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.
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
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
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.
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.
[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.
Independent Auditor's Report
INDEPENDENT AUDITOR'S REPORT
TO THE SHAREHOLDERS OF
NORTH COUNTRY FINANCIAL CORPORATION
TRAVERSE CITY, MICHIGAN
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
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.
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.
Consolidated Statements of
Changes in Shareholders' Equity
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Income (Deficit) Total
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.
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)
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.
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.
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.
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.
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
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.
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
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.
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
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
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.
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.
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%
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.
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.
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
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.
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.
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
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
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
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
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
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
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.
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.
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.
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.
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%.
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.
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
(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
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.
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.
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.
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.
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
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.
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.
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.
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
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.
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