINUED)
Maturities of time deposits outstanding at December 31,
1999, are as follows:
2000 $103,794,332
2001 3,516,900
2002 24,413,852
2003 16,283,994
2004 3,269,348
Thereafter 1,086,363
$152,364,789
NOTE 9 - BORROWINGS
Borrowings consist of the following at December 31:
1999 1998
Federal Home Loan Bank:
Fixed-rate advance at 6.01%, maturing June 19, 2000 $10,000,000 $ -0-
Fixed-rate advance at 6.07%, maturing August 9, 2000 7,000,000 -0-
Fixed-rate advance at 7.37%, maturing April 15, 2004 136,104 159,731
Fixed-rate advance at 7.59%, maturing May 17, 2004 240,177 281,657
Fixed-rate advance at 6.35%, maturing July 7, 2004 1,000,000 -0-
Fixed-rate advance at 6.50%, maturing October 17, 2005 2,268,156 2,535,401
Fixed-rate advance at 7.06%, maturing May 15, 2006 4,422,253 4,630,742
Adjustable-rate advance, maturing May 20, 1999,
5.20% at December 31, 1998 -0- 3,000,000
Adjustable-rate advance, maturing June 23, 2008,
5.49% at December 31, 1999 and 1998 10,000,000 10,000,000
Adjustable-rate advance, maturing October 21, 2009,
5.66% at December 31, 1999 10,000,000 -0-
45,066,690 20,607,531
Farmers Home Administration:
$2,000,000 fixed-rate note payable to Farmers
Home Administration, maturing August 24, 2024,
interest payable at 1% 1,811,346 1,874,857
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 -0- 787,773
Total borrowings $46,878,036 $23,270,161
<PAGE>
NOTE 9 - BORROWINGS (CONTINUED)
Maturities of borrowings outstanding at December 31, 1999, are as follows:
2000 $17,642,792
2001 686,079
2002 734,547
2003 788,567
2004 1,986,607
Thereafter 25,039,444
$46,878,036
The Federal Home Loan Bank borrowings are
collateralized by the following: a blanket collateral
agreement on the Bank's residential mortgage loans;
U.S. Government and agency securities with an amortized
cost and estimated fair value of $22,124,000 and
$22,933,000, respectively, at December 31, 1999; and by
Federal Home Loan Bank stock owned by the Bank totaling
$3,034,300, included in other assets, at December 31,
1999. 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, 1999.
The Farmers Home Administration borrowing is
collateralized by loans totaling $1,594,426, originated
and held by the Corporation's wholly owned subsidiary,
First Rural Relending, and guaranteed by the
Corporation.
NOTE 10 - INCOME TAXES
The components of the federal income tax provision for
the years ended December 31 follow:
1999 1998 1997
Current tax expense $1,852,739 $1,239,912 $1,726,124
Deferred tax credit (117,239) (269,982) (322,707)
Total provision for income taxes $1,735,500 $ 969,930 $1,403,417
Included in the total provision for income taxes are
expenses (credits) of $0, $15,131 and $(20,455) for the
years ended December 31, 1999, 1998 and 1997,
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:
1999 1998
Deferred tax assets:
Allowance for loan losses $2,070,487 $1,844,183
Deferred compensation 413,109 366,290
Unrealized loss on securities
available for sale 338,200 -0-
Total deferred tax assets 2,821,796 2,210,473
Deferred tax liabilities:
Depreciation (1,044,915) (777,689)
Intangibles (195,814) (285,986)
Unrealized gain on securities
available for sale -0- (22,714)
Other (22,162) (43,332)
Total deferred tax liabilities (1,262,891) (1,129,721)
Net deferred tax asset $1,558,905 $1,080,752
<PAGE>
NOTE 10 - INCOME TAXES (CONTINUED)
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:
1999 1998 1997
Tax expense at statutory rate $2,750,957 $1,880,581 $1,873,086
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (1,121,434) (1,127,726) (603,836)
Other 105,977 217,075 134,167
Provision for income taxes $1,735,500 $969,930 $1,403,417
NOTE 11 - RETIREMENT PLAN
The Corporation has established a 401(k) profit-sharing
plan. Employees who have completed three months 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 contributions charged to
operations totaled $158,570, $200,267 and $105,267 for
1999, 1998 and 1997, respectively.
NOTE 12 - 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, 1999 and 1998,
for vested benefits under this plan, was $1,135,769 and
$1,098,267, 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 $940,476 and $899,087 at December 31, 1999 and
1998, 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
$325,050 and $219,100 at December 31, 1999 and 1998,
respectively.
Deferred compensation expense for the plans was
$248,146, $316,041 and $175,000 for 1999, 1998 and
1997, respectively.
NOTE 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE CORPORATION'S SUBORDINATED DEBENTURES
In May 1999, the Corporation formed a Delaware business
trust, North Country Capital Trust (the "Trust"). All
of the common securities of this special purpose trust
are owned by the Corporation. The Trust exists solely
to issue capital securities. For financial reporting
purposes, the Trust is reported as a subsidiary and is
consolidated into the financial statements of the
Corporation. The capital securities are presented as a
separate line item on the consolidated balance sheet as
guaranteed preferred beneficial interests in the
Corporation's subordinated debentures (trust preferred
securities). The Trust has issued trust preferred
securities and invested the net proceeds in
subordinated debentures issued to the Trust by the
Corporation. The subordinated debentures are the sole
asset of the Trust. The Corportion, through guarantees
and agreements, has fully and unconditionally
guaranteed all of the Trust's obligations under the
trust preferred securities.
<PAGE>
NOTE 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE CORPORATION'S SUBORDINATED DEBENTURES (CONTINUED)
The Federal Reserve Bank has accorded the trust
preferred securities Tier I capital status. The
ability to apply Tier I capital treatment, as well as
to deduct the expense of the subordinated debentures
for income tax purposes, provided the Corporation with
a cost-effective way to raise regulatory capital. The
trust preferred securities are not included as a
component of total shareholders' equity on the
consolidated balance sheet.
The trust preferred securities carry a distribution
floating rate of the three month LIBOR plus 2.5% and
have a stated maturity date of May 14, 2029. The
securities are redeemable at par after May 14, 2009.
Distributions on the trust preferred securities are
payable quarterly on February 14, May 14, August 14 and
November 14.
NOTE 14 - SHAREHOLDERS' EQUITY
Earnings per share are based upon the weighted average
number of shares outstanding. The following shows the
computation of basic and diluted earnings per share for
the years ended December 31:
Weighted
Average
Number of Earnings Per
Net Income Shares Share
1999
Earnings per share - Basic $6,355,549 7,031,203 $ 0.90
Effect of stock options - Net 67,972
Effect of deferred stock compensation 21,886
Earnings per share - Diluted $6,355,549 7,121,061 $ 0.89
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
Effective August 25, 1998, the Board of Directors of
the Corporation approved a three-for-one stock split.
All references to the number of shares of common stock
in the consolidated financial statements and footnotes
thereto have been restated for the stock split.
<PAGE>
NOTE 14 - 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, 1999,
the Corporation meets all capital adequacy requirements
to which it is subject.
As of December 31, 1999, 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.
The Corporation's actual and required capital amounts
and ratios as of December 31 are as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
1999
Total capital (to risk-
weighted assets):
Consolidated $51,666,000 13.0% $31,732,000 8.0% N/A
North Country
Bank & Trust $50,053,000 12.7% $31,609,000 8.0% $39,511,000 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $46,684,000 11.8% $15,866,000 4.0% N/A
North Country
Bank & Trust $45,090,000 11.4% $15,804,000 4.0% $23,707,000 6.0%
Tier I capital (to
average assets):
Consolidated $46,684,000 8.4% $22,120,000 4.0% N/A
North Country
Bank & Trust $45,090,000 8.2% $22,066,000 4.0% $27,583,000 5.0%
<PAGE>
NOTE 14 - SHAREHOLDERS' EQUITY (CONTINUED)
1998
Total capital (to risk-
weighted assets):
Consolidated $37,881,000 10.7% $28,397,000 8.0% N/A
North Country
Bank & Trust $37,083,000 10.9% $27,160,000 8.0% $33,950,000 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $33,423,000 9.4% $14,199,000 4.0% N/A
North Country
Bank & Trust $32,816,000 9.7% $13,580,000 4.0% $20,370,000 6.0%
Tier I capital (to
average assets):
Consolidated $33,423,000 7.2% $18,532,000 4.0% N/A
North Country
Bank & Trust $32,816,000 7.2% $18,360,000 4.0% $22,950,000 5.0%
The Bank is restricted by banking regulations from
making dividend distributions above prescribed amounts.
At December 31, 1999, the Bank could have paid
$14,811,000 of additional dividends to the Corporation
without prior regulatory approval.
NOTE 15 - STOCK OPTION PLANS
The Corporation sponsors two stock option plans, one
for officers and employees and one for nonemployee
directors. A total of 600,000 shares were made
available for grant under these plans. Options under
these 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:
1999 1998 1997
Dividend yield 0.90% 1.00% 1.25%
Risk-free interest rate 5.50% 4.72% 5.14%
Weighted average expected life (years) 7.0 7.0 7.0
Expected volatility 16.46% 10.04% 11.45%
The weighted average fair value of options granted as
of their grant date, using the assumptions shown above,
was computed at $0.94 per share for options granted in
1999, $0.39 per share for options granted in 1998 and
$0.37 per share for options granted in 1997.
<PAGE>
NOTE 15 - 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:
1999 1998 1997
Net income:
As reported $6,355,549 $4,561,190 $4,105,659
Pro forma $6,288,107 $4,550,149 $4,100,889
Earnings per share - Basic:
As reported $ 0.90 $ 0.65 $ 0.58
Pro forma $ 0.89 $ 0.64 $ 0.57
Earnings per share - Diluted:
As reported $ 0.89 $ 0.64 $ 0.57
Pro forma $ 0.88 $ 0.64 $ 0.57
Following is a summary of stock option transactions for
the years ended December 31:
Number of Shares
1999 1998 1997
Outstanding at beginning of year 331,895 198,759 75,600
Granted during the year 244,400 163,200 153,309
Exercised during the year (at prices
ranging from $3.67 to $15.00 per share) (3,150) (30,064) (30,150)
Outstanding at end of year 573,145 331,895 198,759
Weighted average exercise price per share
at end of year $ 18.34 $ 16.97 $ 12.51
Available for grant at end of year 39,073 283,473 446,673
Options granted during 1999 were granted at a price of
$20.00. Options granted in 1998 were granted at a
price 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.
<PAGE>
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
Following is a summary of the options outstanding at
December 31, 1999:
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life-Years Price Number Price
$4.17 to $15.00 165,545 7.2 $ 13.86 76,748 $ 12.54
$19.00 to $20.33 407,600 9.0 19.47 163,200 20.22
573,145 8.5 $ 17.85 239,948 $ 17.76
NOTE 16 - OTHER COMPREHENSIVE INCOME (DEFICIT)
Other comprehensive income (deficit) components and
related taxes were as follows:
1999 1998 1997
Unrealized holding gains (losses) on
available for sale securities $(1,061,512) $ 116,212 $ 313,010
Less reclassification adjustments for gains
(losses) later recognized in income -0- 44,504 (60,163)
Net unrealized gains (losses) (1,061,512) 71,708 373,173
Tax effect (360,914) 24,381 126,879
Other comprehensive income (deficit) $(700,598) $ 47,327 $246,294
NOTE 17 - 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:
1999 1998
Commitments to extend credit $130,446,000 $128,059,000
Standby letters of credit 14,425,000 14,869,000
Credit card commitments 5,334,000 2,782,000
$150,205,000 $145,710,000
<PAGE>
NOTE 17 - 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 bank grants residential,
commercial, agricultural, and consumer loans throughout
Michigan. Due to the diversity of locations, the
ability of debtors to honor their contracts is not tied
to any particular economic sector.
NOTE 18 - 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.
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.
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.
<PAGE>
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
Guaranteed preferred beneficial interests in the
Corporation's subordinated debentures - The carrying
value is considered to estimate fair value as this
financial instrument reprices frequently and fully.
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:
1999 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets:
Cash and cash equivalents $ 26,160 $ 26,160 $ 22,640 $ 22,640
Interest-bearing deposits 679 679 -0- -0-
Securities available for sale 43,343 43,343 8,676 8,676
Net loans 459,758 461,511 405,608 414,609
Total financial assets $ 529,940 $ 531,693 $ 436,924 $ 445,925
Financial liabilities:
Deposits $ 462,998 $ 462,634 $ 404,961 $ 406,334
Borrowings 46,878 45,729 23,270 22,380
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures 12,450 12,450 -0- -0-
Total financial liabilities $ 522,326 $ 520,813 $ 428,231 $ 428,714
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.
<PAGE>
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
Cash and cash equivalents $ 889,001 $ 999,979
Investment in subsidiaries 51,648,625 38,802,583
Other assets 1,311,966 1,057,482
TOTAL ASSETS $53,849,592 $40,860,044
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 194,081 $ 602,906
Borrowings -0- 787,773
Total liabilities 194,081 1,390,679
Subordinated debentures 12,836,000 -0-
Total shareholders' equity 40,819,511 39,469,365
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $53,849,592 $40,860,044
<PAGE>
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
(CONTINUED)
STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
Income:
Dividends received from subsidiaries $3,150,000 $3,250,000 $4,377,878
Net security losses -0- -0- (41,888)
Other 23,798 31,809 9,317
Total income 3,173,798 3,281,809 4,345,307
Expenses:
Salaries and benefits 81,557 142,329 270,038
Interest 760,182 95,272 123,191
Other 364,366 595,284 398,325
Total expenses 1,206,105 832,885 791,554
Income before credit for income
taxes and equity in undistributed net
income of subsidiaries 1,967,193 2,448,924 3,553,753
Credit for income taxes (402,000) (146,632) (258,964)
Income before equity in undistributed
net income of subsidiaries 2,369,693 2,595,556 3,812,717
Equity in undistributed net income of
subsidiaries 3,985,856 1,965,634 292,942
Net income $6,355,549 $4,561,190 $4,105,659
<PAGE>
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $6,355,549 $4,561,190 $4,105,659
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of equity securities -0- -0- 41,888
(Gain) loss on sale of premise and equipment 3,528 (31,600) -0-
Provision for depreciation and amortization 9,470 4,872 -0-
Equity in undistributed net income of
subsidiaries (3,985,856) (1,965,634) (292,942)
Change in other assets (267,482) (111,636) (487,485)
Change in accrued expenses (408,825) 38,241 402,536
Total adjustments (4,649,165) (2,065,757) (336,003)
Net cash provided by operating activities 1,706,384 2,495,433 3,769,656
Cash flows from investing activities:
Investment in subsidiaries (9,560,784) -0- (4,052,914)
Payment for purchase of securities
available for sale -0- (110,922) -0-
Proceeds from sales of securities
available for sale -0- 10,000 317,300
Proceeds from sale of premise and equipment -0- 100,000 -0-
Capital expenditures -0- (3,528) -0-
Net cash used in investing activities (9,560,784) (4,450)(3,735,614)
Cash flows from financing activities:
Proceeds from borrowings 15,836,000 -0- -0-
Principal payments on borrowings (3,787,773) (787,539) (787,539)
Proceeds from issuance of common stock 480,036 1,191,638 1,868,178
Retirement of common stock (3,497,980) (1,796,639) (831,606)
Dividends paid (1,286,861) (1,251,224)(1,182,014)
Net cash provided by (used in)
financing activities 7,743,422 (2,643,764) (932,981)
Net decrease in cash and cash equivalents (110,978) (152,781) (898,939)
Cash and cash equivalents at beginning 999,979 1,152,760 2,051,699
Cash and cash equivalents at end $ 889,001 $ 999,979 $1,152,760
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
Year ended December 31,
1999 1998 1997 1996 1995
(Dollars in thousands, except per share amounts)
Selected Financial
Condition Data:
Total assets $568,442 $471,381 $421,434 $367,160 $282,791
Loans 466,622 411,720 372,519 314,886 221,507
Securities 43,343 8,676 10,103 15,191 27,055
Deposits 462,998 404,961 360,549 305,939 244,407
Borrowings 46,878 23,270 19,628 20,441 10,088
Total equity 40,820 39,469 36,592 32,386 25,007
Selected Operations Data:
Interest income $ 42,549 $ 38,498 $ 35,964 $ 28,724 $ 22,100
Interest expense (20,602) (17,815) (15,898) (12,674) (9,561)
Net interest income 21,947 20,683 20,066 16,050 12,539
Provision for loan losses (1,457) (1,200) (1,398) (2,424) (771)
Other income 3,538 2,651 1,638 1,360 1,354
Other expenses (15,937) (16,603) (14,797) (11,609) (9,368)
Income before income taxes 8,091 5,531 5,509 3,377 3,754
Provision for income taxes (1,735) (970) (1,403) (543) (1,084)
Net income $ 6,356 $ 4,561 $ 4,106 $ 2,834 $ 2,670
Per Share Data: *
Net income - Basic $ 0.90 $ 0.65 $ 0.58 $ 0.43 $ 0.42
Net income - Diluted 0.89 0.64 0.57 0.43 0.42
Cash dividends 0.18 0.17 0.16 0.14 0.14
Book value 5.83 5.54 5.13 4.57 3.96
Financial Ratios:
Return on average equity 15.83% 11.18% 11.29% 9.15% 11.65%
Return on average assets 1.22% 0.98% 1.00% 0.82% 1.00%
Dividend payout ratio 20.25% 27.43% 28.79% 32.11% 31.97%
Average equity to average
assets 7.70% 8.75% 8.85% 8.99% 8.57%
* Adjusted for 3 for 1 stock splits on April 29, 1996 and August 25, 1998
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
Three months ended,
March 31 June 30 September 30 December 31
(Dollars in thousands, except per share amounts)
1999
Selected Operations Data:
Interest income $ 9,732 $10,187 $10,791 $11,839
Interest expense (4,622) (4,917) (5,283) (5,780)
Net interest income 5,110 5,270 5,508 6,059
Provision for loan losses (213) (213) (213) (818)
Other income 615 649 1,223 1,051
Other expenses (3,436) (4,167) (4,291) (4,043)
Income before income taxes 2,076 1,539 2,227 2,249
Provision for income taxes (535) (232) (500) (468)
Net income $ 1,541 $ 1,307 $ 1,727 $ 1,781
Per Share Data:
Net income - Basic $ 0.22 $ 0.19 $ 0.25 $ 0.24
Net income - Diluted 0.22 0.19 0.25 0.23
1998
Selected Operations Data:
Interest income $ 9,183 $ 9,815 $ 9,667 $ 9,833
Interest expense (4,253) (4,413) (4,547) (4,602)
Net interest income 4,930 5,402 5,120 5,231
Provision for loan losses (250) (425) (450) (75)
Other income 542 716 662 731
Other expenses (3,658) (3,996) (3,731) (5,218)
Income before income taxes 1,564 1,697 1,601 669
Provision for income taxes (414) (380) (453) 277
Net income $ 1,150 $ 1,317 $ 1,148 $ 946
Per Share Data: *
Net income - Basic $ 0.16 $ 0.18 $ 0.16 $ 0.15
Net income - Diluted 0.16 0.18 0.16 0.14
* Adjusted for 3 for 1 stock split on August 25, 1998
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
MARKET INFORMATION
(Unaudited)
Historically, there has been no active market for the
Corporation's common stock and no published information
with respect to its market price. There have been
occasional direct sales by shareholders of which the
Corporation's common stock has sold at a premium to
book value. The price was reported to management in
most of these transactions, but management has no way
of confirming the prices which were reported. The
following table sets forth the range of high and low
sales prices of the Corporation's common stock during
1999 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 of the ranges
listed.
Three months ended,
March 31 June 30 September 30 December 31
1999
High $25.00 $25.00 $20.00 $20.00
Low 23.00 19.50 19.00 17.00
1998 *
High $19.00 $20.67 $22.00 $23.00
Low 16.34 19.00 20.67 22.00
* Adjusted for 3 for 1 stock split on August 25, 1998
<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 OPERATIONS
HIGHLIGHTS
For North Country Financial Corporation ("the
Corporation"), 1999 was a year of record growth and
profitability. The Corporation grew total assets by
21% and net income by 39% over the prior year. Growth
remains an important element of the Corporation's
strategy, and management believes that the continued
success and profitability of the Corporation depends on
continuing to attract credit-worthy, and profitable
assets both internally and through market expansion.
To enhance its ability to grow, the Corporation formed
a Delaware business trust, North Country Capital Trust,
in 1999 solely to issue capital securities, which are
accorded Tier I capital treatment for regulatory
purposes. The Corporation also formed North Country
Financial Group, in Denver, Colorado, to further
enhance its ability to attract high performing lease
assets. In addition, the Corporation continued its
market expansion into lower Michigan through the
opening of two new branches in Traverse City and
Petoskey and the purchase of two branches in Kaleva and
Mancelona.
At December 31, 1999, the Corporation had total assets
of $568.4 million, an increase of $97 million from
December 31, 1998. During 1999, outstanding loan
balances increased 13% or $55 million to $467 million.
Of the total increase in loans, $43 million, or 78%,
came from an increase in the commercial loan portfolio.
In addition, the Corporation's security portfolio
increased $35 million to $43.3 million over the prior
year. The increase coincides with the Corporation's
strategy to invest funds from increased deposits and
borrowings into securities with similar contractual
maturities.
The growth in 1999 continues the trend which has
developed over the past several years. From 1995
through 1999, assets grew by a total of $286 million or
101%. During the same period, loan and lease assets
grew $245 million, or 111%.
Growth will continue to be an important element of the
Corporation's strategy, and selective bank and branch
acquisitions will continue to occur as opportunities
arise. The Corporation's banking offices are located
in Michigan, a state 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. In order to improve operating efficiency,
management centralized the key departments of the
Corporation's sales and service environment which
allows the branches to focus on customer service and
cross selling of bank products and services.
Earnings have continued to increase over the past
several years. Net income was $6.4 million, $4.6
million, and $4.1 million for 1999, 1998 and 1997,
respectively. Return on average shareholders' equity
was 15.83%, 11.18% and 11.29%, for 1999, 1998 and 1997,
respectively. Basic and diluted earnings per share
have continued to increase during this three-year
period. Basic earnings per share were $0.90 in 1999,
$0.65 in 1998 and $0.58 in 1997, an increase of 38.5%
from 1998 to 1999 and 12.1% from 1997 to 1998. This
increase in earnings per share is a result of
significant growth in earnings with a slight decrease
in outstanding stock as a result of the Corporation's
stock repurchases. The increase in earnings for 1999
is largely the result of increased net interest income,
increased non-interest income and improved efficiency
in operations.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION
Loans
Loans represented 82.09% of total assets at the end of
1999, compared to 87.34% at the end of 1998. The loan
to deposit ratio remained relatively stable, decreasing
slightly from 101.67% at December 31, 1998 to 100.78%
at December 31, 1999. 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 possible level within the constraints of
adequate liquidity.
Following is a summary of the Corporation's loan
balances at December 31 (in thousands):
Percent
1999 1998 Change
Commercial real estate $ 79,000 $ 82,207 (3.90)
Commercial, financial, and agricultural 179,592 136,820 31.26
Leases:
Commercial 22,541 20,097 12.16
Governmental 48,148 40,098 20.08
1 - 4 family residential real estate 107,751 97,415 10.61
Consumer 17,051 23,160 (26.38)
Construction 12,539 11,923 5.17
Total $466,622 $411,720 13.33%
The Corporation has four major categories of lending
activities. Three categories, commercial, residential
real estate, and consumer, are generally with customers
in Michigan. The fourth major lending line, commercial
and governmental leasing, takes place on a nationwide
basis. As shown in the table above, the majority of
the current year loan growth occurred in the commercial
loans and the leasing categories. Management believes
these categories will continue to grow in the future,
with the level of consumer lending continuing to
decrease.
For the year, commercial loans increased by $42.77
million or by 31.26%. The overall commercial loan
growth is largely due to the efforts of the
relationship bankers and their ability to penetrate
growth markets such as Marquette, Sault Ste. Marie, and
more recently, commercial centers in lower Michigan.
The most prominent type of financing, at $70.10 million
or 27.11% of the commercial loan portfolio, continues
to focus on hospitality and tourism related industries.
The remainder of the commercial loan portfolio is
diversified in such categories as gaming, petroleum,
forestry, and farming.
In addition to traditional commercial lending, the
Corporation finances commercial and governmental leases
throughout the country. As illustrated in the table
above, a majority of the leasing activity is to
governmental units, including Native American
organizations. The Corporation has developed expertise
and contacts in the leasing business which provide it
with opportunities to purchase credit-worthy leases at
attractive yields. 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
of the equipment. Management continues to aggressively
pursue leases, and the Corporation will look to enhance
its lease portfolio through its newly formed
subsidiary, North Country Financial Group, in Denver,
Colorado. This new corporation is engaged in the
business of public finance, and intends to focus
primarily on providing tax-exempt lease/purchase
financing to municipalities located throughout the
United States.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Real estate lending on 1-4 family residences comprises
the second largest portion of the loan portfolio. This
past year, real estate loans grew by 10.61% or by
$10.34 million to $107.75 million. Approximately 90%
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 continues to utilize its
mortgage banking operation to sell longer-term, fixed
rate products; however, with the rising interest rate
environment, activity in this area declined in 1999.
Loans originated and sold to the secondary market
totaled $15.15 million in 1999 compared to $21.42
million in 1998.
Consumer lending represents a small percentage of the
Corporation's loan portfolio. At December 31, 1999,
consumer loans totaled $17.05 million, or 3.65% of the
total portfolio. Consumer loans continue to decrease
both in dollars and in percentage in relation to the
overall loan portfolio. This decrease is intentional
as consumer lending is a highly competitive, and
traditionally a higher cost, area of lending. The
Corporation will continue to originate consumer loans;
however, this is not seen as a high priority lending
area at the current time.
At the end of 1999, the allowance for loan losses
represents 1.47% of total loans or $6.86 million. The
allowance is maintained by management at a level
considered adequate to cover losses that are currently
anticipated based on past loss experience, general
economic conditions, information about specific
borrower situations including their financial position
and collateral values, and other factors and estimates
which are subject to change over time. In management's
opinion, the allowance for loan losses is adequate to
cover probable losses related to specifically
identified loans, as well as probable losses inherent
in the balance of the loan portfolio.
The Corporation's success in maintaining credit quality
is demonstrated in the following table (dollars in thousands):
1999 1998 1997
Allowance to total loans at end of year 1.47% 1.48% 1.50%
Net charge-offs during the year $ 706 $ 687 $ 689
Net charge-offs to average outstanding loans 0.16% 0.17% 0.20%
Net charge-offs to beginning allowance balance 11.55% 12.28% 15.01%
Nonaccrual loans at end of year 95 2,174 1,956
Loans 90 days or more delinquent at end of year
(excluding nonaccrual loans) $2,452 $1,238 $ 698
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 consultant to examine a
sample of commercial real estate, lease, and commercial
loan relationships. The recommendations from these
sources, along with the federal and state banking
regulators, are considered in analyzing the adequacy of
the allowance for loan losses.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Securities
During 1999, the security portfolio became a more
important component of the Corporation's strategy to
diversify its asset base. Securities increased $34.66
million in 1999, from $8.68 million to $43.34 million.
Funds made available from increased deposits and
additional borrowings have been invested into
securities with similar contractual maturities. The
security portfolio includes strong diversity among U.S.
Treasury and agency securities, obligations of states
and political subdivisions, corporate securities and
mortgage-related securities. The carrying value of the
Corporation's securities is as follows at December 31
(dollars in thousands):
1999 1998
U.S. Treasury securities and
obligations of U.S. government
agencies $ 9,392 $ 3,513
Obligations of states and
political subdivisions 16,210 1,021
Corporate securities 3,008 1,290
Mortgage-related securities 14,733 2,852
Total securities $ 43,343 $ 8,676
The Corporation's policy is to purchase securities of
high credit quality, consistent with its
asset/liability management strategies. The mortgage-
related securities have maturities ranging up to 30
years, while the remaining securities have maturities
ranging primarily from one to 15 years. The
Corporation classifies all securities as available for
sale, in order to maintain adequate liquidity and to
maximize its ability to react to changing market
conditions.
Deposits
Deposit growth has been, and continues to be a key
element of the Corporation's expansion strategy. Total
deposits at December 31, 1999, were $463.00 million
compared to $404.96 million at the end of 1998. The
growth of $58.04 million during 1999 included a net
increase of $6.60 million related to branch acquisition
and divesture activity. The majority of the growth,
$51.44 million, was internally generated by the
Corporation throughout its branch network.
The most significant impact on the growth of deposits
continues to come from the savings, money market and
interest-bearing demand deposit category. This
increase is directly attributable to the Corporation's
"Preferred Checking" account, which as of December 31,
1999, paid interest at a rate of 5.25% on balances over
$10,000. The Preferred Checking account product was
introduced in 1998 and, as of December 31, 1999,
accounts for $149 million of the Corporation's total
deposit base. Deposits over $100,000, totaling $35.31
million and $25.62 million at December 31, 1999 and
1998, respectively, consist primarily of stable,
governmental balances, and balances from retail
customers. There were no brokered deposits at December
31, 1999.
The Corporation continues to offer its premium-based
certificate of deposit program. Customers can elect to
receive one of several products in place of cash
interest payments 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 sports
enthusiasts 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 $1.48
million and $1.63 million at December 31, 1999 and
1998, 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 $5.6 million
in U.S. dollars at December 31, 1999. CANSAVE accounts
are available only to Canadian citizens who are
attracted to the accounts due to the generally low
interest rates paid by domestic Canadian banks.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Borrowings
As previously mentioned, the Corporation's branch
network is a relatively high cost network in comparison
to peer banking companies. Accordingly, the
Corporation continues to utilize alternative funding
sources to provide funds for investing and lending
activities. Borrowings increased during 1999 from
$23.27 million to $46.88 million. At December 31,
1999, $45.07 million of the borrowings were from the
Federal Home Loan Bank of Indianapolis with both fixed
and variable interest rates and stated maturities
ranging through 2009. The increase in borrowings
during the year was in accordance with the
Corporation's asset/liability management strategies to
match borrowings with assets of similar terms. 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 borrowings will continue to be a
significant part of the overall funding mix of the
Corporation.
Shareholders' Equity
See the discussion under "CAPITAL" below.
RESULTS OF OPERATIONS
Summary
Earnings continued to increase in 1999 through a
combination of increased net interest income and
noninterest income and improved efficiency in
operations. Net income was $6.36 million, $4.56
million, and $4.11 million for 1999, 1998, and 1997,
respectively. Net income for 1999 was 39.34% greater
than in 1998, while assets grew by 20.59% over the same
period. Basic earnings per share were $0.90 in 1999,
$0.65 in 1998 and $0.58 in 1997, an increase of 38.5%
from 1998 to 1999 and 12.1% from 1997 to 1998. This
increase in earnings per share is a result of
significant growth in earnings with continued decreases
in outstanding common stock as a result of the
Corporation's stock repurchases.
Net interest income is the primary source of earnings
growth, increasing to $21.95 million in 1999, from
$20.68 million and $20.07 million in 1998 and 1997,
respectively. The majority of the increase is
attributable to the increase in volume in the lending
and securities areas.
Noninterest income continues to provide a strong
secondary source of revenue for the Corporation,
increasing to $3.54 million in 1999, from $2.65 million
in 1998 and $1.64 million in 1997. Service fee income
from demand and savings products continues to grow at a
rapid pace, outpacing asset growth. Gains recognized
on the sale of the Rudyard and Cedarville offices and
on the sale of premises and equipment contributed to
the strong growth in noninterest income in 1999.
Income from noninterest sources will be an important
component of the Corporation's future earnings as the
expectation is net interest margin will continue to
tighten due to competitive pressures.
In addition to strong increases in net interest income
and noninterest income, management's strategy to
improve the efficiency in operations had a direct
impact on the earnings growth for 1999. Noninterest
expense decreased in 1999 to $15.94 million from $16.60
million in 1998, as compared to $14.80 million in 1997.
Noninterest expense decreased 4.01% while total assets
increased 20.59% for 1999. Management is proud of the
progress made on efficiency in 1999, and will continue
to manage noninterest expense in an effort to maintain
strong earnings growth for the Corporation.
Net Interest Income
Net interest income is a function of the difference, or
margin, between the average yield earned on interest-
earning assets and the average rate paid on interest-
bearing obligations. The net interest margin is
affected by economic and competitive factors that
influence rates, loan demand, and deposit flows. The
Corporation's net interest margin has declined during
1999, from 5.36% to 5.13%.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Net interest income increased $1.28 million on a tax
equivalent basis for 1999 as compared to 1998, and
$1.50 million on a tax equivalent basis for 1998 as
compared to 1997. The volume increases in both loans
and securities had the largest impact on interest
income during 1999. The loan volume increases were
largely a result of growth in the higher yielding
commercial loan and lease areas. This coupled with an
increase in interest rates during the last half of 1999
had a favorable impact on interest income during the
year. Management expects the higher yielding loan and
lease assets will continue to grow as the Corporation
expands its presence in the commercial centers within
its market area.
Total interest expense was $20.60 million in 1999,
compared to $17.82 million and $15.90 million in 1998
and 1997, respectively. The increase in interest
expense during 1999 was largely the result of increases
in the rates and volume of savings deposits and
borrowings, offset by a decrease in the rates and
volume of time deposits. The popularity of the
Preferred Checking account continues to provide the
Corporation an increasing source of funding. For
1999, interest expense on deposits represented 88.74%
of total interest expense. The remaining 11.26%
relates to the Corporation's alternative sources of
funding, namely borrowings and the trust preferred
securities. Management monitors the rates paid on
deposit products and evaluates alternative funding
sources on a regular basis in an effort to control
interest expense.
The following table presents the amount of interest
income from average interest-earning assets and the
yields earned on those assets, as well as the interest
expense on average interest-bearing obligations and the
rates paid on those obligations. All average balances
are daily average balances.
</TABLE>
<TABLE>
Years ended December 31,
1999 1998 1997
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning
assets:
Loans
receivable1,2,3 $434,723 $ 42,288 9.73% $403,563 $ 39,206 9.71% $352,079 $ 35,567 10.10%
Taxable
securities 16,040 1,195 7.45 4,543 436 9.60 14,801 1,030 6.96
Nontaxable
securities2 4,201 352 8.38 1,000 47 4.70 900 53 5.89
Other interest
-earning assets 11,310 665 5.88 12,810 747 5.83 7,009 373 5.32
Total interest-
earning assets 466,274 44,500 9.54 421,916 40,436 9.58 374,789 37,023 9.88
Interest-bearing
obligations:
Savings deposits 265,868 11,045 4.15 209,864 7,271 3.46 156,167 5,593 3.58
Time deposits 131,545 7,237 5.50 150,685 9,259 6.14 159,244 9,040 5.68
Borrowings 29,748 1,651 5.55 22,247 1,285 5.78 21,604 1,265 5.86
Subordinated
debentures 7,781 669 8.60 0 0 0.00 0 0 0.00
Total interest-
bearing
obligations 434,942 20,602 4.76 382,796 17,815 4.65 337,015 15,898 4.72
Net interest
income $ 23,898 $ 22,621 $ 21,125
Net interest
rate spread 4.78% 4.93% 5.16%
Net earning
assets $ 31,332 $ 39,120 $ 37,774
Net yield on
average interest-
earning assets 5.13% 5.36% 5.64%
Average interest-
earning assets
to average
interest-bearing
obligations 1.07X 1.10X 1.11X
</TABLE>
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 securities
and loans has been adjusted to a tax equivalent basis.
3 Interest income on loans includes loan fees.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the dollar amount of
changes in interest income and interest expense for
major components of interest-earning assets and
interest-bearing obligations. It distinguishes between
changes related to higher or lower outstanding balances
and changes due to the levels and changes in interest
rates. For each category of interest-earning assets
and interest-bearing obligations, information is
provided for changes attributable to (i) changes in
volume (i.e. changes in volume multiplied by old rate)
and (ii) changes in rate (i.e. changes in rate
multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume, which
cannot be segregated, have been allocated
proportionately to the change due to volume and the
change due to rate.
Years ended December 31,
1999 vs. 1998 1998 vs. 1997
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $3,031 $ 51 3,082 $5,043 $(1,404) 3,639
Taxable securities 877 (118) 759 (889) 295 (594)
Nontaxable securities 245 60 305 5 (11) (6)
Other interest-earning assets (88) 6 (82) 335 39 374
Total interest-earning
assets $4,065 $ (1) 4,064 $4,593 $(1,180) 3,413
Interest-bearing
obligations:
Savings deposits $2,162 1,612 3,774 $1,866 $ (188) 1,678
Time deposits (1,109) (913) (2,022) (502) 721 219
Borrowings 327 39 366 37 (17) 20
Subordinated debentures 669 0 669 0 0 0
Total interest-bearing
obligations $2,049 $ 738 2,787 $1,401 $ 516 1,917
Net interest income $1,277 $1,496
Provision for Loan Losses
The Corporation maintains the allowance for loan losses
at a level considered adequate to cover losses inherent
in the loan portfolio. The Corporation records a
provision for loan losses necessary to maintain the
allowance at an adequate level after considering
factors such as loan charge-offs and recoveries,
changes in the loan portfolio composition, loan growth,
and other economic factors as more fully described in
Note 1 to the accompanying financial statements. The
increase in the provision for loan losses to $1.46
million in 1999 is a direct result of the strong loan
growth during 1999. Net charge-offs remained stable
and the quality of the loan portfolio continued to
improve, as nonperforming and impaired loans decreased
in 1999 as compared to 1998. The allowance for loan
losses as a percentage of total loans remained stable
at 1.47% at December 31, 1999 compared to 1.48% at
December 31, 1998 and 1.50% at December 31, 1997.
Noninterest Income
Noninterest income was $3.54 million, $2.65 million,
and $1.64 million in 1999, 1998, and 1997,
respectively. The principal source of noninterest
income is service charges on deposit accounts. These
fees increased 32.93% in 1999 to $1.97 million from
$1.48 million in 1998. 1998 fees represent an increase
of 21.17% over the $1.22 million generated in 1997.
The increased fees relate to increases in the
Corporation's deposit accounts and revisions made to
the fee structure throughout the past several years.
In addition to service charges on deposit accounts,
1999 included a net gain of approximately $430,000 on
the sale of the Rudyard and Cedarville offices and a
gain of approximately $496,000 on the sale of land near
the Corporation's Traverse City office.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Noninterest Expense
Noninterest expense was $15.94 million, $16.60 million,
and $14.80 million in 1999, 1998, and 1997,
respectively. The decrease in 1999 is a result of an
ongoing internal restructuring process. Management not
only reduced total full-time equivalents by more than
50 over the past three years 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 results are a
focused and effective team built to serve the
customer's needs and more cost-effective operations.
The restructuring has effectively reduced total
operating expenses of the Corporation in comparison to
asset growth.
While annual increases in noninterest expense are
expected, a primary objective of management is to hold
the rate of increase below future asset growth. For
1999, noninterest expense actually decreased 4.01%
while total assets increased 20.59%. For 1998,
noninterest expense increased 12.20% over the previous
year while total assets increased 11.85% during that
same time period.
The overall decrease in 1999 as compared to 1998
includes decreases in salaries and employee benefits of
$206,000 or 3.13%, data processing of $197,000 or
12.56%, professional fees of $95,000 or 17.26%, and
courier costs of $276,000 or 50.52%. In addition,
amortization of intangible assets from acquisitions
decreased by approximately $91,000 primarily from the
discontinuation of amortization of previously
capitalized intangibles related to the Rudyard branch
sale in 1999. The above decreases were offset by an
increase in occupancy expense of $187,000. The overall
increase in 1998 as compared to 1997 was primarily the
result of increases in salaries and employee benefits
of $669,000 or 11.35%, data processing of $713,000 or
83.45%, occupancy of $214,000 or 9.68%, professional
fees of $105,000 or 23.37%, and telephone of $352,000
or 115.37%. The above increases were offset primarily
by a decrease in other expense of $594,000.
Federal Income Taxes
The provision for income taxes is 21.45% of income
before income tax in 1999, compared to 17.54% in 1998
and 25.47% in 1997. The difference between these rates
and the federal corporate income tax rate of 34% is
primarily due to tax-exempt interest earned on
securities and loans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Corporation's primary market risk exposure is
interest rate risk which management actively manages.
The Corporation has no market risk sensitive
instruments held for trading purposes. In the
relatively low interest rate environment which has been
in place the last several 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.
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 other strategies. Also, the rate of
interest rate changes can impact the actions taken
since the speed of change affects borrowers and
depositors differently.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Exposure to interest rate risk is reviewed on a regular
basis by the Corporation's Executive 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 and 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
maturity/repricing GAP analysis and a simulation model.
Presented below is the Corporation's maturity/repricing
GAP table at December 31, 1999.
GAP Table
(In Thousands)
1 - 90 91 - 365 1 - 5 Over 5
Days Days Years Years Total
Interest-earning assets
Deposits in other
financial institutions $ 679 $ 679
Securities 168 $ 80 $ 2,042 $ 41,053 43,343
Loans 211,166 98,579 85,602 71,275 466,622
Total interest-earning
assets 212,013 98,659 87,644 112,328 510,644
Interest-bearing
obligations
Savings, NOW, and
money market accounts 267,027 267,027
Certificates of deposit 38,472 65,323 47,484 1,086 152,365
Borrowings 20,000 17,643 4,196 5,039 46,878
Subordinated debentures 12,450 12,450
Total interest-bearing
obligations 337,949 82,966 51,680 6,125 478,720
GAP $(125,936) $ 15,693 $ 35,964 $106,203 $ 31,924
Cumulative GAP $(125,936) $(110,243) $(74,279) $ 31,924 $ 31,924
At December 31, 1999, the Corporation had a cumulative
liability GAP position of $110.24 million within the
one-year timeframe. This suggests that if market
interest rates decline in the next twelve months, the
Corporation has the potential to earn more net interest
income. Conversely, if market interest rates increase
in the next twelve months, the above GAP position
suggests the Corporation's net interest income would
decline due to interest-bearing obligations
maturing/repricing prior to interest-earning assets.
A limitation of the traditional GAP analysis is that it
does not consider the timing or magnitude of
noncontractual repricing or expected prepayments. In
addition, the GAP analysis treats savings, NOW and
money market accounts as maturing within 90 days, while
experience suggests that these categories of deposits
are actually comparatively resistant to rate
sensitivity. Considering the limitations of the
maturity/repricing GAP analysis, and based on the
results of other interest rate risk management tools
used by the Corporation, such as the simulation model,
management believes the Corporation is properly
positioned against significant changes in interest
rates without significantly altering operating results.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Foreign Exchange Risk
In addition to managing interest rate risk, management
also actively manages risk associated with foreign
exchange. The Corporation provides foreign exchange
services, makes loans to, and accepts deposits from,
Canadian customers primarily at its banking offices in
Sault Ste. Marie. To protect against foreign exchange
risk, the Corporation monitors the volume of Canadian
deposits it takes in and then invests these Canadian
funds in Canadian commercial loans and securities. As
of December 31, 1999, the Corporation had excess
Canadian assets of approximately $2.42 million (or
$1.64 million in U.S. dollars). Management feels the
exposure to short-term foreign exchange risk is minimal
and at an acceptable level for the Corporation.
Off-Balance-Sheet Risk
Derivative financial instruments include 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 and 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.
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.
LIQUIDITY
The Corporation's primary sources of funds include
principal payments on securities and loans, sales of
securities available for sale, sales of loans held for
sale, deposits from customers, borrowings from the
Federal Home Loan Bank and other sources, and the
issuance of common stock. While scheduled repayments
of securities and loans are predictable sources of
funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic
conditions and competition. In an attempt to minimize
the effects of such fluctuation in funding sources,
management has increased its borrowings from the
Federal Home Loan Bank. In addition, the Corporation
has ready access to significant sources of liquidity on
an almost immediate basis through arrangements with the
Federal Home Loan Bank and other financial
institutions. Management anticipates no difficulty in
maintaining liquidity at the levels necessary to
conduct the Corporation's day-to-day business
activities.
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 1999, 1998 and 1997, the Corporation raised
$0.48 million, $1.32 million and $1.87 million,
respectively, in capital through the issuance of common
stock related to the exercise of stock options and the
dividend reinvestment program. Net income exceeded
cash dividends by $5.07 million in 1999, $3.31 million
in 1998 and $2.92 million in 1997. These increases in
capital were offset by the retirement of common stock
of $3.50 million in 1999, $1.80 million in 1998 and
$0.83 million in 1997. The Corporation will continue
to repurchase common stock from time-to-time when
management believes such repurchases will enhance the
return to its common shareholders. Overall,
shareholders' equity increased by $1.35 million in 1999
and by $2.88 million in 1998.
During 1999, the Corporation formed a Delaware business
trust, North Country Capital Trust, solely to issue
capital, or trust preferred securities. Through this
entity, $12.45 million of trust preferred securities
were issued in 1999; the net proceeds were invested in
subordinated debentures issued to the trust by the
Corporation. The Federal Reserve Bank has accorded the
trust preferred securities Tier I capital treatment for
regulatory purposes. The ability to apply Tier I
capital treatment has positioned the Corporation for
future growth without diluting the common shareholder
base.
Should additional capital be required to take advantage
of expansion opportunities, management believes the
significant demand for the Corporation's common stock
could provide for additional capital to the extent that
such capital cannot be internally generated.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<PAGE>
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 financial
statements. Certain assets cannot be considered assets
for regulatory purposes. The Corporation's acquisition
intangibles are examples of such assets.
Presented below is a summary of the Corporation's
consolidated capital position in comparison to
regulatory requirements:
Tier I Tier I Total
Capital to Capital to Capital to
Average Risk Weighted Risk Weighted
Assets Assets Assets
Regulatory minimum for capital
adequacy purposes 4.0% 4.0% 8.0%
The Corporation:
December 31, 1999 8.4% 11.8% 13.0%
December 31, 1998 7.2% 9.4% 10.7%
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note 1 to the accompanying 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, 1999.
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 mentioned in the Letter to the Shareholders, the
Corporation will be engaging in the following exciting
new developments in the coming year:
* To increase the liquidity for North Country
Financial Corporation stock, effective April 18, 2000,
it is anticipated the Corporation will be listed on The
NASDAQ Market System under the symbol "NCFC."
* The Board of Directors approved, in December 1999,
the moving of the corporate headquarters to Traverse
City, Michigan. Management anticipates this will
enhance the ability of the Corporation to expand its
development in lower Michigan which in turn is
expected to increase the value of the Corporation's
common stock.
* In February 2000, the Corporation entered into an
agreement with Old Kent Bank to purchase banking
offices in Alanson and Glen Arbor. In addition to
acquiring these two offices, the Corporation is in the
process of establishing new offices in Cadillac and
Traverse City. These transactions, which are subject
to regulatory approval, are expected to be completed in
the second quarter of 2000.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
YEAR 2000 COMPLIANCE
Year 2000 was the term used to describe the fact that
many existing computer programs used only two digits to
identify a year in a date field. These programs were
designed and developed without considering the impact
of the change in the century. If not corrected, many
computer applications could have failed or created
erroneous results by or at the year 2000. The term
also refers to devices with imbedded technology that
are time sensitive and may fail to recognize year 2000
correctly. This issue affected virtually all companies
and organizations.
Since January 1997, the Corporation has reported the
status of its actions and plans for the transition to
the year 2000. The Corporation is pleased to report
that the transition to year 2000, as of the present
time, was successful and that there have been no
material adverse consequences during the transition to
its systems or customers.
The Corporation has spent approximately $1 million on
year 2000 compliance. Replacement equipment and
software were capitalized or expensed in accordance
with the Corporation's normal accounting policies. The
effect of writing off the net book value of equipment
and software that was not year 2000 compliant is
included in the above estimate. Year 2000 related
costs incurred in 2000 are estimated to be
insignificant.
<PAGE>
Officers and Directors
NORTH COUNTRY FINANCIAL CORPORATION
Ronald G. Ford, Chairman and Chief Executive Officer
Michael C. Henricksen, Vice Chairman
Thomas G. King, Vice Chairman
Sherry L. Littlejohn, President, Chief Operating Officer and Treasurer
Paulette M. Demers, Secretary
NORTH COUNTRY FINANCIAL CORPORATION BOARD OF DIRECTORS
PAUL W. ARSENAULT
President, Concepts Consulting, Inc.
BERNARD A. BOUSCHOR
Tribal Chairman, Sault Tribe of Chippewa Indians
C. RONALD DUFINA
Balsam Shop, Inc., Ramas, Inc., HRD, Inc., Island Leasing, Inc.,
Mackinac Island Hospitality, Inc.
RONALD G. FORD
Chairman and Chief Executive Officer, North Country Financial Corporation,
North Country Bank and Trust, North Country Capital Trust,
First Manistique Agency, NCB Real Estate Company,
First Rural Relending Corporation
STANLEY J. GEROU II
Owner, Days Inn & Comfort Inn (Munising),
Gerou Excavating
MICHAEL C. HENRICKSEN
Owner, Satellite Services
WESLEY W. HOFFMAN
President, Wesley W. Hoffman and Associates, P.C.
THOMAS G. KING
President, Top of Lake Investment Company
JOHN D. LINDROTH
President, Superior State Agency, Inc.
SHERRY L. LITTLEJOHN
President and Chief Operating Officer, North Country Bank and Trust
JOHN P. MILLER
Retired, Peoples Store Co., Inc.
<PAGE>
Officers and Directors
NORTH COUNTRY BANK AND TRUST
Chairman and Chief Executive Officer - Ronald G. Ford, Chairman and Chief
Executive Officer, North Country Financial Corporation, North Country Bank
and Trust, North Country Capital Trust, First Manistique Agency,
NCB Real Estate Company First Rural Relending Corporation
Vice Chairman - John D. Lindroth, President, Superior State Agency, Inc.
Vice Chairman - Sherry L. Littlejohn, President and
Chief Operating Officer, North Country Bank and Trust
Vice Chairman - John P. Miller, Retired, Peoples Store Co., Inc.
Paul W. Arsenault, Owner, Concepts Consulting
Dennis Bittner, Owner, Bittner Engineering
Bernard A. Bouscher, Tribal Chairman, Sault Tribe of Chippewa Indians
C. Ronald Dufina, Owner, 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 W. Hoffman, President, Wesley W. Hoffman and Associates, P.C.
Kathy Hyland, Owner, Floor Covering Brokers
G. David Jukuri, Owner, Century 21 Agency
Thomas G. King, President, Top of Lake Investment Company
Steve Madigan, Owner, Madigan-Pingatore Insurance Services
Richard A. Paidl, Manager, Stephenson Marketing Association
Spencer Shunk, Owner, Shunk Furniture
Glen Tolksdorf, Owner, Tolksdorf Realty
NORTH COUNTRY FINANCIAL GROUP
Ronald G. Ford, Chairman
Michael Hark, President and Chief Executive Officer
Paul Hinkson, Vice President and Secretary
NORTH COUNTRY CAPITAL TRUST
Ronald G. Ford, Administrative Trustee
Sherry L. Littlejohn, Administrative Trustee
Paul Hinkson, Administrative Trustee
FIRST RURAL RELENDING COMPANY
Ronald G. Ford, President
Sherry L. Littlejohn, Executive Vice President
Paulette M. Demers, Secretary/Treasurer
NCB REAL ESTATE COMPANY
Ronald G. Ford, President
Sherry L. Littlejohn, Executive Vice President
Paulette M. Demers, Secretary/Treasurer
FIRST MANISTIQUE AGENCY
Ronald G. Ford, President
Sherry L. Littlejohn, Executive Vice President
Paulette M. Demers, Secretary/Treasurer
<PAGE>
Officers and Directors
COMMUNITY BANK BOARD DIRECTORS
Escanaba/Marquette/Iron Mountain
Rich Rossway Dave Johnson Michele Butler
Matt Surrell Steve Pelto Brian Steinhoff
Lloyd Houle Heidi Johnson Lyle Berro
Kevin Romitti Kerry Sorensen Larry Seratti
Copper Country
Robert Nara Lawrence Julio Glen Tolksdorf
Delano Harma John Hawley Steve Vairo
Traverse City
Paul Reszka Tom Taylor Kent Rozycki
Michael Witkop Michael Niedzielski Daune Weiss
Phil Potvin Fred Salisbury Sr.
<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
3530 North Country Drive
Traverse City, Michigan 49684
231-929-5600
WORLD WIDE WEB SITE
http://www.ncbt.com
Exhibit 21 - Subsidiaries of Registrant
North County Bank and Trust - 100% owned
(incorporated as a Michigan banking corporation)
First Manistique Agency - 100% owned
(incorporated as a Michigan corporation)
First Rural Relending Company - 100% owned
(incorporated as a Michigan corporation)
North Country Financial Group - 100% owned
(incorporated as a Michigan corporation)
North Country Capital Trust - 100% owned
(organized as a Delaware business trust)
NCB Real Estate Company - 100% owned
(incorporated as a Michigan corporation)
All subsidiaries are directly owned by North
Country Financial Corporation, except NCB Real Estate
Company, which is owned directly by North Country Bank
and Trust.
Exhibit 23 - Consent of Independent Public Accountants
Independent Auditor's Consent
We consent to the incorporation by reference in
the Registration Statement on Form S-3 (No. 33-61533)
and the Registration Statements of Form S-8 (Nos. 333-
75959 and 333-75961) of North Country Financial
Corporation of our report dated January 28, 2000,
relating to the consolidated balance sheets of North
Country Financial Corporation and Subsidiaries, and the
related consolidated statements of income, changes in
shareholders' equity, and cash flows, which report is
included in the 1999 Annual Report 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 24, 2000
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<FISCAL-YEAR-END> DEC-31-1999
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