SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement.
[ ] Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2)).
[ ] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting materials pursuant to Rule 14a-11(c) or Rule 14a-12.
NORTH COUNTRY FINANCIAL CORPORATION
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (check appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of security to which transaction applies:
________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
________________________________________________________________
(5) Total fee paid:
________________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
________________________________________________________________
(3) Filing Party:
________________________________________________________________
(4) Date Filed:
________________________________________________________________
[NORTH COUNTRY FINANCIAL CORPORATION LOGO]
Dear Shareholder:
You are cordially invited to attend a special shareholders' meeting of
North Country Financial Corporation ("North Country") to be held on _______ ___,
2004, at ___ p.m., local time, at the Comfort Inn, 726 East Lakeshore Drive,
Manistique, Michigan 49854.
At the special meeting, you will be asked to consider and vote upon
various proposals to implement the transactions contemplated by the Stock
Purchase Agreement, dated as of August 10, 2004, as amended (the "Stock Purchase
Agreement"), between us and NCFC Recapitalization, LLC. The Stock Purchase
Agreement provides for the private sale of our common shares to new investors
for approximately $30 million, and the net proceeds from the sale will be used
to recapitalize North Country and our subsidiary bank, North Country Bank &
Trust, and complete the other transactions contemplated by the Stock Purchase
Agreement. Shareholder approval of the Stock Purchase Agreement and related
proposals is a condition to the closing under the Stock Purchase Agreement.
Without the recapitalization of the Bank through the transactions
contemplated by the Stock Purchase Agreement, we will be unable to comply with
the capital requirements contained in the March 2003 Cease and Desist Order that
was imposed on us by bank regulators. We expect to continue to incur losses as a
result of our weakened financial condition which will further erode our capital.
Moreover, we believe that our ongoing failure to comply with the Cease and
Desist Order's capital requirements and our continued financial deterioration
will likely cause the Federal Deposit Insurance Corporation to place the Bank
into receivership. If that happens, we will have no alternative but to file for
protection under the United States Bankruptcy Code, potentially leaving little
or no value for existing shareholders.
Our board of directors has determined that the sale of shares pursuant to
the Stock Purchase Agreement, as well as the other transactions contemplated by
it, are fair to, and in the best interests of, our shareholders and recommends
that you vote "FOR" approval of the Stock Purchase Agreement and the related
proposals set forth in our notice of special meeting and proxy statement. Austin
Associates, LLC, the board's financial advisor, has given us an opinion to the
effect that, as of the date of the opinion and based upon the considerations
described in the opinion, the transactions contemplated by the Stock Purchase
Agreement are fair, from a financial point of view, to us and our shareholders.
In addition to shareholder approval, recapitalization of North Country and
the Bank, and the related transactions, are subject to a number of other
conditions contained in the Stock Purchase Agreement, including (1) the receipt
of commitments from investors to purchase $30 million of our common shares in
the private placement, (2) our repurchase from the current holders of all of our
outstanding trust preferred securities and (3) the willingness of our bank
regulators to lift the Cease and Desist Order upon completion of the Bank's
recapitalization. Your vote "FOR" approval of the Stock Purchase Agreement and
our other proposals is required for us to be able to recapitalize the Bank. This
will allow us to focus on operating our business and creating value for
shareholders. Assuming all of the conditions in the Stock Purchase Agreement are
satisfied, the closing under it is expected to occur during the fourth quarter
of 2004.
We urge you to read carefully the accompanying proxy statement which
contains a detailed description of us, the recapitalization transactions, our
business plan, our current troubled financial condition and related matters,
including the other proposals requiring shareholder approval.
Whether or not you plan to attend the special meeting personally, please
complete, sign and date the enclosed proxy card and mail it as soon as possible
in the enclosed postage-paid envelope. If you
attend the special meeting, you may vote in person if you wish, even if you have
previously mailed in your proxy card.
Your vote is very important. We cannot obtain the funds needed to
recapitalize the Bank unless shareholders vote to approve the Stock Purchase
Agreement and the other proposals described in our proxy statement.
We thank you for your prompt attention to this matter and appreciate your
support.
Sincerely,
C. James Bess
President and Chief Executive Officer
IMPORTANT!
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOUR VOTE IS VERY
IMPORTANT.
IN ORDER TO ENSURE THAT YOUR SHARES ARE VOTED AT THE SPECIAL MEETING, YOU
ARE URGED TO VOTE BY COMPLETING, SIGNING AND DATING THE ENCLOSED PROXY CARD AND
RETURNING IT AS SOON AS POSSIBLE IN THE ACCOMPANYING POSTAGE PREPAID RETURN
ENVELOPE.
HOLDERS IN MANY BANKS AND BROKERAGE FIRMS WILL BE ABLE TO VOTE BY INTERNET
OR BY TOLL-FREE TELEPHONE. INSTRUCTIONS FOR INTERNET AND TELEPHONE VOTING IN
MOST CASES WILL BE INCLUDED ON THE ENCLOSED VOTING FORM THAT HAS BEEN PROVIDED
BY YOUR BROKER OR BANK. WE URGE YOU TO TAKE ADVANTAGE OF THE OPPORTUNITY TO VOTE
YOUR SHARES BY FOLLOWING THE INSTRUCTIONS ON THE VOTING FORM FOR USING THE
INTERNET OR TOLL-FREE TELEPHONE.
IF YOU NEED ASSISTANCE VOTING YOUR SHARES, PLEASE CALL: C. JAMES BESS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, NORTH COUNTRY FINANCIAL CORPORATION, AT
(800) 200-7032, OR MORROW & CO., INC. AT (800) 607-0088.
2
NORTH COUNTRY FINANCIAL CORPORATION
130 SOUTH CEDAR STREET
MANISTIQUE, MICHIGAN 49854
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD___________, 2004
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of North
Country Financial Corporation will be held on _________, 2004, at _____ p.m.
(local time) at the Comfort Inn, 726 East Lakeshore Drive, Manistique, Michigan
49854, for the purpose of considering and voting upon the following matters as
more fully described in the accompanying proxy statement:
1. PROPOSAL ONE. Approval of the sale for approximately $30 million of
additional shares of our common stock pursuant to, and in accordance with the
terms and conditions of, the Stock Purchase Agreement, dated as of August 10,
2004, as amended, between North Country and NCFC Recapitalization, LLC.
2. PROPOSAL TWO. Approval of an amendment to North Country's Restated
Articles of Incorporation to reduce the number of North Country's outstanding
common shares through a 1-for-20 reverse stock split, with all fractional shares
being replaced with one whole common share.
3. PROPOSAL THREE. Approval of an amendment to North Country's Restated
Articles of Incorporation to change the name of North Country to "Mackinac
Financial Corporation."
4. PROPOSAL FOUR. Approval of amendments to the North Country 2000 Stock
Incentive Plan.
The board of directors has fixed__________, 2004, as the record date for
the determination of shareholders entitled to notice of and to vote at the
meeting or any postponement or adjournment of the meeting.
By Order of the Board of Directors
/s/ C. James Bess
C. James Bess
President and Chief Executive Officer
Dated: _____________, 2004
YOUR VOTE IS IMPORTANT. EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE
DATE AND SIGN THE ENCLOSED PROXY FORM, INDICATE YOUR CHOICE WITH RESPECT TO THE
MATTERS TO BE VOTED UPON, AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NOTE
THAT IF THE STOCK IS HELD IN MORE THAN ONE NAME, ALL PARTIES MUST SIGN THE PROXY
FORM.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE RECAPITALIZATION AND SPECIAL MEETING............... 1
INTRODUCTION....................................................................... 4
SUMMARY OF THE RECAPITALIZATION.................................................... 4
Parties................................................................... 4
The Recapitalization...................................................... 5
The Proposals............................................................. 8
The Special Meeting....................................................... 13
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION......................... 14
SELECTED FINANCIAL INFORMATION..................................................... 16
HISTORICAL MARKET PRICE AND DIVIDENDS DATA......................................... 17
NORTH COUNTRY...................................................................... 18
Business.................................................................. 18
Regulatory Issues; the Cease and Desist Order............................. 19
Litigation................................................................ 20
Business Plan............................................................. 25
Overview......................................................... 25
Management of North Country Following the Recapitalization....... 25
North Country's New Business Plan................................ 26
Risk Management.................................................. 29
Financial Implications of Business Plan.......................... 30
PRINCIPAL SHAREHOLDERS OF NORTH COUNTRY ........................................... 30
THE SPECIAL MEETING................................................................ 32
Introduction.............................................................. 32
Record Date............................................................... 32
Voting of Proxies......................................................... 32
Solicitation of Proxies................................................... 33
First Mailing Date........................................................ 33
Revoking Your Proxy....................................................... 33
Votes Required to Approve the Proposals................................... 33
PROPOSAL 1 - APPROVAL OF THE STOCK PURCHASE AGREEMENT AND RECAPITALIZATION......... 35
Overview.................................................................. 35
Background of and Reasons for the Proposal................................ 35
Recommendation of the Board of Directors.................................. 39
Vote Required............................................................. 39
Effect on Current Shareholders............................................ 39
i
Risks Related to the Proposed Recapitalization............................ 39
The Stock Purchase Agreement.............................................. 42
Representations and Warranties................................... 42
Covenants........................................................ 43
Conditions to the Closing........................................ 45
Waiver, Amendment and Termination................................ 48
Expenses and Termination Fees.................................... 49
Indemnification.................................................. 50
Use of Proceeds........................................................... 50
Capitalization............................................................ 50
Opinion of North Country's Financial Advisor.............................. 52
Interests of Certain Persons in the Recapitalization ..................... 60
Employment and Option Agreements................................. 60
Change in Control Payments................................................ 63
Other Interests.................................................. 64
Description of the Capital Stock.......................................... 65
Preferred Stock.................................................. 65
Common Shares.................................................... 65
Anti-Takeover Provisions......................................... 66
PROPOSAL 2 - APPROVAL OF REVERSE STOCK SPLIT ...................................... 70
Overview.................................................................. 70
Background of and Reasons for the Proposal................................ 71
Vote Required............................................................. 72
Recommendation of Our Board of Directors.................................. 72
Reservation of Rights..................................................... 72
Exchange of Certificates and Elimination of Fractional Share Interests.... 72
Effect on Current Shareholders............................................ 73
Federal Income Tax Consequences of the reverse stock split................ 74
No Dissenters' Rights..................................................... 75
PROPOSAL 3 - APPROVAL OF CHANGE IN NORTH COUNTRY'S NAME............................ 75
PROPOSAL 4 - AMENDMENT OF 2000 STOCK INCENTIVE PLAN............................... 76
Introduction.............................................................. 76
Summary of the 2000 Plan.................................................. 77
Federal Income Tax Aspects of the 2000 Plan............................... 78
Other Matters............................................................. 79
Approval of 2000 Plan Proposal............................................ 79
Reservation of Rights..................................................... 79
Remuneration of Directors................................................. 80
Executive Compensation.................................................... 81
Employment and Consulting Agreements...................................... 82
Option Grants in Last Fiscal Year......................................... 84
Aggregate Stock Option Exercises in 2003 and Year-End Option Values....... 85
Equity Compensation Plan Information...................................... 86
Compensation Committee Interlocks and Insider Participation............... 86
ii
SHAREHOLDER PROPOSALS.............................................................. 86
EXPERTS............................................................................ 87
OTHER MATTERS...................................................................... 87
WHERE YOU CAN FIND MORE INFORMATION................................................ 87
INFORMATION INCORPORATED BY REFERENCE.............................................. 87
APPENDICES -
A - STOCK PURCHASE AGREEMENT
B - FAIRNESS OPINION
C - CERTIFICATE OF AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
D - AMENDMENT TO 2000 STOCK INCENTIVE PLAN
E - ANNUAL REPORT ON FORM 10-K
F - QUARTERLY REPORT ON FORM 10-Q/A
iii
QUESTIONS AND ANSWERS ABOUT THE RECAPITALIZATION AND SPECIAL MEETING
Q. WHY AM I RECEIVING THIS DOCUMENT?
A. We and our subsidiary bank, North Country Bank & Trust, are seriously
undercapitalized and in violation of applicable banking regulations and a
Cease and Desist Order that was entered against us in March 2003. In an
effort to preserve for our shareholders North Country's remaining value,
we have entered into a Stock Purchase Agreement with NCFC
Recapitalization, LLC, which provides for the sale by us of our common
stock to new investors for $30 million as well as related transactions. If
the sale of shares is completed, we will be able to recapitalize North
Country and the Bank, which should allow us to satisfy the capital
requirements of bank regulations and the Cease and Desist Order, and will
help us to rebuild our business. The Stock Purchase Agreement is described
in this proxy statement and is attached and incorporated into this
document as Appendix A.
To accomplish this recapitalization, however, North Country's shareholders
must vote to approve the Stock Purchase Agreement and each of the other
proposals described in this document. We are holding a special meeting of
shareholders to obtain these approvals. This document contains important
information about the Stock Purchase Agreement, the related proposals and
the special meeting of North Country shareholders. You should read it
carefully. The enclosed voting materials allow you to vote your shares
without attending the special meeting.
If the Stock Purchase Agreement and the other proposals described in this
document are approved and all other conditions set forth in the Stock
Purchase Agreement are satisfied or waived, then:
- we will issue shares of our common stock to new investors in
exchange for $30 million in gross proceeds which will be used
to recapitalize us and the Bank;
- the new investors will own more than 85% of our outstanding
common stock;
- our name will change to Mackinac Financial Corporation; and
- we will have new senior management and a reconstituted board
of directors.
This proxy statement is first being mailed to shareholders on
______________, 2004.
Q. WHAT IS NCFC RECAPITALIZATION, LLC?
A. NCFC Recapitalization is an entity organized by Paul D. Tobias and Eliot
R. Stark solely to facilitate our and the Bank's recapitalization through
issuance to new investors of $30 million of additional common shares. NCFC
Recapitalization will act on its behalf and on behalf of investors under
the Stock Purchase Agreement with respect to matters such as the
satisfaction or waiver of conditions to the investors' obligations to
close the transactions under the Stock Purchase Agreement. Mr. Tobias has
committed to invest approximately $300,000 and Mr. Stark approximately
$100,000 pursuant to the Stock Purchase Agreement. Mr. Tobias will become
chairman of the board and chief executive officer of North Country and
chairman of the board of the Bank and Mr. Stark will become chief
financial officer and a director of North Country and the Bank upon
completion of the Recapitalization.
1
Q. WHAT WILL HAPPEN TO MY COMMON SHARES?
A. To maintain our listing on the Nasdaq SmallCap Market, as well as to
provide a sufficient number of authorized shares to issue to new
investors, we are asking shareholders to approve a 1-for-20 reverse stock
split that will result in your owning, on a post-split basis, one North
Country common share for every twenty shares that you now own. This
reverse stock split alone will not change your proportionate ownership
interest in North Country, with the exception that shareholders who would
have a fractional share as a result of the reverse stock split will each
instead receive a whole share in exchange for the fractional share. Solely
as a result of this reverse stock split, the per share book value of your
post-split shares will be approximately twenty times the pre-split per
share book value. We also expect the trading value of our stock to
increase as a result of this action.
Q. WILL MY PERCENTAGE OWNERSHIP BE AFFECTED?
A. The Stock Purchase Agreement provides a formula under which more than 85%
of the total North Country common shares will be owned by the new
investors. Although the ownership percentage of all current shareholders
will be reduced as a result, current shareholders will own an interest in
a recapitalized entity that is well-capitalized and not in immediate
danger of either failing or being taken over by banking regulators.
Q. WHAT DO I NEED TO DO NOW?
A. After you have carefully read this document, please indicate on your proxy
card how you want to vote on each proposal. Sign and date the proxy card
and mail it in the enclosed prepaid return envelope marked "Proxy" as soon
as possible, so that your common shares may be represented and voted at
the special meeting.
To complete the sale of shares to new investors, the holders of at least a
majority of the votes cast must vote to approve the Stock Purchase
Agreement and the amendments to the North Country 2000 Stock Incentive
Plan, and holders of a majority of the issued and outstanding common
shares must vote to approve the reverse stock split and the change of our
name to "Mackinac Financial Corporation." OUR BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF ALL THE PROPOSALS.
Q. ARE THERE ANY RISKS THAT I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR
APPROVAL OF THE STOCK PURCHASE AGREEMENT AND THE OTHER PROPOSALS?
A. Yes. You should read and carefully consider the risk factors set forth in
the section of this document titled "Risks Related to the
Recapitalization" beginning on page 39.
Q. WHAT HAPPENS IF I DO NOT SEND IN MY PROXY CARD, IF I DO NOT INSTRUCT MY
BROKER TO VOTE MY COMMON SHARES OR IF I ABSTAIN FROM VOTING?
A. If you do not send in your proxy card, if you do not instruct your broker
to vote your common shares or if you abstain from voting, it will have the
same effect as a vote "against" approval of the reverse stock split and
our name change, both of which must be approved to close under the Stock
Purchase Agreement.
2
Q. IF MY BROKER HOLDS MY COMMON SHARES IN "STREET NAME," WILL MY BROKER VOTE
MY COMMON SHARES FOR ME?
A. Your broker cannot vote your common shares without specific instructions
from you. Unless you follow the directions provided by your broker
regarding how to instruct your broker to vote your common shares, your
common shares will not be voted on the proposals.
Q. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A. Yes. You can change your vote at any time before your proxy is voted at
the special meeting. Just send in a later-dated, signed proxy card or a
written notice of revocation to the person to whom you submitted your
proxy card before the special meeting. You can also change your vote by
attending the special meeting and voting in person. Your attendance at the
special meeting alone will not revoke your proxy. If you have instructed
your broker to vote your common shares, you must follow the directions
received from your broker to change those instructions.
Q. WHEN DO YOU EXPECT TO COMPLETE THE RECAPITALIZATION?
A. We are working toward completing the recapitalization of North Country and
the Bank during the fourth quarter of 2004. We anticipate completing the
sale of shares pursuant to the Stock Purchase Agreement shortly after the
special meeting is held, assuming that shareholders approve all proposals.
Q. WHO CAN ANSWER ANY OTHER QUESTIONS I MAY HAVE?
A. If you have questions, you may contact us at our principal executive
offices:
North Country Financial Corporation
130 S. Cedar St.
Manistique, MI 49854
Attn: C. James Bess
President and Chief Executive Officer
Phone: (800) 200-7032
Facsimile Number: (906) 293-5612
3
INTRODUCTION
The proposed Recapitalization consists of a series of related transactions
designed to stabilize and reverse our declining financial condition, provide us
and North Country Bank & Trust (the "Bank") with sufficient capital to implement
a new business plan free from the restrictions of the Cease and Desist Order
under which it currently operates, and provide us and the Bank with experienced
senior management to carry out our business plan.
The Stock Purchase Agreement dated as of August 10, 2004, as amended (the
"Stock Purchase Agreement"), which has been approved by our board of directors,
provides one of the key elements of the Recapitalization - the sale of
additional shares of our common stock to new investors for approximately $30
million. We will use the net proceeds we receive from the sale of our common
stock to pay various costs associated with the Recapitalization and to implement
the other elements of the Recapitalization, including retirement of our
outstanding trust preferred securities at a discount, a contribution of
additional capital to the Bank to bring it into compliance with the requirements
of the Cease and Desist Order and funding the proposed expansion of the Bank's
operations into Oakland County, Michigan.
The completion of the sale of shares pursuant to the Stock Purchase
Agreement is subject to several conditions, including shareholder approval of
the sale of shares pursuant to the Stock Purchase Agreement, a 1-for-20 reverse
stock split of our outstanding common stock, a name change for North Country and
an amendment to the our 2000 Incentive Option Plan to provide additional options
that can be granted to, among others, two key individuals who will join us as
our chief executive officer and chief financial officer, respectively
(collectively, the "Proposals").
What follows is a summary of the proposed Recapitalization and a
description of the Proposals on which you are being asked to vote in order to
complete it. This summary may not contain all of the information that is
important to you. For a more complete understanding of the Recapitalization, and
the Proposals, transactions and the other information contained in this proxy
statement, you should read this entire proxy statement carefully, as well as the
additional documents to which it refers. A copy of the Stock Purchase Agreement
is attached as Appendix A to this proxy statement. For instructions on obtaining
more information, see "WHERE YOU CAN FIND MORE INFORMATION" on page 87.
SUMMARY OF THE RECAPITALIZATION
PARTIES
North Country Financial Corporation North Country, a Michigan corporation, is a
(see page 18) registered bank holding company which owns
and operates one community bank, the Bank.
The Bank has nine branch offices in
Michigan's Upper Peninsula and three branch
offices in the northern part of Michigan's
Lower Peninsula.
4
The Bank is a "troubled institution" within
the meaning of FDIC regulations, and
subject to a Cease and Desist Order issued
by federal and state bank regulators. The
Bank has substantially complied with the
requirements of the Cease and Desist Order,
but to do so, it has shrunk its deposit
base and loan portfolio and otherwise
limited its operations, including through
the recent sales of five branches. In the
process, the Bank has incurred losses
through June 30, 2004, and is likely to
continue to do so in the foreseeable
future. Currently, we fall below, and have
little possibility of achieving in the
foreseeable future, the minimum capital
requirements of the Cease and Desist Order
and applicable bank regulatory
requirements.
NCFC Recapitalization, LLC NCFC Recapitalization, LLC was formed for
(see page 1) the principal purpose of entering into the
Stock Purchase Agreement and acting as
attorney in fact for investors under this
agreement. NCFC Recapitalization will not
conduct any business other than that
associated with facilitating the
Recapitalization through the Stock Purchase
Agreement.
Investors Keefe, Bruyette & Woods, Inc. and Howe
(see page 42) Barnes Investments, Inc. have been retained
by North Country as its placement agents to
assist in the private placement of North
Country common stock for approximately $30
million to finance the Recapitalization as
contemplated by the Stock Purchase
Agreement. It is anticipated that the
offering will be made to a limited number
of institutional and individual investors.
Upon acceptance of their subscriptions,
prospective investors will become parties
to the Stock Purchase Agreement. No
investor or group of investors will be
entitled to purchase shares of common stock
in an amount that would result in such
investor or group owning more than 9.9% of
North Country's common stock after
completion of the offering.
THE RECAPITALIZATION
The Recapitalization consists of several transactions and events which
will occur at the time of, or in certain cases after, the closing under the
Stock Purchase Agreement. The principal transactions and events are:
5
Sale of Common Stock The sale of our common stock to investors
(see page 35) for approximately $30 million. The number
of shares and price per share to be paid by
the new investors will be based on the
number of shares of our common stock
outstanding at the time of the closing and
our equity (as adjusted as provided in the
Stock Purchase Agreement) at the end of the
month preceding the closing. We anticipate
that following the closing, the new
investors will own 2,062,640 or more shares
of our outstanding common stock (adjusted
for the proposed 1-for-20 reverse stock
split), which will be at least 85% of the
outstanding shares, for which they will
have paid $14.60 per share or less
(adjusted for the proposed 1-for-20 reverse
stock split).
Employment Arrangements To assist in implementing our business plan
(see page 60) following the Recapitalization, we have
entered into employment agreements with
Paul D. Tobias and Eliot R. Stark, the two
principals of NCFC Recapitalization, and C.
James Bess, our current chief executive
officer. These employment agreements are
included as Schedule 5-1 to 5-3 to the
Stock Purchase Agreement. Effective at the
closing under the Stock Purchase Agreement,
Mr. Tobias will become North Country's
chief executive officer and Mr. Stark will
become its chief financial officer, each
for a minimum period of three years, and
Mr. Bess will become president of the Bank
for a minimum period of 18 months.
Messrs. Tobias, Stark and Bess will be paid
annual base compensation of $225,000,
$200,000 and $250,000, respectively, plus
possible bonuses, and we will provide each
with health insurance and other benefits
and pay or reimburse each for automobile
and certain other living expenses. Under
the terms of Mr. Bess' existing employment
agreement (which will terminate at the
closing under the Stock Purchase
Agreement), he will be entitled to payments
totaling $1,231,740 when the Cease and
Desist Order is terminated as part of the
Recapitalization.
Stock Options The employment agreements with Mr. Tobias
(see page 60) and Mr. Stark also provide that they will
be awarded options under our 2000 Stock
Incentive Plan to purchase shares of our
common stock at any time
6
during the 10-year period following the
closing under the Stock Purchase Agreement.
The options will vest immediately, and will
permit Mr. Tobias to purchase up to 4.375%,
and Mr. Stark up to 3.125%, of that number
of shares of our common stock that are
issued and outstanding immediately
following the sale of shares to the new
investors under the Stock Purchase
Agreement. The exercise price of the
options will equal the purchase price per
share paid by investors under the Stock
Purchase Agreement. We estimate that the
number of our shares covered by options for
Mr. Tobias will be approximately 105,595
and the number for Mr. Stark will be
75,425, and that the exercise price for
each option will be no greater than $14.60
per share (both the number and exercise
price are adjusted for the proposed
1-for-20 reverse stock split).
Name Change Our board of directors has determined that
(see page 75) implementation of our business plan will be
enhanced by changing our corporate name to
"Mackinac Financial Corporation."
Reconstituted Board The Stock Purchase Agreement provides that,
(see page 45) at the closing, our board of directors will
be made up of two existing directors and
seven persons designated by NCFC
Recapitalization. To implement this
provision, it is anticipated that all
existing directors will resign, except for
Messrs. Bess and Lindroth, and Messrs.
Tobias and Stark will be appointed by the
board of directors to fill two of the
vacancies created by the resignations. In
addition, it is anticipated that five
additional persons will be added to the
board of directors by a similar process, so
that following the closing, a majority of
the board of directors will be persons
designated by NCFC Recapitalization who
meet the "independence" requirements of the
Nasdaq and, to the extent applicable, those
under the Securities Exchange Act.
You are not being asked to vote on the
appointment of any of the new directors,
but prior to the time the new directors
take office, you will be provided with
information about them substantially
equivalent to that which you would receive
under applicable rules of the Securities
and Exchange Commission if these persons
were nominated by our shareholders for
election as directors.
7
Retirement of Trust Preferred We currently have outstanding $12.5 million
Securities in principal amount of trust preferred
(see page 46) securities. As part of the
Recapitalization, we intend to retire the
trust preferred securities by purchasing
them at a substantial discount following
the closing under the Stock Purchase
Agreement using a portion of the net
proceeds received by us from the sale of
common stock to the new investors. Because
the retirement of our trust preferred
securities cannot occur until after the
closing, the Stock Purchase Agreement
conditions the obligations of the new
investors on there being in place at the
time of closing arrangements satisfactory
to NCFC Recapitalization and the new
investors pursuant to which the trust
preferred securities will be retired
promptly following the closing on terms
satisfactory to NCFC Recapitalization.
Regulatory Action Implementation of the Recapitalization
(see page 45) requires termination of the Cease and
Desist Order so that we can proceed with
our new business plan. It is anticipated
that once the Bank is recapitalized
following the closing under the Stock
Purchase Agreement, the regulatory
authorities will terminate the Cease and
Desist Order. One of the conditions to the
sale of common stock to the new investors
is that we receive assurance reasonably
satisfactory to NCFC Recapitalization that
when the recapitalization of the Bank is
completed, the Cease and Desist Order will
terminate and the Bank will have authority
to establish a branch in Oakland County,
Michigan.
Expected Time for Completing the We are working to complete the
Recapitalization (see page 45) Recapitalization as soon as possible, but
we must first satisfy the conditions to the
closing set forth in the Stock Purchase
Agreement. We presently expect to complete
the Recapitalization in the fourth quarter
of 2004. However, we cannot assure you when
or if the Recapitalization will occur.
THE PROPOSALS
There will be presented at the special meeting several Proposals, all of
which must be approved by shareholders in order to complete the sale of shares
pursuant to the Stock Purchase Agreement and implement the Recapitalization.
8
PROPOSAL 1.
APPROVAL OF STOCK PURCHASE AGREEMENT AND RECAPITALIZATION.
Approval Required Approval of the sale of our common stock to
new investors is required by the Stock
Purchase Agreement and the listing
requirements of Nasdaq.
The Effect on Shareholders The sale of common stock pursuant to the
(see page 39) Stock Purchase Agreement will not affect
the rights and privileges of our existing
shareholders. However, it will result in
current shareholders owning less than 15%
of our total outstanding common shares with
the new investors owning more than 85% of
our total outstanding shares.
Fairness Opinion of North Country's Austin Associates, LLC, our financial
Financial Advisor (see page 52) advisor, has delivered its written opinion
to our board of directors to the effect
that the terms of the Stock Purchase
Agreement and the resulting
Recapitalization are fair, from a financial
point of view, to our shareholders. A copy
of the opinion of Austin Associates, dated
as of August 9, 2004, is attached as
Appendix B. The opinion should be read in
its entirety for a description of the
procedures followed, assumptions and
qualifications made and matters considered
by Austin Associates, as well as for a
description of the limitations of the
opinion.
No Dissenter's Rights Under Michigan law, shareholders are not
entitled to any dissenters' rights in
connection with the approval of the Stock
Purchase Agreement or any of the other
Proposals.
Termination Fees The Stock Purchase Agreement provides for
(see page 49) the payment by us to NCFC Recapitalization
of $1,500,000 in the event the Agreement is
terminated in certain circumstances in
which we solicit or accept a competing
transaction. The Stock Purchase Agreement
also requires us to reimburse NCFC
Recapitalization's transaction expenses up
to $250,000 in the event our shareholders
fail to approve the Stock Purchase
Agreement or any of the other Proposals and
the Stock Purchase Agreement is terminated.
9
PROPOSAL 2.
APPROVAL OF AN AMENDMENT TO
NORTH COUNTRY'S RESTATED ARTICLES OF INCORPORATION
TO REDUCE THE NUMBER OF ISSUED AND OUTSTANDING COMMON SHARES
THROUGH THE 1-FOR-20 REVERSE STOCK SPLIT.
Reverse stock split The purpose of the proposed 1-for-20
(see page 70) reverse stock split is to cause an increase
in the price at which our common stock
trades on the Nasdaq SmallCap Market in
order to make an investment in our common
stock more attractive to potential
investors under the Stock Purchase
Agreement and to permit us to continue to
satisfy one of the requirements for
continued listing of our common stock on
Nasdaq. That requirement is that a market
price of at least $1.00 per share must be
maintained for a listed security.
Based on the current number of shares of
common stock outstanding, the purchase
price for shares sold pursuant to the Stock
Purchase Agreement would be $.73 per share
or less. It can be anticipated that, absent
the reverse stock split, the bid price for
our common stock would approximate the
price paid by the new investors, with the
result that we would face the possibility
of having our common stock delisted by
Nasdaq.
Fractional shares resulting from the
reverse stock split will be rounded up to
the nearest whole share. Consequently,
there will be no reduction in the number of
our shareholders. THIS IS NOT A "GOING
PRIVATE TRANSACTION."
10
PROPOSAL 3.
ADOPTION OF AN AMENDMENT TO
NORTH COUNTRY'S RESTATED ARTICLES OF INCORPORATION
TO CHANGE THE NAME OF NORTH COUNTRY
TO "MACKINAC FINANCIAL CORPORATION."
Name Change The proposed name change to Mackinac
(see page 75) Financial Corporation is required under the
Stock Purchase Agreement and we believe it
will assist us to operate more effectively
in our market areas.
PROPOSAL 4.
ADOPTION OF AMENDMENTS TO
NORTH COUNTRY'S 2000 STOCK INCENTIVE PLAN.
Option Plan Changes Our board of directors has approved,
(see page 76) subject to shareholder approval, amendments
to our 2000 Stock Incentive Plan. The
principal purpose of the Plan amendments is
to increase the number of options which can
be granted under the Plan to satisfy one of
the requirements of the Stock Purchase
Agreement that there be created an "option
pool" for directors, executive officers and
key employees (including Messrs. Tobias and
Stark as required by their employment
agreements) equal to 12.5% of our shares of
common stock outstanding after the closing.
The amended Plan also permits the options
awarded to Messrs. Tobias and Stark to have
an exercise price equal to the price per
share paid by new investors under the Stock
Purchase Agreement.
BOARD OF DIRECTORS' RECOMMENDATIONS
Board of Directors' Recommendations After careful consideration, our board of
(see page 39) directors has approved the Stock Purchase
Agreement and the transactions contemplated
by it, including the sale of our common
stock pursuant to and on the terms
contained in the Stock Purchase Agreement,
and has determined that the Stock Purchase
Agreement and all the transactions and
arrangements making up the Recapitalization
are
11
advisable, fair to and in the best
interests of North Country and its
shareholders. OUR DIRECTORS RECOMMEND THAT
YOU VOTE "FOR" THE APPROVAL OF THE STOCK
PURCHASE AGREEMENT PROPOSAL AND ALL OF THE
PROPOSALS CONTAINED IN THIS PROXY
STATEMENT.
Reasons for the Recapitalization Our board of directors considered a number
(see page 38) of factors in reaching its determination to
approve the Stock Purchase Agreement,
including:
- the opinion by Austin Associates
that the terms of the Stock
Purchase Agreement are fair, from
a financial point of view, to us
and our shareholders;
- our troubled financial condition,
and that of the Bank, and serious
concerns about our and the Bank's
continued viability as going
concerns without the capital
infusion from the sale of shares
pursuant to the Stock Purchase
Agreement and our and the Bank's
recapitalization;
- the lack of alternatives to the
Recapitalization pursuant to the
Stock Purchase Agreement; and
- our business plan following the
Recapitalization.
Interests of Directors and Executive Some of the directors and executive
Officers (see page 60) officers of North Country have interests
and arrangements that may be considered
different from, or in addition to, your
interests as a shareholder. These interests
include: future employment arrangements and
change in control payments under existing
employment agreements.
Our board of directors was aware of these
interests and considered them, among other
matters, in making its recommendation to
approve the Stock Purchase Agreement and
the transactions contemplated by it.
12
THE SPECIAL MEETING
General (see page 32) This proxy statement is furnished to our
shareholders for use at the special meeting
of shareholders called to approve the Stock
Purchase Agreement and related proposals.
The meeting will be held at __ p.m., local
time, on ______ ___, 2004 at the Comfort
Inn, 726 East Lakeshore Drive, Manistique,
Michigan 49854.
Votes Required to Approve the Stock The holders of a majority of the votes cast
Purchase Agreement and Related at the special meeting must vote to approve
Proposals (see page 33) the Stock Purchase Agreement (Proposal 1)
and the amendments to the 2000 Stock
Incentive Plan (Proposal 4). The holders of
a majority of issued and outstanding common
shares must vote to approve the amendments
to our Restated Articles of Incorporation
to effect the 1-for-20 reverse stock split
(Proposal 2) and to change our name to
"Mackinac Financial Corporation" (Proposal
3).
Record Date and Quorum Requirement We have set _______ ___, 2004 as the record
(see pages 32 and 33) date for determining those shareholders who
are entitled to notice of and to vote at
the special meeting.
A majority of our common shares issued
and outstanding and entitled to vote at the
meeting must be present in person or
represented by proxy to constitute a quorum
for transacting business at the meeting.
Revocation of Proxies You have the unconditional right to revoke
(see page 33) your proxy at any time prior to its use at
the meeting by:
- delivering written notice that the
proxy is revoked to the person to
whom you submitted your proxy
prior to the special meeting;
- submitting a subsequently dated
proxy prior to the special meeting
or to the inspector of election at
the special meeting; or
- attending the special meeting and
voting in person.
Shares Held by a Bank or Broker If your shares are held in "street name" by
(see page 3) a bank or broker, your bank or broker will
vote your shares regarding the
Recapitalization only if you provide
instructions to them on how to vote. You
should
13
follow the directions provided by your bank
or broker regarding how to vote your
shares.
Where to Find More Information If you have more questions about the
(see page 87) Recapitalization or would like additional
copies of this proxy statement, you should
contact us at our principal executive
office:
North Country Financial Corporation
130 S. Cedar St.
Manistique, MI 49854
Attention: C. James Bess
Phone Number (800) 200-7032.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This proxy statement contains forward-looking statements about the
proposed Recapitalization and about our financial condition, results of
operations, plans, objectives, future performance and business. This includes
information relating to:
- benefits estimated to result from the proposed Recapitalization of
North Country and the Bank; and
- estimated costs of completing the transactions that will result in
the Recapitalization.
It also includes statements using words like "believes," "expects,"
"intends," "anticipates" or "estimates" or similar expressions. When we use any
of the words "believes," "expects," "intends," "anticipates," "estimates" or
similar expressions, we are making forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties. Actual
results may differ materially from those predicted by the forward-looking
statements because of various factors and possible events, including those
discussed under "Risks Related to the Recapitalization" and the following:
- our operating income, interest and non-interest, following the
Recapitalization is lower than expected;
- competition increases in the banking industry or our markets;
- costs or difficulties related to implementing and executing our
business plan following the Recapitalization;
- there are adverse changes in general economic conditions;
14
- technological changes are more difficult or expensive to implement than
anticipated;
- there are adverse changes in the securities markets; and
- we suffer the loss of key personnel.
There is also the risk that North Country incorrectly analyzed these risks
and forces, or that the strategies we developed to address them are
unsuccessful.
Because these forward-looking statements involve risks and uncertainties,
actual results may differ significantly from those predicted in these
forward-looking statements. You should not place a lot of weight on these
statements. These statements speak only as of the date of this proxy statement
or, in the case of any document incorporated by reference, the date of that
document.
All subsequent written and oral forward-looking statements attributable to
us or any person acting on our behalf are qualified by the cautionary statements
in this section. We have no obligation to revise these forward-looking
statements.
15
SELECTED FINANCIAL INFORMATION
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30 AT OR FOR THE YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999 1998 1997
($ in 000s) ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
INCOME STATEMENT DATA:
Net Interest Income $ 4,478 $ 5,884 $ 9,626 $ 17,880 $ 23,633 $ 25,079 $ 21,947 $ 20,683 $ 20,066
Provision for Loan
Losses -- -- -- 26,658 3,200 5,875 1,457 1,200 1,398
Noninterest Income 1,065 2,060 3,231 5,258 10,436 7,001 3,538 2,651 1,638
Noninterest Expense 8,810 10,427 20,116 27,063 24,307 20,077 15,937 16,603 14,797
Net Income (3,267) (4,162) (9,588) (26,713) 5,774 5,183 6,356 4,561 4,106
PER SHARE DATA:
Diluted Earnings per
share $ (0.47) $ (0.59) $ (1.37) $ (3.81) $ 0.82 $ 0.73 $ 0.89 $ 0.64 $ 0.57
Book Value per share 0.84 2.33 1.52 2.92 6.82 6.38 5.83 5.54 5.13
Cash Dividends 0.00 0.00 0.00 0.25 0.30 0.34 0.18 0.17 0.16
Dividend Payout Ratio 0.00% 0.00% 0.00% NM 36.48% 45.42% 20.25% 27.43% 28.79%
Average Diluted Shares 7,019,152 7,019,152 7,019,152 7,019,152 7,021,654 7,064,926 7,121,061 7,120,216 7,155,777
BALANCE SHEET DATA:
Loans $ 233,032 $ 358,398 $ 297,846 $ 435,043 $ 504,412 $ 541,689 $ 466,621 $ 411,720 $ 372,519
Allowance for Loan
Losses 10,850 21,986 22,005 24,908 10,444 9,454 6,863 6,112 5,600
Total Assets 345,042 475,938 422,539 565,306 636,629 666,996 568,442 471,381 421,434
Total Deposits 235,646 353,448 305,794 437,494 482,524 531,883 462,998 404,961 360,549
Shareholder's Equity 5,885 16,339 10,700 20,503 47,889 44,617 40,820 39,469 36,592
AVERAGE BALANCE SHEET
DATA:
Loans $ 266,791 $ 397,510 $ 361,144 $ 484,889 $ 529,354 $ 515,685 $ 434,723 $ 403,563 $ 352,079
Assets 392,158 514,915 489,184 619,791 648,764 617,023 520,984 465,408 410,600
Equity 8,293 18,421 16,210 43,741 46,266 42,729 40,152 40,796 36,368
PERFORMANCE RATIOS:
Return on Average
Assets -1.67% -1.62% -1.96% -4.31% 0.89% 0.84% 1.22% 0.98% 1.00%
Return on Average
Equity -78.79% -45.19% -59.15% -61.07% 12.48% 12.13% 15.83% 11.18% 11.29%
Net Interest Margin 2.57% 2.57% 2.25% 3.36% 4.18% 4.74% 5.13% 5.32% 5.64%
Efficiency Ratio 148.86% 126.25% 150.82% 114.24% 69.23% 58.32% 58.09% 65.81% 64.83%
CAPITAL RATIOS:
Leverage Ratio 1.93% 3.60% 2.48% 3.83% 8.44% 7.60% 8.40% 7.20% 7.20%
Tier 1 Risk-based
Capital Ratio 2.91% 4.99% 3.58% 5.30% 11.07% 9.98% 11.80% 9.40% 9.64%
Total Risk-based
Capital Ratio 5.82% 8.54% 7.16% 8.17% 12.33% 11.30% 13.00% 10.70% 10.89%
Equity to Assets 1.71% 3.43% 2.53% 3.63% 7.52% 6.69% 7.18% 8.37% 8.68%
Tangible Equity to
Tangible Assets 1.39% 3.06% 2.16% 3.26% 6.61% 5.65% 5.98% 7.19% 7.21%
ASSET QUALITY RATIOS:
Net Charge-Offs to
Average Loans 4.2% 1.5% 0.8% 2.6% 0.5% 0.7% 0.2% 0.2% 0.2%
LLR to Loans 4.66% 6.13% 7.39% 5.73% 2.07% 1.75% 1.47% 1.48% 1.50%
LLR to NPAs + 90s 64.51% 42.02% 43.63% 56.89% 35.70% 51.87% 193.54% 158.30% 211.00%
NPAs to Loans & OREOs 7.11% 13.97% 16.61% 9.85% 4.79% 2.78% 0.23% 0.64% 0.53%
16
HISTORICAL MARKET PRICE AND DIVIDENDS DATA
MARKET INFORMATION
Our common shares are quoted on the Nasdaq SmallCap Market under the
symbol "NCFC."
Our common shares traded at a high of $1.12 per share and a low of
$1.00 per share on September 29, 2004, which prices do not reflect the
1-for-20 reverse stock split we have proposed and may not reflect the price
(before giving effect to the reverse stock split) at which we anticipate selling
our common shares in the Recapitalization. However, there is little active
trading in our stock and it is doubtful that this price reflects how much
current shareholders could sell their shares for on the open market.
HOLDERS
We have approximately 1,800 shareholders of record as of the record date
for the special meeting. Following the Recapitalization, and assuming current
shareholders are not among the purchasers under the Stock Purchase Agreement,
current shareholders' aggregate ownership will be less than 15% of our total
outstanding common shares.
DIVIDENDS
The holders of our common shares are entitled to dividends when, as and if
declared by our board of directors out of funds legally available for that
purpose. In determining dividends, our board of directors considers our
earnings, capital requirements and financial condition along with other relevant
factors. Our principal source of funds for cash dividends is the dividends paid
by the Bank.
Our ability to pay dividends is subject to regulatory restrictions and
requirements. In the fourth quarter of 2002, we suspended payment of a dividend
and the boards of directors of North Country and the Bank adopted resolutions
providing for prior regulatory approval of the declaration or payment of any
dividend by us or the Bank. Further, the Cease and Desist Order prohibits the
Bank from declaring or paying dividends without the prior written consent of the
Michigan Office of Financial and Insurance Services ("OFIS") and the Federal
Deposit Insurance Corporation (the "FDIC"). Michigan banking statutes prohibit
state banks from paying dividends other than from retained earnings. At June 30,
2004, the Bank had negative retained earnings. Consequently, even after the
removal of the Cease and Desist Order and contribution of capital to the Bank as
part of the Recapitalization, the Bank will need to receive approval from OFIS
to pay any dividends until it has accumulated earnings.
Additionally, we are contractually prohibited from paying dividends at
this time because we have deferred interest payments on an indenture entered
into in connection with the issuance of our trust preferred securities.
17
NORTH COUNTRY
BUSINESS
We own all of the outstanding stock of the Bank which represents our
principal asset. We also own three active non-bank subsidiaries: First
Manistique Agency, an insurance agency which sells annuities as well as life and
health insurance; First Rural Relending Company, a relending company making
community targeted economic development loans; and North Country Capital Trust,
a statutory business trust which was formed solely for the issuance of our trust
preferred securities. A fourth subsidiary, North Country Financial Group, was
formed as a broker of loans and leases, including tax-exempt lease/purchase
financing to municipalities, but it is presently inactive.
The Bank also has three non-bank subsidiaries: NCB Real Estate Company,
which owns several properties used by the Bank; North Country Mortgage Company
LLC, an entity engaged in the business of mortgage lending and brokering; and
North Country Employee Leasing Company, a company that leases employees to North
Country Bank and Trust.
We are headquartered in Manistique, Michigan. Our executive offices and
mailing address are located at 130 South Cedar Street, in Manistique, Michigan
49854.
We currently have 9 branch offices located in the Upper Peninsula of
Michigan and 3 branch offices located in Michigan's Lower Peninsula, maintaining
offices in Chippewa, Grand Traverse, Houghton, Luce, Manistee, Marquette,
Menominee, Ontonagon, Otsego and Schoolcraft counties. We provide drive-up
service at 12 branch locations and have automated teller machines operating at
10 locations.
We are engaged in a general commercial banking business providing a full
range of loan and deposit products. These banking services include customary
retail and commercial banking services, including checking and savings accounts,
time deposits, interest bearing transaction accounts, safe deposit facilities,
real estate mortgage lending, commercial lending, commercial and governmental
lease financing, and direct and indirect consumer financing. Funds for our
operation are also provided by Internet deposits and through borrowings from the
Federal Home Loan Bank system, proceeds from the sale of loans and
mortgage-backed and other securities, funds from repayment of outstanding loans
and earnings from operations. Earnings depend primarily upon the difference
between (i) revenues from loans, investments, and other interest-bearing assets
and (ii) expenses incurred in payment of interest on deposit accounts and
borrowings, maintaining an adequate allowance for loan losses, and general
operating expenses.
We make mortgage, commercial and installment loans to customers throughout
Michigan and in the past acquired lease obligations through an affiliate
operating in Colorado. We may charge fees for these services. Historically, we
sold most of our conforming residential mortgage loans in the secondary market;
however, since 2002, we have retained residential loans. We have also financed
commercial and governmental leases throughout the country. These leases were
originated by our subsidiary, North Country Financial Group, and unrelated
entities. In March 2003, we decided to cease the operations of North Country
Financial Group and we no longer concentrate on obtaining these leases. This was
done to refocus our lending efforts on
18
loans in our immediate market area and to decrease the size of certain segments
of, and to further diversify, our loan portfolio.
We support the service industry in our market areas, including hospitality
and related businesses as well as gaming, forestry, restaurants, farming,
fishing and many other activities important to growth in Michigan. The economy
of our market areas is affected by summer and winter tourism activities.
Our most prominent concentration in our loan portfolio relates to
commercial loans to entities within the hospitality and tourism industry. This
concentration represented $45.9 million or 24.8% of our commercial loan
portfolio at June 30, 2004, compared to $76.1 million or 31.3% at December 31,
2003. The Cease and Desist Order, described below, requires us to reduce our
concentration of loans to borrowers in the hotel and tourism industry. While our
management has reduced the aggregate amount of loans in these areas, because of
its continuing losses and resulting reduction in its capital, the ratio of hotel
and tourism related loans to capital has not been reduced enough to be in
compliance with the Cease and Desist Order. No material portions of our deposits
have been received from a single person, industry, group or geographical
location.
REGULATORY ISSUES; THE CEASE AND DESIST ORDER
In October 2001, we were notified that the Bank had been designated by the
FDIC as a "troubled institution" within the meaning of the FDIC's regulations.
In September 2002, the OFIS and the FDIC conducted a regularly-scheduled safety
and soundness examination of the Bank and that was followed by an examination of
North Country by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). During the course of those examinations, the FDIC, the OFIS and FRB
requested that North Country and the Bank take certain actions, including
suspending the payment of dividends and conserving the Bank's liquidity. In
response to these requests, the board of directors of North Country and the Bank
adopted resolutions providing for prior regulatory approval of the declaration
or payment of any dividend by North Country or the Bank and the suspension of
interest payments on our trust preferred securities.
Although the suspension of the interest payments on the trust preferred
securities does not violate any of our agreements with the holders of these
securities, we cannot pay any dividends on our common stock while interest
payments are suspended and certain other restrictions apply. A required part of
the Recapitalization is that these outstanding trust preferred securities be
retired at a substantial discount and on other terms and conditions acceptable
to NCFC Recapitalization.
Following the completion of their September 2002 examination, the FDIC and
the OFIS entered a Cease and Desist Order against the Bank on March 26, 2003.
The Cease and Desist Order became effective on April 5, 2003, and will remain in
effect until modified or terminated by action of the FDIC and the OFIS. The
Cease and Desist Order identified deficiencies in the Bank's policies and
procedures, including its directorate and management personnel and practices,
credit underwriting, credit administration and policies regarding
asset/liability management, liquidity, funds management and investments, and its
compliance with applicable laws and regulations, including regulations of the
FRB and FDIC and provisions of the Michigan
19
Banking Code of 1999. The Cease and Desist Order also requires the Bank to
maintain specified capital ratios during the life of the Cease and Desist Order.
We believe that the Bank has addressed all of the major areas of concern and
corrected all of the material deficiencies and violations identified in the 2002
examination report and the Cease and Desist Order, except for meeting the
capital requirements and lending concentration requirements with hotel and
tourism related loans.
The Cease and Desist Order required the Bank and its directors to take the
following specific steps within the time periods specified. For the calendar
quarter beginning July 1, 2003, and for each calendar quarter thereafter, the
Bank was and is required to have a Tier 1 Capital Ratio equal to at least 8.0%.
If the Bank's Tier 1 Capital Ratio is below the required percentage for any
quarter, the Bank must take steps within 60 days to bring its Tier 1 Capital
Ratio to the required level. The Cease and Desist Order also requires the Bank
to maintain its total risk-based capital ratio at 10.0% or greater. If the
Bank's total risk-based capital ratio for any quarter is less than 10.0%, the
Bank must take steps within 60 days to bring its total risk-based capital ratio
to the required level.
Since the entry of the Cease and Desist Order, the Bank has not been in
compliance with the minimum capital ratios specified in the Cease and Desist
Order. Noncompliance with these minimum capital requirements will impact our
ability to continue to operate as a going concern.
LITIGATION
We and our subsidiaries are subject to routine litigation incidental to
the business of banking. In addition, we and the Bank are subject to the
litigation and arbitration described below.
SECURITIES LITIGATION. In an action styled Lanctot v. Littlejohn, et al.,
filed in the U.S. District Court for the Western District of Michigan on June
13, 2003, a shareholder brought a class action against us, our former chairman
and chief executive officer and former director, Ronald G. Ford, and our former
chief executive officer and director, Sherry L. Littlejohn, for alleged
violations of Federal securities laws. In another action styled Rosen v. North
Country Financial Corporation, et al., filed in the U.S. District Court for the
Western District of Michigan on June 23, 2003, a former shareholder brought a
class action against us, Mr. Ford and Ms. Littlejohn for alleged violations of
Federal securities laws.
On September 2, 2003, pursuant to 15 U.S.C. Section 78-u-4(a) (3) (B),
plaintiff Charles Lanctot filed a motion requesting the Court to consolidate the
two securities class action cases (Lanctot and Rosen) under the caption In re
North Country Financial Corporation Securities Litigation, to appoint him as
"Lead Plaintiff" in the consolidated cases, and to approve the selection of his
counsel as "Lead Plaintiff's Counsel." In an order dated September 29, 2003, the
Court among other things consolidated the Lanctot and Rosen actions, designated
Charles D. Lanctot and John F. Stevens as "Lead Plaintiffs," and designated
"Co-Lead Counsel" and "Liaison Counsel" for the class.
On December 1, 2003, the plaintiffs filed their Corrected Consolidated
Amended Class Action Complaint ("Amended Complaint"), which adds John F. Stevens
as a plaintiff. The
20
Amended Complaint, which demands a jury trial, is brought on behalf of all
persons, subject to certain exceptions, who purchased our common stock during
the period from November 13, 2000, through April 15, 2003. It alleges that we
and the individual defendants violated Section 10(b) of the Securities Exchange
Act of 1934 (the "Exchange Act") and Rule 10b-5 of the SEC issued under the
Exchange Act, by disseminating materially false and misleading statements and/or
concealing material adverse facts concerning our financial condition and
operations, with knowledge, or in reckless disregard, of the materially false
and misleading character thereof. The Amended Complaint also alleges violations
of Section 20 of the Exchange Act by the individual defendants, by reason of
their control, at relevant times, of us. Among other things, the Amended
Complaint is based upon allegations of deficiencies in our policies and
procedures for safe and sound operation, including our directorate and
management personnel and practices, credit underwriting, credit administration,
and policies regarding asset/liability management, liquidity, funds management,
and investments, and our compliance with all applicable laws and regulations,
including Regulations O and U of the Federal Reserve, the FDIC Rules and
Regulations, and the Michigan Banking Code of 1999.
The Amended Complaint further alleges that our acquisition of American
Financial Mortgage, which had an "unusually large number of defaulted loans . .
.. which triggered the attention of banking regulators"; that the Cease and
Desist Order demonstrates how defendants made "false statements" in public
filings and other communications, and were required to take "corrective
actions;" that various public filings were "false because [our] operations
resulted in an excessive level of adversely classified assets, delinquent loans,
and nonaccrual loans as well as an inadequate level of capital protection for
the kind and qualify of assets held;" that, "according to former employees,
loans for [our] insiders and their related entities were often approved
regardless of the quality of the loan;" and, that we incorrectly attributed our
performance to the World Trade Center disaster and other factors impacting
tourism and hospitality businesses, instead of disclosing "insider loans," a
disproportionately high loan concentration" in the hospitality industry, and
information about our banking practices and loan loss reserves. The Amended
Complaint seeks certification of a class consisting of all persons who purchased
our common stock on the open market between the dates noted above, compensatory
damages on a joint and several basis against all defendants, including us, plus
interest and costs, including attorney's fees and expert's fees.
On January 23, 2004, we and the other defendants filed a Joint Motion to
Dismiss the Corrected Consolidated Amended Class Action Complaint, principally
based on the ground that plaintiffs have not adequately plead that we, through
our officers and directors, acted with the intent to defraud the investing
public under the standard articulated in prior judicial decisions.
Shortly before the hearing on the Motion to Dismiss, the plaintiffs, we
and the individual defendants and their insurer reached a settlement in
principle of all claims asserted in the consolidated actions. On June 18, 2004,
the parties submitted to the court their Stipulation of Settlement, which
describes in detail the terms and conditions of the settlement. The parties have
submitted two Revised and Amended Stipulations of Settlement, the most recent of
which was filed with the court on July 16, 2004.
In general, the stipulation specifies that within thirty days after final
approval of the settlement by the court and the expiration of all appeals
periods, the individual defendants will
21
cause to be paid $500,000 to a plaintiff class to be certified by the court, and
we will pay this plaintiff class $50,000. In addition, we are required to pay
the plaintiff class an additional $200,000 upon a sale of control of North
Country, a sale of substantially all of our assets or the collection of a
judgment or settlement of our claims, if any, against any third party that
exceeds $200,000. The completion of the transactions provided for in the Stock
Purchase Agreement will be such a change in control.
By letter dated July 21, 2004, the Federal Reserve Bank of Minneapolis
indicated that it does not object to the settlement as proposed, thus meeting
one of the conditions set forth in the stipulation. On August 16, 2004, the
court entered an order granting conditional approval of the stipulation.
However, completion of the settlement is conditioned upon satisfaction of a
number of additional matters described in the stipulation, and further
proceedings in the court. At this time, there can be no assurance that all the
conditions of the stipulation will be satisfied.
SHAREHOLDER'S DERIVATIVE LITIGATION. In an action styled Virginia M. Damon
Trust v. North Country Financial Corporation, Nominal Defendant, and Dennis
Bittner, Bernard A. Bouschor, Ronald G. Ford, Sherry L. Littlejohn, Stanley J.
Gerou II, John D. Lindroth, Stephen Madigan, Spencer Shunk, Michael Henrickson,
Glen Tolksdorf, and Wesley Hoffman, filed in the U.S. District Court for the
Western District of Michigan on July 1, 2003, a shareholder has brought a
shareholder's derivative action under Section 27 of the Exchange Act against us
and certain of our current and former directors and senior executive officers.
The complaint, which demands a jury trial, is brought on our behalf against the
individual defendants. It alleges that the individual defendants have caused
loss and damage to us through breaches of their fiduciary duties of oversight
and supervision by failing (i) adequately to safeguard our assets, (ii) to
ensure that adequate administrative, operating, and internal controls were in
place and implemented, (iii) to ensure that we were operated in accordance with
legally-prescribed procedures and (iv) to oversee the audit process to ensure
that our assets were properly accounted for and preserved.
The complaint further alleges that the individual defendants violated
Section 14(a) of the Exchange Act by making materially false and misleading
statements in the proxy statement mailed to shareholders in connection with our
annual meeting held May 29, 2000, and the adoption by the shareholders at that
meeting of our 2000 Stock Incentive Plan. The complaint also alleges that Mr.
Ford and Ms. Littlejohn, through a series of compensation arrangements, stock
options, and employment agreements obtained by them through improper means
resulting from the offices they held with us, received excessive compensation,
to our injury. Among other things, the complaint is based upon allegations of
material misstatements or omissions in filings we made with the SEC, and
deficiencies in our policies and procedures for safe and sound operation,
including our directorate and management personnel and practices, credit
underwriting, credit administration, and policies regarding asset/liability
management, liquidity, funds management, and investments, and our compliance
with all applicable laws and regulations, including Regulations O and U of the
Federal Reserve, FDIC Rules and Regulations, and the Michigan Banking Code of
1999. The complaint seeks (i) rescission of the approval of the 2000 Stock
Incentive Plan and return of all stock and options granted under this plan, (ii)
a declaration that the individual defendants breached their fiduciary duty to
us, (iii) an order to the individual defendants to account to us for all losses
and/or damages by reason of the acts and omissions alleged, (iv) an order to
each of the individual defendants to remit to us all salaries and
22
other compensation received for periods during which they breached their
fiduciary duties, (v) compensatory damages in our favor, (vi) injunctive relief
and (vii) interest, costs, and attorney's and expert's fees.
By letter dated September 17, 2003, and expressly without prejudice to the
argument that any such written demand is not required, plaintiff's counsel
purported to make a written demand that we pursue a number of indicated putative
claims against: (1) our present and former officers and directors who also are
the individual defendants in the Damon action and (2) the certified public
accounting firm of Wipfli, Ullrich, Bertelson, LLP. Michigan law grants us 90
days in which to respond to a proper written demand.
On September 18, 2003, we filed a motion to dismiss the Damon action
because plaintiff did not satisfy the mandatory precondition, under Section 493a
of the MBCA, M.C.L. Section 450.1493a, for filing a shareholder derivative
action that the shareholder must first have submitted a written demand that we
pursue in our own right the claims asserted by the shareholder (the plaintiff
here). Certain of the individual defendants in the Damon action filed their own
motion to dismiss on November 25, 2003, in which motion the other individual
defendants later joined.
On March 22, 2004, the court issued an order dismissing the Section 14(a)
claim against all of the defendants, but permitting the plaintiff to proceed
with its breach of fiduciary duty claims against the directors.
During the above described proceedings, on November 11, 2003, we filed a
motion requesting the court appoint a disinterested person to conduct a
reasonable investigation of the claims made by the plaintiff and to make a good
faith determination whether the maintenance of the derivative action is in our
best interests. On May 20, 2004, a disinterested person was appointed and
ordered to complete his investigation and submit his report and recommendation
no later than October 18, 2004.
On September 20, 2004, we were served with process in a second
shareholders derivative action, styled Virginia M. Damon Trust v. Wipfli Ullrich
Bertelson, LLP, and North Country Financial Corporation, Nominal Defendant,
filed on August 27, 2004, in the Michigan Circuit Court for Grand Traverse
County by the same shareholder which brought the derivative action discussed
above. Our first responsive pleading will be due on October 11, 2004. The
complaint, which demands a jury trial, is brought on our behalf against Wipfli
Ullrich Bertelson, LLP ("Wipfli") under the Michigan Accountant Liability
statute, M.C.L. 600.2962. It alleges that Wipfli damaged us by (i) failing to
conduct and oversee, with the due care and competence required of professional
accountants, the annual audit of our financial statements for our fiscal years
ending December 31, 2000 and December 31, 2001, (ii) failing to provide, with
requisite due care and competence, the internal audit, regulatory compliance,
and financial reporting services Wipfli had agreed to provide us after August
28, 2002, when Wipfli resigned as our auditors to undertake such consulting
services, (iii) failing to exercise due care and competence required to ensure
that our financial statements conformed to applicable regulatory accounting
principles ("RAP") and generally accepted accounting principles ("GAAP"), (iv)
failing to make full disclosure that our administrative, operating, and internal
controls were inadequate to
23
prevent loss and damage to our assets, and (v) failing to conduct a diligent and
careful "review" of our quarterly financial statements during our fiscal years
2000 and 2001 and the first and second quarters of 2002.
The complaint further alleges that Wipfli undertook in writing (i) to
provide professional services, including auditing services, accounting services
for preparation of audited financial statements, advice regarding financial
statement disclosure, and preparation of annual reports for regulators,
including the annual report required by section 36 of the Federal Deposit
Insurance Act, and (ii) to ensure that we had sufficient systems in place to
determine whether we were in compliance with RAP and other regulations of the
FDIC and the OFIS. The complaint alleges that Wipfli (i) failed to conduct its
audits of our financial statements in accordance with generally accepted
auditing standards ("GAAS"), (ii) negligently represented that our audited
annual financial statements for the year ended December 31, 2000 were fairly
presented in all material respects, (iii) negligently conducted reviews of our
quarterly financial statements for the interim quarters of 2000, 2001 and 2002,
and (iii) negligently audited our financial statements for the fiscal years 2000
and 2001 by failing to obtain or review sufficient documentation, failing to
limit the scope of the audit in light of such failure to obtain or review
sufficient documentation, failing to verify the accuracy of information obtained
from us for the audit, failing to limit the scope of the audit in light of such
failure to verify the accuracy of the information obtained from us, and
substantially underestimating our liabilities and misrepresenting our solvency.
The complaint also alleges that Wipfli is a party responsible for our
liability in any securities fraud action arising out of a material overstatement
of our financial results. The complaint claims contribution and indemnification
from Wipfli on our behalf under the Private Securities Litigation Reform Act of
1995 for any liability we may incur in any such securities fraud action.
EMPLOYMENT AGREEMENT ARBITRATION. On September 16, 2003, Mr. Ford
initiated an arbitration proceeding with the American Arbitration Association
("AAA") against us seeking monetary damages for alleged breach by us of his
Amended and Restated Employment Agreement, Chairman Agreement, and Amended and
Restated Consulting Agreement. We have denied the alleged breach and asserted a
counterclaim to recover all amounts paid to Mr. Ford under the Chairman
Agreement, as required by the Cease and Desist Order entered by the FDIC and the
OFIS, in addition to other amounts.
On March 19, 2004, at the request of Mr. Ford, AAA reactivated the
arbitration proceeding. Pursuant to its procedures, on June 17, 2004, AAA
appointed an arbitrator to preside over the adjudication of these claims and
counterclaims.
On July 13, 2004, the arbitrator convened a scheduling conference at which
the arbitrator adopted the parties' stipulation to stay the arbitration until
the conclusion in the Damon action of the court-appointed disinterested person's
investigation and recommendations concerning the claims of the Virginia M. Damon
Trust, asserted in the name and on our behalf, against our former and present
officers and directors, including Mr. Ford. The arbitrator has scheduled another
conference with the parties to take place on October 27, 2004.
24
BUSINESS PLAN
OVERVIEW
Through the Bank, our principal business will continue to be community
banking - providing a full range of commercial and consumer loan and deposit
services. These banking services include providing customary retail and business
banking products such as checking and savings accounts, interest bearing
transaction accounts, time deposits, real estate mortgage loans, commercial
loans, commercial and governmental lease financing and direct and indirect
consumer loans. Additionally, we will continue to offer safe deposit facilities
and other fee based services.
BROADENED MARKET FOCUS. Currently, we conduct a majority of our business
in the Upper Peninsula of Michigan and the northern portion of Michigan's Lower
Peninsula. Upon the successful completion of the Recapitalization, we plan to
open a loan production office in Oakland County, Michigan, with the intention to
have it become a full service branch facility. Oakland County, located in
suburban Detroit, is one of the leading counties in the United States for income
and economic vitality. The purpose of this facility is to provide a new avenue
for growth as well as to provide greater asset growth and diversification.
The key elements of our future strategy are to build upon our community
banking tradition by stressing superior levels of personal service along with an
aggressive sales program focused on individuals and small and medium sized
businesses. Additionally, by expanding our loan origination focus into Oakland
County, we will diversify our asset mix and avoid heavy loan concentrations in
Northern Michigan, known for its historically cyclical economy.
MANAGEMENT OF NORTH COUNTRY FOLLOWING THE RECAPITALIZATION
Upon the successful completion of the Recapitalization, we will be led by
a new chief executive officer and chief financial officer team who plan to split
their time between our existing Northern Michigan franchise and our expansion
into Oakland County. Our chief executive officer will be Paul Tobias, who has a
29-year career in commercial banking, asset management, investment banking,
venture capital and corporate strategy. Eliot Stark will be the chief financial
officer for both North Country and the Bank. Mr. Stark has had a 28-year career
in financial services, technology and real estate development. Our current chief
executive officer, C. James Bess, will continue as president of the Bank. Mr.
Bess has over 30 years of experience in predominantly community bank settings
and 20 years as a chief executive officer in turn-around situations. Our current
chief lending officer, Kelly George, will remain in that position. Mr. George
has 14 years of banking experience, including 3 years as a bank examiner with
the Federal Reserve Bank of Cleveland. Our directors and non-director executive
officers will own approximately 10% (including option grants) of our pro forma
shares of common stock outstanding, supporting our philosophy of having their
interests aligned with those of our shareholders.
25
NORTH COUNTRY'S NEW BUSINESS PLAN
STRATEGY FOR GROWTH. We seek to increase long-term shareholder value
through organic growth, an expanded product line, a focus on small to medium
size business and a focused expansion into Oakland County and possibly other
growth markets.
The key tactics of our growth strategy are to:
- Build upon the relationships of our management and directors within
the communities we serve and utilize existing client and
professional relationships to propel our growth in Oakland County.
- Hire seasoned loan officers with strong existing customer
relationships and excellent marketing and credit skills.
- Hire branch managers who are community leaders, can market deposit
and consumer loan products and run an efficient bank branch.
- Expand the market penetration of each of our branch and loan offices
with an aggressive calling program. The current capital deficiency
has restricted our ability to develop new business, and we expect
that the recapitalization and our new management team will increase
our business development abilities.
- Develop new products and services particularly in treasury
management and optimize our use of technology. We believe we can
differentiate our product offerings by being willing to customize
our service delivery for smaller, middle market accounts. We expect
that new products will enhance fee income as well as help us serve
new and existing customers.
- Expand our loan and deposit reach into the business banking and
affluent consumer market in Oakland County.
- Develop a private banking capability with trust and investment
products in Oakland County by providing private banking services to
the owners and executives of business clients we expect to
strengthen relationships and provide a new avenue for growth. We
also plan to utilize our management's knowledge of alternative
assets to differentiate our wealth management offerings.
NORTHERN MICHIGAN. In light of the demographics in Northern Michigan that
suggest limited population growth, our strategy will revolve around the staffing
and hiring of community leaders - individuals who know their markets and are
capable of garnering market share. Our plans include hiring experienced
commercial lenders to take advantage of the loan opportunities that currently
exist in this region. Improving and maintaining our asset quality in Northern
Michigan will continue to be of paramount importance. The cornerstone of our
asset plan is an aggressive calling effort that concentrates on not only former
customers who meet our new credit criteria but also new customers who are
targeted based on our calling officers' market knowledge and existing client
referrals. Commercial and residential mortgages will be an important element of
our plan of driving high quality asset growth in Northern Michigan. Industry
concentrations
26
in tourism and agriculture will be avoided in the loan portfolio. The focus will
be placed on small and mid-sized businesses with solid cash flow.
We anticipate that, in the aggregate, our operations in Northern Michigan
will be a net funding generator and we expect relatively lower loan to deposit
ratio levels in our Northern Michigan markets. Initially we will price and
market our deposit and loan products to re-establish ourselves as community
leaders with a long-term relationship focus. Our intermediate-term objective is
to return to the Bank's historical levels of core deposits and quality loans in
its existing Northern Michigan markets. As our business plan matures we may also
offer wealth management products to the affluent retirees who settle in Northern
Michigan.
OAKLAND COUNTY. As soon as practical after the completion of the
Recapitalization, we anticipate opening a loan production office in Oakland
County, with the intention of developing a branch location as quickly as
possible. Our initial branch strategy in Oakland County will resemble a super
store retail approach, i.e., one facility to service the entire market. Because
our goal is to develop relationships with commercial customers and high net
worth individuals, the branch will be attractive and located near the areas
where our clients live. This strategy also entails that banking officers
actively pursue an external calling program that brings the Bank out to our
customers and the communities we serve. These efforts will be completed by
additional services such as courier, internet banking and cash management.
Upon closing of the Recapitalization, we will begin staffing our Oakland
County organization. Initial staffing will include Paul Tobias and Eliot Stark.
We also anticipate hiring an experienced loan officer with existing
relationships with potential borrowers, a cash management specialist and
secretarial staff. By the end of the first quarter of 2005, we anticipate hiring
an additional experienced loan officer and a credit analyst.
Oakland County is economically prosperous and diverse. Compared nationally
to other counties, Oakland County recently ranked third in population growth and
is growing faster than many of the suburban counties of other large metropolitan
cities such as Boston, New York and Philadelphia. Oakland County ranks second in
per capita income nationally for major metropolitan areas and enjoys a AAA bond
rating by both Standard and Poors and Moody's, putting the county in the top one
percent of all counties. Oakland County's median household income of $73,482
ranks first in Michigan and compares favorably to a state median of $52,788.
Oakland County's 63,000 business establishments and government agencies employ
more than 720,000 people, which drive more than 25% of Michigan's total exports.
These business locations account for 35% of Global Fortune 500 companies. From
1990 to 2002 Oakland County's economy grew 82% faster than the state of Michigan
as a whole.. We plan to strategically position our initial location to reach the
affluent areas of Birmingham, Bloomfield Hills, Grosse Pointe, Rochester and
Rochester Hills, which will enable us to achieve our target growth and client
demographic profile.
The loan market is highly competitive with super regional banks and small
boutique competitors. Huntington Bank, Fifth Third, Standard Federal and
Citizens Bank have launched recent initiatives to expand in Oakland County.
However, the market continues to offer
27
opportunity as the large banks transfer or lose personnel and thereby lose
continuity of relationship management.
We will compete by having experienced personnel, who are known in the
market, target specific market segments (i.e., mid-sized manufacturing,
distribution, commercial and residential real estate development and the needs
of high net worth entrepreneurs). We will avoid industry concentrations and
focus on businesses and individuals with proven cash flow generating ability and
strong balance sheets. We also expect to develop customized cash management
services as a generator of deposit and loan relationships.
In the intermediate-term, we anticipate most of the Bank's loan and
deposit growth to be derived from the Oakland County market with it potentially
representing a consistently increasing amount of the Bank's loans and deposits
over time.
OUR TARGET CUSTOMERS. We intend to grow by concentrating on the following
types of customers:
- Small Business: Typically firms with annual revenue of $500,000 to
$5,000,000 where we will compete and differentiate ourselves by
providing superior individual relationship management. Account
officers will have a larger number of customers than those who
handle middle market accounts to provide acceptable business
economics.
- Middle Market: Typically firms with annual revenues of $5,000,000 to
$100,000,000. We will offer customizable products to a wide range of
businesses involved in manufacturing, wholesale and retail
distribution, construction, transportation and professional
services. These offerings will allow us to diversify risk by
customer type as well as geography.
- Real Estate Developers and Owners: We will focus on delivering to
our real estate development and equity ownership customers products
tailored to those seeking credit to acquire, develop, construct and
maintain ownership of commercial and residential real estate.
- Owners and Executives from Business Customers: We will pursue
private banking relationships with the owners and executives of our
business customers to ultimately provide services that facilitate
the entire wealth cycle of creation, preservation and transfer.
OPERATING STRATEGY. The essence of the people we recruit into North
Country, along with our strategy of delegating authority to individual operating
units will allow us to execute a delivery model with high levels of personal
service and responsiveness. The key elements of this strategy are as follows:
- Personal Relationships: We endeavor to develop strong, dedicated
relationships with our business and consumer customers. A key
element to both our Northern Michigan community banking and Oakland
County commercial lending strategies will be the
28
personal service focus of our branch and lending personnel. While we
can train employees in the skills necessary to perform any banking
task, our recruiting efforts will be pointed toward individuals who
by their nature understand the core concept of delivering high
quality personal service.
- Customized Financial Services: With a long-term orientation, we will
differentiate our offerings from the "one size fits all" mentality
of our bigger competitors.
- Streamlined Decision Making: Our clients will interact with decision
makers capable of responding quickly and efficiently to their needs.
We will not have a lengthy chain of command. We will maintain
decision-making within each of our business markets to provide a
high level of personal and professional service with our community
bank philosophy and orientation. Credit administration will be
operated centrally with high service level requirements back to
local branches.
- Northern Franchise Operations: In contrast to our historical
Northern Michigan practice of concentration in the tourism and
hospitality industries, our future Northern Michigan strategy will
entail a focus on the provision of credit to consumers and
households. Additionally, we will provide credit to the small
business and commercial real estate sectors utilizing our
disciplined loan underwriting standards and process. We will utilize
government guaranteed lending programs (SBA and FmHA) where
appropriate.
- Oakland County Operations: Our Oakland County business model will
entail an organizational and management structure involving the
employment of fewer, highly qualified and productive professionals
in credit origination, administration and servicing operating out of
a centralized market hub location. Thus, in contrast to a retail or
small business focus, our targeted commercial lending focus will
allow us to generate greater asset scale while enhancing operating
leverage.
RISK MANAGEMENT
CREDIT RISK. During the past year we have implemented a revised and
comprehensive credit administration program incorporating both enhanced front
end and ongoing loan review procedures. We have an officer loan committee and a
director's loan committee approve loans depending on the size of the loan. The
director's loan committee is also tasked with reviewing lending policies and
concentrations proposed by management and assessing adherence to these policies
by individual loan officers and the in-house committee. The general outline of
our credit policy is to pursue business where the client has proven cash flow
generation ability, adequate collateral and strong repayment characteristics and
history as a borrower.
INTEREST RATE RISK. It is our strategy to manage interest rate risk by
balancing asset and liability pricing through close examination of exposure to
adverse movement in interest rates. The core deposit nature of our liabilities
affords us the opportunity to price assets at a rate equal to or greater than
our liabilities. We will monitor our balance sheet composition to minimize
potential economic losses from future changes in interest rates. Extensive
examination of the
29
maturity periods and duration of the Bank's earning assets and interest bearing
liabilities will serve as the foundation of our asset-liability management and
interest rate risk processes. Our strategy will be to balance risk tolerances
and potential economic losses with our prospective loan and deposit growth
inherent in our business plan.
FINANCIAL IMPLICATIONS OF BUSINESS PLAN
OPERATING LEVERAGE. Our goal is to operate a lean organization with
flexible outsourcing contracts for key processing functions and to direct our
salary and other expenses to revenue generating activities. We plan to leverage
the infrastructure and human resources investment of our existing Northern
Michigan franchise to amplify the growth rate and operating profitability of our
entry into the Oakland County, Michigan market. Our intermediate-term goal is to
bring our efficiency ratio performance back to peer levels.
INCOME DIVERSIFICATION. Generating increased fee income to augment
non-interest income from both consumers and businesses will enhance
profitability. A key area of focus will be to bring treasury management products
to the small and medium size businesses while offering wealth management
services to their owners and executives.
REGULATORY CAPITAL POSITION. Upon completion of the Recapitalization, we
expect that our capital position will improve to a well capitalized regulatory
level with a leverage ratio of approximately 8.48%, Tier 1 capital ratio of
approximately 12.58% and a risk based capital ratio of approximately 13.87%.
Consequently, we will be positioned to pursue our planned earning asset growth
while maintaining a well capitalized position on an ongoing basis.
PRINCIPAL SHAREHOLDERS OF NORTH COUNTRY
As of September 24, 2004, no person was known by management to be the
beneficial owner of more than 5% of our outstanding common shares, except as
follows:
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- -------------------- ----------------
Ernest D. King 515,792 7.3%
Vides E. King
P.O. Box 216
Naubinway, MI 49762
The information in the following table sets forth the beneficial ownership
of our common shares by each of our directors, the principals of NCFC
Recapitalization who will become directors and executive officers upon
completion of the Recapitalization, each of the executive officers included in
the compensation tables in our proxy statement for the 2004 Annual Meeting of
Shareholders, and by all of our directors and executive officers as a group
(including the principals of NCFC Recapitalization), as of September 24, 2004.
Except as noted, beneficial ownership is direct and the person indicated has
sole voting and investment power.
30
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
--------------------------------------------------------------------------- ----------------
C. James Bess ...................................... 0 -
Dennis B. Bittner*.................................. 7,734 ****
Bernard A. Bouschor*................................ 18,942 ****
Stanley J. Gerou II*................................ 118,033 (2) 1.7%
John D. Lindroth.................................... 81,114 (3) 1.2%
Sherry Littlejohn**................................. 217 ****
Stephen Madigan*.................................... 11,446 (4) ****
Spencer B. Shunk*................................... 59,738 (5) ****
Paul D. Tobias***................................... 0 -
Eliot R. Stark***................................... 0 -
All directors, nominees and executive officers as a
group (10 persons)................................. 297,224 4.2%
*Will not continue as directors following the Recapitalization.
** Former President and Chief Executive Officer. Ms. Littlejohn resigned from
North Country and the Bank effective May 21, 2003.
*** Organizer of NCFC Recapitalization who will become a director and executive
officer of North Country in connection with the Recapitalization. Messrs. Tobias
and Stark anticipate purchasing approximately $300,000 and $100,000 worth of
shares of our common stock, respectively, in the Recapitalization. As provided
in their employment agreements, Messrs. Tobias and Stark will also be awarded
options to purchase our common stock covering approximately 105,595 and 75,425
shares, respectively, in connection with the Recapitalization. Assuming the $30
million of post reverse stock split shares are sold pursuant to the Stock
Purchase Agreement for $14.60 per share, then Messrs. Tobias and Stark will
beneficially own (within the meaning of the beneficial ownership rules under the
Securities Exchange Act) 126,143 shares and 82,275 shares, respectively, which
will be approximately 5.2% and 3.4%, respectively, of the shares of our common
stock outstanding immediately following the Recapitalization.
****Less than 1.0%.
(1) Includes options for 6,500 shares for Messrs. Bittner, Madigan and Shunk,
18,600 shares for Messrs. Bouschor, Gerou and Lindroth, and 75,300 shares
for all directors and executive officers as a group, that are exercisable
within 60 days.
(2) Includes 13,156 shares owned jointly with Mr. Gerou's spouse and 42,828
shares held by Mr. Gerou's spouse's revocable trust as to which Mr. Gerou
may be deemed to have shared voting and dispositive power. Includes 621
shares held by Mr. Gerou's spouse and children as to which Mr. Gerou
disclaims beneficial ownership.
31
(3) Includes 52,200 shares held jointly with Mr. Lindroth's spouse or by Mr.
Lindroth's children as to which Mr. Lindroth may be deemed to have shared
voting and dispositive power.
(4) Includes 2,205 shares held by Mr. Madigan's spouse's revocable trust as to
which Mr. Madigan may be deemed to have shared voting and dispositive
power.
(5) Includes 42,143 shares owned jointly with Mr. Shunk's spouse.
THE SPECIAL MEETING
INTRODUCTION
This proxy statement and the enclosed proxy are furnished in connection
with the solicitation of proxies by our board of directors to be voted at the
special meeting of shareholders of North Country to be held on____________,
______________ , 2004, at ____ p.m. (local time), at the Comfort Inn, 726 East
Lakeshore Drive, Manistique, Michigan 49854, for the purposes set forth in the
accompanying notice and in this proxy statement.
This proxy statement is first being mailed on or about ___________ , 2004,
to all holders of record of our common shares as of the record date. Our board
of directors has fixed the close of business on____________, 2004, as the record
date for the determination of shareholders entitled to notice of and to vote at
the special meeting and any adjournment of the meeting. As of the record date,
7,019,152 of our common shares were outstanding. Each outstanding share will
entitle the holder to one vote on each matter presented for vote at the special
meeting.
RECORD DATE
Holders of record of shares of our common stock, as of the close of
business on _______________, 2004, are entitled to notice of and to vote at the
special meeting. Each share of our common stock is entitled to one vote.
VOTING OF PROXIES
If a proxy in the enclosed form is properly executed and returned to us,
the shares represented by the proxy will be voted at the special meeting and any
postponement or adjournment of the special meeting. If a shareholder specifies a
choice, the proxy will be voted as specified. If no choice is specified, the
shares represented by the proxy will be voted "FOR" all of the Proposals and in
accordance with the judgment of the persons named as proxies with respect to any
other matter which may come before the special meeting. All shareholders are
encouraged to date and sign the enclosed proxy, indicate their choice with
respect to the matters to be voted upon and return it to us.
32
SOLICITATION OF PROXIES
We are soliciting the enclosed proxy on behalf of our board of directors.
In addition to the use of the mails, proxies may be solicited by personal
interview and telephone. Arrangements will be made with brokerage houses and
other custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of common shares held of record by such
persons and we will reimburse them for reasonable out-of-pocket expenses
incurred in connection therewith. We have also engaged Morrow & Co., Inc. to aid
in the solicitation of proxies to assure a sufficient return of votes on the
Proposals to be presented at the special meeting. The cost of such services is
estimated to be $7,500, plus reasonable distribution, mailing and other
out-of-pocket expenses and costs associated therewith. Proxies also may be
solicited by our directors, officers, and employees, without additional
compensation. All expenses incurred in connection with this solicitation will be
borne by us.
FIRST MAILING DATE
This proxy statement is first being mailed to shareholders on or about
_____________, 2004.
REVOKING YOUR PROXY
You may revoke your proxy before it is voted at the special meeting. To
revoke, follow the procedures listed under the section entitled "Revoking Your
Proxy" at page 33 of this proxy statement.
VOTES REQUIRED TO APPROVE THE PROPOSALS
The presence of the holders of a majority of our total issued and
outstanding common shares in person or represented by duly executed proxies
(including broker non-votes and abstentions) at the special meeting will
constitute a quorum for the transaction of business.
Each of the proposals to amend our Restated Articles of Incorporation to
effect the reverse stock split and to change our name must be approved by the
affirmative vote of holders of a majority of our outstanding common shares
entitled to vote at the special meeting. Accordingly, each proposal must receive
3,509,577 votes for the proposal to be adopted. Therefore, abstentions on the
proposals to amend our Restated Articles of Incorporation and shares not voted
by brokers and other entities holding shares on behalf of beneficial owners will
count as votes against these proposals.
The proposals to approve the Stock Purchase Agreement and to amend our
2000 Stock Incentive Plan must be approved by a majority of the votes cast on
each of these proposals. Abstentions and broker non-votes will not count in
regard to these proposals.
THE ADOPTION OF EACH OF THE PROPOSALS IS REQUIRED TO COMPLETE THE
RECAPITALIZATION. The amendments to North Country's Restated Articles of
Incorporation and the amendments
33
to our 2000 Stock Incentive Plan will be effected only if the Stock Purchase
Agreement is approved by shareholders and a closing under it takes place.
The Board does not know of any business to be presented for consideration
at the special meeting other than that set forth herein. If any other business
properly comes before the meeting, or any adjournments or postponements thereof,
the proxies will be voted on such matters in the discretion of the persons named
as proxies on the proxy card.
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PROPOSAL 1 -
APPROVAL OF THE STOCK PURCHASE AGREEMENT
AND THE RECAPITALIZATION
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
COMPLETE TEXT OF THE STOCK PURCHASE AGREEMENT, ATTACHED TO THIS PROXY STATEMENT
AS APPENDIX A. SHAREHOLDERS ARE URGED TO READ THE STOCK PURCHASE AGREEMENT IN
ITS ENTIRETY.
OVERVIEW
Shareholders are requested at the special meeting to approve the issuance
and sale of additional shares of our common stock to new investors as set forth
in the Stock Purchase Agreement for approximately $30 million. The actual number
of shares to be issued will be determined by the terms of the Stock Purchase
Agreement. Pursuant to the terms of the Stock Purchase Agreement, the new
investors will receive a sufficient number of shares so as to provide them with
at least 85% of the total number of outstanding common shares of North Country.
We are seeking shareholder approval of the Stock Purchase Agreement
pursuant to applicable Nasdaq rules and to satisfy one of the conditions in the
Stock Purchase Agreement.
BACKGROUND OF AND REASONS FOR THE PROPOSAL
BACKGROUND. In October 2001, we were notified that the Bank had been
designated by the FDIC as a "troubled institution" within the meaning of the
FDIC's regulations. Beginning in 2002, we began to recognize significant loan
losses resulting in a net loss of $26.7 million for that year. Also, in
September 2002, the OFIS and the FDIC conducted a regularly scheduled safety and
soundness examination of the Bank, that was followed by an examination of North
Country by the Federal Reserve. During the course of those examinations, the
FDIC, the OFIS and Federal Reserve requested that North Country and the Bank
take certain actions, including suspending the payment of dividends and
conserving the Bank's liquidity. In response to these requests, our board of
directors adopted resolutions providing for prior regulatory approval of the
declaration or payment of any dividend by North Country or the Bank and the
suspension of interest payments on our trust preferred securities.
Following the completion of the September 2002, examination, the FDIC and
the OFIS entered a Cease and Desist Order on March 26, 2003. The Cease and
Desist Order became effective on April 5, 2003, and will remain in effect until
modified or terminated by action of the FDIC and the OFIS. The Cease and Desist
Order identified deficiencies in the Bank's policies and procedures, including
its directorate and management personnel and practices, credit underwriting,
credit administration and policies regarding asset/liability management,
liquidity, funds management and investments, and its compliance with applicable
laws and regulations, including regulations of the Federal Reserve and FDIC and
provisions of the Michigan Banking Code of 1999. The Cease and Desist Order also
requires the Bank to maintain specified capital ratios during the life of the
Cease and Desist Order. We believe that the Bank has addressed all
35
of the major areas of concern and corrected all of the material deficiencies and
violations identified in the 2002 examination report and the Cease and Desist
Order, except for meeting the Cease and Desist Order's capital requirements and
lending concentration requirements with hotel and tourism related loans.
In December 2002, we engaged an investment banking firm to assist our
Board in evaluating strategic options. Over the next six months, we considered a
number of options, but no material transactions were announced or consummated.
In mid-2003, we took additional steps to replace and enhance our senior
management: Jim Bess was hired as our president and chief executive officer
effective August 1, 2003. Joe Petterson was hired effective August 18, 2003 as
executive vice president. Kelly George was hired effective September 3, 2003 as
senior vice president and chief lending officer. Ernie Krueger was hired
effective October 13, 2003 as chief accounting officer. In addition, in August
2003, Austin Associates, LLC, was engaged to replace the former investment
banking firm.
Also in 2003, we became party to several legal proceedings against us, our
current directors and former officers. (See "Litigation" at page 20.)
In September 2003, Austin Associates began contacting parties that had
previously expressed interest in acquiring either North Country as a whole, or
select branches of the Bank. In addition, Austin Associates contacted additional
financial institutions that it believed may have had similar interest in all or
part of our franchise. The solicitation of certain branch sales resulted in the
sale, or pending sale, of five branches with deposits of approximately $30
million to three separate financial institutions. Although contact was made by
either Austin Associates or otherwise with over fifty different organizations or
individuals regarding some type of combination or other business transaction,
this solicitation resulted in no formal agreements. A letter of intent was
entered into with a party in November 2003, but it was later terminated after it
was determined that the conditions of the offer could not be met.
Throughout this process, we have continued to incur operating losses. For
the calendar year 2003, North Country realized a net loss of $9.6 million. North
Country's equity capital at year-end 2003 had declined to $10.7 million. For the
first six months of 2004, North Country incurred operating losses of $3.3
million and equity capital declined to $5.9 million at June 30, 2004.
On April 30, 2004, Jim Bess was introduced to Paul D. Tobias and Eliot R.
Stark of Mackinac Partners. Mr. Tobias expressed an interest in discussing the
possible recapitalization of North Country and developing a banking franchise in
the Oakland County area. We entered into a confidentiality agreement with
Mackinac Partners on May 3, 2004. During the week of May 10, 2004, Mr. Tobias
and Mr. Stark conducted preliminary diligence reviews of selected financial data
and other books and records we provided at our main office in Manistique,
Michigan. After several subsequent discussions and meetings, we entered into an
exclusive arrangement with Mackinac Partners, as representative of potential new
investors, effective May 25, 2004. This exclusive arrangement provided Mackinac
Partners a further opportunity to perform due diligence reviews of our
organization and to present financial terms of a proposed recapitalization by
June 18, 2004, with an understanding that the exclusive arrangement could be
extended to July 31, 2004, if certain conditions were met.
36
During the first week of June, 2004, Mackinac Partners contacted Howe
Barnes Investments, Inc. ("Howe Barnes") and shortly thereafter Keefe Bruyette &
Woods, Inc. ("KBW") to determine whether they would be interested in assisting
in raising additional capital for us through recapitalization. Representatives
of Mackinac Partners, KBW and Howe Barnes performed due diligence investigations
of the books and records of North Country at our main office over the next
several weeks.
Shortly thereafter, Mackinac Partners presented our board with a summary
of the terms under which the recapitalization might occur. Our board considered
those summary terms at a meeting on June 23, 2004, along with advice from Austin
Associates and Werner & Blank, our outside counsel. At that meeting, the board
authorized our management and representatives to continue to negotiate with
Messrs. Tobias and Stark under terms comparable to those presented at the June
23, 2004, board meeting.
In addition, on June 23, 2004, we reached a conditional settlement of a
securities action brought on behalf of a class of our shareholders, which is
pending in the U.S. District Court for the Western District of Michigan. The
conditional settlement does not include a shareholders' derivative action also
pending in this court, but which, by its nature, does not involve claims against
North Country. This settlement was an important step in the negotiations of
terms with Messrs. Tobias and Stark.
Subsequent to the June 23, 2004 board meeting, numerous meetings and
conference calls occurred with representatives of all parties. In addition, on
July 22, 2004, our management, Mr. Tobias and Mr. Stark, and representatives of
KBW met with regulatory officials of the OFIS, FDIC and Federal Reserve to
outline the proposed terms and structure of the proposed recapitalization.
Although no commitments were made, the basic terms of the recapitalization were
believed to be favorably received by all regulatory agencies. No significant
conditions were placed at that time on the proposed process or the
recapitalization.
NCFC Recapitalization was organized by Mr. Tobias and Mr. Stark during the
first week of August to enter into the Stock Purchase Agreement and act as
attorney in fact for new investors under the agreement, and to assume
arrangements and understandings made with us, KBW and Howe Barnes. KBW and Howe
Barnes provided advisory services to NCFC Recapitalization for an aggregate fee
of $150,000 payable if the proposed recapitalization occurs. We retained NCFC
Recapitalization to provide us with advisory and structuring services, and will
pay it a fee of $200,000, plus reimbursement of its expenses incurred in
connection with the Recapitalization (including any fee owed by NCFC
Recapitalization to KBW and Howe Barnes) if $30 million of common stock is sold
pursuant to the Stock Purchase Agreement. Mackinac Partners is no longer
involved in any of these transactions.
As a result, all parties proceeded to prepare documentation for
presentation and approval by our board. On August 9, 2004, our board (one
director being absent) met at a special meeting to consider the Stock Purchase
Agreement among other items. Representatives of Austin Associates and Werner &
Blank were present at that meeting and Austin Associates gave the board a
presentation and opinion that the terms of the Stock Purchase Agreement were
fair to North Country and its shareholders, from a financial point of view. A
representative of KBW, who attended a part of the meeting by conference
telephone call, verbally indicated, and
37
subsequently confirmed in written letter dated August 10, 2004, that KBW was
highly confident of its ability to place approximately $30 million of the
Company's shares of common stock in connection with North Country's planned
private placement of the shares, based on current market conditions and subject
to the assumptions described in the letter.
After due deliberation, our board approved the Stock Purchase Agreement
and related documents and authorized our management and representatives to
proceed to gain all necessary approvals to consummate the transactions provided
for in the Stock Purchase Agreement.
Our board also authorized us to engage KBW as our financial advisor for a
fee of $100,000, and to engage KBW and Howe Barnes as our exclusive placement
agents for the private placement of our shares of common stock as contemplated
by the Stock Purchase Agreement for a fee of 5% of the gross amount raised from
purchasers of our shares in the private placement.
The Stock Purchase Agreement was executed August 10, 2004, and announced
in a press release on August 11, 2004. A first amendment to the Stock Purchase
Agreement was executed by the parties on September 28, 2004, to authorize the
reverse stock split and to clarify certain closing conditions.
REASONS. In approving the Stock Purchase Agreement in furtherance of the
Recapitalization, our board considered the following:
- We had engaged two investment banking firms since December 2002 in an
effort to consummate a sale or recapitalization of North Country. After
over fifty contacts, no other parties had expressed interest in our
remaining branches at terms that, even if collectively considered, would
allow us to meet the capital requirements of the Cease and Desist Order,
nor had any other parties recently performed due diligence or made an
offer to purchase all of our outstanding shares or to recapitalize our
organization.
- A public offering to raise additional capital was not viable when
considering the expected costs to be incurred without any certainty of the
amount of capital to be raised. Our management and board believed that a
public offering to our current shareholders would be unlikely to raise
sufficient funds to meet the capital requirements of the Cease and Desist
Order.
- We have realized operating losses for nine consecutive quarters and for
each of the fiscal years ended 2002 and 2003. We realized a net loss of
$3.3 million for the six months ended June 30, 2004. Without the
Recapitalization, our management expects operating losses to continue
through 2005.
- As a result of continuing operating losses, our consolidated equity
capital position was $5.9 million as of June 30, 2004, and parent-company
cash on-hand was just $97,000 as of the same date. Without the
Recapitalization, and without any other viable transactions currently
existing, our board is concerned we may not be able to meet our financial
obligations in the near future which could result in us declaring
bankruptcy. Under that scenario, our common shareholders would likely
realize no value for their shares.
38
- We considered the opinion of Austin Associates, that the terms of the
Stock Purchase Agreement were fair to our shareholders, from a financial
point-of-view. Our board of directors reviewed the entire opinion of
Austin Associates and its analyses as described in the section entitled
"Opinion of North Country's Financial Advisor."
RECOMMENDATION OF THE BOARD OF DIRECTORS
In view of the variety of factors considered in connection with its
evaluation of the Stock Purchase Agreement, and the transactions provided for in
it, our board of directors did not find it practicable to, and did not, quantify
or otherwise attempt to assign relative weights to the specific factors
considered in reaching its determination. Our board has considered all of the
foregoing and recommends that our shareholders vote in favor of approval of the
Stock Purchase Agreement. Our board has considered all of the positive and
adverse factors discussed above and believes that the Stock Purchase Agreement,
and the transactions provided for in it, are fair to, and in the best interest
of, the shareholders of North Country.
VOTE REQUIRED
Approval of the proposal to approve the Stock Purchase Agreement and the
related transactions will require the affirmative vote of a majority of the
votes cast by the holders of our shares of common stock entitled to vote at the
special meeting. Abstentions and broker non-votes will not count in regard to
this proposal. These votes, however, will be counted in determining the number
of shares of common stock present or represented by proxy in determining whether
a quorum is present.
EFFECT ON CURRENT SHAREHOLDERS
Upon completion of the Recapitalization, current shareholders will own
less than 15% of our total outstanding common shares.
RISKS RELATED TO THE PROPOSED RECAPITALIZATION
While our board of directors recommends approval of the Stock Purchase
Agreement, and the transactions provided for in it, and is of the opinion that
they are fair to, and in the best interests of, North Country's shareholders,
you should consider carefully the following factors in determining whether to
approve the Stock Purchase Agreement.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY UNDER CURRENT CIRCUMSTANCES
TO CONTINUE AS A GOING CONCERN.
We have suffered significant losses from operations resulting in a
decrease of our regulatory capital below the minimum required in the Cease and
Desist Order and these losses are expected to continue in 2004. Our independent
public accountant concluded in its March 24, 2004, report on our consolidated
financial statements that these factors raise substantial doubt about our
ability to continue as a going concern. If our shareholders do not approve the
Stock Purchase Agreement, or if it otherwise does not close, we may be forced to
liquidate. It is
39
possible that even with shareholder approval and the additional capital raised
from new investors pursuant to the Stock Purchase Agreement, that we will be
unable to reverse this trend and we will be forced to liquidate. If we
liquidate, it is likely that our liabilities will exceed our assets and our
current shareholders and the new investors will lose their entire investment in
North Country.
YOUR PROPORTIONATE OWNERSHIP INTEREST IN THE COMMON SHARES OF NORTH
COUNTRY WILL BE SUBSTANTIALLY DILUTED.
The Stock Purchase Agreement provides for the issuance of additional
common shares based upon a formula that considers the relationship of the net
proceeds of the issuance of $30 million of new common stock to the pre-closing
adjusted equity of North Country. This formula will result in our current
shareholders having their proportionate ownership interest reduced from 100% to
less than 15%. If the reconstituted board and new management of North Country
are not successful in returning North Country to profitability following the
Recapitalization, we may still fail and be forced into receivership by bank
regulators.
YOUR VOTING POWER WITH RESPECT TO THE ELECTION OF DIRECTORS AND OTHER
MATTERS REQUIRING SHAREHOLDER APPROVAL WILL BE REDUCED.
Upon consummation of the Recapitalization, existing shareholders will have
their voting power significantly reduced as a result of the reduction in their
proportionate ownership of voting shares from 100% to 15% or less.
The completion of the transactions contemplated by the proposals may make
it more difficult for a third party to acquire North Country and discourage
unilateral tender offers. As a result of the consummation of the transactions
contemplated by the Stock Purchase Agreement controlling ownership of North
Country's outstanding shares upon completion of the Recapitalization will be
held by new investors purchasing common shares in the private placement. This
will have the effect of precluding the acquisition of North Country by a third
party without the approval of the new investors.
THE ULTIMATE SUCCESS OF OUR BUSINESS PLAN IS DEPENDENT UPON OUR RECEIPT OF
ASSURANCES FROM BANKING REGULATORS REGARDING FUTURE REGULATORY ACTIONS AND
APPROVALS.
The closing of the transactions contemplated by the Stock Purchase
Agreement depends upon the receipt of assurances from banking regulators that
after the proposed Recapitalization, the Cease and Desist Order will be
terminated and the Bank will be allowed to do a number of things, including the
commencement of banking operations through new branches in Oakland County,
Michigan. No definitive action can be taken by banking regulators on the Cease
and Desist Order or this proposed expansion until the Bank receives the proposed
capital infusion from a portion of the proceeds from the Recapitalization.
Accordingly, even if we receive such assurances prior to the closing under the
Stock Purchase Agreement, facts and circumstances could change after the closing
such that the Cease and Desist Order is not terminated and that the Bank is not
allowed to expand into new markets. Either of these occurrences would seriously
jeopardize our business plan and could result in substantial losses to our
shareholders.
40
OUR FUTURE SUCCESS WILL BE HEAVILY DEPENDENT UPON OUR KEY MANAGEMENT
PERSONNEL.
Our future success depends largely upon the continued service of our
executive officers and other key management personnel who are experienced in
banking and financial services. Upon the completion of the Recapitalization,
Paul Tobias will be the most senior officer of North Country and the Bank, Eliot
Stark will be the new chief financial officer of both North Country and the
Bank, C. James Bess, the current chief executive officer and president of North
Country and the Bank, will be the president of the Bank and Kelly George will
continue as the chief lending officer of the Bank. In addition to these
executives, we will depend on the services of our other lending officers and our
operational and staff officers. The unexpected loss of the services of any one
of these key people would materially harm our business. Additionally, our future
success and growth will depend upon our ability to recruit and retain highly
skilled employees with strong community relationships and specialized knowledge
in the financial services industry. The level of competition in our industry for
people with these skills is intense, and our inability to successfully recruit
qualified people and retain them could have a material adverse effect on our
business, financial condition and results of operations.
OUR PROPOSED BUSINESS PLAN MAY NOT BE SUCCESSFUL AND THAT COULD LEAD TO A
FURTHER SUBSTANTIAL DECREASE IN THE VALUE OF OUR STOCK.
Our proposed business plan relies heavily upon a proposed expansion of our
operations into Oakland County, Michigan. Relying upon our existing loan and
deposit base, we believe that we can successfully enter this market and compete
with existing financial institutions in the area. There is no assurance that
this plan will be successful or that we can profitably operate in this new
market area. Moreover, the principals of NCFC Recapitalization, who will be
executive officers of North Country after closing, may not know enough about us
or about the business opportunities in Oakland County to have accurately
assessed whether the new business plan has a reasonable likelihood of success.
We will need to invest substantial capital and dedicate other resources to
implement this business plan, and we may be unable to salvage a material portion
of our investment if we fail in these efforts.
INTEGRATING OUR EXISTING OPERATIONS WITH NEW OPERATIONS IN OAKLAND COUNTY,
MICHIGAN, WILL BE DIFFICULT, EXPENSIVE AND TIME CONSUMING, AND POSSIBLY
UNSUCCESSFUL.
Our business plan requires the expansion of the Bank's business to Oakland
County, Michigan. Because Oakland County is approximately 350 miles from our
current main office in Manistique, Michigan, our existing facilities and
personnel may not be able to provide all necessary logistical support for these
new operations. Accordingly, we may need to purchase or develop some of the
infrastructure required for the Oakland County operations. This will be
expensive and time consuming and could divert management's attention from
managing and resolving problems with our current operations in Michigan's Upper
Peninsula and northern Lower Peninsula. Additionally, the economies of
Michigan's Upper Peninsula and northern Lower Peninsula are different than the
economies in Oakland County, Michigan, and the surrounding areas. We may not be
able to adequately service multiple markets that have different economic
foundations.
41
DUE TO OUR WELL PUBLICIZED PAST PROBLEMS, OUR REPUTATION IN OUR CURRENT
MARKET AREA MAY BE SO DAMAGED THAT WE WILL BE UNABLE TO GAIN MARKET SHARE AND
BECOME PROFITABLE IN OUR CURRENT MARKETS.
We have disclosed in our reports to the Securities and Exchange Commission
and in press releases our deteriorating financial situation, the imposition of
the Cease and Desist Order and the shareholder litigation, and our situation has
been publicized in the various media in our markets. We believe as a result that
we have lost substantial business in our current market area. It is possible
that our business reputation has been so damaged by these past disclosures and
occurrences that we may be unable to gain enough market shares to operate
profitably in our existing markets. If this occurs, we will not be able to
provide the base for expansion envisioned by our business plan, and this will
place additional pressure on our proposed operations in Oakland County.
WE FACE CONTINUED RISK OF ADDITIONAL LITIGATION AND REGULATORY ENFORCEMENT
ACTIONS.
In addition to the Cease and Desist Order, we are subject to various
lawsuits stemming from the actions and events that occurred under previous
management. We cannot guarantee that we will not be subject to additional
lawsuits, enforcement actions or civil monetary penalties related to any of
these or other past actions, violations or deficiencies, including possible past
violations of bank lending laws and regulations. Additionally, we may be subject
to lawsuits stemming from future actions, including this transaction which will
substantially dilute our current shareholders.
THE STOCK PURCHASE AGREEMENT
We have entered into a Stock Purchase Agreement dated August 10, 2004, and
amended on September 28, 2004, with NCFC Recapitalization, a Michigan limited
liability company, individually and on behalf of the subscribers for shares of
our common stock in the Recapitalization. NCFC Recapitalization was organized by
Paul Tobias and Eliot Stark for the principal purpose of entering into this
Stock Purchase Agreement and acting as attorney in fact for purchasers.
The following information describes material terms of the Stock Purchase
Agreement, but it does not provide a complete description of all the terms and
conditions of this agreement. It is qualified in its entirety by the terms of
the Stock Purchase Agreement which is attached as Appendix A hereto. We urge you
to read it in its entirety.
REPRESENTATIONS AND WARRANTIES
In the Stock Purchase Agreement, we make numerous representations and
warranties to NCFC Recapitalization and the purchasers of our common stock under
the Stock Purchase Agreement relating to, among other things, the following:
- incorporation, good standing, corporate power and similar corporate
matters;
- authorization, execution, delivery and performance and the
enforceability of the Stock Purchase Agreement and the absence of
violations;
42
- compliance with the Cease and Desist Order;
- conflicts under charter documents, required consents or approvals and
violations of agreements or laws;
- capitalization;
- financial statements and reports;
- ownership of property and sufficiency of assets;
- loan portfolio and allowance for loan and lease losses;
- absence of certain material adverse events, changes, effects, defaults
or undisclosed liabilities;
- filing of tax returns and payment of taxes;
- employee benefit plans and compliance with federal employee benefit
laws;
- compliance with laws and Nasdaq rules;
- litigation;
- the absence of material changes since December 31, 2003; and
- the accuracy of documents filed with regulatory agencies, including
reports filed with the SEC, and of all other information furnished to
subscribers for our common shares under the terms of the Stock Purchase
Agreement.
The representations and warranties are subject to the related disclosure
schedules that we delivered to NCFC Acquisition in connection with the Stock
Purchase Agreement.
COVENANTS
Under the Stock Purchase Agreement, we have agreed to certain restrictions
on our activities until the closing. In general, we are required to conduct our
operations in the ordinary course of business. The following is a summary of the
more significant restrictions and obligations imposed upon us and the Bank,
subject to the exceptions set forth in the Stock Purchase Agreement. We must,
among other requirements:
- comply with the Cease and Desist Order, except with respect to the
Cease and Desist Order's requirements for additional capital;
- not issue any additional shares of stock, grant any stock options or
warrants or adjust the number of shares subject to outstanding options
or the exercise price of any options, except as required by the Stock
Purchase Agreement;
43
- not pay dividends on our common stock, repurchase any of our shares, or
effect any stock split (except for the reverse stock split) or other
reclassification or recapitalization;
- not make any changes in our articles of incorporation or bylaws except
for those amendments described in this proxy statement;
- not merge or consolidate ourselves or any of our subsidiaries with any
other entity, or acquire any significant assets;
- not purchase any equity securities other than Federal Home Loan bank
stock or incur any indebtedness, other than in the ordinary course of
business; and
- not grant any increases in compensation or benefits to any of our
directors, officers or employees.
We have also agreed that we will not encourage any third-party proposals
or transactions involving a merger, consolidation or other business combination
transaction involving, or any purchase of all or substantially all of the assets
of, us or any of our subsidiaries and will not participate in any negotiations
regarding the foregoing. However, we may provide information and negotiate with
a third party if our board determines that failure to do so would be
inconsistent with its fiduciary duties. We must provide NCFC Recapitalization
notice of any proposal to acquire us.
We and NCFC Recapitalization have agreed to cooperate in seeking any
necessary regulatory approvals or assurances that are listed as closing
conditions in the Stock Purchase Agreement. We have also agreed to call and hold
this special meeting of our shareholders for the purpose of obtaining all
necessary shareholder approvals required in connection with the Stock Purchase
Agreement and the transactions contemplated thereby, including, among other
things, the following:
- the issuance of our common shares in accordance with the terms of the
Stock Purchase Agreement;
- an amendment of our Restated Articles of Incorporation to effect a
1-for-20 reverse stock split;
- an amendment of our Restated Articles of Incorporation to change our
name to "Mackinac Financial Corporation";
- an amendment of the our 2000 Stock Incentive Plan to increase the
number of shares under the Plan to allow options to be granted to Paul
Tobias and Eliot Stark, the principals of NCFC Recapitalization (who
will become the chief executive officer and the chief financial
officer, respectively, of North Country), and whose employment
agreements with North Country entitle them collectively to options in
the aggregate amount of 7.5% of our common stock to be outstanding
after completion of the Recapitalization; and
44
- any other action by our shareholders required by applicable law or
Nasdaq rules.
CONDITIONS TO THE CLOSING
The obligation of NCFC Recapitalization and each new investor to proceed
with the purchase of our common stock under the terms of the Stock Purchase
Agreement is conditioned upon the satisfaction of various conditions. NCFC
Recapitalization and the investors are only required to complete their purchase
of our shares if all of the following conditions, among others, are satisfied:
- accuracy in all material respects of our representations and warranties
in the Stock Purchase Agreement and the subscription agreement to be
entered into between us and the new investors, as described in the
Stock Purchase Agreement (the "Subscription Agreement");
- performance by us in all material respects of our covenants and
agreements in the Stock Purchase Agreement and the Subscription
Agreement;
- non-occurrence or non-existence of any fact, event or circumstance at
any time since December 31, 2003, or any change in any event, fact or
circumstance in existence at or before that date, which individually or
in the aggregate with all other facts, events or circumstances, has had
or is reasonably likely to have a material adverse effect on our
business, assets, properties, results of operations, financial
condition or prospects;
- receipt of all regulatory approvals required in connection with the
consummation of the transactions contemplated in the Stock Purchase
Agreement, all of which shall be in full force and effect, and the
expiration or termination of all applicable statutory waiting periods;
- receipt of reasonably satisfactory assurances that upon completion of
the transactions contemplated by the Stock Purchase Agreement and our
recapitalization to the levels required by the Cease and Desist Order,
all applicable bank regulatory authorities will (i) remove the Cease
and Desist Order and all other cease and desist and other orders
against us and/or our banking and non-banking subsidiaries, (ii)
approve the transactions contemplated by the Stock Purchase Agreement,
(iii) determine the Bank to be well-capitalized, (iv) approve a new
branch in Oakland County, Michigan and (v) approve a name change for
the Bank;
- approval by our shareholders of each of the actions described in the
Stock Purchase Agreement requiring shareholder approval;
- effective upon the closing of the purchase of our shares,
reconstitution of our board of directors as specified by NCFC
Recapitalization and determined in accordance with the Stock Purchase
Agreement;
- termination of our existing shareholder rights agreement (the "Rights
Agreement") effective prior to or upon the closing of the purchase of
our shares, so that following the closing no Rights shall be issued or
outstanding, no person shall have become an
45
Acquiring Person and there shall not have occurred any Share
Acquisition Date or Distribution Date, all as these terms are
defined in the Rights Agreement;
- listing of our shares to be issued to the new investors on the Nasdaq
SmallCap Market, subject to official notice of issuance;
- final settlement on terms reasonably acceptable to NCFC
Recapitalization of all material litigation involving us, any of our
subsidiaries and/or any of our or their directors or officers (in such
capacities);
- the registration rights agreement to be entered into with the new
investors, as required by the Stock Purchase Agreement (the
"Registration Rights Agreement") shall be in full force and effect. The
Registration Rights Agreement will require us to use our best efforts
to prepare and file a registration statement on Form S-3 under the
Securities Act covering the shares issued to the new investors on or
before 30 days after the closing under the Stock Purchase Agreement and
to use our best efforts to cause such registration statement to become
effective as soon as practicable after filing, and in any event no
later than December 31, 2004. We are also required to further use our
best efforts to maintain the effectiveness of such registration
statement until the earliest of two years after the closing or the date
all of the shares issued to the new investors have been sold pursuant
to such registration statement.
- employment agreements with each of Paul Tobias, Eliot Stark and Jim
Bess shall be in full force and effect;
- the North Country stock option plans shall be amended to increase the
number of shares available under the plans as described in this proxy
statement;
- non-existence of any (i) order, injunction or decree issued by any
regulatory authority or court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the
transactions contemplated by the Stock Purchase Agreement or (ii)
statute, rule, regulation, order, injunction or decree which prohibits
or makes illegal any of the transactions contemplated by the Stock
Purchase Agreement;
- retirement by (i) us of all of our outstanding subordinated debentures
issued to North Country Capital Trust and (ii) North Country Capital
Trust of all of the trust preferred securities issued by it, in each
case on terms and conditions agreed upon by NCFC Recapitalization and
as set forth in the Stock Purchase Agreement;
- amendment on terms acceptable to NCFC Recapitalization of any agreement
or arrangement to which we are a party that involves any "parachute
payment" by us or any of our subsidiaries as a result of any of the
transactions contemplated by the Stock Purchase Agreement in a manner
that eliminates any (i) "excess parachute payment" that would otherwise
not be deductible under Section 280G of the Internal Revenue Code or
(ii) excise tax under Section 4999 of the Internal Revenue Code;
- confirmation that we have obtained director and officer liability
insurance in an amount, on terms and conditions, and from an insurance
company acceptable to NCFC Recapitalization;
46
- submission by investors of Subscription Agreements that have been
accepted by us by the deadline specified in the Stock Purchase
Agreement, and representing not less than an aggregate of $30 million
in subscriptions;
- maintenance of North Country's stockholders equity of at least $3
million;
- maintenance by us at all times prior to the closing of an allowance for
loan and lease losses equal to or in excess of the greater of 4% of our
total loans or $10 million;
- all other conditions set forth in the Stock Purchase Agreement shall
have been satisfied;
- the reverse stock split shall have become effective; and
- the number of shares and exercise prices of all outstanding options
under our stock option plans shall have been adjusted to account for
the reverse stock split.
We are only required to complete the sale of shares to the new investors
in the Recapitalization if the following conditions are satisfied:
- receipt of all regulatory approvals required in connection with the
consummation of the transactions contemplated in the Stock Purchase
Agreement, all of which shall be in full force and effect, and the
expiration or termination of all applicable statutory waiting periods;
- approval by our shareholders of each of the actions described in this
proxy statement requiring shareholder approval;
- listing of our shares to be issued to the new investors on the Nasdaq
SmallCap Market, subject to official notice of issuance;
- non-existence of any (i) Cease and Desist Order, injunction or decree
issued by any regulatory authority or court of competent jurisdiction
or other legal restraint or prohibition preventing the consummation of
the transactions contemplated by the Stock Purchase Agreement or (ii)
statute, rule, regulation, Cease and Desist Order, injunction or decree
which prohibits or makes illegal any of the transactions contemplated
by the Stock Purchase Agreement; and
- submission by investors of Subscription Agreements that have been
accepted by us by the deadline specified in the Stock Purchase
Agreement, and representing not less than an aggregate of $30 million
in subscriptions.
We cannot be certain as to when or if all of the conditions to a closing
under the Stock Purchase Agreement can or will be satisfied or waived by the
party permitted to do so. If the closing has not occurred by October 31, 2004,
either we or NCFC Recapitalization may terminate the Stock Purchase Agreement;
provided, however, that the party responsible for a condition to be met prior to
October 31, 2004, may not terminate the Stock Purchase Agreement if the closing
has not occurred by October 31, 2004. Additionally, either party may extend the
closing if one or more of the closing conditions have not been satisfied but
neither party can
47
extend the Stock Purchase Agreement past December 31, 2004, without the consent
of the other party.
WAIVER, AMENDMENT AND TERMINATION
Subject to certain limitations described below, we and NCFC
Recapitalization can agree in writing to amend the Stock Purchase Agreement or
waive performance of covenants and conditions. The new investors under the Stock
Purchase Agreement appoint NCFC Recapitalization as their agent and
attorney-in-fact for all purposes under the Stock Purchase Agreement, including
taking action with respect to amendments and waivers, provided, however, that
NCFC Recapitalization can only waive certain closing conditions identified in
the Stock Purchase Agreement if it receives the written approval of investors
who have subscribed for at least two-thirds in dollar amount of the total
subscriptions for the new shares.
Subject to this limitation, before or at the closing of the
Recapitalization, either we or NCFC Recapitalization, or both, may waive any
default in the performance of any term of the Stock Purchase Agreement by the
other or may waive or extend the time for the compliance or fulfillment by the
other of any of its obligations under the Stock Purchase Agreement. Either we or
NCFC Recapitalization may also waive any of the conditions precedent to our
respective obligations under the Stock Purchase Agreement. In addition, the
Stock Purchase Agreement may be terminated as follows and as further set forth
in the Stock Purchase Agreement:
- by NCFC Recapitalization or any of the investors (but in the case of an
investor, as to that investor only), if any of the conditions to the
investors' obligation to close has not been satisfied or has become
impossible, and NCFC Recapitalization has not waived the condition as
described above;
- by us, if any of the conditions to our obligation to close has not been
satisfied or has become impossible, and we have not waived the
condition;
- by either NCFC Recapitalization or us, depending on the circumstances,
if we receive a proposal for, or agree to enter into, a different
transaction with a person other than NCFC Recapitalization or its
affiliates;
- by either us or NCFC Recapitalization if any of the Proposals are not
approved by our shareholders at the special meeting;
- by either us or NCFC Recapitalization if the closing of the
Recapitalization has not occurred, other than through the failure of
the party seeking to terminate the Stock Purchase Agreement to perform
any of its required obligations under the Stock Purchase Agreement, by
October 31, 2004, or, if either we or NCFC Recapitalization extend the
closing deadline, by the extended deadline, which may not be later than
December 31, 2004; or
- by NCFC Recapitalization in the event that we and NCFC Recapitalization
are unable to resolve any objections by NCFC Recapitalization to the
calculation to any adjustment to the number of shares to be issued to
the new investors under the Stock Purchase Agreement.
48
If the Stock Purchase Agreement is terminated, it will become void and
have no effect, except that certain provisions of the Stock Purchase Agreement,
including those relating to the obligation to share some expenses and maintain
the confidentiality of certain information obtained, will survive. A termination
may also trigger the obligation of a party to pay certain expenses and
termination fees to the other party.
EXPENSES AND TERMINATION FEES
If the closing occurs, we will pay all the expenses (both ours and those
of NCFC Recapitalization) in connection with the Stock Purchase Agreement and
the Recapitalization, including printing fees and fees and expenses of financial
or other consultants, accountants and counsel. If the parties mutually agree to
terminate the Stock Purchase Agreement or if either party terminates the Stock
Purchase Agreement through no fault of the other because the Recapitalization
has not been completed by December 31, 2004, we and NCFC Recapitalization will
each pay our own respective fees and expenses.
If, however, the Stock Purchase Agreement is terminated under the special
circumstances described below, either party will be obligated to pay all or part
of the other's fees and expenses in connection with the Stock Purchase Agreement
and the Recapitalization and also perhaps a special termination fee depending
upon the reason for the termination of the Stock Purchase Agreement and
subsequent occurrences.
We are obligated to pay certain of the fees and expenses of NCFC
Recapitalization and KBW and Howe Barnes, as placement agents in connection with
the Recapitalization, incurred in connection with the Stock Purchase Agreement
and the Recapitalization, up to a maximum of $250,000, if NCFC Recapitalization
terminates the Stock Purchase Agreement and certain investor conditions are not
satisfied at the time of termination. The conditions requiring this payment
include: (i) our representations and warranties are materially inaccurate, (ii)
we fail to perform a covenant or agreement contained in the Stock Purchase
Agreement, (iii) our shareholders fail to approve the each of the items to be
presented at this special meeting; (iv) we fail to terminate the Rights
Agreement; (v) the Registration Rights Agreement is not in full force and
effect; (vi) certain employment agreements are not in full force and effect;
(vii) we have not amended our stock option plans; or (viii) we have not amended
our current employment agreements to prevent the payment of any excess parachute
payments as a result of the contemplated transactions.
In addition, we are obligated to pay certain expenses as described above,
plus an additional termination fee of $1,500,000, if we or NCFC Recapitalization
terminate the Stock Purchase Agreement because: (i) we authorize, recommend,
approve or enter into an agreement or letter of intent with any person other
than NCFC Recapitalization to effect a different acquisition proposal than
contemplated under the Stock Purchase Agreement; or (ii) we do not recommend to
our shareholders that they approve the transactions described in the Stock
Purchase Agreement or if we withdraw a recommendation to approve these
transactions. We will also be obligated to pay the additional termination fee if
(1) we fail to call or hold a shareholder meeting to obtain all approvals
required in connection with the Stock Purchase Agreement; or (2) we fail to
satisfy any of the investors' conditions to close, the Stock Purchase Agreement
is terminated and within twelve months after the termination, we authorize,
recommend, approve or enter into an agreement or letter of intent with any
person other than
49
NCFC Recapitalization to effect a different acquisition proposal than
contemplated under the Stock Purchase Agreement.
INDEMNIFICATION
The Stock Purchase Agreement provides for us to indemnify NCFC
Recapitalization and the new investors from all liabilities, damages, penalties,
costs and expenses, including reasonable attorneys' fees, in respect of any
inaccuracy in any representation, misrepresentation, breach of any warranty or
breach or failure to fulfill any covenant or agreement by us in the Stock
Purchase Agreement.
In addition, the Stock Purchase Agreement provides for us to indemnify
NCFC Recapitalization and its control persons (currently Mr. Tobias and Mr.
Stark), in respect of all liabilities, damages, penalties, costs and expenses,
including reasonable attorneys' fees, arising from any untrue statement of
material fact or omission (or allegation thereof) in this proxy statement or the
offering documents relating to the private placement of our common shares with
the new investors under the Stock Purchase Agreement. The Stock Purchase
Agreement further provides that if the indemnification is not available or is
insufficient, then we will contribute in proportion to the relative benefits
received by, and the relative fault of, the parties.
USE OF PROCEEDS
We estimate that we will have approximately $26.5 million of net proceeds
from the sale of common stock pursuant to the Stock Purchase Agreement after
paying or reimbursing approximately $3.5 million of advisory and placement fees,
and other fees and expenses paid or incurred by us, NCFC Recapitalization, KBW
and Howe Barnes in connection with the Stock Purchase Agreement and the
transactions contemplated by it. We anticipate using approximately $10 million
of the net proceeds to fund the settlement of a pending securities action in
which we are involved, pay accrued legal fees relating to that lawsuit and other
litigation in which we are involved, pay change of control payments to our
management, retire our outstanding preferred securities at a discount and
provide us with working capital. The remaining funds in the estimated amount of
$16.5 million will be used by the Bank to pay a prepayment penalty to retire
Federal Home Loan Bank advances, pay anticipated expenses of carrying out our
new business plan, and for investments.
The remaining net proceeds will be used for general corporate purposes in
an effort to expand our presence to Oakland County, Michigan.
CAPITALIZATION
The following table shows our capitalization on a consolidated basis at
June 30, 2004. Our capitalization is presented:
- on an actual basis; and
- on a pro forma basis to reflect the assumed sale of approximately 41.2
million (prior to adjustment for the reverse stock split) of our common
shares in the
50
Recapitalization at an estimated $0.73 (prior to adjustment for the
reverse stock split) per share resulting in gross proceeds of $30
million and the redemption of our outstanding trust preferred
securities.
You should read the information in this table together with our
consolidated financial statements and related notes that are contained elsewhere
in, or incorporated into, this proxy statement.
As of June 30, 2004
-------------------
Actual Pro Forma(1)
---------- ------------
(dollars in thousands)
Long-term debt:
Subordinated debentures(2) $ 12,450 $ --
----------
Total long-term debt $ 12,450 $ --
========== ============
Shareholders' Equity
Preferred stock, no par value, 500,000 shares
authorized, no shares issued and outstanding $ -- $ --
Common Stock, no par value, 18,000,000
shares authorized(1) 16,175 42,868
Retained earnings (9,769) (11,601)
Accumulated other comprehensive income, net of tax (521) (521)
---------- ------------
Total shareholders' equity $ 5,885 $ 30,746
========== ============
Tier 1 capital $ 7,168 $ 30,749
Tier 2 capital 7,168 3,152
Total risk based capital 14,336 33,901
Total assets 345,042 336,553
Total risk adjusted assets 246,139 244,441
Leverage ratio 1.93% 8.48%
Tier 1 to risk adjusted assets 2.91% 12.58%
Total capital to risk adjusted assets 5.82% 13.87%
----------------------------
(1)Reflects the following assumptions: (a) $28,500,000 net proceeds, after
underwriting commissions, from the offering of 41,252,783 (pre-reverse stock
split) common shares at a price of approximately $0.73 (pre-reverse stock split)
per share, as proposed by the Stock Purchase Agreement; (b) NCFC
Recapitalization and Keefe, Bruyette & Woods transaction related expenses of
$975,000; (c) North Country transaction related expenses of $832,000; (d)
$2,229,000 of transaction related change of control payments taxed at 35%; (e) a
$6,778,032 Federal Home Loan Bank prepayment penalty taxed at 35%; (f)
elimination of $12,450,000 of trust preferred securities, which includes a
$6,650,000 net gain taxed at 35%; and (g) a payment of $300,000 in connection
with the settlement of the class action lawsuit brought against North Country.
(2)Represents trust preferred securities of North Country, presented on a
deconsolidated basis.
51
OPINION OF NORTH COUNTRY'S FINANCIAL ADVISOR
We retained Austin Associates, LLC to provide financial advisory services
in connection with various strategic options, including the sale of North
Country as a whole, the sale of branches, assets or other businesses of North
Country and the potential recapitalization of North Country. Austin Associates
is an investment banking and consulting firm specializing in mergers and
acquisitions, valuations and other services for community banks. We selected
Austin Associates as our financial advisor on the basis of Austin Associates'
experience and expertise in representing community banks in similar
transactions.
In conjunction with our board meeting held on August 9, 2004, to consider
the Stock Purchase Agreement, Austin Associates rendered an oral opinion
(subsequently confirmed in writing) to our board of directors that the terms
provided for in the Stock Purchase Agreement and the Recapitalization were fair,
from a financial point of view, to our shareholders.
The preparation of a fairness opinion involves various determinations as
to the most appropriate methods of financial analysis and the application of
those methods to the particular circumstances. It is, therefore, not readily
susceptible to partial analysis or summary description. Austin Associates
believes that a partial review of the analyses and the facts considered in its
analyses could create an incomplete or inaccurate view of the process used and
the conclusions reached by Austin Associates in rendering its opinion. You
should consider the following when reading the discussion of Austin Associates'
opinion:
- The opinion should be read in its entirety for a full understanding of the
procedures followed, assumptions made, matters considered and
qualifications and limitations of the review undertaken by Austin
Associates in connection with its opinion. The summary of Austin
Associates' opinion set forth in this proxy statement is qualified in its
entirety by reference to the full text of the opinion that is attached as
Appendix B to this document;
- Austin Associates' opinion rendered in connection with the Stock Purchase
Agreement and the Recapitalization does not constitute a recommendation to
any of our shareholders as to how he or she should vote at the special
meeting; and
- No limitations were imposed on Austin Associates by our board or our
management with respect to the investigations made or the procedures
followed by Austin Associates in rendering its opinion.
In performing its analyses, Austin Associates made numerous assumptions
with respect to industry performance, business and economic conditions, and
other matters, many of which are beyond the control of North Country and NCFC
Recapitalization and may not be realized. Any estimates contained in Austin
Associates' analyses do not purport to be appraisals or necessarily reflect the
prices at which the companies or their securities may actually be sold. Except
as may be described below, none of the analyses performed were assigned a
greater significance by Austin Associates than any other. The summaries of
financial analyses include
52
information presented in tabular format. The tables should be read together with
the text of those summaries.
Austin Associates has relied, without independent verification, upon the
accuracy and completeness of the information it reviewed for the purpose of
rendering its opinion. Austin Associates did not undertake any independent
evaluation or appraisal of our assets and liabilities. Austin Associates has not
reviewed any of our individual credit files and has assumed that our loan loss
reserves are, in the aggregate, adequate to cover future losses. Austin
Associates' opinion is based on economic, market and other conditions existing
on the date of its opinion, August 9, 2004, and on information as of various
earlier dates made available to it which may not necessarily be indicative of
current market conditions.
In rendering its opinion, Austin Associates made the following
assumptions:
- all material governmental, regulatory and other consents and approvals
necessary for the consummation of the Recapitalization would be
obtained without any adverse effect on us or on the anticipated
benefits of the Recapitalization;
- we and NCFC Recapitalization have provided all of the information that
might be material to Austin Associates in its review; and
- the financial projections provided to Austin Associates were reasonably
prepared on a basis reflecting the best currently available estimates
and judgment of the management of North Country and NCFC
Recapitalization as to our future operating and financial performance.
As stated in its opinion letter, Austin Associates considered, among other
factors, the following:
- Austin Associates prepared and circulated confidential information
packages on North Country including the disclosure of certain nonpublic
information to various parties. Since its engagement, Austin Associates
has contacted, or been aware of contacts with, over fifty different
organizations or individuals with varying strategic, business and
transaction interests. Since its engagement, Austin Associates has
facilitated the sale or pending sale of five branch offices of North
Country to three separate parties. In addition, we previously engaged
another investment banking firm in 2002-03 to contact parties and
explore various transactions and business combinations;
- Austin Associates is not aware of any other parties that have expressed
interest in our remaining branches at terms that, even if collectively
considered, would allow us to meet our capital requirements under the
Cease and Desist Order;
- While many inquiries have been made, Austin Associates is not aware of
any other parties that have recently performed due diligence or made an
offer to purchase all of the outstanding shares or to recapitalize
North Country;
53
- The negative prospects of a public offering, including the expected
costs to be incurred without any certainty of the amount of capital to
be raised. Our management and board of directors have concluded that a
public offering to our current shareholders would be unlikely to raise
sufficient funds to meet the capital requirements of the Cease and
Desist Order;
- Austin Associates' review of our audited financial statements of North
Country for the years-ended 2001-2003 and the unaudited financial
statements for the six months-ended June 30, 2004. We have realized
operating losses for nine consecutive quarters and for each of the
fiscal years ended 2002 and 2003. We have realized net losses of $3.3
million for the six-months ended June 30, 2004, and our management
expects operating losses to continue through 2005;
- Our consolidated equity capital position was $5.9 million as of June
30, 2004, and parent-company cash on-hand was just $97,000 as of the
same date;
- Austin Associates' due diligence of certain other internal information,
primarily financial in nature, relating to our respective businesses,
earnings, assets and our prospects without the Recapitalization;
- Austin Associates due diligence of the Recapitalization, including the
principals of NCFC Recapitalization, our proposed business plan after
the Recapitalization, and prospects for earnings, growth and future
value of North Country with the Recapitalization;
- Discussions with principals of NCFC Recapitalization, and the placement
agents for the issuance, KBW and Howe Barnes, regarding their
collective expectations of completing the Recapitalization pursuant to
the terms of the Stock Purchase Agreement;
- With the Recapitalization, our ability to fund the redemption of the
$12.5 million of our outstanding trust preferred securities at a
substantial discount to par value;
- With the Recapitalization, our ability to fund the restructuring and
related penalties of approximately $85 million of high rate Federal
Home Loan Bank advances;
- While the per share issuance price of the Recapitalization is
significantly below the trading values of our stock, our respective
historical trading multiples are not consistent with peer group levels
when considering our operating losses and financial condition. In
addition, our stock has limited trading volume.
- The terms, to the extent publicly available, of certain other
transactions, which Austin Associates deemed relevant for purposes of
its opinion; and,
54
- The terms of the Stock Purchase Agreement and related documents to
which Austin Associates was a party in the negotiation of such
agreements.
The following is a summary of all material analyses performed by Austin
Associates in connection with its opinion provided to our board of directors at
its meeting on August 9, 2004, and updated where more current information was
available. The summary does not purport to be a complete description of the
analyses performed by Austin Associates.
SUMMARY OF FINANCIAL TERMS OF AGREEMENT. The Stock Purchase Agreement
provides for a formula by which the number of shares to be issued by us will be
determined. The formula considers our Pre-Closing Adjusted Equity Capital in
relation to the Net Proceeds of the Offering (both are defined terms in the
Stock Purchase Agreement). Based on June 30, 2004, actual information, and
estimated expenses in the transaction, approximately 41.2 million shares (prior
to adjustment for the reverse stock split) would have been issued resulting in
our current shareholders retaining 14.5% ownership of our pro forma outstanding
shares. Given our projected operating losses prior to closing of the
Recapitalization, additional shares are expected to be issued. The probable
range of ownership retained by our shareholders is projected to be less than
13.5%.
DILUTION AND PRO FORMA TANGIBLE BOOK VALUE ANALYSIS. For purposes of this
section, dilution is the amount by which our net tangible book value per share
is reduced as a result of the Recapitalization. Our net tangible book value per
share is determined at any date by subtracting our intangible assets from our
stated common equity capital and dividing by the number of shares of our common
stock outstanding as of that date. Presented below is the impact to our net
tangible book value per share as of June 30, 2004:
ACTUAL
PRO FORMA EQUITY CAPITAL 6/30/04
------------------------ ---------
North Country Equity Capital $ 5,885
Less: Pre-Closing Adjusting Entries (1) (1,057)
---------
Pre-Closing Adjusted Equity Capital $ 4,828
Plus: Net Offering Proceeds $ 28,500
Less: Closing Entries (2) (2,582)
---------
Pro Forma Equity Capital $ 30,746
TANGIBLE BOOK VALUE DILUTION ACTUAL PRO FORMA
---------------------------- ------ ---------
North Country Equity Capital $ 5,885 $ 30,746
Less: Intangible Assets (1,103) (591)
---------- ----------
Tangible Equity Capital $ 4,782 $ 30,155
Shares Outstanding (3) 7,019,152 48,271,935
Tangible Book Value Per Share $ .68 $ .62
Tangible Book Value Per Share Dilution to North Country Shareholders $ .06
Tangible Book Value Per Share Dilution to Investors (4) $ .10
55
(1) Includes: (a) estimated net transaction costs of North Country of
$757,000 which represents the amount by which estimated North
Country transaction costs exceed $75,000; and (b) litigation
settlement expenses of $300,000.
(2) Includes: (a) NCFC Recapitalization transaction related expenses of
$975,000; (b) transaction related change of control payments of
$2.29 million, taxed at 35%; (c) Federal Home Loan Bank pre-payment
penalty estimated at $6.77 million, taxed at 35%; (d) the redemption
$12.5 of outstanding trust preferred securities, at a gain of $6.7
million, taxed at 35%, and (e) other expenses of $75,000.
(3) Assumes 41,252,783 pre reverse stock split shares issued by North
Country.
(4) Based on a pre reverse stock split offering price of $.73 per share
($30.0 million divided by 41,252,783 shares)
Based on this analysis, Austin Associates concluded that the tangible book
value dilution for our current shareholders would approximate $.06 per share or
8.8%. Shares purchased by new investors in the Recapitalization would experience
dilution of approximately $.10 or 13.7%.
PRO FORMA REGULATORY CAPITAL RATIOS. We are subject to regulatory capital
requirements imposed by applicable banking regulations and the Cease and Desist
Order. As a result of significant operating losses, we are not in compliance
with these capital requirements. The following tables illustrate our capital
positions before and after the Recapitalization using June 30, 2004,
information.
Actual Pro Forma
June 30, 2004 June 30, 2004
------------- -------------
Tier 1 capital $ 7,168 $ 30,749
Tier 2 capital 7,168 3,152
Total risk based capital 14,336 33,901
Total assets 345,042 336,553
Total risk adjusted assets 246,139 244,441
Leverage ratio 1.93% 8.48%
Tier 1 to risk adjusted assets 2.91% 12.58%
Total capital to risk adjusted assets 5.82% 13.87%
NORTH COUNTRY'S OPERATING PERFORMANCE. We experienced calendar year losses
of $26.7 million and $9.6 million in 2002 and 2003, respectively. These losses
represented 56% and 47% of our beginning equity capital for each year,
respectively. For the six months ending June 30, 2004, we realized a net loss of
$3.3 million representing 31% of our beginning equity capital. We have reported
net losses for each of the last nine quarters.
Under our current management, we have made significant progress in, among
other things, resolving credit problems, selling problem loans and selling or
closing unprofitable branches. Nevertheless, our management expects operating
losses to continue through at least
56
calendar year 2005. A significant reason for operating losses is our low net
interest margin. We were not well positioned for the prolonged low interest rate
environment that has existed over the past few years. For the calendar year
2003, our net interest income to average assets ratio was 2.14% compared to a
peer group ratio of 3.80%. Below is a summary of our performance ratios compared
to peer group:
1Q 2004 2003 2002
------- ---- ----
NORTH NORTH NORTH
COUNTRY PEER(1) COUNTRY PEER(1) COUNTRY PEER(1)
------- ------- ------- ------- ------- -------
Net Interest Income/Avg. Assets 2.06% 3.76% 2.14% 3.80% 3.41% 3.94%
Overhead Expense/Avg. Assets 4.21% 3.10% 3.99% 3.13% 3.80% 3.15%
ROAA (1.62%) 1.03% (1.97%) 1.06% (4.31%) 1.09%
ROAE (70.0%) 11.1% (62.3%) 11.6% (61.0%) 12.5%
Nonperforming Loans/Assets 4.75% 0.51% 9.21% 0.49% 4.81% 0.53%
Tier 1 Leverage Ratio 2.13% 9.02% 2.48% 8.84% 3.83% 8.56%
(1)Source: North Country's Bank Holding Company Performance Report - Peer Group
#5 comprised of 478 bank holding companies with assets between $300
and $500 million.
FIVE YEAR FORECASTS. Austin Associates reviewed our new business plan and
related financial projections from closing through 2009. The projections were
based on the following underlying assumptions:
- Loans and deposits would grow rapidly over the next five years
through a rebuilding of our northern franchise and growth in our new
markets such as Oakland County;
- Our net interest margin would expand through a restructuring of our
existing balance sheet and the addition of a greater earning asset
base supported by core deposit funding;
- Overhead costs would be controlled and our efficiency ratio would
reach normalized levels;
- By 2009, on a fully taxable basis, our return on average assets
(ROAA) is projected to reach 1.00% and return on average equity
(ROAE) is projected to be nearly 14.0%; and
- No cash dividends would be paid during the forecasted period.
57
Based on these and other assumptions, the following range of stock values
could exist within the next four to five years:
RANGE OF POTENTIAL STOCK
PRICES BY YEAR-END(1)
---------------------
2008 2009
---- ----
PRICE TO EARNINGS MULTIPLES
12.0 $1.29 $1.43
14.0 $1.50 $1.66
16.0 $1.72 $1.90
PRICE TO TANGIBLE BOOK MULTIPLES
150% $1.38 $1.59
175% $1.61 $1.85
200% $1.84 $2.11
(1) dollar amounts do not reflect a 1-for-20 reverse stock split.
This range of projected stock values is calculated by applying current
multiples for comparable community banking organizations. While Austin
Associates believes this range to be reasonable, market conditions and
valuations of financial institutions could vary significantly in the future.
NORTH COUNTRY'S STOCK PRICE. Austin Associates reviewed the trading levels
of our stock price for the past year. From June 30, 2003 to July 31, 2004, our
stock traded between $1.42 and $2.83 per share. The closing stock price as of
August 10, 2004 (the day before the announcement of the Recapitalization) was
$1.61. The most recent reported closing stock price (September 29, 2004) was
$1.00. Our stock trades on the Nasdaq SmallCap Market under the symbol "NCFC".
For 2004, approximately 5,438 shares of our stock traded on a daily basis or
less than 2% of the outstanding shares on a monthly basis.
Austin Associates compared the trading price levels of our stock as a
multiple of tangible book value to three different peer groups. Peer Group A
represents all publicly-traded banks in the nation which realized net losses in
calendar-year 2003. Peer Group B represents all publicly-traded banks in the
nation, with assets between $300 million and $1 billion, and a nonperforming
assets to total assets ratio of at least 1.0%. Peer Group C represents all
publicly-traded banks in the Midwest, with assets between $300 million and $1
billion, and a nonperforming assets to total assets ratio of at least 1.0%.
Presented below is a summary of this analysis:
58
MEDIAN RESULTS
----------------------------------------------
NORTH COUNTRY PEER A PEER B PEER C
------------- ------ ------ ------
Total Assets ($ mil.) $ 345 $ 107 $ 596 $ 541
Tangible Equity/Assets 1.3% 7.4% 7.6% 7.6%
ROAA (2.10%) (.45%) .46% .58%
ROAE (80.3%) (6.1%) 5.6% 7.2%
Nonperforming Assets/Assets 5.73% 2.86% 1.93% 1.41%
------ ------ ----- -----
PRICE/TANGIBLE BOOK (1) 217% 163% 157% 143%
------ ------ ----- -----
(1) Based on a North Country stock price of $1.65 (August 2, 2004).
Austin Associates concluded that our stock price multiples are
significantly higher than peer group multiples, despite having greater operating
losses and greater levels of nonperforming assets. In addition, Austin
Associates concluded that our trading activity was limited and our stock did not
maintain any public following by market analysts.
SALE OF CONTROL DATA. Despite the lack of any merger or acquisition
offers, given that the Recapitalization represents a change of control, Austin
Associates reviewed sale of control data for relevant transactions. Group 1
transactions represent the sale of banks and thrifts in the nation since January
1, 1999 with assets between $100 million and $1 billion, prior year net losses,
and nonperforming assets of at least 1.0% of total assets (13 transactions).
Group 2 transactions represent the sale of banks in the Midwest since January 1,
2003 with assets between $100 million and $1 billion, prior year net losses, and
nonperforming assets of at least 1.0% of total assets (2 transactions).
Presented below is a summary of this analysis:
MEDIAN RESULTS
--------------
NORTH COUNTRY GROUP 1 GROUP 2
------------- ------- -------
Total Assets ($ mil.) $ 345 $ 150 $ 174
Tangible Equity/Assets 1.3% 7.2% 3.0%
ROAA (2.10%) (1.07%) (2.05%)
ROAE (80.3%) (9.3%) (58.3%)
Nonperforming Assets/Assets 5.73% 1.91% 4.38%
------ ------ ------
ANNOUNCED DEAL VALUE/TANGIBLE BOOK N.A. 113% 122%
------ ------ ------
Austin Associates noted that the median price-to-tangible book value
ratios for these two groups of transactions ranged from 113% to 122%. While our
shareholders are not selling their shares, the computed offering price of $.73
per share as of June 30, 2004, represents approximately 110% of tangible book
value.
ADDITIONAL INFORMATION. The opinion expressed by Austin Associates was
based on market, economic and other relevant considerations as they existed and
could be evaluated as of the date of the opinion. Events occurring after the
date of issuance of the opinion, including, but not limited to, changes
affecting the securities markets, the results of operations or material
59
changes in our financial condition could materially affect the assumptions used
in preparing this opinion.
North Country has agreed to pay Austin Associates a cash fee for its
services in the Recapitalization, which is currently estimated at $427,500, of
which payment of $402,500 is contingent upon closing of the Recapitalization. In
addition, Austin Associates was paid $50,000 to assist prior management in
complying with certain portions of the Cease and Desist Order. Austin Associates
also has been paid approximately $90,000 in connection with three separate
branch sale transactions. We have agreed to reimburse Austin Associates for its
reasonable out-of-pocket expenses, and to indemnify Austin Associates against
certain liabilities, including liabilities under securities laws.
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
Some of our directors and executive officers, and the principals of NCFC
Recapitalization who will join our board of directors and become executive
officers under the Stock Purchase Agreement, have interests in the
Recapitalization which are different from, or in addition to, the interests of
our shareholders. We have summarized these interests below.
EMPLOYMENT AND OPTION AGREEMENTS. In connection with our execution and
delivery of the Stock Purchase Agreement, Paul D. Tobias and Eliot R. Stark,
principals of NCFC Recapitalization, entered into employment agreements with us
which provide, effective with the closing under the Stock Purchase Agreement,
for them to be employed as executive officers (chairman of the board and chief
executive officer of North Country and chairman of the board of the Bank in the
case of Mr. Tobias, and executive vice president and chief financial officer for
North Country and the Bank in the case of Mr. Stark) and for the award to them
of options under our 2000 Stock Incentive Plan. In addition, C. James Bess
entered into an amendment to his existing employment agreement as required by
the Stock Purchase Agreement to address issues under Sections 280G and 4999 of
the Code with respect to the "change in control" payment to be paid to him as
result of the Recapitalization and to provide for the agreement to terminate
after the required payments are received by him. Mr. Bess also entered into a
new employment agreement which provides, effective with the closing under the
Stock Purchase Agreement, for Mr. Bess to be employed as the president and chief
operating officer of the Bank.
Mr. Tobias, Mr. Stark and Mr. Bess will also serve on our board of
directors.
We have summarized below the material features of the new employment
agreements. These summaries of the new agreements with Mr. Tobias, Mr. Stark and
Mr. Bess are qualified in their entirety by reference to the full text of the
agreements which are attached as Schedules 5-1, 5-2 and 5-3 to the Stock
Purchase Agreement. See Appendix A.
Tobias and Stark Employment Agreements. The agreements with Mr. Tobias and
Mr. Stark are essentially identical except as noted below. Mr. Tobias's
agreement provides for him to be employed and appointed as our chairman of the
board and the chief executive officer and the chairman of the board of the Bank.
Mr. Tobias is to receive an initial annual base salary of $225,000, subject to
annual increases by the board of directors. We are to develop an incentive
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plan or plans for annual cash bonuses to be awarded to eligible employees
(including Mr. Tobias). Mr. Tobias's minimum bonus for 2005 is to be $25,000.
Mr. Stark's agreement provides for him to be employed and appointed as the
executive vice president and chief financial officer of North Country and the
Bank. Mr. Stark is to receive an initial annual base salary of $200,000, subject
to annual increase by the board of directors. Mr. Stark's minimum bonus for 2005
is also to be $25,000.
Each of the employment agreements with Mr. Tobias and Mr. Stark have
initial three-year terms which renew for an additional year on each anniversary
date of the agreement unless the executive or we elect to not renew at least
sixty (60) days prior to the renewal date.
In addition to the compensation noted above, each of the agreements
provides for health and other benefits to be provided to the executive at least
substantially equivalent to other management employees holding comparable
positions. Each agreement also requires us to reimburse the executive for all
reasonable out-of-pocket expenses in connection with his employment, including a
car allowance of $750 per month and a per diem allowance for living expenses
while in Manistique, Michigan, of at least $100 per day, not to exceed $1,000 in
any calendar month, but subject to upward adjustment upon demonstration that the
reasonable ordinary living expenses exceed the per diem amount. We have also
agreed in the employment agreement to pay the executive's reasonable costs of an
office in Oakland County and a personal secretary and other assistance unless we
otherwise provide him with an office and support staff in that county.
The agreements provide for Mr. Tobias to be awarded options under the 2000
Stock Incentive Plan to purchase our shares of common stock in amounts equal to
4.375% of the number of shares to be outstanding after completion of the
Recapitalization (approximately 2,111,897 shares before, and 105,595 shares
after, the reverse stock split) and for Mr. Stark to be awarded options covering
3.125% of the shares to be outstanding after the Recapitalization (approximately
1,508,497 shares before, and 75,425 shares after, the reverse stock split). The
exercise prices of the options are to be the same as the purchase price of our
common stock issued to purchasers under the Stock Purchase Agreement. The
options are to continue and be exercisable in accordance with their terms if the
agreement is terminated for any reason other than death or for cause as if the
employment had not terminated. It employment is terminated due to death or for
cause, the options are to continue and may be exercised in accordance with terms
to be negotiated and set forth in the related option agreement.
If the agreement is terminated, we are to make termination payments in
amounts and in a
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lump sum or over time depending on the reason the agreement is terminated. The
table below summarizes the termination payments under the agreements.
REASON FOR TERMINATION TERMINATION PAYMENTS
---------------------- --------------------
By North Country for cause No termination payments required
By North Country without cause and not due to Three years; base salary, highest bonus and benefits
disability, or by the executive for Good Reason
Death One year; base salary and benefits
Disability Two years, base salary and benefits, subject to reduction
for long term disability benefits received by the executive
Following a Change in Control, either by Lump sum; 300% of aggregate of base salary and highest
Executive for Good Reason or by North Country bonus. Three years for benefits.
other than for Cause or disability
By Executive without Good Reason following a Lump sum; 100% of base salary and highest bonus
Change in Control
By mutual agreement Per the mutual agreement
Each agreement provides for a specified adjustment to the termination
payments should they be determined to constitute a parachute payment under
Section 280G of the Code. Each agreement also provides for us to pay interest at
an annual rate equal to 120% of the applicable federal rate and to indemnify the
executive for expenses, including reasonable attorneys' and consultants' fees,
incurred to collect any unpaid amounts. We are also required to indemnify the
executive for costs and expenses, on an as incurred basis, as a result of any
dispute or controversy, regardless of the outcome of the dispute or controversy.
Each agreement includes confidentiality obligations of the executive and
provides that the executive will not engage in competitive activities while
employed by us. If his employment is terminated, the restriction on executive's
competitive activities will continue after termination in certain instances for
a period of 1 to 3 years, depending on the reason for the termination.
Bess Amendment and Employment Agreement. For a description of Mr. Bess's
existing Employment Agreement see the discussion starting on page 82. Under his
existing agreement, Mr. Bess will be entitled to change in control payments as a
result of the Recapitalization in an aggregate amount of approximately
$1,231,740. In connection with our execution and delivery of the Stock Purchase
Agreement, Mr. Bess entered into an amendment of his existing employment
agreement and a new employment agreement that will become effective upon the
closing of the Recapitalization.
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The amendment to Mr. Bess's existing employment agreement provides that he
will not be entitled to receive any payment or other benefit under the agreement
if the payment or benefit would cause any payment to be considered as an excess
parachute payment under Section 280G of the Code. In that event, Mr. Bess will
have the right to designate the payments or benefits to be reduced or eliminated
in order to avoid the payment being deemed an excess parachute payment. Under
the amendment, we also agree to indemnify Mr. Bess for all taxes and reasonable
legal, accounting and other professional fees and related expenses incurred by
him in connection with any tax audit or proceeding to the extent attributable to
the application of Section 280G or 4999 of the Code to the change in control
payments made to him under the agreement.
The amendment further provides that upon payment of the change in control
payments following the closing of the Recapitalization, including a bonus
related to the removal of the Cease and Desist Order, that we and Mr. Bess will
have no further rights or obligations under the agreement except for the
indemnity provision noted above and Mr. Bess's confidentiality obligations in
the agreement. If the closing does not occur under the Stock Purchase Agreement
by December 31, 2004, the amendment will no longer be effective.
The new employment agreement with Mr. Bess provides for him to be employed
and appointed as the president and chief operating officer of the Bank. The
agreement has an initial 18 month term and will be extended for additional
one-year periods unless we or Mr. Bess elect to terminate the agreement at the
end of the then current term.
Mr. Bess is to receive base salary at the annual rate of $250,000 and an
additional incentive bonus in accordance with our or the Bank's policy or plan.
In addition, we are to provide Mr. Bess with a per diem allowance for living
expenses while in Manistique, Michigan, of at least $100 per day, not to exceed
$1,000 in any calendar month, but subject to upward adjustment upon
demonstration that his reasonable ordinary living expenses exceed the per diem
amount. In addition, we are to provide Mr. Bess with the use of the automobile
presently used by him. Mr. Bess will also be entitled to participate in our
employee benefit plans as are made available to our executives generally.
The agreement provides that if Mr. Bess's employment is terminated as a
result of his disability, by us without cause or if we elect to not extend the
term of the agreement, Mr. Bess will be entitled to his base salary for a period
of one year, except that, if termination occurs during the initial 18 month
employment period, Mr. Bess will only be entitled to the payments for the
shorter of one year or the balance of the initial period. The agreement includes
confidentiality obligations of Mr. Bess, but does not include any
non-competition provisions.
CHANGE IN CONTROL PAYMENTS
Our current executive officers have employment agreements with us that
provide for us to make change in control payments to them in the event the
closing under the Stock Purchase Agreement occurs.
63
Mr. Bess will be entitled to payments of approximately $1,231,740 under
his existing employment agreement. See the description of his existing
employment agreement on page 82 and the amendment to that agreement on page 63.
Joseph E. Petterson, our executive vice president and chief financial
officer, and Kelly W. George, our senior vice president and chief lending
officer, each have employment agreements which include change in control
provisions similar to those in Mr. Bess's existing agreement. In general, these
agreements provide that if during the term of the agreement or within one year
following the termination date of the agreement, we engage in a change in
control transaction as defined in the agreement, the executive's employment
under the agreement will automatically terminate two months following the change
in control transaction and the executive shall receive: (i) his base salary and
benefits through the end of the original employment term (July, 31, 2005 in the
case of Mr. Petterson and August 31, 2005 in the case of Mr. George), plus (ii)
one year of his then base pay. The closing under the Stock Purchase Agreement
will trigger the change in control payments under these agreements and the
executive officers will be entitled to payments of approximately $486,000 to Mr.
Petterson and $511,000 to Mr. George and continuation of benefits through the
original employment term.
Jani L. Blake, our executive vice president and chief operating officer,
has an employment agreement which provides that if her employment is terminated
as a consequence of the sale, liquidation, regulatory closure or changed
management of the Bank that she would receive one year's base pay under the
agreement ($110,000).
We also have an employment agreement with Sherry L. Littlejohn, our former
president and chief executive officer. For information with respect to this
agreement see "Employment and Consulting Agreements" beginning on page 82.
The Stock Purchase Agreement includes a condition to the closing to the
effect that any of these arrangements that constitute a "parachute payment" must
be amended so that no part of the payment would not be deductible under Section
280G of the Code or subject to an excise tax under Section 4999 of the Code. We
have as yet not made any determination with respect to whether this condition
will require an amendment to any of these employment agreements, other than Mr.
Bess's agreement which we believe has been addressed by the amendment to his
agreement.
In addition, the payments under these provisions to any of our executive
officers may also require prior approval of the FDIC under the "golden
parachute" provisions of the FDIC regulations.
OTHER INTERESTS. Mr. Stark and Mr. Tobias are the principals of NCFC
Recapitalization and Mr. Tobias is a principal of Mackinac Partners. A part of
the proceeds from the sale of our common shares to the new investors under the
Stock Purchase Agreement will be used to pay NCFC Recapitalization's advisory
fee of $200,000 and to reimburse its transaction related expenses, which are
estimated to be approximately $600,000. Alternatively, if the Stock Purchase
Agreement is terminated, we may be required to reimburse NCFC for those expenses
64
up to $250,000 and to pay an additional termination fee of $1.5 million. See
"The Stock Purchase Agreement - Expenses and Termination Fees" on page 49.
The Stock Purchase Agreement provides for us to indemnify NCFC
Recapitalization from damages relating to any breach by us of our
representations, warranties and covenants in the Stock Purchase Agreement and
for us to indemnify NCFC Recapitalization and its control persons (Mr. Tobias
and Mr. Stark) for securities law liabilities damages arising out of this proxy
statement or our offering documents relating to our offering to the new
investors. See "The Stock Purchase Agreement - Indemnification."
DESCRIPTION OF THE CAPITAL STOCK
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by reference to our
Restated Articles of Incorporation, as amended.
Under our Restated Articles of Incorporation, as amended, our authorized
capital stock consists of 500,000 shares of preferred stock, no par value, none
of which is outstanding, and 18,000,000 shares of common stock, no par value, of
which 7,019,152 shares are outstanding and held of record by approximately 1,800
persons as of the date of this proxy statement.
PREFERRED STOCK
Our Board is authorized to issue preferred stock in one or more series,
from time to time, and to fix the particular designations and terms thereof,
including voting rights, dividend rates, redemption rights, liquidation value,
conversion rights and other matters, without further approval of our
shareholders. The issuance of preferred stock could adversely affect the holders
of our common stock. We have authorized a Series B Junior Participating
Preferred Stock, par value $.01 per share pursuant to a shareholders rights plan
as set forth in the Rights Agreement. Prior to the adoption of the Stock
Purchase Agreement, our board amended the Rights Agreement to exempt the
transactions contemplated by the Stock Purchase Agreement from the terms of the
Rights Agreement and to provide that all of the currently outstanding rights
will expire prior to the closing under the Stock Purchase Agreement.
COMMON SHARES
All voting rights are vested in the holders of shares of our common stock,
with each share entitling the holder to one vote. Holders of the shares of
common stock do not have cumulative voting rights, nor do they have the
preemptive right to subscribe for additional securities issuable by us.
In the event of the liquidation of North Country, the holders of common
shares are entitled to receive, pro rata, any assets distributable to
shareholders in respect of shares held by them after satisfaction of the
liquidation preferences of any outstanding preferred stock. Subject to any prior
rights of the holders of preferred stock then outstanding, holders of our common
shares are entitled to receive such dividends as are declared by our board of
directors out of
65
funds legally available for that purpose. The outstanding shares of common
shares are fully paid and nonassessable.
The Registrar and Transfer Company of Cranford, New Jersey, serves as
transfer agent of our common stock.
There are, at present, no plans, understandings, agreements or
arrangements concerning the issuance of additional shares of our common stock,
except for the shares of our stock to be issued pursuant to the Stock Purchase
Agreement and shares of our common stock reserved and to be for issuance under
our dividend reinvestment plan and our stock option and incentive plans, as
amended in accordance with the Stock Purchase Agreement.
Uncommitted authorized but unissued shares of our common stock may be
issued from time to time to such persons and for such consideration as our Board
may determine and holders of the then outstanding shares of our common stock may
or may not be given the opportunity to vote thereon, depending upon the nature
of any such transactions, applicable law and the judgment of our board regarding
the submission of such issuance to our shareholders. As noted, our shareholders
have no preemptive rights to subscribe to newly issued shares.
Under current Nasdaq rules, and because the number of shares of our stock
to be issued in connection with the Recapitalization will exceed 20% of our
currently outstanding shares of common stock, our shareholders must approve the
issuance of the shares proposed to be sold under the terms of the Stock Purchase
Agreement.
ANTI-TAKEOVER PROVISIONS
In addition to our ability to use authorized but unissued shares of
preferred or common stock for the purpose of making an acquisition by an
unwanted suitor of a controlling interest in North Country more difficult, time
consuming or costly, our Restated Articles of Incorporation and the Michigan
Business Corporation Act ("MBCA") contain other provisions which could be used
by us to impede certain efforts to acquire control of North Country. Those
provisions include the following:
ANTI-TAKEOVER LEGISLATION. The MBCA contains provisions intended to
protect shareholders and prohibit or discourage certain types of hostile
takeover activities. These provisions regulate the acquisition of "control
shares" of large public Michigan corporations (the "Control Share Act").
The Control Share Act establishes procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by an acquirer which, when combined with other shares held by that person
or entity, would give the acquirer voting power at or above any of the following
thresholds: 20%, 33-1/3% or 50%. Under the Control Share Act, an acquirer may
not vote "control shares" unless the corporation's disinterested shareholders
vote to confer voting rights on the control shares. The acquiring person,
officers of the target corporation, and directors of the target corporation who
are also employees of the corporation are precluded from voting on the issue of
whether the control shares shall be
66
accorded voting rights. The Control Share Act does not affect the voting rights
of shares owned by an acquiring person prior to the control share acquisition.
The Control Share Act entitles corporations to redeem control shares from
the acquiring person under certain circumstances. In other cases, the Control
Share Act confers dissenters' rights upon all of a corporation's shareholders
except the acquiring person.
The Control Share Act applies only to an "issuing public corporation." We
fall within the statutory definition of an "issuing public corporation." The
Control Share Act automatically applies to any "issuing public corporation"
unless the corporation "opts out" of the statute by so providing in its articles
of incorporation or bylaws. In contemplation of the Recapitalization, our Board
amended our bylaws to "opt out" of the Control Share Act.
FAIR PRICE ACT. Certain provisions of the MBCA (the "Fair Price Act")
establish a statutory scheme similar to the supermajority and fair price
provisions found in many corporate charters. The Fair Price Act provides that a
supermajority vote of 90% of the shareholders and no less than two-thirds of the
votes of non-interested shareholders must approve a "business combination." The
Fair Price Act defines a "business combination" to encompass any merger,
consolidation, share exchange, sale of assets, stock issue, liquidation or
reclassification of securities involving an "interested shareholder" or certain
"affiliates." An "interested shareholder" is generally any person who owns 10%
or more of our outstanding voting shares. An "affiliate" is a person who
directly or indirectly controls, is controlled by, or is under common control
with a specified person.
The supermajority vote required by the Fair Price Act does not apply to
business combinations that satisfy certain conditions. These conditions include,
among others, that: (i) the purchase price to be paid for our shares is at least
equal to the highest of either (a) the market value of the shares or (b) the
highest per share price paid by the interested shareholder within the preceding
two-year period or in the transaction in which the shareholder became an
interested shareholder, whichever is higher; and (ii) once a person has become
an interested shareholder, the person must not become the beneficial owner of
any additional shares of our voting stock except as part of the transaction
which resulted in the interested shareholder becoming an interested shareholder
or by virtue of proportionate stock splits or stock dividends.
The requirements of the Fair Price Act do not apply to business
combinations with an interested shareholder that the board of directors has
approved or exempted from the requirements of the Fair Price Act by resolution
at any time prior to the time that the interested shareholder first became an
interested shareholder. In contemplation of the Recapitalization, our Board
passed a resolution exempting the transactions contemplated in the Stock
Purchase Agreement, or any other business combination with NCFC
Recapitalization, from the Fair Price Act.
CLASSIFIED BOARD. Our board is classified into three classes, with each
class serving a staggered, three-year term. Classification of the board could
have the effect of extending the time during which the existing board could
control our operating policies even though opposed by the holders of a majority
of our outstanding shares of common stock.
67
Under our Restated Articles of Incorporation, all nominations for
directors by a shareholder must be delivered to us in writing at least 60 days
prior to the annual meeting of the shareholders. A nomination that is not
received prior to this deadline will not be placed on the ballot. Our board
believes that advance notice of nominations by shareholders will afford a
meaningful opportunity to consider the qualifications of the proposed nominees
and, to the extent deemed necessary or desirable by our board, will provide an
opportunity to inform shareholders about such qualifications. Although this
nomination procedure does not give our board any power to approve or disapprove
of shareholder nominations for the election of directors, this nomination
procedure may have the effect of precluding a nomination for the election of
directors at a particular annual meeting if the proper procedures are not
followed.
Our Restated Articles of Incorporation provide that any one or more of our
directors may be removed at any time, with or without cause, but only by either
(i) the affirmative vote of a majority of "Continuing Directors" and at least
80% of the directors; or (ii) the affirmative vote, at a meeting of the
shareholders called for that purpose, of the holders of at least 80% of the
voting power of the then-outstanding shares of capital stock of North Country
entitled to vote generally in the election of directors, voting together as a
single class. A "Continuing Director" is generally defined in our Restated
Articles of Incorporation as any member of our board who is unaffiliated with
any "interested shareholder" (generally, an owner of 10% or more of our
outstanding voting shares) and was a member of the board prior to the time an
interested shareholder became an interested shareholder, and any successor of a
Continuing Director who is unaffiliated with an interested shareholder and is
recommended to succeed a Continuing Director by a majority of the Continuing
Directors then on our board. However, these provisions are unenforceable under
Michigan law at least to the extent that they purport to allow the removal of a
director by the other directors or require a supermajority vote of the
shareholders to remove a director for "cause."
Any vacancies in our board for any reason, and any newly created
directorships resulting from any increase in the number of directors, may be
filled only by our board, acting by an affirmative vote of a majority of the
Continuing Directors and an 80% majority of all of the directors then in office,
although less than a quorum. Any directors so chosen shall hold office until the
next annual meeting of shareholders at which directors are elected to the class
to which such a director was named and until their respective successors shall
be duly elected and qualified or their resignation or removal. No decrease in
the number of directors may shorten the term of any incumbent director.
NOTICE OF SHAREHOLDER PROPOSALS. Under our Restated Articles of
Incorporation, the only business that may be conducted at an annual meeting of
our shareholders is business that has been brought before the meeting by or at
the direction of the majority of the directors or by one of our shareholders (a)
who provides timely notice of the proposal in writing to the secretary of North
Country and the proposal is a proper subject for action by shareholders under
Michigan law or (b) whose proposal is included in our proxy materials in
compliance with all the requirements set forth in the applicable rules and
regulations of the SEC. To be timely, a shareholder's notice of proposal must be
delivered to, or mailed to and received at our principal executive offices not
less than 30 days prior to the date of the originally scheduled meeting
regardless of any postponements, deferrals or adjournments of that meeting to a
later date. The
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shareholder's notice of proposal must set forth in writing each matter the
shareholder proposes to bring before the meeting including: the name and address
of the shareholder submitting the proposal, as it appears on our books and
records; a representation that the shareholder (i) is a holder of record of our
stock entitled to vote at the meeting, (ii) will continue to hold such stock
through the date on which the meeting is held, and (iii) intends to vote in
person or by proxy at the meeting and to submit the proposal for shareholder
vote; a brief description of the proposal desired to be submitted to the meeting
for shareholder vote and the reasons for conducting such business at the
meeting; and the description of any financial or other interest of the
shareholder in the proposal. This procedure may limit to some degree the ability
of shareholders to initiate discussions at our annual shareholders' meetings. It
may also preclude the conducting of business at a particular meeting if the
proposed notice procedures have not been followed.
AMENDMENT OR REPEAL OF CERTAIN PROVISIONS OF THE RESTATED ARTICLES OF
INCORPORATION. Under Michigan law, our board need not adopt a resolution setting
forth an amendment to our Restated Articles of Incorporation before the
shareholders may vote on it. Unless our Articles of Incorporation provide
otherwise, amendments of our Restated Articles of Incorporation generally
require the approval of the holders of a majority of the outstanding stock
entitled to vote thereon, and if the amendment would increase or decrease the
number of authorized shares of any class or series, or the par value of such
shares, or would adversely affect the rights, powers or preferences of such
class or series, a majority of the outstanding stock of such class or series
also would be required to approve the amendment.
Our Restated Articles of Incorporation require that in order to amend,
repeal or adopt any provision inconsistent with Article VII relating to our
board or Article VIII relating to shareholder proposals, we must receive the
affirmative vote of at least 80% of the issued and outstanding shares of our
capital stock entitled to vote in the election of directors, voting as a single
class; provided, however, that such amendment or repeal or inconsistent
provision may be made by a majority vote of such shareholders at any meeting of
the shareholders duly called and held where such amendment has been recommended
for approval by at least 80% of all directors then holding office and by a
majority of the "Continuing Directors." These amendment provisions could render
it more difficult to remove management or for a person seeking to effect a
merger or otherwise gain control of North Country. These amendment requirements
could, thus, adversely affect the potential realizable value of shareholders'
investments.
BOARD EVALUATION OF CERTAIN OFFERS. Article X of our Restated Articles of
Incorporation provides that our board shall not approve, adopt or recommend any
offer of any person or entity (other than North Country) to make a tender or
exchange offer for any of our common shares, to merge or consolidate North
Country with any other entity, or to purchase or acquire all or substantially
all of our assets, unless and until our board has evaluated the offer and
determined that it would be in compliance with all applicable laws and that the
offer is in the best interests of North Country. In doing so, our board may rely
on an opinion of legal counsel who is independent from the offeror, and/or any
test of such legal compliance in front of any court or agency that may have
appropriate jurisdiction over the matter.
In making its determination, our board must consider all factors it deems
relevant, including, but not limited to: (i) the adequacy and fairness of the
consideration to be received by
69
North Country and/or our shareholders, considering historical trading prices of
our common shares, the price that could be achieved in a negotiated sale of
North Country as a whole, past offers, and the future prospects of North
Country; (ii) the potential social and economic impact of the proposed
transaction on North Country and our employees, depositors and other customers
and vendors; (iii) the potential social and economic impact of the proposed
transaction on the communities in which we and our subsidiaries operate or are
located; (iv) the business and financial condition and earnings prospects of the
proposed acquiring person or entity; and (v) the competence, experience and
integrity of the proposed acquiring person or entity and its or their
management.
To amend, repeal, or adopt any provision that is inconsistent with Article
X, at least 80% of our shareholders, voting together as a single class, must
approve the change, unless the change has been recommended for approval by at
least 80% of our directors, in which case a majority of our voting stock could
approve the action.
SHAREHOLDER RIGHTS PLAN. We have adopted a Shareholder Rights Plan
pursuant to which we issued one preferred stock purchase right, or a Right, for
each outstanding share of our common stock. Each Right entitles the registered
holder to purchase from us one one-thousandth of a share of our Series B Junior
Participating Preferred Stock at a price of $200.00 per one one-thousandth of a
preferred share. Currently, the Rights are not exercisable and are attached to
all outstanding shares of common stock.
As a condition to the closing of the Recapitalization, we have agreed in
the Stock Purchase Agreement to terminate the Shareholder Rights Plan at or
before the closing. The termination will not result in any fees for redemption
or cancellation of the outstanding Rights.
PROPOSAL 2 -
APPROVAL OF REVERSE STOCK SPLIT
OVERVIEW
To enhance our ability to satisfy our obligations under the Stock Purchase
Agreement, and for the reasons stated below, our board of directors has
determined that it would be advisable to amend our current Restated Articles of
Incorporation to effect a 1-for-20 reverse stock split of our issued and
outstanding common stock without reducing the number of shares of common stock
that we are authorized to issue under our Restated Articles of Incorporation.
If the proposed amendment is approved by our shareholders and becomes
effective, it would result in one post-split share of our common stock being
issued in exchange for every twenty shares of our common stock issued and
outstanding at the effective time of the reverse stock split, and provide for
the rounding upward to the nearest whole share of any fractional shares that
would otherwise be issuable to our shareholders.
Because fractional shares will be rounded upward to the nearest whole
shares, there will not be any reduction in the number of our shareholders as a
result of the transaction. THIS IS NOT A "GOING PRIVATE" TRANSACTION.
70
Please refer to the full text of the proposed Certificate of Amendment to
our Restated Articles of Incorporation attached as Appendix C.
If the proposed amendment is approved by the shareholders, but the closing
under the Stock Purchase Agreement does not occur, our board of directors will
abandon the amendment and the reverse stock split will not become effective.
BACKGROUND OF AND REASONS FOR THE PROPOSAL
The proposed amendment to our Restated Articles of Incorporation to effect
the reverse stock split is for the purposes of:
- Increasing the per share price of our common stock in order to make
an investment in our common stock more attractive to new investors
and to continue to satisfy a Nasdaq listing requirement.
- Providing a sufficient number of authorized and unissued shares of
our common stock for issuance under the Stock Purchase Agreement
without the need to authorize additional shares and pay additional
franchise taxes associated with the increase.
Our Restated Articles of Incorporation authorize us to issue up to
18,000,000 shares of common stock. As of September 29, 2004, we had issued and
outstanding 7,019,152 shares of common stock and had reserved an additional
535,732 shares for issuance upon the exercise of outstanding options under our
stock option plans. If the Recapitalization is consummated, we anticipate being
required to issue approximately 41,252,783 additional shares, subject to
adjustment, under the Stock Purchase Agreement and to reserve an additional
6,033,991 shares for issuance upon exercise of the options to be awarded at the
closing and options that may be issued in the future under our amended stock
plans. See the discussion of Proposal 4 beginning on page 76.
If the reverse stock split is effected, our outstanding number of shares
of common stock would be decreased to 350,958 shares, and the number of shares
reserved for outstanding options would be decreased to 26,787 shares, in each
case subject to adjustment to eliminate fractional shares. On a post-split
basis, we anticipate being required to issue at least approximately 2,062,640
shares in the Recapitalization and to reserve an additional 301,670 shares for
options that may be issued under our stock option plans at and after the
closing. Accordingly, because the reverse stock split will not reduce the number
of authorized shares of common stock (18,000,000 shares), we will have
sufficient authorized and unissued shares to satisfy our obligations under the
Stock Purchase Agreement without any need to amend the Restated Articles of
Incorporation to increase the number of authorized shares.
The closing price per share of our common stock on September 29, 2004, was
$1.00. Management anticipates that the reverse stock split will result in a per
share increase in the market price of our common stock, although no assurance
can be given as to the amount of the increase or whether any increase will
continue for any particular
71
period following the closing. We believe that an increase per share market price
for our common stock will be attractive to the new investors.
Moreover, the Nasdaq SmallCap Market listing rules include a requirement
that shares traded on the Nasdaq SmallCap Market have a minimum bid price per
share of at least $1.00. It is a condition to the closing of the
Recapitalization that the new shares of our common stock to be issued as part of
the Recapitalization be included in our common stock listing on the Nasdaq
SmallCap Market. Although we do not yet know whether we can satisfy all of
Nasdaq's listing requirements, we are reasonably certain that we will not be
able to maintain our listing on the Nasdaq SmallCap Market if our common stock
trades at under $1.00 per share.
Absent the proposed reverse stock split, the additional shares of our
common stock to effect the Recapitalization, on a pro forma basis at June 30,
2004, would be issued at a price of approximately $.73 per share. See
"Capitalization" on page 50. If the reverse stock split is effected, we
anticipate that our common stock should have both a minimum bid and a sales
price well above $1.00 per share thus satisfying at least this Nasdaq listing
requirement.
VOTE REQUIRED
The affirmative vote of a majority of our outstanding shares of common
stock entitled to vote is required to approve the proposal to amend our Restated
Articles of Incorporation to effect the reverse stock split. Abstentions and
broker non-votes will not be deemed affirmative votes, and will have the same
effect as a negative vote on the proposal. Those votes, however, will be counted
in determining the number of shares of common stock present or represented by
proxy in determining whether a quorum is present.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors believes that the reverse stock split to be
effected by the proposed amendment to our Restated Articles of Incorporation is
in the best interest of North Country and our shareholders and recommends that
you vote "FOR" the amendment and the reverse stock split.
RESERVATION OF RIGHTS
Our board of directors reserves the right to abandon the proposed
amendment and the reverse stock split without further action by our shareholders
at any time before the filing the Certificate of Amendment with the Michigan
Department of Labor & Economic Growth, Bureau of Commercial Services
notwithstanding authorization of the proposed amendment and reverse stock split
by the shareholders. Our board of directors intends to abandon the proposed
amendment if the closing under the Stock Purchase Agreement does not occur.
EXCHANGE OF CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARE INTERESTS
When the reverse stock split becomes effective, each twenty pre-split
shares of common stock will automatically be combined and changed into one
post-split share of common stock. No additional action on the part of any
shareholder will be required in order to effect the reverse stock split and,
beginning at the effective time, each certificate representing pre-split shares
of
72
common stock will represent for all purposes one-twentieth of that number of
post-split shares of common stock, subject to adjustment to eliminate fractional
shares. Shareholders will be requested to exchange their certificates
representing shares of common stock held prior to the reverse stock split for
new certificates representing shares of common stock issued as a result of the
reverse stock split. We expect that our transfer agent will act as our exchange
agent to act for holders of shares in implementing the exchange of their
certificates. Shareholders will be furnished the necessary materials and
instructions to effect such exchange promptly following the closing under the
Stock Purchase Agreement. Certificates representing pre-split shares of common
stock subsequently presented for transfer will not be transferred on our books
and records but will be returned to the tendering person for exchange.
SHAREHOLDERS ARE NOT BEING REQUESTED TO SUBMIT THEIR CERTIFICATES AND SHOULD NOT
SUBMIT ANY CERTIFICATES UNTIL REQUESTED TO DO SO.
No script or fractional post-split share of common stock will be issued to
any shareholder in connection with the reverse stock split. Accordingly, all
shareholders of record who would otherwise be entitled to receive a fractional
post-split share of common stock will, upon surrender of their certificates
representing pre-split shares of common stock, have the post-split shares of
common stock to which they are entitled rounded upwards to the nearest whole
share and receive a whole shares of common stock in lieu of their fractional
post-split share of common stock.
EFFECT ON CURRENT SHAREHOLDERS
As a result of the reverse stock split, each issued and outstanding share
of our common stock will automatically, without any action on the part of the
shareholders, become and be converted into one-twentieth of a share of common
stock, subject to adjustment to eliminate fractional shares. No fractional
shares will be issued in connection with the reverse stock split. Instead, all
shareholders who would otherwise be entitled to receive a fractional share of
post-split common stock will receive in lieu thereof a whole share of post-split
common stock.
The terms of the post-split common stock will be the same as the terms of
the pre-split common stock, and subject to adjustments for fractional shares, as
described below, consummation of the reverse stock split alone will not result
in a change in the relative equity interest in North Country or the voting power
or other rights, preferences or privileges of the holders of common stock. See
discussion beginning on page 65 for a more complete description of our common
stock. The reverse stock split will not affect the par value of either the
common stock or the preferred stock, and the number of authorized shares of
common stock and preferred stock will remain at 18,000,000 shares and 500,000
shares, respectively.
The additional authorized shares of common stock that we do not use in
connection with the Recapitalization would be available from time to time for
corporate purposes including raising additional capital, acquisitions of
companies or assets, for strategic transactions, including a sale of all or a
portion of North Country, and sales of stock or securities convertible into
common stock. We currently have no present intention, plan, arrangement or
agreement, written or oral, to issue shares of our common stock for any purpose,
except pursuant to the terms of the Recapitalization and for the issuance of
shares of common stock upon the exercise of outstanding or newly issued stock
options. We believe that the availability of the additional
73
shares will provide us with the flexibility to meet business needs as they
arise, to take advantage of favorable opportunities and to respond to a changing
corporate environment. If we issue additional shares, the ownership interests of
holders of our common stock will be diluted.
The Stock Purchase Agreement provides that we will take or cause to be
taken all required action under our stock option plans to adjust the number of
shares issuable pursuant to all outstanding options (number of shares to be
divided by twenty) and the exercise prices (exercise prices to be multiplied by
twenty) as a result of the reverse stock split, subject to adjustment as a
result of the elimination of fractional shares.
While we expect that the reduction in the outstanding shares of common
stock will increase the market price of our common stock, we cannot assure you
that the reverse stock split will proportionately increase the market price of
our common stock based on the reverse stock split ratio, or result in any
permanent increase in the market price, which can be dependent upon many
factors, including our business and financial performance and prospects. Should
the market price decline after the reverse stock split, the percentage decline
may be greater, due to the smaller number of shares outstanding, than would have
been prior to the reverse stock split. In some cases the stock price of
companies that have effected reverse stock splits has subsequently declined back
to pre-split levels. Accordingly, we cannot assure you that the market price of
our common stock immediately after the reverse stock split becomes effective
will be maintained for any period of time or the ratio of post- and pre-split
shares will remain the same after the reverse stock split is effected, or the
reverse stock split will not have an adverse effect on our stock price due to
the reduced number of shares outstanding after the reverse stock split. A
reverse stock split may be viewed negatively by the market and, consequently,
could lead to a decrease in our overall market capitalization.
The reverse stock split is likely to result in some shareholders owning
"odd-lots" of less than 100 shares of common stock. Brokerage commissions and
other costs of transactions in odd-lots are generally somewhat higher than the
costs of transactions on "round-lots" of even multiples of 100 shares.
Assuming the reverse stock split is approved and the other conditions to
the Recapitalization are satisfied, we expect that the reverse stock split will
become effective at the time specified in the Certificate of Amendment on the
date filed with the Michigan Department of Labor and Economic Growth, Bureau of
Commercial Services - Corporation Division. Management currently expects the
amendment and the reverse stock split would become effective shortly before the
closing, if at all, under the Stock Purchase Agreement.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following general description of the federal income tax consequences
is based on the Internal Revenue Code of 1986, as amended, the applicable
treasury regulations promulgated thereunder, judicial authority and current
administrative rulings and practices as in effect on the date of this proxy
statement (collectively, the "Code"), all of which are subject to change and any
such change could apply retroactively. This discussion is for general
information only and does not purport to deal with all aspects of federal income
taxation that may be relevant to holders of our common stock and does not
discuss consequences which may apply to special classes of
74
taxpayers (e.g., non-resident aliens, broker-dealers, tax-exempt organizations,
banks or insurance companies). Shareholders are urged to consult their own tax
advisors to determine the particular federal, state, local and foreign tax
consequences to them.
We believe that the reverse stock split will constitute a tax-free
recapitalization under the Code and that our shareholders should not recognize
any gain or loss as a result of the reverse stock split. In addition, our
shareholders should not recognize any gain or loss if they receive only common
stock upon the reverse stock split. Although the issue is not free from doubt,
receipt of an additional whole share of common stock received in lieu of the
receipt of a fractional share should be treated in the same manner and the
shareholder should recognize no gain or loss as a result of the reverse stock
split. However, it is possible that the receipt of an additional share could be
wholly or partially taxable. The shareholder should consult a tax advisor to
determine which of these treatments will apply upon the receipt of a whole share
of common stock in lieu of a fractional share of common stock.
We further believe that a shareholder's aggregate basis in his, her or its
post-split shares of common stock will equal his, her or its aggregate basis in
the pre-split shares of common stock owned by that shareholder that are
exchanged for the post-split shares of common stock. Generally, the aggregate
basis will be allocated among the post-split shares on a pro rata basis,
however, if a shareholder has used the specific identification method to
identify his, her or its basis in pre-split shares of common stock surrendered
in the reverse stock split, the shareholder should consult a tax advisor to
determine his, her or its basis in the post-split shares. The holding period of
the post-split common stock received by a shareholder will generally include the
shareholder's holding period for the shares of pre-split common stock with
respect to which post-split shares of common stock are issued, provided that the
shares of pre-split common stock were held as a capital asset on the date of the
exchange.
Our view regarding the tax consequence of the reverse stock split is not
binding on the Internal Revenue Service or the courts and we have not sought and
will not seek an opinion of counsel or a ruling from the Internal Revenue
Service regarding the federal income tax consequences of the reverse stock
split. Accordingly, each shareholder should consult with such shareholder's own
tax advisor with respect to all of the potential tax consequences to such
shareholder of the reverse stock split.
NO DISSENTERS' RIGHTS
Under the MBCA, our shareholders are not entitled to dissenter's rights
with respect to the proposed amendment to our Restated Articles of Incorporation
to effect the reverse stock split, and we will not independently provide
shareholders with any such right.
PROPOSAL 3 -
APPROVAL OF CHANGE IN NORTH COUNTRY'S NAME
Our board has approved an amendment to our Restated Articles of
Incorporation to change our name from North Country Financial Corporation to
Mackinac Financial Corporation. The proposed amendment is included in the
Certificate of Amendment attached as Appendix C. If our
75
shareholders approve the proposed change of name, the implementation of the new
name would occur, if at all, concurrently with the closing under the Stock
Purchase Agreement.
Pursuant to the terms of the Stock Purchase Agreement, it is a condition
to the closing of the Recapitalization that our shareholders approve this
proposed name change. We believe that the proposed name change will more
accurately reflect our new proposed market area in Oakland County, Michigan, as
well as our current locations in Michigan's Upper Peninsula and the northern
portion of the Lower Peninsula. We further believe that the new name will
symbolically represent our new start as a result of the Recapitalization and
will help us compete more effectively in our established market areas.
Our board of directors reserves the right to abandon the proposed
amendment without further action by our shareholders at any time before filing
with the Michigan Department of Labor & Economic Growth, Bureau of Commercial
Services notwithstanding authorization of the proposed amendment by the
shareholders. Our board of directors intends to abandon the proposed amendment
if the closing under the Stock Purchase Agreement does not occur.
To be approved by our shareholders, the amendment must receive the
affirmative vote of a majority of our outstanding shares of common stock
entitled to vote. Abstentions and broker non-votes will not be deemed
affirmative votes, and will have the same effect as a negative vote on the
proposal. Those votes, however, will be counted in determining the number of
shares of common stock present or represented by proxy in determining whether a
quorum is present. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE YOUR SHARES
FOR THE AMENDMENT.
PROPOSAL 4 -
AMENDMENT OF 2000 STOCK INCENTIVE PLAN
INTRODUCTION
Our shareholders approved our 2000 Stock Incentive Plan at our annual
meeting of shareholders in 2000. Under the 2000 Plan, our board is authorized to
issue options to purchase up to 500,000 shares of our common stock. Our
management estimates that as of the date of this proxy statement there are
approximately 68,300 shares remaining under the 2000 Plan for which options can
be granted.
All options issued under the 2000 Plan must have an exercise price per
share of not less than 100% of their fair market value, which is defined under
the 2000 Plan as the closing price of our common stock as reported by Nasdaq on
the date the option is granted. In addition, the 2000 Plan currently provides
that no individual can receive in any year options under the 2000 Plan to
purchase more than 50,000 shares of common stock.
The Stock Purchase Agreement provides that upon completion of the
Recapitalization there will be an "option pool" created under the 2000 Plan
available for grants to officers, key employees and non-employee directors equal
to 12.5% of the number of shares outstanding upon the closing of the Stock
Purchase Agreement (approximately 301,670 post reverse stock split shares). On
August 10, 2004, we entered into employment agreements with Paul D. Tobias and
Eliot R. Stark which provide for Mr. Tobias' employment as our chief executive
officer and
76
Mr. Stark's employment as our chief financial officer, effective upon the
closing under the Stock Purchase Agreement. The employment agreements also
provide that Mr. Tobias is to be granted options to purchase 35% (or
approximately 105,595 post reverse stock split shares), and Mr. Stark 25% (or
approximately 75,425 post reverse stock split shares), of the shares in the
"option pool" at per share exercise prices equal the per share price paid by new
investors under the Stock Purchase Agreement. The options granted to Mr. Tobias
and Mr. Stark will be immediately exercisable and may be exercised until the ten
year anniversary of grant. In addition, it is contemplated that options up to
15% (or approximately 45,250 post reverse stock split shares)of the "option
pool" will be available for grants to non-employee directors and that the
balance of the "option pool" will be available for future grants under the 2000
Plan to key employees after the Recapitalization.
To accommodate the requirements of the Stock Purchase Agreement and the
employment agreements with Mr. Tobias and Mr. Stark, and to provide for future
options to key employees and non-employee directors, our board of directors has
approved, and recommends to our shareholders for their approval, amendments to
the 2000 Plan to:
- Increase the number of shares available under the 2000 Plan by an
additional number of shares equal to 12.5% of the total number of
shares to be outstanding after the closing under the Stock Purchase
Agreement (approximately 301,670 post reverse stock split shares).
- Amend the 2000 Plan's definition of "fair market value" so that the
options issued to Mr. Tobias and Mr. Stark, and any options issued
to non-employee directors within three months following the Stock
Purchase Agreement closing will have an exercise price equal to the
per share price paid by new investors under the Stock Purchase
Agreement (see page 35).
- Eliminate the current limitation on the number of shares that can be
granted to any individual in any year (currently 50,000 pre-reverse
stock split shares).
A copy of the proposed First Amendment to the 2000 Stock Incentive Plan is
attached as Appendix D. Shareholder approval of the 2000 Plan amendments is
required by the terms of the Stock Purchase Agreement, the 2000 Plan and the
listing requirements of Nasdaq.
SUMMARY OF THE 2000 PLAN
The following summary description of the 2000 Plan is qualified in its
entirety by reference to the full text of the 2000 Plan, which is attached as an
Exhibit to our 2000 proxy statement.
The purpose of the 2000 Plan is to attract and retain selected officers,
key employees, non-employee directors and consultants whose skills and talents
are important to our operations, and to reward them for making major
contributions to our success.
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The 2000 Plan permits us to grant non-qualified stock options and
incentive stock options as defined in Section 422 of the Code. No options may be
granted under the 2000 Plan after February 15, 2010.
The compensation committee administers the 2000 Plan, and it has full and
exclusive power to interpret the 2000 Plan and to adopt rules, regulations and
guidelines for carrying out the 2000 Plan.
Under the 2000 Plan, current and prospective employees and non-employee
directors who provide services to us and our subsidiaries and partnerships and
other business ventures in which we have a significant equity interest are
eligible to participate in the 2000 Plan.
The 2000 Plan may be amended with the approval of our board, but certain
amendments adversely affecting the rights of a participant under any existing
option grant may not be made without obtaining the participant's written
consent, and amendments increasing the number of shares of our common stock
which may be granted under the 2000 Plan may not be made without obtaining
shareholder approval.
The exercise price for options granted under the 2000 Plan may be no less
than 100% of the fair market value (as defined in the 2000 Plan) of our common
stock on the date of grant. Options can be exercised during the periods
specified in each award agreement and generally are exercisable in installments
pursuant to a vesting schedule designated by our compensation committee. No
option will remain exercisable later than 10 years after the date of grant.
FEDERAL INCOME TAX ASPECTS OF THE 2000 PLAN
This is a brief summary of the federal income tax aspects of awards that
may be made under the 2000 Plan based on existing US federal income tax laws.
This summary provides only the basic tax rules. It does not describe a number of
special tax rules, including the alternative minimum tax, and various elections
that may be applicable under certain circumstances.
INCENTIVE STOCK OPTIONS. The grant of an incentive stock option will not
be a taxable event for the participant or for us. A participant will not
recognize taxable income upon exercise of an incentive stock option (except that
the alternative minimum tax may apply), and any gain realized upon a disposition
of our common stock pursuant to the exercise of an incentive stock option will
be taxed as long term capital gain if the participant holds our shares of common
stock for at least two years after the date of grant and for one year after the
date of exercise. We are not entitled to any business expense deduction with
respect to the exercise of an incentive stock option. For the exercise of an
option to qualify for the foregoing tax treatment, the participant must
generally exercise the option while an employee or, if the participant has
terminated employment, no later than three months after employment is
terminated.
If all the foregoing requirements are met except the holding period
requirement mentioned above, the participant will recognize ordinary income upon
the disposition of our common stock in an amount generally equal to the excess
of the fair market value of our common stock at the time the option was
exercised over the option exercise price, but not in excess of the gain realized
on the sale. The balance of the realized gain if any, will be capital gain. We
will be allowed a business expense deduction to the extent the participant
recognizes
78
ordinary income, subject to our compliance with Section 162(m) of the Internal
Revenue Code and to certain reporting requirements.
NON-QUALIFIED OPTIONS. The grant of a non-qualified stock option (that is,
generally any stock option other than an incentive stock options) will not be a
taxable event for the participant or us. Upon exercising a non-qualified option,
a participant will recognize ordinary income in an amount equal to the
difference between the exercise price and the fair market value of the common
stock on the date of exercise. Upon a subsequent sale or exchange of shares
acquired pursuant to the exercise of a non-qualified option, the participant
will have taxable capital gain or loss, measured by the difference between the
amount realized on the disposition and the tax basis of the shares of common
stock (generally, the amount paid for the shares plus the amount treated as
ordinary income at the time the option was exercised). If we comply with the
applicable reporting requirements and with the restrictions of Section 162(m) of
the Code, we will be entitled to a business expense deduction in the same amount
and generally at the same time as the participant recognizes ordinary income.
OTHER MATTERS
Our compensation committee has broad discretion to determine the type,
terms and conditions and recipients of stock options granted under the 2000
Plan. With the exception of the options to be granted to Mr. Tobias and Mr.
Stark as described above, it is not possible to determine the amount or specific
terms of options that will be received by any non-employee director, officer or
other employee of North Country under the 2000 Plan if the amendment is
approved.
On September 29, 2004, the closing price of our common stock as reported
on Nasdaq was $1.00 per share.
APPROVAL OF 2000 PLAN PROPOSAL
Approval of the proposal to amend the 2000 Plan will require the
affirmative vote of a majority of the votes cast by the holders of our shares of
common stock entitled to vote at the special meeting. Abstentions and broker
non-votes will not count in regard to this proposal. These votes, however, will
be counted in determining the number of shares of common stock present as
represented by proxy in determining whether a quorum is present.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND THE
2000 PLAN.
RESERVATION OF RIGHTS
Our board of directors reserves the right to abandon the proposed
amendment to the 2000 Stock Incentive Plan without further action by our
shareholders if the closing under the Stock Purchase Agreement does not occur.
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REMUNERATION OF DIRECTORS
Since November, 2002, our directors have not received any compensation for
their service as members of our board. The directors of North Country also serve
on the board of directors of the Bank, for which they were paid an annual fee
for 2003 of $1,200 and a fee of $1,000 per month. For 2004, the directors of the
Bank are expected to receive an annual fee of $1,200, and a fee of $1,000 for
each meeting that is held of the board of directors of the Bank. Attendance is
not a requirement in order for the director to be paid the monthly fee.
The 2000 Plan provides for the grant of options to eligible directors
(i.e., nonemployee directors of North Country or the Bank) in addition to key
employees. Options are granted at the discretion of the compensation committee
of our board. The term of each option is 10 years, subject to earlier
termination in certain events, and the option price is 100% of fair market value
on the date of grant. No options were granted to directors in 2003.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation received by executive
officers for the three years ended December 31, 2003:
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------- NUMBER OF
NAME AND OTHER OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) ANNUAL(2) GRANTED COMPENSATION(3)
--------------------- ---- --------- -------- --------- ------------ ---------------
C. James Bess 2003 $ 152,163 $ 10,000 $ 5,000 -0- $ 21,104
President and Chief
Executive Officer
of North Country
and the Bank
John D. Lindroth 2003 $ -0- $ -0- $ 13,200 -0- $ -0-
Interim Chief
Executive Officer
and Director of
North Country and
the Bank (4)
Sherry L. Littlejohn 2003 $ 116,357 $ -0- $ 5,200 -0- $ 452
President and Chief 2002 $ 250,000 $ -0- $ 7,200 -0- $ 6,000
Executive Officer 2001 $ 250,000 $ -0- $ 8,700 50,000 $ 10,500
of North Country
and the Bank (5)
(1) Represents a one-time signing bonus for Mr. Bess.
(2) Represents director fees paid. Perquisites and other personal benefits
(valued on the basis of incremental cost to North Country) did not exceed
the lesser of $50,000 or 10% of the salary and bonus for any of the named
executive officers for any year.
(3) The amounts shown include the taxable amount of group life insurance cost
paid by North Country for Mr. Bess ($4,713) and Ms. Littlejohn ($452). Other
compensation for Mr. Bess includes the amounts paid by North Country for
housing and the taxable portion of the benefit of a corporate owned auto
provided for Mr. Bess' use.
(4) Mr. Lindroth served as interim chief executive officer for the period of May
27, 2003, through August 1, 2003, at which time Mr. Bess assumed the chief
executive officer position. The fees shown in the table ($13,200) represent
director fees paid to Mr. Lindroth for the entire 2003 year. Mr. Lindroth
received no compensation from North Country or the Bank for serving as
interim chief executive officer.
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(5) Ms. Littlejohn resigned from North Country and the Bank on May 21, 2003.
EMPLOYMENT AND CONSULTING AGREEMENTS
C. JAMES BESS. Mr. Bess is a party to a two-year employment agreement with
North Country dated August 1, 2003 which was amended May 18, 2004. Under the
terms of the agreement, Mr. Bess is to receive a salary of $30,000 per month in
base pay. Mr. Bess also received a one-time signing bonus of $10,000. Mr. Bess
is also entitled to the use of a corporate owned auto and payment of all living
expenses during the term of his employment.
If we terminate Mr. Bess' employment for any reason other than cause, as
defined in the agreement, or in the event of Mr. Bess' resignation for good
reason, as defined in the agreement, he is entitled to receive the amount of his
base pay and benefits (including a cash payment for any unused vacation) through
the stated expiration date of the agreement, July 31, 2005.
If during the term of the agreement or within one year following the
termination date of the agreement, North Country engages in a change in control
transaction as defined in the agreement, Mr. Bess' employment under the
agreement will automatically terminate two months following the consummation of
the change in control transaction and Mr. Bess shall receive: (i) the payments
provided to Mr. Bess upon a termination without cause as set forth in the
agreement, and (ii) two years of Mr. Bess' then base pay. In addition, if the
Cease and Desist Order is lifted during the term of his agreement, Mr. Bess is
entitled to a bonus equal to one-year's base salary. The Recapitalization and
the anticipated removal of the Cease and Desist Order as part of the
Recapitalization, will trigger these change in control and bonus payments and
Mr. Bess will receive approximately $1,231,740 as a result, which includes the
bonus payment to Mr. Bess related to the removal of the Cease and Desist Order.
Mr. Bess has also entered into a new employment agreement in connection with the
Recapitalization and this is described on page 62.
RONALD G. FORD. We and our former Chairman and former director, Ronald G.
Ford, entered into a chairman agreement as of April 12, 2002. Under the terms of
the agreement, Mr. Ford agreed to serve as our and the Bank's non-executive
chairman of the board of directors of each of North Country and the Bank for the
period commencing May 1, 2002, and ending on April 30, 2003. The agreement
expired on April 30, 2003. Mr. Ford resigned from our board of directors on
September 3, 2004.
Mr. Ford also has a consulting agreement with us which was amended and
restated on December 21, 2001, and became effective on May 1, 2002. Pursuant to
the consulting agreement, for a period of 10 years following his termination of
employment other than by reason of death or disability, Mr. Ford agreed to
consult with our and the Bank's executive officers and directors with respect to
such matters as we may reasonably request. Mr. Ford must reside in our direct
geographical service area during the 10-year consulting term. We agreed to pay
Mr. Ford $7,000 per month for these services and to provide comprehensive
medical and dental insurance benefits to him and his spouse and dependents on
specified conditions. We also agreed to provide Mr. Ford with the use of an
automobile, which was to be replaced with a new vehicle every 48 months. The
consulting agreement contains various non-competition, non-
82
solicitation, and confidentiality provisions restricting Mr. Ford's activities
during the consulting term and for two years thereafter.
Since October, 2001, we and the Bank have been required to obtain the
prior approval of the FDIC to enter into certain compensation, severance, or
indemnification agreements (a "golden parachute" as defined in applicable FDIC
regulations) with any director, officer, employee, or controlling shareholder of
the Bank or North Country, or certain other persons participating in the affairs
of the Bank or North Country, or to make any payment under such an agreement to
any such person. The chairman agreement was determined by the FDIC to be such a
golden parachute agreement and was entered into by us without the prior approval
of the FDIC. The consulting agreement was entered into by us after such prior
approval requirement took effect and without the prior approval of the FDIC.
During the regularly scheduled safety and soundness examination of the Bank by
the FDIC and the OFIS which commenced in September, 2002, we and the Bank were
directed by the FDIC and the OFIS to suspend cash payments to Mr. Ford under the
chairman agreement. In addition, we simultaneously suspended cash payments for
services to Mr. Ford under the consulting agreement, pending clarification of
its status as a golden parachute agreement.
Under the Cease and Desist Order, we and the Bank were directed to seek
restitution from Mr. Ford of all amounts paid to him under the chairman
agreement. In May, 2003, we made formal demand for restitution of such amounts
from Mr. Ford. In September, 2003, Mr. Ford initiated an arbitration proceeding
with the AAA against us seeking monetary damages for alleged breach by us of the
chairman agreement and the consulting agreement. See "Litigation" on page 20.
SHERRY L. LITTLEJOHN. We have an employment agreement, dated September 30,
2000, with Sherry L. Littlejohn, our former president and chief executive
officer. The agreement was for a term of three years, with an automatic daily
extension of its term unless thirty days' notice was given by either party to
the other to discontinue the daily extensions. Ms. Littlejohn resigned as
president and chief executive officer of North Country and the Bank, and as a
director of North Country and the Bank, effective May 21, 2003, which ended any
further extension of the agreement's term.
Ms. Littlejohn's minimum annual salary under the employment agreement was
$250,000, subject to at least annual review by our compensation committees. Ms.
Littlejohn was entitled to participate in various bonus, long-term incentive,
retirement, employee benefit and welfare plans available to our senior
executives, received the use of a car with a retail value of up to $50,000 and
four weeks of paid vacation.
If Ms. Littlejohn terminated her employment for good reason (defined as
the material breach by us of the employment agreement or the occurrence of
certain events in anticipation, or upon the occurrence, of a change in control
of us) or we terminated her employment without cause (as defined in the
agreement), upon Ms. Littlejohn's execution and delivery of a release of all
claims against us, the Bank, and their respective current and former
shareholders, directors, officers, employees, and agents relating to or arising
from her employment with us, she would receive 12 quarterly payments, each in an
amount equal to 25% of her then annual base salary (or
83
if the termination occurred after a change in control, the greater of her annual
base salary before or after the change in control), and for three years
following the termination date, she and her spouse and dependents would receive
medical and dental benefits under our plans for active employees at our expense.
If, after a change in control (as defined in our 2000 Stock Incentive Plan), Ms.
Littlejohn terminated her employment for good reason or we terminated her
employment without cause, she would receive the following benefits in addition
to those noted above: outplacement services up to a maximum amount of 15% of her
annual base salary (or if the termination occurred after a change in control,
the greater of her annual base salary before or after the change in control),
plus travel expense reimbursement for job search travel of up to $5,000; the
same counseling services that may be available to our employees pursuant to the
"Employee Assistance Program;" and a cash payment within 90 days of the end of
each of the three (3) calendar years during which Ms. Littlejohn receives
payments from us under the agreement in an amount equal to the amounts that we
would have contributed to its qualified retirement plan and Supplemental
Executive Retirement Plan on her behalf during each such calendar year if she
had continued her employment for the three-year period commencing on the date of
her termination of employment and had earned the annual base salary (or if the
termination occurs after a change in control, the greater of her annual base
salary before or after the change in control) and a bonus equal to the bonus
earned by her for the fiscal year ending immediately prior to the year in which
the change in control occurred.
If Ms. Littlejohn's employment were terminated by us for cause, or by
voluntary termination by her other than for good reason, she would receive her
annual base salary and related benefits through the date of termination of her
employment. If any payment to Ms. Littlejohn were subject to the golden
parachute excise tax under Section 4999 of the Internal Revenue Code, we would
pay additional amounts, to Ms. Littlejohn or to tax authorities such that the
amount she received equaled the amount she would have received under the
agreement if an excise tax were not imposed. The employment agreement also
contained various non-competition, non-solicitation, and confidentiality
provisions restricting Ms. Littlejohn's activities during her employment and for
three years thereafter.
On December 9, 2003, Ms. Littlejohn submitted a claim for additional
compensation under her employment agreement. In January, 2004, the FDIC advised
us that any payments under Ms. Littlejohn's employment agreement would require
prior approval of the FDIC under the "golden parachute" provisions of the FDIC
Regulations. We subsequently advised Ms. Littlejohn's counsel we will not make
further payments under her employment agreement.
OPTION GRANTS IN LAST FISCAL YEAR
Our 2000 Stock Incentive 2000 Plan, which we are asking our shareholders
to amend, provides for the grant of options to our key employees as well as
eligible directors. Options are granted at the discretion of our compensation
committee. The term of each option is up to 10 years, subject to earlier
termination in certain events, and the option price is 100% of fair market value
on the date of grant.
The following table provides information on options granted in 2003 to the
executives listed in the Summary Compensation Table and the potential realizable
value of the options
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Potential Realizable Value at
Number of Assumed Annual Rates of Stock
Shares Underlying Percent of Total Options Appreciation of Option Term
Options Granted to Employees Exercise Price Expiration --------------------------------
Granted in Fiscal Year Per Share Date 5% 10%
------------------ ------------------------ -------------- ---------- ------------ ---------------
C. James Bess -0- 0% - - - -
John D. Lindroth -0- 0% - - - -
Sherry Littlejohn 50,000 100% $ 2.95 3/19/13(1) $ 92,762 $ 235,077
(1) These same options had a scheduled expiration date of March 19, 2013,
however they expired in 2003 as a result of Ms. Littlejohn's resignation.
AGGREGATE STOCK OPTION EXERCISES IN 2003 AND YEAR-END OPTION VALUES
The following table provides information on the exercise of stock options
during 2003 by the executives listed in the Summary Compensation Table and the
value of unexercised options at December 31, 2003.
Number of Shares Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Options at 12/31/03 Options at 12/31/03 (1)
on Value --------------------------- ----------------------------
Exercise Realized Exercisable / Unexercisable Exercisable / Unexercisable
-------- -------- --------------------------- ----------------------------
C. James Bess -0- $ -0- -0-/-0- $-0- /$-0-
John D. Lindroth -0- $ -0- 18,600/18,600 $-0- /$-0-
Sherry Littlejohn -0- $ -0- -0-/-0- $-0- /$-0-
(1) Values are based on the difference between the last reported sale price of
the Corporation's common stock on December 31, 2003 ($1.75), and the
exercise prices of the options.
85
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
NUMBER OF
NUMBER OF SECURITIES REMAINING
SECURITIES TO BE WEIGHTED- AVAILABLE FOR FUTURE
ISSUED UPON AVERAGE PRICE ISSUANCE UNDER
EXERCISE OF OF OUTSTANDING EQUITY COMPENSATION
OUTSTANDING OPTIONS, PLANS (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED
PLAN CATEGORY AND RIGHTS(1) RIGHTS(b) IN COLUMN (a)(2)
-------------------------------------- ----------------- -------------- --------------------
Equity compensation plans approved by
security holders 535,732 $14.02 372,238
Equity compensation plans not approved
by security holders - - -
------- ------ -------
Total 535,732 $14.02 372,238
======= ====== =======
(1) Number of shares and price have not been adjusted to the proposed reverse
stock split.
(2) Of the equity securities listed in this column, 68,300 are shares issuable
under the 2000 Stock Incentive Plan and 303,938 are shares issuable under
the Stock Compensation Plan and the 1997 Directors Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
In 2003, Stanley S. Gerou, II, Bernard A. Bouschor and John D. Lindroth
served on the compensation committee. After our 2004 annual meeting of
shareholders, Mr. Lindroth stepped down from the committee and Dennis B. Bittner
replaced him.
Mr. Lindroth is the owner of the insurance agency that we use for
purchasing liability, property, casualty and automobile insurance. In 2003, Mr.
Lindroth's agency earned $62,574 in commissions for insurance sold to us and our
subsidiaries. For the period May 27, 2003, through August 1, 2003, Mr. Lindroth
served as interim chief executive officer, however, he did not receive
additional compensation for this position.
Mr. Bouschor was a related party to a tax-exempt loan from the Bank, which
bears interest at 5.5%. The principal balance at June 30, 2004 was $5,010,191.
SHAREHOLDER PROPOSALS
If the Recapitalization is completed, we expect to hold our 2005 annual meeting
of shareholders in mid-May of 2005. A proposal submitted by a shareholder for
our 2005 annual meeting must be sent to the Secretary of North Country, 130
South Cedar Street, Manistique, Michigan 49854, and must be received by us no
later than December 20, 2004, to be eligible for inclusion in our proxy
materials for our 2005 annual meeting. A shareholder proposal must be received
30 days prior to the meeting and comply with the other requirements in our
bylaws and Restated Articles of Incorporation to be considered at the meeting. A
shareholder who intends to present a
86
proposal to our 2005 annual meeting of shareholders, other than pursuant to Rule
14-8 of the Exchange Act, must provide us with notice of such intention by at
least March 8, 2005, or the persons named in the proxy to vote the proxies will
have discretionary voting authority at the 2005 annual meeting with respect to
any such proposal without discussion of the matter in our proxy statement.
EXPERTS
Our consolidated financial statements as of December 31, 2003, and 2002,
and for each of the years in the three year period ended December 31, 2003, have
been incorporated by reference herein from our Annual Report on Form 10-K in
reliance upon the report of Plante & Moran, LLP and Wipfli Ullrich Bertelson
LLP, independent certified public accountants, and upon the authority of said
firms as experts in accounting and auditing. A representative of Plante & Moran
is expected to be at the meeting and will have an opportunity to make a
statement and will be available to answer appropriate questions.
OTHER MATTERS
As of the date of this proxy statement, our board does not know of any
other matter that will be presented for consideration at the special meeting
other than as described in this proxy statement. However, if any other matters
properly come before the special meeting or any adjournment or postponement of
the special meeting and are voted upon, the enclosed proxy will be deemed to
confer authority to vote for adjournment to solicit additional votes and
discretionary authority on the individuals named as proxies to vote the shares
represented by such proxy as to any such matters.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. The annual reports include our audited financial
statements and the quarterly reports include our unaudited financial statements.
You may read and copy any reports, statements or other information that we file
at the SEC's public reference room, which is located at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Shareholders may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. Copies of such materials are also available from the public
reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. Copies of such materials may also be accessed through the
SEC's internet web site at http://www.sec.gov.
INFORMATION INCORPORATED BY REFERENCE
The following documents we filed with the SEC are incorporated by
reference into this proxy statement:
87
a) Our Annual Report on Form 10-K (file no. 000-20167) for the fiscal
year ended December 31, 2003.
b) Our Quarterly Report on Form 10-Q/A (file no. 000-20167) for the
quarter ended June 30, 2004.
We have included copies of these reports with the proxy statement. The
Annual Report on Form 10-K is attached as Appendix E and the Form 10-Q/A is
attached as Appendix F.
88
APPENDIX A
STOCK PURCHASE AGREEMENT
See attached.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is executed and delivered
as of August 10, 2004, by and between North Country Financial Corporation, a
Michigan corporation registered as a bank holding company ("North Country"), and
NCFC Recapitalization, LLC, a Michigan limited liability company ("NCFC
Recapitalization"), individually and on behalf of the "Investors" that subscribe
for shares of North Country common stock and become a party to this Agreement as
contemplated in Section 2.1. Capitalized terms used in this Agreement and not
otherwise defined have the respective meanings in Schedule 1.
WITNESSETH:
WHEREAS, the Bank is a wholly owned subsidiary of North Country; and
WHEREAS, on March 26, 2003, the FDIC and OFIS, with the consent of the
Bank, entered the Order under Federal and State banking laws. The Order
identifies deficiencies in the Bank and requires the Bank and its directors to
take specified steps to address the deficiencies; and
WHEREAS, as part of its efforts to address certain of the issues
identified in the Order, North Country began discussions with investment banking
firms to determine the feasibility of recapitalizing North Country and also
began discussions with regard to a sale of North Country; and
WHEREAS, in connection with these matters, North Country and Mackinac
Partners, LLC ("Mackinac Partners") entered into the Confidentiality Agreement
and the Exclusivity Agreement; and
WHEREAS, North Country and NCFC Recapitalization have been discussing the
terms and conditions of a possible investment arrangement pursuant to which
North Country would offer shares of common stock to prospective interested
investors, North Country would be recapitalized (including redemption of North
Country's outstanding trust preferred securities), the Boards of Directors of
North Country and its Subsidiaries would be reconstituted, and North Country's
and its Subsidiaries' names would be changed; and
WHEREAS, NCFC Recapitalization has been organized for the purpose of
entering into this Agreement and performing the obligations imposed on it by
this Agreement; and
WHEREAS, the parties are entering into this Agreement as part of North
Country's efforts to address the requirements of the Order, including to provide
to North Country capital and additional management resources, and to set forth
the parties' representations, warranties, covenants and undertakings.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
Article 1 Offering of Common Stock of North Country
1.1 Summary of Terms of the Offering. The Summary of Terms attached as
Schedule 2 sets forth certain of the terms of the Offering of North Country
Shares by North Country to prospective Investors identified by the Placement
Agents as contemplated by this Agreement.
1.2 Exempt Offering by North Country. The offer and sale of the North Country
Shares to prospective Investors shall be made by North Country in accordance
with the Offering Documents to be prepared by North Country and pursuant to
exemptions from the registration and prospectus delivery requirements of the
Securities Act, MUSA and all other state securities laws afforded by Rule 506
under Regulation D and other applicable exemptions under applicable state
securities laws.
1.3 Definitive Subscription Documents. Any acquisition of North Country Shares
by prospective Investors will only be made on the terms and conditions set forth
in this Agreement and to be set forth in the Definitive Subscription Documents
to be prepared, negotiated, executed and delivered by North Country and the
Investors.
1.4 Placement Agents. North Country shall engage the Placement Agents to act
as placement agents for North Country in respect of the Offering. The terms and
conditions of the engagement of the Placement Agents by North Country shall be
as set forth in one or more engagement agreements between the Placement Agents
and North Country.
Article 2 Purchase and Sale
2.1 Procedure to Become an Investor.
(a) A Person desiring to become an Investor under this Agreement must
(i) qualify as an Accredited Investor, (ii) have received all Offering
Documents, and (iii) complete, execute and deliver to a Placement Agent the
Definitive Subscription Documents within the time specified in the Definitive
Subscription Documents. All Definitive Subscription Documents submitted by a
prospective Investor shall be irrevocable by the prospective Investor.
(b) No Person shall become an "Investor" under this Agreement unless and
until North Country shall have accepted the Person as an Investor as provided in
the Definitive Subscription Documents. When so accepted by North Country, the
Investor shall become a party to this Agreement as an Investor. North County
shall give notice to each Person submitting Definitive Subscription Documents as
to whether such Person has been accepted as an Investor under this Agreement not
later than the earlier of the second Business Day after the Closing Deadline or
the Closing Date.
2.2 Acceptance of the Subscriptions. The acceptance of Definitive Subscription
Documents by North Country shall constitute the binding obligation by the
Investor to subscribe for and purchase from North Country, and of North Country
to issue and sell to the Investor, the North Country Shares indicated in the
Definitive Subscription Documents, on the terms and subject to the conditions
set forth in this Agreement and the Definitive Subscription Documents and
subject to the proration provisions of the Definitive Subscription Documents if
applicable.
A-2
Article 3 Pre-Closing Covenants
3.1 Certain Covenants of North Country.
(a) Between the date of this Agreement and the Closing Date, North
Country agrees to give to NCFC Recapitalization and its respective
representatives and agents full access (to the extent lawful) to all of the
premises, books, records and employees of North Country and its Subsidiaries at
all reasonable times and to furnish and cause its Subsidiaries to furnish to
NCFC Recapitalization, the investors and their respective agents and
representatives access to and true and complete copies of such financial and
operating data, all documents with respect to matters to which reference is made
in this Agreement or on any list, schedule or certificate delivered or to be
delivered in connection herewith and such other documents, records, or
information with respect to the businesses and properties of North Country and
its Subsidiaries as NCFC Recapitalization, any of the Investors or their
respective agents or representative shall from time to time reasonably request;
provided, however, that any such inspection (i) shall be conducted in such
manner as not to interfere unreasonably with the operation of the business of
the entity inspected and (ii) shall not affect any of the representations and
warranties hereunder.
(b) Between the date of this Agreement and the Closing Date, and except
as agreed to herein or otherwise permitted hereby, North Country agrees, on
behalf of itself and each of its respective Subsidiaries:
(i) That North Country and its Subsidiaries shall (A) except as
contemplated in this Agreement conduct their business only in the ordinary
course consistent with current practices, (B) maintain their books and
records in accordance with current practices and (B) use all reasonable
efforts to preserve intact their business organizations and assets, to
maintain their rights, franchises and existing relations with customers,
suppliers, employees and business associates and to take no action that
would (1) adversely affect the ability of any of them to obtain any
Regulatory Approvals or which would reasonably be expected to hinder or
delay receipt of such Regulatory Approvals or (2) adversely affect its
ability to perform its obligations under this Agreement or any of the
Definitive Subscription Documents;
(ii) That North Country and its Subsidiaries shall comply with the
Order, except for the Order's requirements with respect to additional
capital since those requirements are being addressed by this Agreement.
(iii) That North Country and its Subsidiaries shall not: (A)
declare, set aside or pay any dividend or make any other distribution with
respect to its capital stock, except for dividends or distributions by a
wholly owned Subsidiary of North Country to North Country; (B) reacquire
or buy any of its outstanding shares; (C) issue or sell any shares of
capital stock of it or any of its Subsidiaries, except shares issued
pursuant to exercise of stock options previously issued and identified in
the Disclosure Schedule; (D) effect any stock split, stock dividend,
reverse stock split or other reclassification or recapitalization of its
common stock; or (E) grant any options or issue any warrants exercisable
for or securities convertible or exchangeable into capital stock of it or
any of its Subsidiaries or grant any stock appreciation or other rights
with respect to shares of capital stock of it or
A-3
of any of its Subsidiaries; or (F) take any action (including any action
by its Board of Directors (or any committee thereof) to adjust in any way
either the number of shares of North Country covered by any outstanding
North Country Stock Options, or the exercise price of any of the options,
whether pursuant to the terms of such Plans or otherwise.
(iv) That North Country and its Subsidiaries shall not: (A) sell,
dispose of or pledge any assets of it or of any of its Subsidiaries other
than in the ordinary course of business consistent with current practices
or to borrow funds consistent with the provisions hereinafter contained;
(B) merge or consolidate it or any of its Subsidiaries into another entity
or acquire any other entity, or acquire any significant assets; (C) sell
or pledge or agree to sell or pledge or permit any lien to exist on any
stock of any of its Subsidiaries owned by it; (D) change the articles of
incorporation or certificate of incorporation, charter, bylaws or other
governing instruments of it or any of its Subsidiaries; (E) engage in any
lending activities other than in the ordinary course of business
consistent with current practices; (F) form any new subsidiary or cause or
permit a material change in the activities presently conducted by any
Subsidiary or make additional investments in subsidiaries; (G) except to
hedge interest rate risk on certificates of deposits or mortgage servicing
rights, or to hedge interest rate risk and/or credit risk on commitments
to extend consumer credit secured by residential mortgage loans, engage in
any off balance sheet interest rate swap arrangement, (H) engage in any
activity as would cause any of its representation and warranties in this
Agreement or in any of the Definitive Subscription Documents to not be
correct or complete as if being made continuously through the Closing
Date, (I) purchase any equity securities other than Federal Home Loan Bank
stock or incur or assume any indebtedness except in the ordinary and usual
course of business; (J) authorize capital expenditures other than in the
ordinary and usual course of business; or (K) implement or adopt any
change in its accounting principles, practices or methods other than as
may be required by generally accepted accounting principles; or (L) fail
to maintain its loan and lease loss reserve at equal to or exceeding the
greater of 4.0% of total loans or $10,000,000. The limitations contained
in this Section 3.1(b) shall also be deemed to constitute limitations as
to the making of any commitment with respect to any of the matters set
forth in this Section 3.1(b).
(v) That North Country and its Subsidiaries shall not: (A) grant
any general increase in compensation or benefits to its employees or
officers or pay any bonuses to its employees or officers except in
accordance with policies in effect on the date hereof; (B) enter into,
extend, renew, modify, amend or otherwise change any employment or
severance agreements with any of its directors, officers or employees
except as consistent with past practice; (C) grant any increase in fees or
other increases in compensation or other benefits to any of its present or
former directors in such capacity; (D) establish or sponsor any new
Employee Plan or Benefit Arrangement or effect any material change in its
Employee Plans or Benefit Arrangements (unless such change is required by
applicable law or, in the opinion of its counsel, is necessary to maintain
continued qualification of any tax-qualified plan that provides for
retirement benefits).
A-4
(c) North Country agrees to use its Best Efforts to cause to be listed
on the NASDAQ SmallCap Market, subject to official notice of issuance, the North
Country Shares to be issued to the Investors as contemplated in this Agreement.
(d) Each of the covenants of North Country contained in Section 3 of the
Placement Agent Agreement are hereby incorporated by reference herein.
(e) North Country shall take all required action so that it shall
continue to be qualified to use Form S-3 for the registration statement to be
filed by it as contemplated by the Registration Rights Agreement.
3.2 Covenants as to Regulatory Filings and Legal Conditions.
(a) Each of the parties agrees to use its Best Efforts and to fully
cooperate with the other in seeking all required Regulatory Approvals of this
Agreement and the transactions contemplated by this Agreement (including the
issuance and sale of the North Country Shares and a new branch in Oakland
County, Michigan) and, without limiting the generality of the foregoing, to
furnish to the other upon request all information as may be required for
submission in connection with any required Regulatory Filings. Each party agrees
to execute and deliver all required consents to all Regulatory Filings. Counsel
for NCFC Recapitalization shall take the lead in the preparation of any
Regulatory Filings with the FRB, FDIC and OFIS relating to the transactions
contemplated by this Agreement. The Definitive Subscription Documents will
contain similar covenants of the Investors executing the documents. North
Country shall, as promptly as practicable under the circumstances, deliver to
NCFC Recapitalization copies of all Regulatory Filings and other correspondence
and documents submitted or received from any Regulatory Authority relating to
the transactions contemplated by this Agreement or the Order and a written
summary of any conversations or meetings with any Regulatory Authorities
relating to the transactions contemplated by this Agreement or the Order (to the
extent those conversations or meetings do not involve participation by a
representative of NCFC Recapitalization).
(b) Each party shall, and North Country shall cause its Subsidiaries to,
use their Best Efforts (i) to take, or cause to be taken, all actions necessary,
proper or advisable to comply promptly with all legal requirements which may be
imposed on such party or its Subsidiaries with respect to the transactions
contemplated by this Agreement and, subject to the Closing Conditions, to
consummate the transactions contemplated by this Agreement and (ii) to obtain
(and to cooperate with the other party to obtain) any consent, authorization,
order or approval of, or any exemption by, any governmental authority and any
other third party which is required to be obtained by it or any of its
Subsidiaries in connection with the transactions contemplated by this Agreement.
3.3 North Country Disclosure Schedule and Changes.
(a) North Country is delivering to NCFC Recapitalization the Disclosure
Schedule contemporaneously with the execution and delivery of this Agreement.
Each exception to a representation and warranty made by North County in this
Agreement must be described in reasonable detail in the Disclosure Schedule and
identify the Section of this Agreement to which
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the disclosure applies. The mere inclusion of an item in the Disclosure Schedule
as an exception to a representation or warranty shall not be deemed an admission
by North Country that the item represents a material exception or that the item
is reasonably likely to have or result in a Material Adverse Effect on North
Country.
(b) North Country shall give prompt notice to NCFC Recapitalization as
soon as practicable after it has knowledge of (i) the occurrence, or failure to
occur, of any event which would cause North Country's representations or
warranties contained in this Agreement to be incorrect or not complete in any
material respect at any time from the date of this Agreement to the Closing Date
(or if the representation and warranty were given continuously), or (ii) any
failure on its part or on the part of any of its or its Subsidiaries' officers,
directors, employees, representatives or agents to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by North Country under this Agreement. NCFC Recapitalization shall be
entitled to exercise any right it may have to terminate this Agreement pursuant
to Section 4.6 of this Agreement notwithstanding any disclosure set forth in any
such notice.
3.4 North Country Shareholder Meeting.
(a) North Country shall duly call and hold, in accordance with
applicable state law, the Securities Exchange Act and the NASDAQ Rules, a
meeting of its shareholders as soon as reasonably practicable for the purpose of
obtaining all requisite North Country shareholder approvals required in
connection with this Agreement and the transactions contemplated hereby
(including the Shareholder Approval Items). North Country shall, through its
Board of Directors, but subject to its fiduciary obligations as determined by
its Board of Directors, recommend to its shareholders approval of the
Shareholder Approval Items (and such recommendation shall be contained in the
Proxy Statement) and use its Best Efforts to solicit proxies in favor of
approval of the Shareholder Approval Items. In the event that prior to the
approval of the Shareholder Approval Items by the North Country shareholders,
the Board of Directors of North Country determines in good faith by resolution
duly adopted that a Recommendation Event is required in order for the directors
to comply with their respective fiduciary duties under Michigan law, the Board
of Directors of North Country may undertake the Recommendation Event.
3.5 Offering Documents and Proxy Materials.
(a) For purposes of the Offering, North Country shall use its Best
Efforts to prepare as soon as possible and make available to the Placement
Agents and NCFC Recapitalization the Offering Documents. The Offering Documents
shall be in accordance with the terms and conditions of this Agreement and shall
be in form and content to satisfy all applicable laws and regulations and the
Order. The Offering Documents shall be submitted to the FDIC and OFIS as
required by the Order prior to their dissemination by North Country.
(b) For the purposes of soliciting proxies in connection with the North
Country shareholder meeting pursuant to Section 3.4, North Country shall use its
Best Efforts prepare and cause to be filed with the SEC a Schedule 14A including
a preliminary proxy statement and associated materials meeting the requirements
of the Securities Exchange Act as soon as possible
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and to prepare and cause to be filed with the SEC an amended Schedule 14A
including a definitive proxy statement and associated materials meeting the
requirements of the Securities Exchange Act as soon thereafter as practicable
(the definitive proxy statement in the form mailed to North Country
shareholders, together with all and any amendments and supplements thereto, is
referred to as the "Proxy Statement"). The Proxy Statement, the related
solicitation materials, and the solicitation by North Country of proxies for use
at the North Country shareholder meeting referred to in Section 3.4 shall fully
comply with all applicable requirements of state laws, the Securities Exchange
Act and the NASDAQ Rules.
3.6 Exclusivity.
(a) In consideration of the undertakings and agreements contained
herein, North Country agrees that, so long as this Agreement is in effect,
neither North Country nor any of its Subsidiaries nor any of the respective
officers and directors of North Country or any of its Subsidiaries shall, and
North Country will cause its employees, agents and representatives (including
any investment banker, attorney, advisor or accountant retained by North Country
or any of its subsidiaries) not to, initiate or solicit, directly or indirectly,
any inquiries or the making of any Acquisition Proposal, or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person, entity or group relating to any
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement any Acquisition Proposal, except as contemplated by this Agreement.
(b) North Country will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any persons, entities or
groups conducted heretofore with respect to any of the foregoing. North Country
shall notify NCFC Recapitalization immediately if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with North
Country. NCFC Recapitalization acknowledges that North Country has agreements in
place to sell three branch locations. Completion of these branch sale
transactions will not in any way violate the terms of this Section or this
Agreement.
(c) Nothing contained in this Agreement shall prohibit North Country or
its Board of Directors from making such disclosures to its shareholders as are
required under applicable law or the NASDAQ Rules or from taking and disclosing
to its shareholders a position contemplated by Rule 14e-2(a) promulgated under
the Exchange Act. Nothing contained in this Agreement shall prohibit the Board
of Directors of North Country from either furnishing information to, or entering
into discussions or negotiations with, any person, entity or group regarding any
Acquisition Proposal, approving and recommending an Acquisition Proposal from
any person, entity or group or being involved in a North Country Recommendation
Event, if the Board of Directors of North Country determines in good faith that
such action is appropriate in furtherance of the best interests of its
shareholders. In connection with any such determination, (i) North Country shall
direct its officers and other appropriate personnel to cooperate with and be
reasonably available to consult with any such person, entity or group, (ii)
North Country shall disclose to NCFC Recapitalization that it is furnishing
information to, or entering into discussions or negotiations with, such person,
entity or group, which disclosure shall describe the terms thereof (but need not
identify the person, entity or group making the offer), (iii) prior to
furnishing such information to such person, entity or group, North Country shall
enter into a
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written agreement with such person, entity or group which provides for, among
other things, (A) the furnishing to North Country of information regarding such
person, entity or group that is relevant to its ability to finance and otherwise
perform its obligations under its Acquisition Proposal; (B) the confidentiality
of all non-public information furnished to such person, entity or group by North
Country; and (C) procedures reasonably satisfactory to North Country that are
designed to restrict or limit the provision of information regarding North
Country that could be used to the competitive disadvantage of North Country, or
in a manner that would be detrimental to the interests of its shareholders; (iv)
North Country shall not furnish any non-public information regarding NCFC
Recapitalization or any of the transactions contemplated hereby; and (v) North
Country shall keep NCFC Recapitalization informed of the status of any such
discussions or negotiations (provided that North Country shall not be required
to disclose to NCFC Recapitalization confidential information concerning the
business or operations of such person, entity or group).
3.7 Publicity. Between the date of this Agreement and the Closing Date,
neither party nor in the case of North Country any of its Subsidiaries shall,
without the prior approval of the other party (which approval shall not be
unreasonably withheld), issue or make, or permit any of its directors,
employees, officers or agents to issue or make, any press release, disclosure or
statement to the press or any third party with respect to the transactions
contemplated hereby, except as required by applicable law, the rules of the
National Association of Securities Dealers, Inc. or the NASDAQ Rules. The
parties shall cooperate when issuing or making any press release, disclosure or
statement with respect to the transactions contemplated by this Agreement.
Article 4 Closing Matters.
4.1 Closing. The Closing of the transactions contemplated by this Agreement
shall take place beginning at 10:00 a.m. (local time) on a date not later than
the Closing Deadline and at a place specified by NCFC Recapitalization but not
later than the fifth Business Day after the satisfaction or waiver of the
Closing Conditions.
4.2 Extension of Closing Deadline. At any time prior to the Closing Deadline,
NCFC Recapitalization or North Country may, in its discretion (without any
obligation to do so) extend the Closing Deadline to a date selected by it, in
the event that one or more of the Closing Conditions shall not have been
satisfied, or if additional time is required to determine whether one or more of
the Closing Conditions have been satisfied or to seek waivers by the Investors,
but in no event may either NCFC Recapitalization or North Country extend the
Closing Deadline beyond 11:59 p.m., local time, on December 31, 2004 without the
consent of the other party. The party so extending the Closing Deadline shall
give notice to the other party of any extension of the Closing Deadline as
promptly as practicable after the extension (whether before or after the
previous deadline).
4.3 Closing Conditions. Each Investor's obligation to proceed with the Closing
is subject to the satisfaction on or prior to the Closing Date of all of the
Investors' Closing Conditions, any one or more of which may be waived in writing
in whole or part by the Investors (including by NCFC Recapitalization as
contemplated by Section 7.13). North Country's obligation to proceed with the
Closing is subject to the further satisfaction on or prior to the Closing Date
of all of the
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North Country Closing Conditions, any one or more of which may be waived in
writing in whole or part by North Country.
4.4 Best Efforts to Satisfy Closing Conditions. The parties shall use their
respective Best Efforts to satisfy or cause to be satisfied the Closing
Conditions within their control.
4.5 Determination of Number of North Country Shares to be Issued to the
Investors at the Closing.
(a) The number of North Country Shares to be issued to each of the
Investors shall be determined pursuant to the proration and other provisions in
the Definitive Subscription Documents. North Country shall duly issue and
deliver, or cause to be duly issued and delivered, at the Closing, certificates
for the North Country Shares to be issued at the Closing in such denominations
and in such registered names as shall be required by the Definitive Subscription
Documents.
(b) The following shall be used to determine the total number of North
Country Shares to be issued to the Investors, provided that the number of North
Country Shares to be issued shall not be less than 39,775,195:
First Step: Add the Net Proceeds of the Offering to the Pre-Closing
Adjusted Equity.
Second Step: Divide the Pre-Closing Adjusted Equity by the result of
the First Step.
Third Step: Divide the Pre-Closing Outstanding Shares by the result of
the Second Step. The result of this Third Step is the
number of shares of common stock to be outstanding after
the Closing.
Fourth Step: Subtract the Pre-Closing Outstanding Shares from the
result of the Third Step. The greater of 39,775,195 or
the result determined in this Fourth Step shall be the
total number of North Country Shares to be issued by
North Country to the Investors at the Closing.
(c) Not less than five (5) Business Days prior to the Closing Date,
North Country shall cause the Accounting Firm to prepare (with the participation
of North Country and NCFC Recapitalization) and deliver to North Country and
NCFC Recapitalization a schedule setting forth computations of (i) the
Pre-Closing Adjusted Equity and (ii) the number of North County Shares to be
issued to the Investors pursuant to this Agreement (the "Closing Schedule") and
the Accounting Firms certification that the Closing Schedule and such
computations were prepared in accordance with this Agreement. The records
necessary to prepare the Closing Schedule and the computations therein shall be
furnished by North Country to the Accounting Firm and to NCFC Recapitalization.
(d) NCFC Recapitalization (together with its advisors) shall have the
right during the succeeding five (5) Business Day period, or such longer period
as NCFC shall reasonably require by notice to North Country (the "Review
Period"), to examine the Closing Schedule, and all information reasonably
related thereto that may be requested by NCFC Recapitalization. Seller
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shall provide, and cause the Accounting Firm to provide, to NCFC
Recapitalization and its advisors reasonable access to the work papers used to
prepare the Closing Schedule. If NCFC Recapitalization disagrees with any of the
computations on the Closing Schedule, it shall notify North Country (such
notice, a "Notice of Disagreement") on or before the last day of the Review
Period, setting forth a description of NCFC Recapitalization's objections.
(e) In the event that NCFC Recapitalization does not provide a Notice of
Disagreement on or before the last day of the Review Period or NCFC
Recapitalization affirmatively notifies North Country that it does not disagree
with the Closing Schedule, the Closing Schedule, and the computations set forth
therein, shall be final, binding and conclusive for all purposes hereunder. In
the event that a Notice of Disagreement is provided by NCFC Recapitalization,
NCFC Recapitalization and North Country shall use Best Efforts for a period of
five (5) Business Days (or such longer period as they may mutually agree) to
resolve any disagreements with respect to the Closing Schedule. The objections
set forth in the Notice of Disagreement that are resolved by NCFC
Recapitalization and North Country in accordance with this Section are referred
to herein as the "Resolved Objections" and the Closing Schedule shall be
adjusted to reflect any Resolved Objections.
(f) If, at the end of such five (5) Business Day period (or longer
agreed upon period), NCFC Recapitalization and North Country are unable to
resolve all of the objections set forth in any Notice of Disagreement, NCFC
Recapitalization may elect to either (i) terminate this Agreement pursuant to
Section 4.6(h) or (ii) to proceed with the Closing, and in that case the number
of North Country Shares to be issued at the Closing shall be based on the
Closing Schedule as adjusted to reflect the Resolved Objections and the
remaining disagreements as to the Closing Schedule shall be resolved by the
Second Accounting Firm as provided in Section 4.5(h) below.
(g) In the event that NCFC Recapitalization shall elect to proceed with
the Closing as provided in Section 4.5(f), NCFC Recapitalization and North
Country shall jointly engage the Second Accounting Firm within ten (10) Business
Days after the Closing to resolve any remaining objections in the Notice of
Disagreement. NCFC Recapitalization and North Country shall submit the remaining
objections in writing to the Second Accounting Firm within thirty (30) days
after the Second Accounting Firm's engagement. The Second Accounting Firm,
acting as experts and not as arbitrators, shall review the objections set forth
in the Notice of Disagreement that are not Resolved Objections (collectively,
the "Differences"). The Second Accounting Firm shall determine, within 45 days
of the date on which such dispute is referred based on the requirements set
forth in this Section 4.5, and only with respect to the Differences submitted to
the Second Accounting Firm, whether and to what extent the Closing Schedule was
prepared in accordance with this Agreement and what adjustments (if any) the
Closing Schedule requires in order for it to comply with this Agreement. North
Country shall pay the fees and expenses of the Second Accounting Firm. The
accepted Closing Schedule pursuant to the first sentence of Section 4.5(e) or
the finally determined Closing Schedule pursuant to Section 4.5(g) is referred
to as the "Final Closing Schedule".
(h) In the event that the finally determined Final Closing Schedule
pursuant to Section 4.5(h), shows that additional North Country Shares are to be
issued to the Investors, North Country shall duly issue and deliver, or cause to
be duly issued and delivered, within five
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(5) Business Days after receipt of the Final Closing Schedule, certificates for
the additional North Country Shares in such denominations and in such registered
names as shall be required by the Definitive Subscriptions Documents.
4.6 Termination. This Agreement may be terminated before the Closing Date as
follows:
(a) By written agreement of NCFC Recapitalization and North Country.
(b) By NCFC Recapitalization or any Investor (but in the case of an
Investor as to that Investor only), by written notice to North Country in the
event that, through no fault of NCFC Recapitalization, one or more of the
Investors' Closing Conditions is not satisfied prior to the Closing Deadline or
satisfaction of such condition is or becomes impossible.
(c) By North Country by notice to NCFC Recapitalization, in the event
that, through no fault of North Country, one or more of the North Country
Closing Conditions is not satisfied prior to the Closing Deadline or
satisfaction of such condition is or becomes impossible.
(d) By NCFC Recapitalization by notice to North Country, if North
Country shall have authorized, recommended or approved, or if North Country
shall have entered into, an agreement or letter of intent with any person,
entity or group, other than NCFC Recapitalization, to effect an Acquisition
Proposal.
(e) By NCFC Recapitalization by notice to North Country, after the
occurrence of a Recommendation Event or Acquisition Event.
(f) By North Country by notice to NCFC Recapitalization, after the
occurrence of (i) a Recommendation Event or (ii) an Acquisition Event (provided
North Country has not breached Section 3.6).
(g) By either NCFC Recapitalization or North Country by notice to the
other, if any approval of the shareholders of North Country as to any of the
Shareholder Approval Items shall not have been obtained by reason of the failure
to obtain the required vote at a duly held meeting of shareholders or at any
adjournment or postponement thereof.
(h) At any time prior to the Closing, by North Country or NCFC
Recapitalization, in the event that the Closing has not occurred by the Closing
Deadline, except to the extent that the failure of the Closing to occur arises
out of or results from the knowing action or inaction of the party seeking to
terminate pursuant to this Section 4.6(h).
(i) By NCFC Recapitalization by notice to North Country pursuant to
Section 4.5(g).
4.7 Effect of Termination. In the event that this Agreement is terminated
prior to the Closing pursuant to Section 4.6, this Agreement shall become null
and void and of no further force and effect and no party shall have any
liability to another party except only for such party's willful breach of this
Agreement and except that Section 4.8 and Article 8 shall survive the
termination.
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4.8 Liquidated Damages; Termination Fee.
(a) Notwithstanding anything to the contrary contained in this
Agreement, in the event that any of the following events or circumstances shall
occur, North Country shall, within ten (10) days after notice of the occurrence
thereof by NCFC Recapitalization, pay to NCFC Recapitalization the sum equal to
$1,500,000 plus reimbursement of the Specified Expenses not to exceed $250,000,
if not previously paid pursuant to Section 4.8(b), (which the parties agree and
stipulate as reasonable and full liquidated damages and reasonable compensation
for the involvement of NCFC Recapitalization in the transactions contemplated in
this Agreement, is not a penalty or forfeiture, and will not affect the
provisions of Section 4.7): (i) NCFC Recapitalization shall terminate this
Agreement pursuant to Section 4.6(d) or 4.6(e); (ii) North Country shall
terminate this Agreement pursuant to Section 4.6(f); (iii) North Country fails
to call and hold the meeting of its shareholders as contemplated in Section 3.4
of this Agreement; or (iv) any of the Investors' Conditions shall not have been
satisfied as of the date of any termination of this Agreement pursuant to
Section 4.6 and there shall occur any Acquisition Event (whether or not pending
on the effective date of termination of this Agreement) within twelve (12)
months after the effective date of any such termination.
(b) Notwithstanding anything to the contrary contained in this
Agreement, in the event that any of the Investors' Conditions set forth in
Section 2, 3, 7, 10, 13, 14, 15 or 20 of Part I of Schedule 3 shall not have
been satisfied as of the date of any termination of this Agreement pursuant to
Section 4.6, North Country shall, within ten (10) days after the effective date
of any such termination, pay to NCFC Recapitalization an amount equal to the
Specified Expenses not to exceed $250,000 (which the parties agree and stipulate
as reasonable and full liquidated damages and reasonable compensation for the
involvement of NCFC Recapitalization in the transactions contemplated in this
agreement, is not a penalty or forfeiture, and will not affect the provisions of
Section 4.7 or 4.8(a)).
(c) Upon the making and receipt of the payment(s) under this Section
4.8, North Country shall have no further obligation of any kind under this
Agreement and neither NCFC Recapitalization nor any Investor shall have any
further obligation of any kind under this Agreement, except in each case as
provided under this Section 4.8 or Section 4.7.
Article 5 Representations and Warranties
5.1 Representations and Warranties of North Country. North Country represents
and warrants to NCFC Recapitalization and each of the Investors that the
statements contained in this Section 5.1 are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date was substituted for the date of
this Agreement throughout this Section), except (i) as set forth in the North
Country Disclosure Schedule and (ii) as to statements made on the Closing Date
only, for any changes to the North Country Disclosure Schedule in accordance
with Section 3.3(b).
(a) Organization and Good Standing. North Country is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Michigan; the Bank is a banking corporation organized, validly existing and in
good standing under the laws of the State of Michigan; North Country Capital
Trust is a business trust duly organized, validly existing and
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in good standing under the laws of the State of Delaware; and each of North
Country's other Subsidiaries are corporations duly organized, validly existing
and in good standing under the laws of the State of Michigan. Each of North
Country and each of its Subsidiaries has full power and authority to own its
assets and properties and carry on its business as now being conducted. Each of
North Country and each of its Subsidiaries is duly licensed and qualified to do
business in each jurisdiction in which the nature of the business conducted by
it or the character or location of properties and assets owned or leased by it
makes such licensing or qualification necessary. North Country is duly
registered as a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. All eligible accounts of each of its Subsidiaries that
is a depositary institution are insured by the FDIC to the maximum extent
permitted under applicable law.
(b) Power; Due Authorization; Enforceability.
(i) North Country has all requisite capacity, power and
authority to execute and deliver this Agreement and the Definitive
Subscription Documents and to perform and comply with all of the terms,
covenants and conditions to be performed and complied with by North
Country in this Agreement and the Definitive Subscription Documents.
(ii) The execution, delivery and performance by North Country
of this Agreement have been, and when the Definitive Subscription
Documents are executed and delivered by North Country they will have been,
duly authorized by all necessary actions on the part of North Country
(including approval by North Country's Board of Directors). The Board of
Directors of North Country has duly approved and authorized the this
Agreement and each of the transactions contemplated by this Agreement, and
has determined that this Agreement and the transactions contemplated by
this Agreement are in the best interests of North Country and its
Shareholders. This Agreement has been duly executed and delivered by North
Country and constitutes, and when the Definitive Subscription Agreement
have been executed and delivered by North Country they will have been duly
executed and delivered and will constitute, North Country's legal, valid
and binding obligation, enforceable against it in accordance with their
respective terms, except as enforceability may be limited by bankruptcy,
insolvency, moratorium, or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity.
(c) Consents and Approvals. No third Person or governmental
authorization, consent, waiver, approval or license, nor any exemption of, or
filing or registration with, or expiration of any waiting period of, any court
or governmental agency of any jurisdiction is or will be necessary in connection
with the execution, delivery or performance by North Country, except such
authorizations, consents, waivers, approvals, licenses, exemptions, filings or
registrations as have been obtained or made and waiting periods as have expired
and except as contemplated in Part II of Schedule 3.
(d) No Conflicts or Violations. The execution, delivery and performance
by North Country of this Agreement do not and will not, and the execution,
delivery and performance by North Country of the Definitive Subscription
Documents will not: (i) conflict with or violate any
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provision of the Articles of Incorporation or Bylaws of North Country or any of
its Subsidiaries; (ii) violate any provision of any law, statute, regulation,
order or decree applicable to North Country or any of its Subsidiaries; (iii)
violate the Order; (iv) conflict with, violate, result in a breach of,
constitute a default under (without regard to requirements of notice, lapse of
time or any combination thereof), accelerate or permit the acceleration of the
performance required by, cause any "change in control" or similar payment to be
made under, any contract, agreement or instrument to which North Country or any
of its Subsidiaries is party or by which North Country or any of its
Subsidiaries or the assets or properties owned or leased by any of them are
bound or affected; or (iv) result in the creation or imposition of any
encumbrance against or upon any of the assets of North Country or any of its
Subsidiaries.
(e) The Order. Except as set forth in Section 5.1(e) of the Disclosure
Schedule, North Country, the Bank, their Boards of Directors and executive
officers have fully complied with all provisions of the Order. The Order has not
been amended or modified.
(f) No Litigation. There are no claims, lawsuits, arbitrations or
governmental investigations pending, or to the best knowledge of North Country,
threatened against North Country or any of its Subsidiaries which would
reasonably be expected to result in an order or decree restraining, enjoining or
otherwise prohibiting or making illegal the consummation of the transactions
contemplated by this Agreement.
(g) Authorized and Outstanding Capital Stock. The authorized capital
stock of North Country consists of 18,500,000 shares, divided into two classes.
One class consists of 500,000 shares of preferred stock, none of which is issued
or outstanding, and the other class consists of 18,000,000 shares of common
stock. As of the date of this Agreement, 7,019,152 shares of common stock of
North Country are issued and outstanding and no shares of common stock of North
Country were held in treasury. All of the issued and outstanding shares of
common stock of North Country have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights with no personal
liability attaching to the ownership thereof. Except pursuant to the terms of
this Agreement, and except for the North Country Stock Option Plans and the
North Country Stock Options, North Country does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of common
stock of North Country or any other equity securities of North Country or any
securities representing the right to purchase or otherwise receive any shares of
common stock of North Country or any other equity securities of North Country.
As of the date of this Agreement, no shares of common stock of North Country
were subject to outstanding and unexercised options, warrants, or other rights
to purchase shares of common stock of North Country, except for 535,732 shares
reserved for issuance upon the exercise or vesting of North Country Stock
Options issued pursuant to the North Country Stock Option Plans. Section 5.1(g)
or the Disclosure Schedule contains a true and correct list of all outstanding
North Country Stock Options, the holder of the options, the number of shares of
common stock of North Country subject to the options, the vesting schedule of
the options, and the exercise price per share of the options. Neither the number
of the shares of North Country covered by any outstanding North Country Options,
the exercise price of any outstanding North Country Options, nor any other term
or provision of any North Country Options will be altered or in any way affected
by the consummation of the transactions contemplated by this Agreement. Since
June 30, 2004, North Country has not issued any shares
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of common stock of North Country or other equity securities of North Country, or
any securities convertible into or exercisable for any North Country Shares or
other equity securities of North Country, other than as contemplated by this
Agreement or pursuant to the exercise of stock options issued under the North
Country Stock Option Plans granted prior to the date of this Agreement. The
outstanding shares of common stock of North Country are the only securities
issued by North Country that are entitled to vote on the Shareholder Approval
Items.
(h) Preferred Share Purchase Rights. The Board of Directors has taken
all required action so that (i) neither a "Share Acquisition Date" nor a
"Distribution Date" (as those terms are defined in the Rights Agreement) shall
occur as a result of this Agreement or any of the transactions contemplated by
this Agreement, (ii) none of NCFC Recapitalization, any Investor or any
Affiliate or Associate (as those terms are defined in the Rights Agreement) of
any of them (or any group of any of them), shall be or become an "Acquiring
Person" (as that term is defined in the Rights Agreement) as a result of this
Agreement, any of the transactions contemplated by this Agreement, or any action
taken by any of them (or any group of any of them) under or in connection with
this Agreement or any of the transactions contemplated hereby, in each case
regardless of the number of shares of common stock of North Country
"Beneficially Owned" (as that term is defined in the Rights Agreement) by any of
them or any group of any of them, and (iii) all outstanding Rights and the
Rights Agreement shall expire and be terminated immediately prior to the Closing
without any payment. No Person (as that term is defined in the Rights Agreement)
has become an Acquiring Person and no Share Acquisition Date or Distribution
Date has occurred.
(i) SEC Reports and Financial Statements; Regulatory Filings.
(i) North Country has filed all forms, reports and documents
required to be filed by it with the SEC since January 1, 2001. Section
5.1(i) of the Disclosure Schedule lists, and North Country has made
available to NCFC Recapitalization, copies in the form filed with the SEC
of (A) North Country's Annual Reports on Form 10-K for each fiscal year of
North Country since December 31, 2000, (B) its Quarterly Reports on Form
10-Q for each of the first three fiscal quarters in each of the fiscal
years of North Country since December 31, 2000, (C) all proxy statements
relating to North Country's meetings of shareholders (whether annual or
special) held, and all information statements relating to shareholder
consents, since December 31, 2000, (D) all certifications and statements
required by (y) Rule 13a-14 or 15d-14 under the Exchange Act or (z) 18
U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) with
respect to any report referred to in clause (A) or (B) of this sentence,
(E) all other forms, reports and registration statements (other than
preliminary materials if the corresponding definitive materials have been
provided to NCFC Recapitalization pursuant to this Section 5.1(h)) filed
by North Country with the SEC since December 31, 2000 (the items described
in (A), (B), (C), (D) and (E) of this sentence, together with any and all
amendments thereto, are, collectively, the "SEC Reports"), and (F) all
comment letters received by North Country from the Staff of the SEC since
December 31, 2000 and all responses to such comment letters.
(ii) The SEC Reports (A) were prepared in all material respects in
accordance with the requirements of the Securities Act and the Exchange
Act, as the case may be, and (B) did not at the time they were filed with
the SEC, or if thereafter amended, at the time of
A-15
such amendment, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order
to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. No Subsidiary of North Country
is or has been required to file any form, report, registration statement
or other document with the SEC. To the Knowledge of North Country, each
director and executive officer of North Country has filed with the SEC on
a timely basis all statements required by Section 16(a) of the Securities
Exchange Act since December 31, 2000, except as otherwise disclosed in a
SEC Report. As used in this Section 5.1(i), the term "file" shall be
broadly construed to include any manner in which a document or information
is furnished, supplied or otherwise made available to the SEC.
(iii) North Country has established and maintains disclosure
controls and procedures (as such term is defined in Rule 13a-15(e) under
the Exchange Act). Such disclosure controls and procedures: (A) are
designed to ensure that material information relating to North Country and
its Subsidiaries is made known to North Country's chief executive officer
and its chief financial officer by others within those entities,
particularly during the periods in which North Country's reports and
filings under the Securities Exchange Act are being prepared, (B) have
been evaluated for effectiveness as of the end of the most recent annual
period reported to the SEC, and (C) are effective to perform the functions
for which they were established. Neither the auditors of North Country nor
the Audit Committee of the Board of Directors of North Country has been
advised of: (x) any significant deficiencies or material weaknesses in the
design or operation of the internal controls over financial reporting (as
such term is defined in Rule 13a-15(f) under the Securities Exchange Act)
of North Country that have materially affected North Country's internal
control over financial reporting; or (y) any fraud, whether or not
material, that involves management or other employees who have a role in
the internal controls over financial reporting of North Country.
(iv) Since July 31, 2002, each SEC Report was accompanied by the
certifications of North Country's chief executive officer and chief
financial officer to the extent required under Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002, and North Country hereby reaffirms, represents
and warrants to NCFC Recapitalization and each Investor, the matters and
statements made in such certifications.
(v) The financial statements of North Country and its Subsidiaries
included in the SEC Reports (including the related notes) complied as to
form, as of their respective dates of filing with the SEC (or if amended,
as of the date of such amendment), in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto (including Regulation S-X), were prepared
in accordance with generally accepted accounting principles in the United
States applied on a consistent basis ("GAAP") during the periods and at
the dates involved (except as may be indicated in the notes thereto and
except, in the case of unaudited statements, to the extent permitted by
Regulation S-X for Quarterly Reports on Form 10-Q), and fairly present the
consolidated financial condition of North Country and its Subsidiaries at
the dates thereof and the consolidated results of operations and cash
flows for the periods then ended.
A-16
(vi) To the best knowledge of North Country, Plante & Moran, PLLC,
which has expressed its opinion with respect to the financial statements
of North Country and its Subsidiaries included in SEC Reports (including
the related notes), is and has been throughout the periods covered by such
financial statements (A) "independent" with respect to North Country
within the meaning of Regulation S-X, and is (B) a registered public
accounting firm as defined in Section 2(a)(12) of the Sarbanes-Oxley Act
of 2002 and (C) in compliance with subsections (g) through (l) of Section
10A of the Securities Exchange Act and the Public Company Accounting
Oversight Board. Section 5.1(i) of the Disclosure Schedule lists all
non-audit services performed by Plante & Moran, PLLC for North Country and
each Subsidiary since December 31, 2000.
(vii) North Country has made available to NCFC Recapitalization
copies of the documentation creating or governing all securitization
transactions and "off-balance sheet arrangements" (as defined in Item
303(c) of Regulation S-K of the SEC) effected by NCFC or its Subsidiaries
since December 31, 2000.
(viii) North Country and each Subsidiary maintains proper and
adequate internal controls over financial reporting which provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of its financial statements in
accordance with GAAP and to maintain accountability for its assets; and
(iii) access to material assets is permitted only in accordance with
management's general or specific authorization.
(ix) Since January 1, 2001, North Country and its Subsidiaries,
including the Bank, have filed all reports, registrations and financial
and other statements, together with any amendments required to be made
with respect thereto, that were required to be filed with any Regulatory
Authority (collectively, the "Filings"). North Country has provided NCFC
Recapitalization with copies of all Filings, together with copies of all
orders or other administrative actions taken in connection with such
Filings. As of their respective dates, each of the Filings (i) was true
and complete in all material respects (or was amended so as to be so
promptly following discovery of any discrepancy), and (ii) complied in all
material respects with the statutes, rules and regulations enforced or
promulgated by the Regulatory Authority with which it was filed. No such
Filing contains any untrue statement of a material fact or omitted to
state a material fact requires to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading. Any financial statement contained in any Filing
that was intended to present the financial position of the entity or
entities to which it related fairly presented such financial position in
accordance with generally accepted accounting principles or applicable
banking regulations consistently applied, except as stated therein.
(x) North Country is qualified to use Form S-3 for the registration
statement to be filed by it as contemplated by the Registration Rights
Agreement.
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(j) Compliance with Laws and NASDAQ Rules.
(i) Except as set forth in Section 5.1(j) of the Disclosure
Schedule, North Country and each of its Subsidiaries are in compliance in
all material respects with all laws, regulations, ordinances, rules,
judgments, orders or decrees applicable to their respective operations or
businesses, including the Equal Credit Opportunity Act, the Fair Housing
Act, the Community Reinvestment Act, the Home Owners' Disclosure Act and
all other applicable fair lending laws or other laws relating to
discrimination. Except as set forth in Section 5.1(j) of the Disclosure
Schedule, neither North Country nor any of its Subsidiaries has received
notice from any federal, state or local government or governmental or
regulatory agency or body of any material violation of, and does not know
of any material violations of, any of the above.
(ii) North Country and each of its Subsidiaries have all permits,
licenses, certificates of authority, franchises, orders and approvals of,
and have made all filings, applications and registrations with, all
federal, state, local and foreign government or governmental or regulatory
agency or body that are required in order to permit them to carry on their
respective businesses as they are presently being conducted.
(iii) Other than the Order, North Country and each of its
Subsidiaries have not received any notification or communication from any
government or governmental or regulatory agency or body or the staff
thereof, since January 1, 2001 or, whether or not received since that
date, that remain outstanding and not fully resolved (A) asserting that it
or any of its Subsidiaries is not in compliance with any of the statutes,
regulations or ordinances that such government or governmental or
regulatory agency or body administers or enforces; (B) threatening to
revoke any license, franchise, permit or authorization; or (C) threatening
or contemplating any enforcement action by or supervisory or other written
agreement with a state or federal banking regulator, or any revocation or
limitation of, or action which would have the effect of revoking or
limiting, the FDIC deposit insurance of any Subsidiary (nor, to the
knowledge of its executive officers, do any grounds for any of the
foregoing exist).
(iv) Other than the Order, neither North Country nor any Subsidiary
of North Country is subject to any cease-and-desist or other order issued
by, or is a party to any written agreement, consent agreement or
memorandum of understanding currently in effect with, or is a party to any
commitment letter or similar undertaking currently in effect to, or is
subject to any order or directive by, or is currently subject to any
supervisory letter from, or has adopted any board resolutions at the
request of any Regulatory Authority currently in effect nor has North
Country or any of its Subsidiaries been advised in writing by any
Regulatory Authority that it is considering issuing or requesting any of
the foregoing.
(v) There is no pending or, to the best knowledge of North Country,
threatened (in writing), charge by any Regulatory Authority that North
Country or any Subsidiary has violated any applicable laws, rules or
regulations, nor, to the best knowledge of North Country, any pending or
threatened investigation by any Regulatory Authority with respect to
possible material violations of any applicable laws, rules or regulations.
A-18
(vi) There are no contracts, real estate leases, loans, guarantees
or other arrangements or transactions of any nature between North Country
or any Subsidiary or North Country, on the one hand, and any of their
respective officers, directors, or affiliates (as such term is defined in
Rule 405 of the SEC), on the other hand. North Country has not, since July
30, 2002, extended or maintained credit, arranged for the extension of
credit, or renewed an extension of credit, in the form of a personal loan
to or for any director or executive officer (or equivalent thereof) of
North Country or any Subsidiary or North Country in violation of Section
13(k)(1) of the Securities Exchange Act. Section 5.1(j)(vi) of the
Disclosure Schedule identifies each loan or extension of credit currently
maintained by North Country or any Subsidiary of North Country to which
the second sentence of Section 13(k)(1) of the Securities Exchange Act
applies.
(vii) North Country is in compliance in all material respects with
the provisions of the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated thereunder that are applicable to it and has
implemented such programs and has taken reasonable steps to be in a
position to comply with the requirements, upon effectiveness, of Section
404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations
promulgated thereunder.
(viii) None of North Country, any of the North Country Subsidiaries,
any of their respective current directors or officers, or, to the best
knowledge of North Country, any of their respective former officers or
directors or current or former employees, agents or representatives has,
since December 31, 2000: (i) used any corporate funds for any illegal
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) used any corporate funds for any direct or
indirect unlawful payments to any foreign or domestic government officials
or employees, (iii) violated any provision of the Foreign Corrupt
Practices Act of 1977, (iv) established or maintained any unlawful or
unrecorded fund of corporate monies or other assets, (v) made any false or
fictitious entries on the books and records of North Country or any North
Country Subsidiary, (vi) made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment of any nature, or (vi) made
any material favor or gift which is not deductible for federal income tax
purposes. To the best knowledge of North Country: (x) no director or
officer of North Country or any North Country Subsidiary has engaged in
any "insider trading" in violation of applicable law with respect to any
security issued by North Country or any North Country Subsidiary; and (y)
no director or officer of North Country has made any false certifications
or statements under (i) the SEC's Order dated June 27, 2002 pursuant to
Section 21(a)(1) of the Securities Exchange Act (File No. 4-460), (ii)
Rule 13a-14 or 15d-14 under the Securities Exchange Act or (iii) 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) with respect
to any SEC Report.
(iv) North Country is in compliance with all applicable NASDAQ
Rules, including all listing and corporate governance requirements.
(k) North Country Shares to be Issued. When issued in accordance with
this Agreement and the Definitive Subscription Documents, the North Country
Shares to be so issued will be duly authorized, validly issued, fully paid and
nonassessable and not subject to any preemptive rights or Encumbrances.
A-19
(l) Registration Exemptions. The offering and sale of the North Country
Shares to the Investors contemplated by this Agreement will be exempt from the
registration and prospectus delivery requirements of the Securities Act, MUSA
and all other applicable state securities laws.
(m) Proxy Statement. At the time the Proxy Statement is mailed to the
shareholders of North Country for the solicitation of proxies for the
Shareholder Approval Items and at all times after such mailings up to and
including the times of such approvals, such Proxy Statement (including any
supplements thereto) will (i) comply in all material respects with applicable
provisions of the Exchange Act and (ii) not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements contained therein, in light of the
circumstances under which it is made, not misleading.
(n) Offering Documents. At the time the Offering Documents are delivered
to prospective Investors and at all times after that time to and including the
Closing Date, such Offering Documents (including any supplements thereto) will
(i) comply in all material respects with applicable provisions of the Securities
Act and applicable securities laws of all other applicable jurisdictions and
(ii) not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements contained therein, in light of the circumstances under which it is
made, not misleading.
(o) State Takeover Laws; Supermajority Voting Provisions. The Board of
Directors of North Country has duly approved the transactions contemplated by
this Agreement and has adopted irrevocable resolutions approving and exempting
from Section 780 of the MBCA, and any supermajority voting provision contained
in the Articles of Incorporation or Bylaws of North Country, the transactions
contemplated by this Agreement and any existing or future business combination
with NCFC Recapitalization or any Investor, and any of their respective existing
or future Affiliates, and any group of any of them, and taken such further
action as maybe required so that Chapter 7A of the MBCA and any other provisions
of any state "business combination" or "takeover" law applicable to North
Country, or supermajority voting provision contained in the Articles of
Incorporation or Bylaws of North Country, will not apply to this Agreement, any
of the transactions contemplated by this Agreement, or any such existing or
future business combination. The bylaws of North Country have been duly amended
to provide that Chapter 7B of the MBCA does not apply to control share
acquisitions of shares of North Country and, accordingly, Chapter 7B of the MBCA
will not apply to this Agreement or any of the transactions contemplated by this
Agreement.
(p) No Preemptive or Dissenters' Rights. No shareholder of North Country
has any pre-emptive rights or any right to dissent and obtain payment for his or
her shares of North Country under any agreement or under applicable law with
respect to, or as a result of, the transactions contemplated by this Agreement.
(q) No Broker Fees. Except for Austin Associates, LLC in accordance with
its amended engagement letter (a copy of which is included in Section 5.1(q) of
the Disclosure Schedule), and except for the Placement Agents in accordance with
their engagement letters (copies of which are also included in Section 5.1(q) of
the Disclosure Schedule) and in this
A-20
Agreement, no agent, broker, investment banker, person or firm acting on behalf
or under authority of North Country or any of its Subsidiaries is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
directly or indirectly from North Country or any of its Subsidiaries in
connection with the transactions contemplated by this Agreement,
(r) Regulatory Approvals. North Country know of no reason why any of the
Regulatory Approvals should not be obtained without the imposition of any
Burdensome Condition on a timely basis.
(s) Corporate Affairs.
(i) North Country has made available to NCFC Recapitalization
correct and complete copies of the Articles of Incorporation and Bylaws of
North Country and each of its Subsidiaries (as amended to date). North
Country has made available to NCFC Recapitalization all of the minute
books containing the records of the meetings of the shareholders, the
board of directors and any committee of the board of directors of North
Country and each Subsidiary since January 1, 2001. The minute books of
North Country and its Subsidiaries reflect all of the material actions
taken by each of their respective Boards of Directors (including each
committee thereof) and shareholders. North Country has made available to
NCFC Recapitalization all of the stock ledgers of North Country and its
Subsidiaries.
(ii) The minute books and the stock ledgers of North Country
accurately and completely list and describe all issuances, transfers of
record and cancellations of shares of capital stock of North Country. The
minute books and stock ledgers of each Subsidiary accurately and
completely list and describe all issuances, transfers and cancellations of
shares of capital stock of the Subsidiary.
(t) Ownership of Subsidiaries. All outstanding shares or ownership
interests of North Country's Subsidiaries are validly issued, fully paid,
nonassessable and owned beneficially and of record by North Country or one of
its Subsidiaries free and clear of any Encumbrance. There are no options,
convertible securities, warrants or other rights (preemptive or otherwise) to
purchase or acquire any capital stock or ownership interests of any of North
Country's Subsidiaries and no contracts to which North Country or any of its
Subsidiaries is subject with respect to the issuance, voting or sale of issued
or unissued shares of the capital stock or ownership interests of any of its
Subsidiaries. Neither North Country nor any of its Subsidiaries owns more than
2% of the capital stock or other equity securities (including securities
convertible or exchangeable into such securities) of or more than 2% of the
aggregate profit participations in any entity other than a Subsidiary or as
otherwise set forth in Section 5.1(t) of the Disclosure Schedule.
(u) Absence of Changes.
(i) Since December 31, 2003, except as set forth in Section 5.1(u)
of the Disclosure Schedule, and except as disclosed in the SEC Reports of
North Country and Regulatory Filings that were filed prior to the date of
this Agreement and are identified in Section 5.1(u) of the Disclosure
Schedule, there has been no Material Adverse Effect.
A-21
There is no occurrence, event or development of any nature existing or, to
its best knowledge, threatened which may reasonably be expected to have a
Material Adverse Effect.
(ii) Except as set forth in North Country's Regulatory Filings
filed after December 31, 2001 and before the date of this Agreement, since
December 31, 2001, each of it and its Subsidiaries has owned and operated
its respective assets, properties and businesses in the ordinary course
and consistent with past practice.
(iii) Since December 31, 2003, except as set forth in Section
5.1(u)(iii) of the Disclosure Schedule, neither North Country nor any of
its Subsidiaries has (i) except for such actions as are in the ordinary
course of business consistent with past practice or except as required by
applicable law, (A) increased the wages, salaries, compensation, pension,
or other fringe benefits or perquisites payable to any executive officer,
employee, or director from the amount thereof in effect as of December 31,
2003, or (B) granted any severance or termination pay or entered into any
contract to make or grant any severance or termination pay, or (ii)
suffered any strike, work stoppage, slowdown, or other labor disturbance
which, in its reasonable judgment, is likely, either individually or in
the aggregate, to have a Material Adverse Effect, or (iii) taken or
allowed to occur any of the actions described in Section 3.1(b).
(v) Litigation and Other Proceedings. Except as set forth in Section
5.1(v) of the Disclosure Schedule, neither North Country nor any of its
Subsidiaries is a defendant in, nor is any of its property subject to, any
pending or, to its best knowledge, threatened claim, action, suit, investigation
or proceeding or subject to any order, judgment or decree, except for the Order.
Except as set forth in Section 5.1(v) of the Disclosure Schedule, there is no
injunction, order, judgment, decree, or regulatory restriction imposed upon it,
any of its Subsidiaries or the assets of it or any of its Subsidiaries which has
had, or might reasonably be expected to have, a Material Adverse Effect on it,
except for the Order.
(w) Trust Activities. None of North Country's Subsidiaries performs any
personal trust, corporate trust and other fiduciary activities other than as
custodian for individual retirement accounts.
(x) Employment Arrangements.
(i) All employees of North Country and its Subsidiaries are
employees-at-will, may be terminated at any time for any lawful reason or
no reason and have no entitlement to employment by virtue of any oral or
written contract, employer policy, or otherwise, except for any employees,
individually or in the aggregate, the termination of whom without cause
would not impose any material liability on it or its Subsidiaries or
require any material payments by it or any of its Subsidiaries. Except as
set forth in Section 5.1(x) of the Disclosure Schedule, there are no
agreements, plans or other arrangements with respect to employment,
severance or other benefits with any current or former directors, officers
or employees of North Country or any of its Subsidiaries which may not be
terminated without penalty or expense (including any augmentation or
acceleration of benefits) on 30 days' or less notice to any such person.
Except as set forth in Section
A-22
5.1(x) of the Disclosure Schedule, no payments and benefits (including any
augmentation or acceleration of benefits) to current or former directors,
officers or employees of North Country or any of its Subsidiaries
resulting from the transactions contemplated hereby or the termination of
such person's service or employment within two years after the Closing
Date will cause the imposition of excise taxes under Section 4999 of the
Code or the disallowance of a deduction to North Country or any of its
Subsidiaries pursuant to Section 162, Section 280G, or any other section
of the Code; and (iv) neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will (A)
constitute a stated "triggering event" under any "Employee Plan" (as
defined in Section 5.1(y) below) or "Benefit Arrangement" (as defined in
Section 5.1(y) below) of North Country or any of its Subsidiaries that
will result in any material payment (including severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director,
officer, shareholder, or employee of North Country or any of its
Subsidiaries, or any dependent or affiliate of any of the foregoing, from
North Country or any of its Subsidiaries under any Employee Plan or
Benefit Arrangement of North Country or any of its Subsidiaries or
otherwise, (B) materially increase any benefits otherwise payable under
any Employee Plan or Benefit Arrangement of North Country or any of its
Subsidiaries or (C) result in any acceleration of the time of payment or
vesting of any such benefits to any material extent.
(ii) Neither North Country nor any of its Subsidiaries is a party to
any collective bargaining agreement or labor union contract. To the best
knowledge of North Country, (i) no grievance procedure, arbitration
proceeding or other labor controversy is pending against it or any of its
Subsidiaries under any collective bargaining agreement or otherwise, (ii)
North Country and each of its Subsidiaries has complied in all material
respects with all laws relating to the employment of labor, including any
provision thereof relating to wages, hours, equal employment, safety,
collective bargaining and the payment of social security and similar taxes
and neither North Country nor any of its Subsidiaries is liable for any
arrears of wages or any taxes or penalties for failure to comply with any
of the foregoing, and (iii) there is no unfair labor practice or similar
complaint against North Country or any of its Subsidiaries pending before
the National Labor Relations Board or similar authority, or any strike,
dispute, slowdown, work stoppage or lockout pending or threatened against
North Country or any of its Subsidiaries or any complaint pending before
the Equal Employment Opportunity Commission or any comparable federal,
state or local fair employment practices agency and none has existed
during the past three years that was not dismissed without liability on
the part of North Country or any of its Subsidiaries.
(y) Employee Benefits.
(i) None of North Country, or any of its Subsidiaries, or any trade
or business, whether or not incorporated, required to be treated as a
"single employer" (within the meaning of Section 4001 of the Employment
Retirement Income Security Act of 1974 ("ERISA")) with it under Section
414(b) or (c) of the Code (an "ERISA Affiliate"), maintains any funded
deferred compensation plans (including profit sharing, pension, retirement
savings or stock bonus plans), unfunded deferred compensation arrangements
or employee benefit plans as defined in Section 3(3) of ERISA, other than
any plans
A-23
("Employee Plans") set forth in Section 5.1(y) of the Disclosure Schedule
(true and correct copies of which it has delivered to NCFC
Recapitalization). None of the Employee Plans of North Country or any of
its Subsidiaries is, and none of North Country, or any of its
Subsidiaries, or any ERISA Affiliate has ever sponsored, participated in,
or contributed to, a "multi-employer plan" as defined in Section 3(37) of
ERISA, or a "multiple employer plan" as covered in Section 413(c) of the
Code or any plan which is subject to Title IV of ERISA or Section 412 of
the Code. Neither North Country nor any of its Subsidiaries has incurred
or reasonably expects to incur any liability to the Pension Benefit
Guaranty Corporation except for required premium payments which, to the
extent due and payable, have been paid. The Employee Plans intended to be
qualified under Section 401(a) of the Code are so qualified, and it is not
aware of any fact which would adversely affect the qualified status of
such plans. Except as set forth in Section 5.1(y) of the Disclosure
Schedule, neither North Country nor any of its Subsidiaries (a) provides
health, medical, death or survivor benefits to any former employee or
beneficiary thereof or (b) maintains any form of current (exclusive of
base salary and base wages) or deferred compensation, bonus, stock option,
stock appreciation right, benefit, severance pay, retirement, employee
stock ownership, incentive, group or individual health insurance, welfare
or similar plan or arrangement for the benefit of any single or class of
directors, officers or employees, whether active or retired (collectively
"Benefit Arrangements"). There are no restrictions on the rights of North
Country or any of its Subsidiaries or any ERISA Affiliate to amend or
terminate any of the Employee Plans or Benefit Arrangements without
incurring any liability thereunder except for any such restrictions
described in Section 5.1(y)(i) of the Disclosure Schedule.
(ii) With respect to all Employee Plans and Benefit Arrangements,
North Country and each of its Subsidiaries are in substantial compliance
with the requirements prescribed by any and all statutes, governmental or
court orders or rules or regulations currently in effect, including but
not limited to ERISA and the Code, applicable to such Employee Plans or
Benefit Arrangements. No condition exists that could constitute grounds
for the termination of any Employee Plan under Section 4042 of ERISA; no
"prohibited transaction," as defined in Section 406 of ERISA and Section
4975 of the Code, has occurred with respect to any Employee Plan, or any
other employee benefit plan maintained by it or any of its Subsidiaries
which is covered by Title I of ERISA, which could subject any person to
liability under Title I of ERISA or to the imposition of any tax under
Section 4975 of the Code; no Employee Plan subject to Part III of Subtitle
B of Title I of ERISA or Section 412 of the Internal Revenue Code, or
both, has incurred any "accumulated funding deficiency," as defined in
Section 412 of the Code, whether or not waived; neither North Country nor
any of its Subsidiaries has failed to make any contribution or pay any
amount due and owing as required by the terms of any Employee Plan or
Benefit Arrangement. Neither North Country nor any of its Subsidiaries has
incurred or expects to incur, directly or indirectly, any liability under
Title IV of ERISA arising in connection with the termination of, or a
complete or partial withdrawal from, any plan covered or previously
covered by Title IV of ERISA which could constitute a liability of North
Country or any of its Subsidiaries at or after the Closing.
(z) Information Furnished. No statement contained in any Regulatory
Filing, schedule, certificate or other document furnished (whether before, on or
after the date of this
A-24
Agreement) or to be furnished in writing by or on behalf of North Country or any
of its Subsidiaries pursuant to this Agreement contains or will contain any
untrue statement of a material fact or any omit to state any material fact
necessary in order to make the statements and information contained therein not
misleading in light of the circumstances under which such statements were made.
(aa) Property and Assets. Either North Country or one of its Subsidiaries
is the sole and absolute owner of all of the assets (real and personal, tangible
and intangible) reflected in the financial statements referred to in Section
5.1(i) or acquired subsequent thereto (other than assets which are leased under
leases capitalized in accordance with generally accepted accounting principles
and assets which have been disposed of since the date of such financial
statements). North Country and its Subsidiaries have good and marketable title
to all such assets free and clear of any and all Encumbrances. No Person has any
written or oral agreement, option, understanding, or commitment, or any right or
privilege capable of becoming an agreement, for the purchase from North Country
or any of its Subsidiaries of any of the material assets owned or leased by any
of them. North Country and its Subsidiaries enjoy peaceful and undisturbed
possession under all material leases for the use of real property or personal
property under which they are the lessee; all of such leases are valid and
binding and in full force and effect, and neither North Country nor any of its
Subsidiaries is in default in any material respect under any such lease. Except
as set forth in Section 5.1(aa) of the Disclosure Schedule, no default will
arise under any material real property, material personal property lease or
material intellectual property license by reason of the consummation of the
transactions contemplated by this Agreement without the lessor's or licensor's
consent. There has been no material physical loss, damage or destruction,
whether or not covered by insurance, affecting any of the real properties or
material personal property of it and its Subsidiaries since December 31, 2003.
All fixed assets material to North Country's or any of its Subsidiaries'
respective business and currently used by it or any of its Subsidiaries are, in
all material respects, in good operating condition and repair.
(bb) Agreements and Instruments. Except for the Order, except as set
forth in Section 5.1(bb) of the Disclosure Schedule or except as set forth in,
or incorporated by reference into, its SEC Reports filed after December 31, 2003
and before the date of this Agreement, neither North Country nor any of its
Subsidiaries is a party to (a) any material agreement, arrangement or commitment
not made in the ordinary course of business, (b) any agreement, indenture or
other instrument relating to the borrowing of money by North Country or any of
its Subsidiaries or the guarantee by it or of its Subsidiaries of any such
obligation, (c) any agreements to make loans or for the provision, purchase or
sale of goods, services or property between North Country or any of its
Subsidiaries and any director or officer of it or any of its Subsidiaries or any
affiliate or member of the immediate family of any of the foregoing, (d) any
agreements with or concerning any labor or employee organization to which North
Country or any of its Subsidiaries is a party, (e) any agreements between North
Country or any of its Subsidiaries and any 5% or more shareholder of North
Country and (f) any agreements, directives, orders or similar arrangements
between or involving North Country or any of its Subsidiaries and any Regulatory
Authority.
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(cc) Material Contract Defaults. Neither North Country nor any of its
Subsidiaries nor the other party thereto is in default in any respect under any
contract, agreement, commitment, arrangement, lease, insurance policy or other
instrument to which North Country or any Subsidiary of North Country is a party
or by which its respective assets, business or operations may be bound or
affected or under which it or its respective assets, business or operations
receives benefits, which default is reasonably expected to have either
individually or in the aggregate a Material Adverse Effect, and there has not
occurred any event that, with the lapse of time or the giving of notice or both,
would constitute such a default.
(dd) Tax Matters.
(i) North Country and each of its Subsidiaries have duly and
properly filed all federal, state, local and other tax returns and reports
required to be filed by them and have made timely payments of all taxes
shown thereon to be due and payable, whether disputed or not; and there is
no agreement by North Country or any of its Subsidiaries for the extension
of time for the assessment or payment of any taxes payable. Neither the
Internal Revenue Service nor any other taxing authority is now asserting
or, to the best knowledge or North Country, threatening to assert any
deficiency or claim for additional taxes (or interest thereon or penalties
in connection therewith), nor is North Country aware of any basis for any
such assertion or claim. North Country and each of its Subsidiaries have
complied in all material respects with applicable Internal Revenue Service
backup withholding requirements. North Country and each of its
Subsidiaries have complied with all applicable state law tax collection
and reporting requirements.
(ii) Adequate provision for any unpaid federal, state, local or
foreign taxes due or to become due from North Country or any of its
Subsidiaries for all periods through and including March 31, 2004 has been
made and is reflected in its March 31, 2004 financial statements referred
to in Section 5.1(i) and has been or will be made with respect to periods
ending after March 31, 2004.
(ee) Environmental Matters.
(i) To the best knowledge of North Country, neither North Country
nor any of its Subsidiaries owns, leases, or otherwise controls any
property affected by toxic waste, radon gas or other hazardous conditions
or constructed in part with the use of asbestos which requires removal or
encapsulation. Neither North Country nor any of its Subsidiaries is aware
of, nor has it or any of its Subsidiaries received written notice from any
governmental or regulatory body of, any past, present or future
conditions, activities, practices or incidents which may interfere with or
prevent compliance or continued compliance with hazardous substance or
other environmental laws or any regulation, order, decree, judgment or
injunction, issued, entered, promulgated or approved thereunder or which
may give rise to any common law or legal liability or otherwise form the
basis of any claim, action, suit, proceeding, hearing, investigation or
remediation activity based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or
the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant, chemical or industrial, toxic
or hazardous substance or waste. There is no civil, criminal or
administrative claim,
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action, suit, proceeding, hearing or investigation pending or, to its
knowledge, threatened against North Country or any of its Subsidiaries
relating in any way to such hazardous substance laws or any regulation,
order, decree, judgment or injunction issued, entered, promulgated or
approved thereunder. There is no reasonable basis for any such claim,
action, suit, proceeding, hearing, investigation or remediation activity
that would impose any material liability on North Country or any of its
Subsidiaries.
(ii) To North Country's best knowledge, none of its "Loan Portfolio
Properties, Trust Properties and Other Properties" (as defined in this
Section) is in violation of or has any liability absolute or contingent,
under any environmental laws or regulation. There are no actions, suits,
demands, notices, claims, investigations or proceedings pending or
threatened relating to any of its Loan Portfolio Properties, Trust
Properties and Other Properties (including any notices, demand letters or
requests for information from any federal or state environmental agency
relating to any such liability under or violation of environmental laws or
regulation), which would impose a liability upon North Country or its
Subsidiaries pursuant to any environmental laws or regulation. "Loan
Portfolio Properties, Trust Properties and Other Properties" means, with
respect to North Country and its Subsidiaries, any real property, interest
in real property, improvements, appurtenances, rights and personal
property attendant thereto, which is owned, leased as a landlord or a
tenant, licensed as a licensor or licensee, managed or operated or upon
which is held a mortgage, deed of trust, deed to secure debt or other
security interest by it or any of its Subsidiaries whether directly, as an
agent, as trustee or other fiduciary or otherwise.
(ff) Loan Portfolio; Portfolio Management.
(i) All evidences of indebtedness reflected as assets in its
financial statements at December 31, 2003 referred to in Section 5.1(i),
or originated or acquired since such date, are (except with respect to
those assets which are no longer assets of it or any of its Subsidiaries)
binding obligations of the respective obligors named therein except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except as to
the availability of equitable remedies, including specific performance,
which are subject to the discretion of the court before which a proceeding
is brought, and the payment of no material amount thereof (either
individually or in the aggregate with other evidences of indebtedness) is
subject to any defenses or offsets which have been threatened or asserted
against it or any Subsidiary, except as set forth in Section 5.1(ff) of
the Disclosure Schedule. All such indebtedness which is secured by an
interest in real property is secured by a valid and perfected mortgage
lien having the priority specified in the loan documents. All such
indebtedness which is secured by an interest in personal property is
secured by a valid and perfected security interest having the priority
specified in the loan documents. All loans originated, directly or
indirectly, or purchased by North Country or any of its Subsidiaries were
at the time entered into and at all times owned by North Country or its
Subsidiaries in compliance in all material respects with all applicable
laws and regulations (including all consumer protection laws and
regulations). North Country and its Subsidiaries (as applicable)
administer their loan and investment portfolios (including, but not
limited to, adjustments to adjustable mortgage loans) in accordance with
all
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applicable laws and regulations and the terms of applicable instruments.
The records of North Country and any of its Subsidiaries (as applicable)
regarding all loans outstanding on its books are accurate in all material
respects.
(ii) Section 5.1(ff) of the Disclosure Schedule sets forth a list,
accurate and complete in all material respects, of the aggregate amounts
of loans, extensions of credit and other assets of it and its Subsidiaries
that have been adversely designated, criticized or classified by it as of
March 31, 2004, separated by category of classification or criticism (the
"Asset Classification"); and no amounts of loans, extensions of credit or
other assets that have been adversely designated, classified or criticized
as of the date hereof by any representative of any governmental or
regulatory authority as "Special Mention," "Substandard," "Doubtful,"
"Loss" or words of similar import are excluded from the amounts disclosed
in the Asset Classification, other than amounts of loans, extensions of
credit or other assets that were charged off by North Country or any of
its Subsidiaries before the date hereof.
(gg) Real Estate Loans; Investments.
(i) Except for properties acquired in settlement of loans, there
are no facts, circumstances or contingencies known to North Country which
exist and would require a material reduction under generally accepted
accounting principles in the present carrying value of any of the real
estate investments, joint ventures, construction loans, other investments
or other loans of it or any of its Subsidiaries (either individually or in
the aggregate with other loans and investments).
(ii) North Country and its Subsidiaries have good and marketable
title to all securities held by it (except securities sold under
repurchase agreements or held in any fiduciary or agency capacity), free
and clear of any Encumbrance, except to the extent such securities are
pledged in the ordinary course of business consistent with prudent banking
practices to secure obligations of North Country or any of its
Subsidiaries. Such securities are valued on its books in accordance with
generally accepted accounting principles. No investment material to North
Country or any of its Subsidiaries is subject to any restrictions,
contractual, statutory or other, that would materially impair the ability
of North Country or any of its Subsidiaries to dispose freely of any such
investment at any time, except restriction on the public distribution or
transfer of any such investments under the Securities Act and the
regulations thereunder or state securities laws and pledges or security
interests given to secure public funds on deposit with any of its
Subsidiaries.
(hh) Derivatives Contracts. Neither North Country nor any of its
Subsidiaries is a party to or has agreed to enter into an exchange-traded or
over-the-counter swap, forward, future, option, cap, floor or collar financial
contract or any other contract not included in its financial statement as of
March 31, 2004 which is a derivatives contract (including various combinations
thereof) (each, a "Derivatives Contract") or owns securities that are identified
in Thrift Bulletin No. 65 or otherwise referred to as structured notes (each, a
"Structured Note"), except for those Derivatives Contracts and Structured Notes
set forth in Section 5.1(hh) of the Disclosure
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Schedule, including a list, as applicable, of any of its or any of its
Subsidiaries' assets pledged as security for a Derivatives Contract.
(ii) Intellectual Property.
(i) North Country and each of its Subsidiaries own or have the right
to use pursuant to license, sublicense, agreement or permission all
intellectual property necessary for the operation of its respective
business as presently conducted and as presently proposed to be conducted.
The term "intellectual property" means all trademarks, service marks,
logos, trade names and corporate names and registrations and applications
for registration thereof, copyrights and registrations and applications
for registration thereof, computer software, data and documentation, trade
secrets and confidential business information (including financial,
marketing and business data, pricing and cost information, business and
marketing plans, and customer and supplier lists and information), other
proprietary rights, and copies and tangible embodiments thereof (in
whatever form or medium).
(ii) Neither North Country nor any of its Subsidiaries has
interfered with, infringed upon, misappropriated or otherwise come into
conflict with any intellectual property rights of third parties and none
of North Country, its Subsidiaries and their respective directors and
officers (and employees with responsibility for intellectual property
matters) has ever received any charge, complaint, claim or notice alleging
any such interference, infringement, misappropriation or violation. To the
best knowledge of North Country, no third party has interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of North Country or any of its Subsidiaries.
(iii) As to each item of intellectual property that any third party
owns and that North Country or any of its Subsidiaries uses pursuant to
license, sublicense, agreement, or permission: (a) the license,
sublicense, agreement or permission covering the item is legal, valid,
binding, enforceable and in full force and effect; (b) the license,
sublicense, agreement or permission will continue to be legal, valid,
binding and enforceable and in full force and effect on identical terms on
and after the Closing Date; (c) no party to the license, sublicense,
agreement or permission is in breach or default, and no event of default
has occurred which with notice or lapse of time, or both, would constitute
a breach or default or permit termination, modification or acceleration
thereunder; (d) no party to the license, sublicense, agreement or
permission has repudiated any provision thereof; and (e) neither North
Country nor any of its Subsidiaries has granted any sublicense or similar
right with respect to the license, sublicense, agreement or permission.
(jj) No Investment Company. Neither North Country nor any of its
Subsidiaries is an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
(kk) Insurance. North Country and the Subsidiaries, including the Bank,
have in full force and effect policies of insurance with respect to their
respective assets and businesses
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against such casualties and contingencies and in such amounts, types and forms
as are appropriate for their respective businesses, operations, properties and
assets, including directors' and officers' insurance for the directors and
officers of North Country. North Country has provided NCFC Recapitalization with
complete and accurate copies of all such insurance policies, and bonds carried
by North Country or any of the Subsidiaries. No insured is in default under any
such insurance policy or bond such that it can be cancelled, and all material
claims thereunder have been filed on a timely basis. Except as set forth in
Section 5.1 (kk) of the Disclosure Schedule, no insurer under any such insurance
policy or bond has rejected or denied coverage with respect to any filed claim,
in whole or in part.
(ll) Placement Agent Agreement. North Country hereby remakes in favor of
NCFC Recapitalization and the Investors each of the representations and
warranties set forth in Section 2 of the Placement Agent Agreement.
Article 6 Indemnification
6.1. Survival.
(a) All representations, warranties, covenants and agreements contained
in this Agreement or in any document delivered pursuant hereto shall survive the
Closing.
(b) The rights of indemnification and other remedies based on such
representations, warranties, covenants and obligations will not be affected by
any investigation conducted with respect to, or any knowledge acquired (or
capable of being acquired), at any time, whether before or after execution and
delivery of this Agreement or the Closing Date, with respect to the accuracy or
inaccuracy of or compliance with any such representations, warranties, covenants
and obligations. All such representations and warranties are contractual
provisions, entitling the party suffering Damages based on the breach thereof to
indemnification in accordance with the terms of this Agreement without necessity
of reliance thereon.
6.2. Indemnification.
(a) North Country shall indemnify, defend, pay, reimburse and hold
harmless NCFC Recapitalization and each of the Investors from and against any
and all Damages related to, caused by or arising from, any inaccuracy in any
representation, misrepresentation, breach of any warranty or breach or failure
to fulfill any covenant or agreement by North Country contained herein (whether
as of the date of this Agreement or the Closing Date). The Investors shall not
be entitled to recover Damages from North Country under this Section 6.2 unless
the aggregate of all Damages claimed by the Investors first equals or exceeds a
cumulative of $100,000, in which case the Investors shall be entitled to recover
all such Damages (including the first $100,000).
(b) Following the assertion of any claim by a third party or the
occurrence of any event or the discovery of any facts or conditions which could
reasonably be expected to give rise to a claim for indemnification from North
Country (the "Indemnitor") under this Article 6, the party to be indemnified
(the "Indemnitee") shall promptly thereafter notify the Indemnitor in writing of
such claim, setting forth in reasonable detail the specific facts and
circumstances
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relating to such claim and the amount of Damages claimed (or an estimate thereof
if the actual amount is not known or not capable of reasonable calculation) (an
"Indemnification Notice"); provided, that any delay in giving any such notice
shall not affect such parties' rights to indemnification hereunder except to the
extent of any demonstrable prejudice to the Indemnitor.
(c) If the facts or conditions giving rise to the right of
indemnification under this Article 6 involve any actual or threatened claim or
demand by a third party against an Indemnitee (a "Third Party Claim"), the
Indemnitor shall have thirty (30) days following receipt of the Indemnification
Notice in respect of such Third Party Claim to advise the Indemnitee whether the
Indemnitor disputes or accepts, in whole or in part, its liability to the
Indemnitee and/or whether the Indemnitor desires to defend the Indemnitee
against such Third Party Claim. Assuming the Indemnitor is liable for any
properly notified Third Party Claim, the Indemnitor shall have no obligation to
the Indemnitee for legal fees incurred by the Indemnitee prior to or during such
thirty day period in connection with such Third Party Claim other than
reasonable legal costs necessarily to avoid a default judgment and/or to
maintain the status quo. In the event the Indemnitor determines to accept the
defense of any such Third Party Claim, the Indemnitee shall have the right to be
represented by its own counsel, its participation to be subject to the
reasonable direction of the Indemnitor, and the Indemnitee shall provide all
requested waivers and authorities to permit the Indemnitor to defend such Third
Party Claim. The Indemnitor shall provide, to the Indemnitee's satisfaction,
evidence that the Indemnitor has the financial ability both to defend the claim
and to indemnify the Indemnitee if such defense is not successful. Counsel
selected by the Indemnitee to act on its behalf in the defense of a Third Party
Claim shall be at the Indemnitee's sole cost and expense; provided, however,
that if the Indemnitee determines in good faith that there exists a conflict of
interest between the Indemnitor and the Indemnitee or that the Indemnitor did
not satisfactorily demonstrate financial ability, the Indemnitee shall have the
right to engage separate counsel, the reasonable costs and expenses (including
reasonable attorneys fees) of which shall be paid by the Indemnitor, but in no
event shall the Indemnitor be liable for the costs and expenses of more than one
such separate counsel. If the Indemnitor fails to undertake the defense of or
settle or pay any Third Party Claim within thirty (30) days following receipt of
the Indemnification Notice in respect of such Third Party Claim, or if the
Indemnitor, after having given notification to the Indemnitee that it intends to
assume the defense, fails within thirty (30) days from its receipt of the
Indemnification Notice to defend, settle or pay such Third Party Claim, then the
Indemnitee may take any and all necessary actions to dispose of the Third Party
Claim including the settlement or full payment thereof upon such terms as it
shall deem appropriate, in its sole discretion, with respect to any proposed
settlement thereof. Notwithstanding the foregoing, however, Indemnitee shall in
all cases be entitled to control of the defense of any action (provided that
Indemnitee does so in good faith) if it (i) may result in injunctions or other
equitable remedies in respect of the Indemnitee; (ii) may result in liabilities
which, taken with other then existing claims by Indemnitee, would not be fully
indemnified hereunder; or (iii) may have an adverse impact on the business or
the financial condition of the Indemnitee even if Indemnitor shall pay all
indemnification amounts in full. In the event that the Indemnitee exercises its
right to control the defense of the action pursuant to the preceding sentence,
the Indemnitor shall be liable for the reasonable costs and expenses (including
reasonable attorneys fees) incurred by Indemnitee in doing so.
(d) In the event that the Indemnitor has not assumed the defense,
settlement or payment of a Third Party Claim and in failing to do so, has not
admitted its liability for such
A-31
Third Party Claim in writing to the Indemnitee, then the Indemnitee shall be
entitled to settle such Third Party Claim in any manner which it determines. In
the event the Indemnitee exercises its right to control the defense of an action
as permitted in the penultimate sentence of Section 6.2(c), Indemnitee may
settle the Third Party Claim that it has agreed to settle, pay or defend on
terms which it may deem reasonable; provided, however, that the Indemnitee shall
not, without the Indemnitor's written consent, which shall not be unreasonably
withheld or delayed (i) settle or compromise any such proceeding, claim or
demand, or consent to the entry of any judgment which does not include as an
unconditional term thereof the delivery by the claimant or plaintiff to the
Indemnitor of a written release from all Liability in respect of such
proceeding, claim or demand, or (ii) settle or compromise any such proceeding,
claim or demand in any manner that may adversely affect the Indemnitor.
(e) The Indemnitor may settle a Third Party Claim that it has agreed to
settle, pay or defend on terms which it may deem reasonable; provided, however,
that the Indemnitor shall not, without the Indemnitee's prior written consent,
which shall not be unreasonably withheld or delayed (i) settle or compromise any
such proceeding, claim or demand, or consent to the entry of any judgment which
does not include as an unconditional term thereof the delivery by the claimant
or plaintiff to the Indemnitee of a written release from all Liability in
respect of such proceeding, claim or demand, or (ii) settle or compromise any
such proceeding, claim or demand in any manner that may adversely affect the
Indemnitee.
(f) Except for Third Party Claims, the Indemnitor shall have thirty (30)
days to advise the Indemnitee of whether it disputes or accepts liability to the
Indemnitee for all other indemnification claims that are the subject of an
Indemnification Notice delivered to the Indemnitor as provided in Section 6.2(b)
above.
(g) Schedule 7 hereto includes additional indemnification and other
covenants of North Country that are incorporated by reference herein. Schedule
7, rather than the foregoing provisions of this Article 6, shall apply to the
matters set forth in the schedule.
(h) The remedies provided by this Article 6 and Schedule 7 shall not be
exclusive of or limit any other remedies that may be available to NCFC
Recapitalization or any of the Investors.
Article 7 Miscellaneous
7.1 No Other Representations, Warranties or Covenants. Except as expressly set
forth in this Agreement or the Definitive Subscription Documents, there are no
other representations, warranties, statements, covenants of any of the parties
and no party is authorized to rely, and each party agrees that it is not relying
upon, any other representations, warranties, covenants or agreements.
7.2 Further Assurances. Each party agrees to do, execute, acknowledge and
deliver or cause to be done, executed, acknowledged and delivered any and all
such further acts, instruments, papers and documents and will give such further
assurances, as may be reasonably requested by another party as necessary or
proper to implement the provisions of this Agreement or otherwise to carry out
and effectuate the intent and purposes of this Agreement.
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7.3 Notices. All notices, requests, waivers and consents under this Agreement
directed to a party shall be in writing and shall be effective upon receipt, if
delivered by hand (including by mail, courier or otherwise) or facsimile
transmission. All notices, requests and consents hereunder shall be addressed or
directed to the applicable Notice Address(es).
7.4 Entire Agreement. This Agreement, together with the Definitive
Subscription Documents and the Confidentiality Agreement, constitute the entire
agreement between the parties hereto pertaining to the subject matter hereof
and, if the Closing occurs, shall supersede all prior and contemporaneous
agreements, understandings, representations, warranties, negotiations and
discussions, whether oral or written, of the parties, and there are no
warranties, representations or other agreements between or among the parties in
connection with the subject matter hereof except as specifically set forth
herein.
7.5 Amendments; Governing Law. This Agreement may be amended by the parties
hereto at any time, but only by an instrument in writing duly executed and
delivered on behalf of NCFC Recapitalization, North Country and the Investors
(by NCFC Recapitalization pursuant to Section 7.13). This Agreement shall be
construed and enforced in accordance with and governed by the laws of the State
of Michigan (without regard to conflicts of law principles).
7.6 Successors and Assigns. This Agreement may not be assigned by any party
without the prior written consent of NCFC Recapitalization and North Country.
All of the terms and provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and permitted
assigns.
7.7 Captions. The titles of the articles and sections of this Agreement have
been inserted as a matter of convenience of reference only and shall not control
or affect the meaning or construction of any of the terms or provisions hereof.
7.8 Waivers. Any waiver of any breach of or failure to comply with any
provision of this Agreement shall be in writing and approved by the party which
is not in non-compliance with or breach of this Agreement (or, in the case of
waivers by the Investors, NCFC Recapitalization pursuant to Section 7.13). Any
such waiver shall be strictly construed and shall not be interpreted as or
constitute a continuing waiver of the relevant provision or a waiver of any
other breach of, or failure to comply with, any other provision of this
Agreement.
7.9 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which shall constitute one
agreement.
7.10 Severability. If any provision of this Agreement shall be deemed or
declared to be unenforceable, invalid or void, the same shall not impair any of
the other provisions of this Agreement, which shall be enforced in accordance
with their respective terms. The parties intend that each provision of this
Agreement be enforced to the maximum extent permissible under applicable law
and, should any provision of this Agreement be unenforceable because of its
scope, the time period covered or otherwise, the provision shall be deemed to be
reduced, limited and/or changed to enable the provision to be enforced to the
maximum permissible extent under the laws and public policies applied in the
jurisdiction in which enforcement is sought.
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7.11 No Third Party Beneficiaries. This Agreement is intended to be for the
sole benefit of, and to be enforced by, the parties except if the Closing shall
occur, this Agreement is also for the benefit of and may be enforced by each of
the Investors. No Person other than the parties shall have any rights under this
Agreement, and none of the provisions of this Agreement shall be enforced by,
any such Person, except that if the Closing shall occur each Investor shall have
rights under this Agreement and may enforce this Agreement.
7.12 Facsimile Signatures. Facsimile signatures to this Agreement shall be
considered originals hereof, with any party executing this Agreement by
facsimile signature agreeing to provide promptly to the other parties an
original signature evidencing the same.
7.13 Authorization of NCFC Recapitalization; Actions by Investors.
(a) By joining in this Agreement as contemplated by Section 2.1, each
Investor irrevocably appoints NCFC Recapitalization as the Investor's agent and
attorney-in-fact for all purposes under this Agreement including exercising,
taking, performing and making all rights, covenants, actions, decisions,
elections, amendments and waivers under this Agreement (by NCFC Recapitalization
or the Investors) including determining whether any of the Investors' Closing
Conditions have been satisfied; waiving any of the Investors' Closing Conditions
(either generally or in a particular instance, either retroactively or
prospectively and either for a specific time or indefinitely); agreeing to any
amendment to this Agreement; extending the Closing Deadline; reviewing,
accepting, agreeing or disagreeing with the Closing Schedule and any
computations therein; resolving with North Country any Notice of Disagreement;
and/or terminating this Agreement, in each case as NCFC shall determine
appropriate in its discretion, except only that any amendment to the Summary of
Terms, any waiver of any of the Investors' Closing Conditions described in
Sections 4, 5, 11, 12, 13, 16, 17, 20, 21, 24, 26, and 27 of Part I of Schedule
3, and any extension of the Closing Deadline beyond December 31, 2004, shall
require the written approval of not less than Two Thirds of the Investors. For
clarification, NCFC shall have the power and authority to make such
determinations as it deems appropriate as to whether particular Investors'
Closing Conditions have been satisfied. In making any such determination or any
other determination under this Agreement, NCFC Recapitalization may rely,
without any further inquiry or investigation, upon any certification or
confirmation, oral or written, given by North Country or any of its Subsidiaries
or any other Person whatsoever (including the certificate described in Section
24 of Part I of Schedule 3). If NCFC Recapitalization shall determine that one
or more of the Investors' Closing Conditions shall not be satisfied it shall
have the further power and authority to determine whether to waive any such
Investors' Closing Condition except that waiver of any of the conditions that
require the approval of Two Thirds of the Investors as specified above in this
Section 7.13(a) shall require such approval. The grant of the authority and
powers under this Agreement are coupled with an interest and irrevocable, and
are durable powers of attorney granted by each of the Investors. The grant of
the authority and powers under this Agreement shall expire once all North
Country Shares to be issued to the Investors shall have been so issued.
(b) None of NCFC Recapitalization or any of its members, managers,
employees or agents shall be liable or responsible for, and each Investor and
North Country irrevocably waives, releases and agrees to not assert, any claim
or cause of action against NCFC Recapitalization or any of its members,
managers, employees or agents under any theory
A-34
whatsoever (including negligence) for, or in connection with, this Agreement;
any of the Subscription Documents; any of the Offering Documents; the Proxy
Statement; any of the Regulatory Filings; or any related materials; the
proposal, development, adequacy, reasonableness, implementation, or results to
be obtained by any business plan or strategy for North Country or any of its
Subsidiaries (regardless of any participation by NCFC Recapitalization or any of
its members, managers, employees or agents); or any action taken or omitted
under this Agreement (including any of the determinations or waivers referred to
in Article 4, this Section 7.13 or Schedule 3, any diligence or other review of
North Country and its Subsidiaries (including the adequacy or scope of the
review, any information discovered in connection with the review, or otherwise),
except only in the case of NCFC Recapitalization for gross negligence or willful
violation of law. North Country and the Investors acknowledge and agree that
NCFC Recapitalization has not, and will not, make any representation, warranty,
assurance, or statement under or in connection with this Agreement; any of the
Subscription Documents; any of the Offering Documents; the Proxy Statement; any
of the Regulatory Filings; or related materials; or the proposal, development,
adequacy, reasonableness, implementation, or results to be obtained by any
business plan or strategy for North Country or any of its Subsidiaries, and the
Investors and North Country each acknowledge and agree they are not relying on
any such representation, warranty, assurance or statement in entering into this
Agreement, any of the Subscription Documents or otherwise, and the only
information supplied or to be supplied by NCFC Recapitalization or any of its
members for inclusion in any of those materials will be information supplied in
writing by NCFC Recapitalization as to NCFC Recapitalization itself and its
members expressly for inclusion therein.
(c) Except as otherwise expressly set forth in this Agreement to the
contrary, any consent, election, waiver, amendment or other action by the
"Investors" under or as contemplated by this Agreement may be taken by, and
shall be deemed to be effective only with the consent of, NCFC Recapitalization
as provided in this Section 7.13 or Two Thirds of the Investors, and when taken,
shall be binding and enforceable against each of the Investors (whether or not
the Investor shall have consented to the matter in question).
7.14 Relationship of Parties. The relationship between the parties is that of
independent contractors and not of employer-employee, principal-agent or
partners. No party is the legal representative of any other party nor has the
right or authority to assume or undertake any obligation or make any
representation on behalf of any other party.
7.15 Expenses. Except as otherwise expressly set forth in this Agreement, each
party shall pay its on expenses incurred in connection with the transactions
contemplated hereby.
7.16 Acknowledgment and Waiver. The parties acknowledge and agree as follows:
Miller, Canfield, Paddock and Stone, P.L.C. ("Miller Canfield") has represented
NCFC Recapitalization in preparing this Agreement and the transactions
contemplated by this Agreement and has not represented any of the Investors in
connection with this Agreement or the transactions contemplated hereby.
[Remainder of Page Intentionally Left Blank]
A-35
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
NORTH COUNTRY FINANCIAL CORPORATION
By: /s/ C. James Bess
------------------------------------------
Name: C. James Bess
Title: President and Chief Executive Officer
North Country Financial Corporation
130 S. Cedar Street
Manistique, Michigan 49854
Attn: C. James Bess
President and Chief Executive Officer
Facsimile: (906) 341-7879
With a copy to:
Werner & Blank, LLC
7205 West Central Avenue
Toledo, Ohio 43617
Attn: E. L. Herbert, Esq.
Facsimile: (419) 841-8380
NCFC RECAPITALIZATION, LLC
By: /s/ Eliot R. Stark
------------------------------------------
Name: Eliot R. Stark
Title: A Member
and
By: /s/ Paul D. Tobias
------------------------------------------
Name: Paul D. Tobias
Title: A Member
NCFC Recapitalization, LLC
c/o 38710 Woodward Ave, Suite 240
Bloomfield Hills, Michigan 48304-6913
Attn; Eliot R. Stark and Paul D. Tobias
With a copy to:
Miller, Canfield, Paddock and Stone, P.L.C.
840 West Long Lake Road, Suite 200
Troy, Michigan 48098-6358
Attn: David D. Joswick, Esq.
Facsimile: (248) 267-3252
A-36
Schedule 1
Certain Definitions and Interpretation
Certain Definitions. In this Agreement or in any Schedule, and in any
amendment hereto or thereto, unless the context otherwise requires or unless
otherwise defined in any such Schedule or amendment, the following words and
phrases shall have the meanings set forth after them.
"Accounting Firm" means Plante & Moran, PLLC, or such other
nationally recognized accounting firm as may be agreed upon in writing by
NCFC Recapitalization and North Country.
"Accredited Investor" has the meaning set forth in Rule 501(a) of
Regulation D.
"Acquisition Event" means that North Country shall have authorized,
recommended, or approved, or entered into an agreement with any person,
entity or group (other than any of the parties to this Agreement) to
effect an Acquisition Proposal.
"Acquisition Proposal" means any proposal or transaction involving a
merger, consolidation or other business combination transaction involving,
or any purchase or all or any significant portion of the assets of, or any
equity interest in, North Country or any of its Subsidiaries.
"Bank" means North Country Bank and Trust, a wholly-owned subsidiary
of North Country.
"Benefit Arrangements" has the meaning in Section 5.1(y).
"Best Efforts" means commercially reasonable efforts that a
reasonably prudent person would make that desires to take the action in
question.
"Burdensome Condition" means any term, condition, requirement,
restriction or limitation not reasonably acceptable to NCFC
Recapitalization.
"Business Day" means a day, other than a Saturday, Sunday or
national holiday in the United States, on which banks in the State of
Michigan are generally open for the conduct of commercial banking
business.
"Change in Bank Control Act" means the Change in Bank Control Act of
1978 and the regulations promulgated thereunder, in each case as amended.
"Closing" means the closing of the transactions contemplated in this
Agreement.
"Closing Conditions" means and includes the Investors' Closing
Conditions and the North Country Closing Conditions.
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"Closing Date" means a date specified by NCFC Recapitalization but
not later than five (5) Business Days after the satisfaction of the
Investors' Closing Conditions (other than those which by their nature are
to be satisfied by deliveries on the Closing Date or at the Closing) and
not later than the Closing Deadline.
"Closing Deadline" means 11:59 p.m., local time, on October 31,
2004, provided that the Closing Deadline may be extended at the written
election of NCFC Recapitalization or North Country as provided in Section
3.2, and if so extended the Closing Deadline shall be 11:59 p.m. on the
date to which the deadline has been extended.
"Closing Schedule" has the meaning in Section 4.5(d).
"Code" means the Internal Revenue Code of 1986 as amended and the
regulations promulgated thereunder.
"Confidentiality Agreement" means the letter agreement dated as of
May 3, 2004 between North Country and Mackinac Partners as the same may be
amended in accordance with its terms from time to time.
"Damages" means all liabilities, obligations, damages, losses,
diminution in value, deficiencies, penalties, fines, forfeitures,
assessments, judgments, awards, taxes, payments, costs and expenses and
including court costs, reasonable attorneys fees, consultants' and
experts' fees and other costs and expenses incident to claims, suits,
proceedings, actions, demands, and causes of actions arising from or
related to the matter or transaction in question or the defense or
investigation thereof (whether or not litigation has commenced). For
clarification, Damages includes all Damages suffered whether or not in
connection with a third party claim.
"Definitive Subscription Documents" means and includes the
definitive subscription agreements (including suitability questionnaire
and a counterpart signature page to this Agreement) and other agreements
and instruments prepared by North Country pursuant to which a prospective
Investor may subscribe for shares of North Country common stock as
contemplated under this Agreement.
"Derivatives Contracts" has the meaning in Section 5.1(hh).
"Disclosure Schedule" means the disclosure schedule delivered by
North Country to NCFC Recapitalization contemporaneously with the
execution and delivery of this Agreement.
"Employee Plans" has the meaning in Section 5.1(y).
"Employment Agreements" means the separate Employment Agreements
executed and delivered by and between North Country and Eliot R. Stark,
Paul D. Tobias, and Jim Bess in the form attached as Schedule 5-1, 5-2 and
5-3, respectively, contemporaneously with the execution and delivery by
North Country of this Agreement, but effective only if the Closing shall
occur.
1-2
"Encumbrance" means and includes any lien, security interest,
mortgage, claim, charge, restriction, proxy, voting agreement, right of
third parties, or encumbrance whatsoever.
"ERISA" has the meaning in Section 5.1(y).
"ERISA Affiliate" has the meaning in Section 5.1(y).
"Exclusivity Agreement" means the letter agreement dated as of May
20, 2004 between Mackinac Partners, for itself and on behalf of the
"Investors" referred to therein, and North Country, as the same may be
amended in accordance with its terms from time to time.
"Filings" has the meaning in Section 5.1(h)(ix).
"Final Closing Schedule" has the meaning in Section 4.5(g).
"Indemnitee" has the meaning in Section 6.2(b).
"Indemnitor" has the meaning in Section 6.2(b).
"Identified Claims" means and includes all claims, litigation and
arbitrations described in Item 1 of Part II of North Country's Quarterly
Report on Form 10-Q for the period ended June 30, 2004.
"Investor" means a Person who or which has submitted Definitive
Subscription Documents to a Placement Agent or North Country which have
been accepted by North Country, and "Investors" means all of them
collectively.
"Investors' Closing Conditions" means and includes the conditions
precedent set forth in part I of Schedule 3.
"Loan Portfolio Properties, Trust Properties and Other Properties"
has the meaning in Section 5.1(ee).
"Mackinac Partners" has the meaning in the preamble.
"Material Adverse Effect" means, with respect to North Country and
its Subsidiaries, a material adverse effect on the business, assets,
properties, results of operations, financial condition or prospects of
North Country and its Subsidiaries taken as a whole.
"MBCA" means the Michigan Business Corporation Act, as amended.
"MUSA" means the Michigan Uniform Securities Act and the regulations
promulgated thereunder, in each case as amended.
1-3
"NASDAQ Rules" means the Marketplace Rules of the Nasdaq Stock
Market, Inc., as amended, and North Country's agreements and obligations
under its Nasdaq listing agreement.
"NCFC Recapitalization" has the meaning in the preamble.
"Net Proceeds of the Offering" means the gross amount of the
Offering proceeds minus the Placement Agent Fees of 5.0% of such gross
amount of the Offering and less Specified Expenses in excess of $850,000
(and the $100,000 fee to be paid to the Placement Agents as described in
the Summary of Terms is included in the $850,000).
"North Country" has the meaning in the preamble.
"North Country Shares" means the shares of common stock of North
Country to be issued to the Investors as contemplated by this Agreement.
"North Country Stock Options" means the outstanding options and
other awards issued by North Country under the North Country Stock Option
Plans to purchase 535,732 shares of common stock of North Country.
"North Country Stock Option Plans" means the Stock Option Plan; the
Deferred Compensation, Deferred Stock and Current Stock Purchase Plan for
Nonemployee Directors; the North Country Financial Corporation Stock
Compensation Plan; the North Country Financial Corporation's 1997
Directors' Stock Option Plan, and the North Country Financial Corporation
2000 Stock Incentive Plan, all referred to more specifically in Exhibits
10.1, 10.2, 10.3, 10.4, and 10.5 of North Country's Form 10-K for the
period ended December 31, 2003.
"Notice Address" means (a) in the case of a party, the address and
facsimile number for notices set forth below such party's signature on the
signature page(s) to this Agreement, and (b) in the case of an Investor,
prior to the Closing c/o NCFC Recapitalization and after the Closing, the
address and facsimile number for purposes of notice set forth in the
Definitive Subscription Documents; or in each case to such other address
or facsimile designated by the party or Investor for the purpose of
notices under this Agreement in a writing delivered to the other parties.
"Notice of Disagreement" has the meaning in Section 4.5(d).
"Offering" means the offering by the private placement by North
Country of the North Country Shares as contemplated by this Agreement, the
Offering Documents and the Definitive Subscription Documents.
"Offering Documents" means a confidential private placement
memorandum and other offering documents, and any required amendments or
supplements, delivered by North Country to Investors in connection with
the offering and sale of North Country common stock as contemplated by
this Agreement and shall also include this Agreement, the Disclosure
Schedule, the Definitive Subscription Documents, and the SEC Reports
identified in the private placement memorandum.
1-4
"OFIS" means the Michigan Office of Financial and Insurance
Services.
"Order" means the Cease and Desist Order with respect to the Bank
entered by the FDIC and OFIS on March 26, 2003, as the same may be
amended, supplemented or revised in the future.
"Placement Agents" means Keefe, Bruyette & Woods, Inc. and Howe
Barnes Investments, Inc. engaged by North Country in connection with the
Offering.
"Placement Agent Agreement" means the Placement Agent Agreement
dated as of the date of this Agreement among Keefe Bruyette & Woods, Inc.,
as representative of the several Placement Agents, and North Country.
"Pre-Closing Adjusted Equity" means stockholders' equity of North
Country, at the end of the calendar month immediately preceding the
Closing Date, determined in accordance with generally accepted accounting
principles, consistently applied, but adjusted pursuant to the Pre-Closing
Equity Adjustments, as set forth in the Final Closing Schedule. For
clarification, Pre-Closing Adjusted Equity does not include the Specified
Expenses.
"Pre-Closing Equity Adjustments" means all of the following:
(a) Reduce stockholders' equity by the full amount of the
following, whether or not then due, accrued or incurred:
(i) the full amount by which all costs and expenses of North
Country and its Subsidiaries with respect to the transactions
contemplated by this Agreement, including investment banking, legal
and accounting fees and expenses, exceed $75,000; and
(ii) the full amount of the settlement or other resolution of
the Identified Claims and any other litigation or claims, including
all attorneys fees and any contingent or deferred amounts.
(b) Do not make any adjustment for any gains that may be
realized as a result of the redemption, retirement or repayment of any
trust preferred securities.
(c) Reduce stockholders' equity by the full amount of the
FASB 115 adjustment at June 30, 2004 (regardless of the actual amount of
the FASB 115 adjustment at the end of the calendar month immediately
preceding the Closing Date).
"Pre-Closing Outstanding Shares" means the number of shares of
common stock of North Country issued and outstanding immediately before
the Closing without taking into account the North Country Options
outstanding under the North Country Stock Option Plans or the awards to be
issued by North Country under the 2000 Stock Incentive Plan, as amended,
as contemplated in Section 15 of Part I of Schedule 3. Based on the
1-5
representation and warranty set forth in Section 5.1(g), the Pre-Closing
Outstanding Shares as of the date of this Agreement are 7,019,152 shares.
"Proxy Statement" has the meaning in Section 3.5(b).
"Recommendation Event" means that (a) the Board of Directors of
North Country does not, or shall indicate to NCFC Recapitalization that
North Country is unwilling or unable to, publicly recommend in the Proxy
Statement that its shareholders approve the North Country Shareholder
Approval Items, or (b) after recommending in the Proxy Statement that its
shareholders approve the North Country Shareholder Approval Items, the
Board of Directors of North Country shall have withdrawn, modified or
amended such recommendation in any respect materially adverse to the
Investors.
"Registration Rights Agreement" means the Registration Rights
Agreement executed and delivered by North Country for the benefit of the
Investors in the form attached as Schedule 4. contemporaneously with the
execution and delivery by North Country of this Agreement but effective
only if the Closing shall occur.
"Regulation D" means Regulation D promulgated under the Securities
Act.
"Regulatory Approvals" means all consents and approvals required
from all Regulatory Authorities of the transactions contemplated by this
Agreement including, if necessary, the approval of the applicable
Regulatory Authority under the Change in Bank Control Act.
"Regulatory Authority" means any federal, state or local
governmental authority having jurisdiction over any of North Country or
any of its Subsidiaries or any of the transactions contemplated by this
Agreement including the SEC, any state securities or "blue sky"
administrator, any applicable industry self regulatory organization
(including the National Association of Securities Dealers, Inc. and the
Nasdaq Stock Market, Inc.), the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the OFIS, any other
federal or state banking authority, and any state insurance regulatory
authority.
"Regulatory Filings" means and includes any and all filings and
notices required to be filed by North Country or any of its Subsidiaries
with all Regulatory Authorities either in the ordinary course of business
or in connection with this Agreement and the transactions contemplated by
this Agreement, including the Securities Act, the Securities Exchange Act,
the Change in Bank Control Act, MUSA, any other state securities or "blue
sky" laws, and the rules of the National Association of Securities
Dealers, Inc. and/or the NASDAQ Rules.
"Resolved Objections" has the meaning in Section 4.5(f).
"Review Period" has the meaning in Section 4.5(d).
"Rights" means the preferred share purchase rights issued by the
Company entitling the holder to purchase one one-thousandth of a share of
Series B Junior
1-6
Participating Preferred Stock, par value $.01 per share. The Rights are
described in the Rights Agreement.
"Rights Agreement" means the Rights Agreement dated as of June 21,
2000 by and between North Country and the Registrar and transfer Company
as agent.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" has the meaning in Section 5.1(i)(a).
"Second Accounting Firm" means a nationally recognized accounting
firm agreed upon in writing by NCFC Recapitalization and North Country.
"Securities Act" means the Securities Act of 1933 and the
regulations promulgated thereunder, in each case as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934
and the regulations promulgated thereunder, in each case as amended.
"Shareholder Approval Items" means and includes approval of (a) the
issuance of the North Country Shares to the Investors as contemplated by
this Agreement, (b) an amendment to the Articles of Incorporation of North
Country to increase the authorized common stock of North Country to
85,000,000 shares, (c) an amendment to the Articles of Incorporation of
North Country to change its name to "Mackinac Financial Corporation", (d)
the amendment of North Country's 2000 Stock Incentive Plan to increase the
authorized number of shares of common stock of North Country under the
plan and to permit the awards to be made as contemplated in certain of the
Employment Agreements to be priced at a per share price equal to the price
per share in the Offering (see Section 15 of Part 1 of Schedule 3), (e)
the reconstitution of the Board of Directors contemplated by Section 9 of
Part 1 of Schedule 3, and (f) any other action by the shareholders of
North Country required under applicable law or the NASDAQ Rules, or
reasonably requested by NCFC Recapitalization, in connection with this
Agreement or any of the transactions contemplated by this Agreement.
"Specified Expenses" means and includes all costs, expenses, fees
and charges incurred by NCFC Recapitalization, Mackinac Partners and the
Placement Agents in connection with any of the transactions contemplated
by this Agreement and including reasonable attorneys' fees of any of the
foregoing.
"Structured Note" has the meaning in Section 5.1(hh).
"Subsidiary" means any entity (including any corporation,
partnership, joint venture or other organization, whether incorporated or
unincorporated) which North Country, directly or indirectly, owns at least
50% of (a) the outstanding shares or other securities representing the
right to vote for the election of directors or other managing authority or
(b) in the case of any entity which does not have outstanding shares or
securities, ownership interests which represent the right to make the
decisions for such
1-7
entity, whether or not such entity is consolidated with North Country for
financial reporting purposes.
"Summary of Terms" means the summary of terms for the investment in
North Country contemplated by this Agreement as set forth on Schedule 2.
"Third Party Claim" has the meaning in Section 6.2(c).
"Two Thirds" means in the case of the Investors (a) prior to the
Closing, Investors having submitted Definitive Subscription Documents for
at least two-thirds in dollar amount of the Definitive Subscription
Documents of all Investors at the time in question and (b) after the
Closing, Investors holding at least two-thirds of the North Country Shares
held by all Investors at the time in question.
Construction of Certain Terms and Phrases. Unless the context of the
Agreement otherwise requires, (i) words of any gender include each other gender;
(ii) words using the singular or plural number also include the plural or
singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement; (iv) the terms
"Section" and "Article" refer to the specified Section or Article of this
Agreement; (v) the term "Schedule" refers to the specified Schedule to this
Agreement; and (vi) "including" means "including but not limited to". This
Agreement is being entered into by and among competent and sophisticated parties
who are experienced in business matters and represented by counsel and other
advisors, and has been reviewed by the parties and their counsel and other
advisors. Therefore, any ambiguous language in this Agreement will not be
construed against any particular party as the drafter of the language.
1-8
Schedule 2
Summary of Terms
Security to be Offered: Shares of Common Stock to be issued by
North Country.
Investment Amount: $30 million.
Investor Qualifications: Accredited Investor.
Maximum Individual Investment: $3,000,000, but subject to waiver by
NCFC Recapitalization, in its sole
discretion.
Minimum Individual Investment: $250,000, but subject to waiver by NCFC
Recapitalization, in its sole
discretion.
Total Number of Shares: Not less than 39,775,195 shares of
common stock of North Country. The
precise number of shares of North
Country issued will be determined by
Section 4.5 (b)
Minimum Closing Date Equity of $3
million. See Schedule 3.
Placement Agents: Keefe, Bruyette & Woods, Inc.
Howe Barnes Investments, Inc.
Placement Agent Fees $100,000 plus 5% of the gross proceeds
to the Company from the sale of the
North Country Shares pursuant to this
Agreement and reimbursement of expenses.
Use of Proceeds: Payment or reimbursement of all
expenses.
Redemption of all trust preferred
securities.
Contribution of additional capital to
the Bank.
Repayment of Federal Home Loan Bank
advances made to the Bank.
Other general corporate purposes.
2-1
Amendments to North Country Stock The North Country Stock Option Plans to
Option Plans be amended to increase the number of
shares that may be subject to awards
made at or after the Closing under the
plans to 12.5% of the total number of
shares to be outstanding after the
Closing Date. The number of shares to be
subject to each plan shall be determined
prior to Closing by NCFC
Recapitalization. The 2000 Stock
Incentive Plan will be further amended
to permit the options to be awarded as
contemplated under certain of the
Employment Agreements (see Schedule 5)
to be priced at the per share price in
the Offering and to continue to vest and
be exercisable notwithstanding
termination of the Employment Agreements
as contemplated in the agreements.
Registration Rights North Country will use its Best Efforts
to prepare and file a registration
statement on Form S-3 under the
Securities Act covering the North
Country Shares on or before the date
that is 30 days after the Closing Date
and will use its Best Efforts to cause
such registration statement to become
effective as soon as practicable after
filing, and in any event no later than
December 31, 2004. North Country will
further use its Best Efforts to maintain
the effectiveness of such registration
statement until the earliest of (i) the
date that is two years after the Closing
Date and (ii) the date on which all of
the North Country Shares have been sold
pursuant to such registration statement.
See Schedule 4.
Expenses: North Country to pay or reimburse NCFC
Recapitalization, Mackinac Partners and
the Placement Agents for all Specified
Expenses.
North Country to also pay all of its own
costs, expenses and fees including
Placement Agent Fees.
Total expenses not to exceed $2.5
million unless the Offering is increased
at the behest of North Country or in the
event of the occurrence of a material
adverse event and not including costs
and expenses relating to the
registration statement (see Registration
Rights above).
Other Terms and Conditions: As provided in this Agreement and other
terms, conditions, representations and
warranties customary for a transaction
of the character contemplated by this
Agreement.
2-2
Schedule 3
Closing Conditions
Part I: Investors' Closing Conditions.
1. Negotiation, execution and delivery by the Investors and North Country of
Definitive Subscription Documents (including a North Country subscription
agreement and investment questionnaire).
2. Accuracy as of the Closing Date, in all material respects, of North
Country's representations and warranties in this Agreement and the
Definitive Subscription Documents.
3. Performance by North Country, in all material respects, of its covenants
and agreements in this Agreement and the Definitive Subscription
Documents.
4. There shall not have occurred or be in existence any fact, event or
circumstance at any time since December 31, 2003, or any change in any
event, fact or circumstance in existence at or before that date, which
individually or in the aggregate with all other facts, events or
circumstances, has had or is reasonably likely to have a Material Adverse
Effect.
5. All Regulatory Approvals required in connection with the consummation of
the transactions contemplated in this Agreement (including the issuance of
the North Country Shares to the Investors and the reconstitution of the
Board of Directors of North Country and its Subsidiaries) shall have been
obtained and shall be in full force and effect, and all applicable
statutory waiting periods shall have expired or been terminated, in each
case without the imposition of any Burdensome Condition.
6. NCFC Recapitalization shall have received assurances reasonably
satisfactory to it that upon completion of the transactions contemplated
by this Agreement and the recapitalization of the Company and the Bank to
the levels required by the Order, all applicable Regulatory Authorities
will remove the Order and all other cease and desist and other orders
against North Country and/or its banking and non-banking subsidiaries at
the Closing, approve the transactions contemplated by this Agreement,
determine the Bank to be well capitalized, approve a new branch in Oakland
County, Michigan, and approve a name change for the Bank.
7. The North Country shareholders shall have duly adopted and approved each
of the Shareholder Approval Items.
8. Effective upon the Closing, the names of the Bank will be changed to
Mackinac Bank and the names of all other Subsidiaries of North Country
will be changed to names designated by NCFC Recapitalization.
9. Effective upon the Closing, the Board of Directors of North Country will
be reconstituted as specified by NCFC Recapitalization and North Country
shall have taken all required
3-1
action to reconstitute the Board of Directors of its Subsidiaries as
specified by NCFC Recapitalization, provided that Mr. Bess and Mr.
Lindroth, two (2) current directors of North Country, shall continue as
directors of North Country following the Closing.
10. The Board of Directors of North Country shall have duly taken all
necessary steps to terminate the Rights Agreement effective prior to or
upon the Closing, and no Rights shall thereafter be issued or outstanding,
and no Person shall have become an "Acquiring Person" and there shall not
have occurred any Share Acquisition Date or Distribution Date.
11. The North Country Shares to be issued to the Investors shall have been
listed on the NASDAQ SmallCap Market, subject to official notice of
issuance.
12. All material litigation involving North Country, any of its subsidiaries,
and/or any of their directors or officers (in such capacities) shall have
been finally settled on terms reasonably acceptable to NCFC
Recapitalization (including the Identified Claims).
13. The Registration Rights Agreement shall be in full force and effect.
14. Employment Agreements shall be in full force and effect.
15. North Country shall have duly amended the North Country Stock Option Plans
to increase the number of shares that may be subject to awards made at or
after the Closing under the plan to 12.5% of the total number of shares
outstanding after the Closing Date. The number of shares to be subject to
each plan is to be determined by NCFC Recapitalization prior to the
Closing. The 2000 Stock Incentive Plan will be further amended to permit
the options to be awarded as contemplated under certain of the Employment
Agreements (see Schedule 5) to be priced at the per share price in the
Offering and to continue to vest and be exercisable notwithstanding
termination of the Employment Agreements as contemplated in the
agreements.
16. No order, injunction or decree issued by any Regulatory Authority or court
of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this
Agreement shall be in effect. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or
enforced by any Regulatory Authority or court which prohibits or makes
illegal any of the transactions contemplated by this Agreement.
17. North Country shall have redeemed and retired all of its outstanding
subordinated debentures issued to North Country Capital Trust, North
Country Capital Trust shall have redeemed and retired all of the trust
preferred securities issued by it, North Country and North Country Capital
Trust shall have been released and discharged from all guarantees and
obligations under all agreements with and for the benefit of North Country
Capital Trust or the holders of any of its trust preferred securities, and
from all unpaid principal, interest, fees, charges or other amounts, in
each case at a substantial discount from par and on other terms and
conditions agreed upon by NCFC Recapitalization and set forth in the
Definitive Subscription Documents.
3-2
18. NCFC Recapitalization shall have completed such reviews of North Country
and its Subsidiaries, and on the Disclosure Schedule and items disclosed
therein, as it deems appropriate under the circumstances and such reviews
shall be satisfactory to them.
19. All other conditions set forth in the Definitive Subscription Documents
shall have been satisfied.
20. C. James Bess and any other "disqualified individual" with any agreement
or arrangement that shall involve any "parachute payment" by North Country
or any Subsidiary as a result of any of the transactions contemplated by
this Agreement shall have agreed in writing to such amendment to any such
agreement or arrangement as may be necessary so that any such payment
shall not include any "excess parachute payment" and no part of any such
payment shall not be deductible under Section 280G of the Code or subject
to any excise tax under Section 4999 of the Code, and any such amendment
shall be on terms acceptable to NCFC Recapitalization.
21. North Country shall have obtained director and officer liability insurance
in an amount, on terms and conditions, and from an insurance company
acceptable to NCFC Recapitalization.
22. Receipt of an opinion of counsel for North Country in form and content
reasonably satisfactory to NCFC Acquisition and the Placement Agents.
23. Investors shall have submitted Definitive Subscription Agreements that
have been accepted by North Country by the Closing Deadline representing
not less than an aggregate of $30 million in subscriptions.
24. Receipt of a certificate from an appropriate officer or officers of North
Country confirming the satisfaction of the Investors' Closing Conditions
set forth in this Part I.
25. North Country's stockholders equity, determined in accordance with
generally accepted accounting principles, consistently applied, shall
exceed $3 million at all times prior to the Closing.
26. North Country's loan and lease loss reserves, determined in accordance
with current practices, shall equal or exceed the greater of 4% of total
loans or $10,000,000 at all times prior to the Closing.
27. NCFC shall have received the Closing Schedule, including the computation
of the Pre-Closing Adjusted Equity, as contemplated in Section 4.5, and
all disagreements with respect to the closing schedule and the
computations shall have been finally resolved as provided in Section 4.5.
Part II: North Country's Closing Conditions.
1. All Regulatory Approvals required in connection with the consummation of
the transactions contemplated in this Agreement (including the issuance of
the North Country Shares to the Investors and the reconstitution of the
Board of Directors of North Country
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and its subsidiaries) shall have been obtained and shall be in full force
and effect, and all applicable statutory waiting periods shall have
expired or been terminated.
2. The North Country shareholders shall have duly adopted and approved each
of the Shareholder Approved Items.
3. The North Country Shares to be issued to the Investors shall have been
admitted for quotation on the NASDAQ SmallCap Market, subject to official
notice of issuance.
4. No order, injunction or decree issued by any Regulatory Authority or court
of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this
Agreement shall be in effect. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or
enforced by any Regulatory Authority or court which prohibits or makes
illegal any of the transactions contemplated by this Agreement.
5. Investors shall have submitted Definitive Subscription Documents to the
Placement Agents or North Country by the Closing Deadline representing not
less than an aggregate of $30 million in subscriptions.
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Schedule 4
Registration Rights Agreement
See Attached
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
September ____, 2004, between North Country Financial Corporation, a Michigan
corporation (the "Company"), and each of the Persons who have executed this
Agreement and are named in Annex A hereto (each, an "Investor" and,
collectively, the "Investors").
Execution and delivery of this Agreement by the parties hereto are
conditions to each Investor purchasing Shares (as defined below) from the
Company under the Subscription Agreement (as defined below). Accordingly, the
parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS. Unless the context otherwise requires, the terms
defined in this Section 1 have the meanings herein specified for all purposes of
this Agreement, applicable to both the singular and plural forms of such terms:
"Board" means the Board of Directors of the Company.
"Closing Date" has the meaning given in the Subscription Agreement;
provided that if there is more than one Closing Date pursuant to the
Subscription Agreement, this term shall refer to the latest such Closing Date.
"Common Stock" means the common stock, no par value of the Company.
"Commission" means the Securities and Exchange Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holder" means the record owner of Registrable Securities.
"Person" means any natural person, corporation, trust, association,
limited liability company, partnership, joint venture or other entity and any
government, governmental agency, instrumentality or political subdivision.
"Register," "registered" and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of the effectiveness of such
registration statement.
"Registrable Securities" means the Shares and any shares of capital stock
issued or issuable from time to time as a dividend or other distribution with
respect to, or in exchange for or in replacement of, the Shares if and so long
as: (i) they have not been sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction; or (ii) they have
not been sold in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act under Section 4(1) thereof so that
all transfer restrictions and restrictive legends with respect to such Shares
are removed upon the consummation of such sale; or (iii) they could not be sold
without registration by any Holder thereof pursuant to Rule 144 promulgated
under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of Common Stock sold and issued to the Investors
pursuant to the Subscription Agreement.
"Subscription Agreement" means one or more Subscription Agreements of even
date herewith between the Company and each Investor relating to the purchase and
sale of the Shares.
SECTION 2. REQUIRED REGISTRATION.
(a) Subject to the receipt of all necessary information from the
Investors, the Company shall use commercially reasonable efforts to prepare and
file a registration statement on Form S-3 under the Securities Act covering the
Registrable Securities (the "Registration Statement"), on or before the date
that is ninety (90) days after the Closing Date (the "Filing Date"), and shall
use its commercially reasonable efforts to cause such Registration Statement to
become effective as soon as practicable after filing, and in any event no later
than March 31, 2005 (the "Effectiveness Date"); provided, however, that if the
Company receives notification from the SEC that the Registration Statement will
receive no action or review from the SEC, then the Company will, subject to its
rights under Section 2(d) below, cause the Registration Statement to become
effective within five business days after such SEC notification. Notwithstanding
the foregoing, if Form S-3 is not available for use by the Company, then the
Company will file a Registration Statement on such form as is then available to
effect a registration of the Registrable Securities, subject to the consent of
the Holders of a majority of the Registrable Securities then outstanding, which
consent will not be unreasonably withheld or delayed.
(b) The Company shall use its commercially reasonable efforts to
maintain the effectiveness of the Registration Statement under the Securities
Act until the earliest of: (i) the date that is two years after the Closing
Date; and (ii) the date on which all of the Registrable Securities have been
sold pursuant to the Registration Statement or no longer constitute Registrable
Securities (the "Registration Period").
(c) Notwithstanding the foregoing, if the Company is engaged in
any activity or transaction or preparations or negotiations for any activity or
transaction that the Company desires to keep confidential for business reasons
and the Company determines in good faith that the public disclosure requirements
imposed on the Company under the Securities Act in connection with a
registration hereunder would require disclosure of such activity, transaction,
preparation or negotiations and that such disclosure would be seriously
detrimental to the Company, the Company shall have the right, by written notice
to the Holders: (i) to withdraw a registration statement after filing and after
such notice, but prior to the effectiveness thereof; or (ii) suspend the
effectiveness thereof for a period not to exceed 90 days; provided that such
right may not be exercised more than once in any twelve-month period.
SECTION 3. PIGGY-BACK REGISTRATION.
(a) If, at any time prior to the expiration of the Registration
Period a Registration Statement is not effective with respect to all of the
Shares, each time the Company determines to file a registration statement under
the Securities Act (other than pursuant to Section 2 hereof and other than a
registration statement on Form S-4 or Form S-8 or a
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registration statement on Form S-1 covering solely an employee benefit plan) in
connection with the proposed offer and sale for money of any of its securities,
either for its own account or on behalf of any other security holder, it will
give prompt written notice of its determination to all Holders of Registrable
Securities. Upon the written request of a Holder of Registrable Securities given
within 20 days after the receipt of such written notice, the Company will use
commercially reasonable efforts to cause all such Registrable Securities, the
Holders of which have so requested registration, to be included in such
registration statement and registered under the Securities Act, all to the
extent requisite to permit the sale or other disposition by the prospective
seller or sellers of the Registrable Securities to be so registered.
(b) If the registration of which the Company gives written notice
pursuant to Section 3(a) is for a public offering involving an underwriting, the
Company will so advise the Holders as a part of its written notice. In such
event, the right of any Holder to registration pursuant to this Section 3 is
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
with the underwriter or underwriters selected for such underwriting by the
Company, along with the Company and the other holders distributing their
securities through such underwriting; provided, that such underwriting agreement
is in customary form and is reasonably acceptable to the Holders of a majority
of the Registrable Securities requesting to be included in such registration.
(c) Notwithstanding any other provision of this Section 3, if the
managing underwriter of an underwritten distribution advises the Company and the
Holders of the Registrable Securities participating in such registration in
writing that in its good faith judgment the number of shares of Registrable
Securities and the other securities requested to be registered exceeds the
number of shares of Registrable Securities and other securities which can be
sold in such offering, then: (i) the number of shares of Registrable Securities
and other securities so requested to be included in the offering will be reduced
to that number of shares which in the good faith judgment of the managing
underwriter can be sold in such offering (except for shares to be issued by the
Company in an offering initiated by the Company, which will have priority over
the shares of Registrable Securities); and (ii) subject to existing priority
rights of the holders of such other securities, such reduced number of shares
will be allocated among all participating Holders of Registrable Securities and
the holders of other securities in proportion, as nearly as practicable, to the
respective number of shares of Registrable Securities and other securities held
by such Holders and other holders at the time of filing the registration
statement in relation to the total number of shares of Common Stock outstanding
on a fully diluted basis. All Registrable Securities which are excluded from the
underwriting by reason of the underwriter's marketing limitation and all other
Registrable Securities not originally requested to be so included will not be
included in such registration and will be withheld from the market by the
Holders thereof for a period, not to exceed 180 days, which the managing
underwriter reasonably determines is necessary to effect the underwritten public
offering.
SECTION 4. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of Section 2 or 3 hereof to effect the registration
of Registrable Securities under the Securities Act, the Company will:
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(a) In accordance with the Securities Act and all applicable rules
and regulations thereunder, prepare and file with the Commission a registration
statement with respect to such securities and use its commercially reasonable
efforts to cause such registration statement to become effective, and use its
commercially reasonable efforts to cause such registration statement to remain
effective (including preparing and filing with the Commission such amendments
and supplements to such registration statement and the prospectus contained
therein as may be necessary to keep such registration statement effective) until
the securities covered by such registration statement have been sold or as
otherwise set forth in Section 2;
(b) If the offering is to be underwritten in whole or in part,
enter into a customary written underwriting agreement in form and substance
reasonably satisfactory to the managing underwriter of the public offering, the
Company and the Holders of a majority of the Registrable Securities
participating in such offering;
(c) Furnish to the Holders participating in such registration and
to the underwriters of the securities being registered such number of copies of
the registration statement and each amendment and supplement thereto,
preliminary prospectus, final prospectus and such other documents as such
underwriters and Holders may reasonably request in order to facilitate the
public offering of such securities; provided, however, that the obligation of
the Company to deliver copies of prospectuses or preliminary prospectuses to any
Holder shall be subject to the receipt by the Company of reasonable assurances
from such Holder that the Holder will comply with the applicable provisions of
the Securities Act and of such other securities or blue sky laws as may be
applicable in connection with any use of such prospectuses or preliminary
prospectuses;
(d) Use its commercially reasonable efforts to register or qualify
the securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such participating Holders
and underwriters may reasonably request within ten days prior to the original
filing of such registration statement, except that the Company will not for any
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction where it is
not so qualified;
(e) Notify the Holders participating in such registration,
promptly after it receives notice thereof, of the date and time when such
registration statement and each post-effective amendment thereto has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(f) Notify such Holders promptly of any request by the Commission
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(g) Prepare and file with the Commission, promptly upon the
request of any such Holders, any amendments or supplements to such registration
statement or prospectus which, in the written opinion of counsel for such
Holders, which opinion shall be reasonably acceptable to counsel for the
Company, is required under the Securities Act or the rules and regulations of
the Commission thereunder in connection with the distribution of the Registrable
Securities by such Holders;
4
(h) Prepare and file promptly with the Commission, and promptly
notify such Holders of the filing of, such amendments or supplements to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(i) Advise such Holders, promptly after it receives notice or
obtains knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its commercially
reasonable efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued; and
(j) At the request of any Holder of Registrable Securities covered
by such registration statement, furnish to such Holder on the effective date of
the registration statement or, if such registration includes an underwritten
public offering, at the closing provided for in the underwriting agreement, an
opinion dated such date of the counsel representing the Company for the purposes
of such registration, addressed to the underwriters, if any, and to the Holder
or Holders making such request, covering such matters with respect to the
registration statement, the prospectus and each amendment or supplement thereto,
proceedings under state and federal securities laws, other matters relating to
the Company, the securities being registered and the offer and sale of such
securities as are customarily the subject of opinions of issuer's counsel
provided to underwriters in underwritten public offerings; provided, however,
that such opinion shall be no more extensive than the opinion provided as
Appendix B to the Subscription Agreement.
(k) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the Effectiveness Date.
SECTION 5. ACCURACY OF REGISTRATION STATEMENT. Subject to the Company's
rights under Section 10, any Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) filed by the Company
covering Registrable Securities will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading. Subject to the limitations set forth in Section
10, the Company will prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to permit sales pursuant to the Registration Statement at all times
during the Registration Period, and, during such period, will comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until the termination of the Registration Period, or if earlier, until such time
as all of such Registrable Securities have been disposed of in accordance with
the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement.
5
SECTION 6. ADDITIONAL OBLIGATIONS OF THE COMPANY.
6.1 Review by Investors. The Company will permit Barack Ferrazzano
Kirschbaum Perlman & Nagelberg LLP, to review the Registration Statement and all
amendments and supplements thereto (as well as all requests for acceleration or
effectiveness thereof) a reasonable period of time prior to their filing with
the SEC, and will not file any document in a form to which such counsel
reasonably objects, unless otherwise required by law in the opinion of the
Company's counsel. The sections of any such Registration Statement including
information with respect to the Investors, the Investors' beneficial ownership
of securities of the Company or the Investors' intended method of disposition of
Registrable Securities must conform to the information provided to the Company
by each of the Investors.
6.2 Expenses. With respect to the registration effected pursuant to
Section 2 hereof, the Company will bear all fees, costs and expenses of and
incidental to such registration and the public offering in connection therewith;
provided, however, that the Company shall not be liable for any underwriting
discounts and commissions, which in all cases shall be borne by the Holders.
Such fees, costs and expenses of registration to be borne as provided in the
preceding sentence, include, without limitation, all registration, filing and
NASD fees, printing expenses, fees and disbursements of counsel and accountants
for the Company, all expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered or qualified and reasonable fees and disbursements (not to exceed
$50,000) of one firm of counsel for all selling security holders, selected by
the Holders of a majority of the Registrable Securities to be included in such
registration, and reasonably acceptable to the Company.
6.3 Due Diligence. The Company will make available for inspection by any
Investor whose Registrable Securities are being sold pursuant to a Registration
Statement and one firm of attorneys retained by the Investors (collectively, the
"Inspectors"), all pertinent financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records"), as each
Inspector reasonably deems necessary to enable the Inspector to exercise its due
diligence responsibility. The Company will cause its officers, directors and
employees to supply all information that any Inspector may reasonably request
for purposes of performing such due diligence. Each Inspector will hold in
confidence, and will not make any disclosure of, any Records or other
information that the Company determines in good faith to be confidential, and of
which determination the Inspectors are so notified, unless: (i) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
any Registration Statement; (ii) the release of such Records is ordered pursuant
to a subpoena or other order from a court or government body of competent
jurisdiction, or (iii) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement.
SECTION 7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Holder
of Registrable Securities which are included in a registration statement
pursuant to the provisions of this Agreement and each of such Holder's officers,
directors, partners, legal counsel and accountants, and each Person who controls
such Holder within the meaning of the Securities Act
6
and any underwriter (as defined in the Securities Act) for such Holder, and any
Person who controls such underwriter within the meaning of the Securities Act,
from and against, and to reimburse such Holder, its officers, directors,
partners, legal counsel, accountants and controlling Persons and each such
underwriter and controlling Person of such underwriter with respect to, any and
all claims, actions (actual or threatened), demands, losses, damages,
liabilities, costs and expenses to which such Holder, its officers, directors,
partners, legal counsel, accountants or controlling Persons or any such
underwriter or controlling Person of such underwriter may become subject under
the Securities Act or otherwise, insofar as such claims, actions, demands,
losses, damages, liabilities, costs or expenses arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in light of
the circumstances in which they were made; provided, however, that the Company
will not be liable in any such case to the extent that any such claim, action,
demand, loss, damage, liability, cost or expense is caused by an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with written information furnished by such Holder, such underwriter
or such controlling Person specifically for use in the preparation thereof.
(b) Each Holder of shares of Registrable Securities that are
included in a registration statement pursuant to the provisions of this
Agreement agrees, severally and not jointly, to indemnify and hold harmless the
Company, its officers, directors, legal counsel and accountants, any underwriter
and each Person who controls the Company or any underwriter within the meaning
of the Securities Act, from and against, and agrees to reimburse the Company,
its officers, directors, legal counsel, accountants and controlling Persons, any
underwriter with respect to, any and all claims, actions, demands, losses,
damages, liabilities, costs or expenses to which the Company, its officers,
directors, legal counsel, accountants, such controlling Persons, or any
underwriter may become subject under the Securities Act or otherwise, insofar as
such claims, actions, demands, losses, damages, liabilities, costs or expenses
are caused by any untrue or alleged untrue statement of any material fact
contained in such registration statement, any prospectus contained therein or
any amendment or supplement thereto, or are caused by the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, in each case, to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was so made in reliance upon and in conformity with written
information furnished by such Holder specifically for use in the preparation
thereof. Notwithstanding the foregoing, no Holder of Registrable Securities will
be obligated hereunder to pay more than the net proceeds realized by it upon its
sale of Registrable Securities included in such registration statement.
(c) Promptly after receipt by a party indemnified pursuant to the
provisions of subsection (a) or (b) of this Section of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim therefor is to be
made against the indemnifying party pursuant to the provisions of subsection (a)
or (b), notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section and will not relieve the indemnifying party from liability
7
under this Section 6 unless such indemnifying party is prejudiced by such
omission. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying parties similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party
reasonably concludes that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties will have
the right to select separate counsel (in which case the indemnifying party will
not have the right to direct the defense of such action on behalf of the
indemnified party or parties). Upon the permitted assumption by the indemnifying
party of the defense of such action, and approval by the indemnified party of
counsel, the indemnifying party will not be liable to the indemnified party
under subsection (a) or (b) for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof (other
than reasonable costs of investigation) unless: (i) the indemnified party has
employed separate counsel in connection with the assertion of legal defenses in
accordance with the proviso to the next preceding sentence; (ii) the
indemnifying party has employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time; (iii) the indemnifying
party and its counsel fail actively and vigorously to pursue the defense of the
action; or (iv) the indemnifying party authorizes the employment of counsel for
the indemnified party at the expense of the indemnifying party. No indemnifying
party will be liable to an indemnified party for any settlement of any action or
claim without the consent of the indemnifying party, and no indemnifying party
may unreasonably withhold its consent to any such settlement. No indemnifying
party will consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to the indemnified party of a release from all liability with respect
to such claim or litigation.
(d) If the indemnification provided for in subsection (a) or (b)
of this Section is held by a court of competent jurisdiction to be unavailable
to a party to be indemnified with respect to any claims, actions, demands,
losses, damages, liabilities, costs or expenses referred to therein, then each
indemnifying party under any such subsection, in lieu of indemnifying such
indemnified party thereunder, agrees to contribute to the amount paid or payable
by such indemnified party as a result of such claims, actions, demands, losses,
damages, liabilities, costs or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
which resulted in such claims, actions, demands, losses, damages, liabilities,
costs or expenses, as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party will be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, the amount any Holder of Registrable Securities
will be obligated to contribute pursuant to this subsection will be limited to
an amount equal to the per share public offering price (less any underwriting
discount and commissions) multiplied by the number of shares of Registrable
Securities sold by such Holder pursuant to the registration statement which
gives rise to such
8
obligation to contribute (less the aggregate amount of any damages which such
Holder has otherwise been required to pay in respect of such claim, action,
demand, loss, damage, liability, cost or expense or any substantially similar
claim, action, demand, loss, damage, liability, cost or expense arising from the
sale of such Registrable Securities). No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution hereunder from any person who was not guilty of
such fraudulent misrepresentation.
SECTION 8. REPORTING REQUIREMENTS UNDER EXCHANGE ACT. The Company will
maintain the effectiveness of its registration under Section 12 of the Exchange
Act and timely file (whether or not it is then required to do so) such
information, documents and reports as the Commission may require or prescribe
under Section 15(d) of the Exchange Act. The Company will, forthwith upon
written request, furnish to any Holder of Registrable Securities a written
statement by the Company that it has complied with such reporting requirements.
In addition, the Company will take such other measures and file such other
information, documents and reports, as may be required of it hereafter by the
Commission as a condition to the availability of Rule 144 under the Securities
Act (or any similar exemptive provision hereafter in effect).
SECTION 9. HOLDER INFORMATION. The rights of each Holder of Registrable
Securities to participate in any registration to be effected pursuant to this
Agreement is subject to such Holder furnishing the Company with such information
with respect to such Holder and the distribution of such Registrable Securities
as the Company may from time to time reasonably request and as may be required
by law or by the Commission in connection therewith, and each Holder of
Registrable Securities as to which any registration is to be effected pursuant
to this Agreement shall furnish the Company with such information.
SECTION 10. SUSPENSION OF SALES. Upon receipt of written notice from the
Company that a registration statement or prospectus contains an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (a
"Misstatement"), each Holder of Registrable Securities shall forthwith
discontinue disposition of Registrable Securities until such Holder has received
copies of the supplemented or amended prospectus that corrects such
Misstatement, or until such Holder is advised in writing by the Company that the
use of the prospectus may be resumed, and, if so directed by the Company, such
Holder shall deliver to the Company (at the Company's expense) all copies, other
than permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
SECTION 11. FORMS. All references in this Agreement to particular forms of
registration statements are intended to include, and will be deemed to include,
references to all successor forms which are intended to replace, or to apply to
similar transactions as, the forms herein referenced.
SECTION 12. MISCELLANEOUS.
12.1 Waivers and Amendments. With the written consent of the Holders of a
majority of the Registrable Securities then outstanding, the obligations of the
Company and the rights of the Holders under this Agreement may be waived (either
generally or in a particular instance, either retroactively or prospectively and
either for a specified period of time or indefinitely), and
9
with the same consent the Company may enter into a supplementary agreement for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Agreement or of any supplemental agreement or
modifying in any manner the rights and obligations hereunder of the Holders and
the Company; provided, however, that no such waiver or supplemental agreement
may reduce the aforesaid proportion of Registrable Securities, the Holders of
which are required to consent to any waiver or supplemental agreement, without
the consent of the Holders of all the Registrable Securities; and provided
further, and notwithstanding any provision herein to the contrary, that any such
waiver amendment or supplement that applies only to a particular registration
shall require only the written consent of the Holders of a majority of the
Registrable Securities included in such registration. Upon the effectuation of
each such waiver, consent or agreement of amendment or modification, the Company
will give prompt written notice thereof to the Holders of the Registrable
Securities who have not previously consented thereto in writing. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally or by course of dealing, but only by a statement in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought, except to the extent provided in this Section 12.1.
Specifically, but without limiting the generality of the foregoing, the failure
of any Investor at any time or times to require performance of any provision
hereof by the Company will not affect the right of any Investor at a later time
to enforce the same. No waiver by any party of the breach of any term or
provision contained in this Agreement, in any one or more instances, will be
deemed to be, or construed as, a further or continuing waiver of any such
breach, or a waiver of the breach of any other term or covenant contained in
this Agreement.
12.2 Effect of Waiver or Amendment. Each Investor acknowledges that by
operation of Section 12.1 the Holders of a majority of the Registrable
Securities will, subject to the limitations contained in Section 12.1, have the
right and power to diminish or eliminate certain rights of such Investor under
this Agreement.
12.3 Rights of Investors Inter Se. Each Investor has the absolute right
to exercise or refrain from exercising any right or rights which such Investor
may have by reason of this Agreement or any Registrable Security, including,
without limitation, the right to consent to the waiver of any obligation of the
Company under this Agreement and to enter into an agreement with the Company for
the purpose of modifying this Agreement or any agreement effecting any such
modification, and such Investor will not incur any liability to any other
Investor or Investors with respect to exercising or refraining from exercising
any such right or rights.
12.4 Notices. All notices, requests, consents and other communications
required or permitted hereunder will be in writing and will be delivered, or
mailed first class postage prepaid, registered or certified mail,
(a) If to any Investor, addressed to such Investor at its address
shown on Annex A hereto, or at such other address as such Investor may specify
by written notice to the Company; or
(b) If to the Company, at 130 South Cedar Street, Manistique,
Michigan 49854, or at such other address as the Company may specify by written
notice to the Investors;
10
and each such notice, request, consent and other communication will for all
purposes of this Agreement be treated as being effective or having been given
when delivered, if delivered personally, or, if sent by mail, at the earlier of
its actual receipt or three days after the same has been deposited in a
regularly maintained receptacle for the deposit of United States mail, addressed
and postage prepaid as aforesaid.
12.5 Severability. If any one or more of the provisions of this Agreement
or of any agreement entered into pursuant to this Agreement is determined to be
illegal or unenforceable, it is the intention of the parties hereto that all
other provisions of this Agreement and of each other agreement entered into
pursuant to this Agreement should be given effect separately from the provision
or provisions determined to be illegal or unenforceable and not be affected
thereby.
12.6 Parties in Interest. All the terms and provisions of this Agreement
will be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto, whether so expressed or
not and, in particular, will inure to the benefit of and be enforceable by the
Holder or Holders at the time of any registration of Registrable Securities.
Subject to the immediately preceding sentence, this Agreement will not run to
the benefit of or be enforceable by any Person other than a party to this
Agreement and its successors and assigns.
12.7 Headings. The headings of the sections, subsections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
12.8 Entire Agreement. This Agreement constitutes the entire understanding
of the parties hereto and supersedes all prior understanding among such parties.
12.9 Choice of Law. This Agreement and any and all matters related to or
arising under this Agreement shall be governed by the internal laws of the State
of Michigan, regardless of any provisions on choice of or conflicts of law.
12.10 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts will be deemed an original, will be construed together and will
constitute one and the same instrument.
12.11 Assignment of Registration Rights. The rights of the Investors
hereunder, including the right to have the Company register Registrable
Securities pursuant to this Agreement, will be automatically assigned by the
Investors to transferees or assignees of all or any portion of the Registrable
Securities, but only if: (a) the Investor agrees in writing with the transferee
or assignee to assign such rights, and a copy of such agreement is furnished to
the Company within a reasonable time after such assignment; (b) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being transferred
or assigned; (c) after such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities laws; (d) at or before the time the Company
received the written notice contemplated by clause (b) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (e) the transferee is an "accredited
investor" or a "qualified institutional buyer," as each such term is defined,
respectively, in Rule 501 of Regulation D and Rule 144A, both promulgated under
the Securities Act.
(Signature page follows)
11
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed personally or by a duly authorized representative thereof as of
the day and year first above written.
NORTH COUNTRY FINANCIAL CORPORATION ___________________________________
Printed Name of Investor
By: _______________________________ By: _______________________________
Name: _________________________ Name: _________________________
Title:_________________________ Title:_________________________
12
ANNEX A
Schedule 5-1
Employment Agreement - Stark
See attached
EMPLOYMENT AGREEMENT
(ELIOT R. STARK)
This Agreement, dated as of the 10th day of August, 2004, by and among
NORTH COUNTRY FINANCIAL CORPORATION, a Michigan corporation (the "Company"), and
ELIOT R. STARK ("Executive")
W I T N E S S E T H:
WHEREAS, the Company desires to engage the services of Executive, and
Executive is willing to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
undertakings set forth herein the parties hereto agree as follows:
1. Employment and Duties; Board Appointment. In accordance with actions
taken and authorized by the Board of Directors of the Company (the "Company
Board"), effective upon the Closing of the transactions provided for in the
Stock Purchase Agreement dated August 10, 2004 between the Company and NCFC
Recapitalization, LLC (the "Effective Date") Executive shall become employed and
appointed as the Executive Vice President and Chief Financial Officer of the
Company and the Bank and shall have the duties and responsibilities commensurate
with such titles and offices, including, without limitation, all such duties and
responsibilities as now are or hereafter may be set forth with respect to such
offices in the by-laws of the Company. In the event, for whatever reason,
Executive is not elected by the Company's shareholders to the Company Board
prior to the Effective Date, then as promptly as practicable following the
Effective Date, the Company Board shall take necessary and appropriate action to
appoint Executive as a director of the Company and the Bank. During the period
of his employment hereunder, Executive also shall serve as an officer of such
other
affiliates of the Company and in such other capacities as he may be requested by
the Company Board and shall assume such additional duties and responsibilities
as from time to time may be assigned to him by the Company Board, all without
additional compensation therefor. Excluding any periods of vacation (not less
than 6 weeks per year) and sick leave to which the Executive is entitled, the
Executive agrees to devote his primary attention and time during normal business
hours to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period, it shall not be a violation of
this Agreement for the Executive to (a) serve on corporate, civic or charitable
boards or committees, (b) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (c) own, operate and manage investments or
businesses other than banking institutions, including Mackinac Partners, LLC, so
long as such activities do not interfere with the performance of the Executive's
primary responsibilities as an executive of the Company in accordance with this
Agreement. It is expressly understood and agreed that, to the extent that any
such activities have been conducted by Executive prior to the Effective Date,
the continued conduct of such activities (or the conduct of activities similar
in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
2. Term of Employment. The "Employment Period" of Executive hereunder
shall commence on the Effective Date and shall continue thereafter through the
third (3rd) anniversary of the Effective Date; provided, however, that,
commencing on the date one year after the Effective Date, and on each annual
anniversary of such date (such date and each annual anniversary thereof, the
"Renewal Date"), unless previously terminated, the Employment Period
-2-
shall be automatically extended so as to terminate three (3) years from such
Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company
shall give notice to the Executive that the Employment Period shall not be so
extended. The Company shall employ Executive in accordance with this Agreement
for the Employment Period, unless Executive's employment is terminated sooner as
provided herein.
3. Compensation and Benefits.
a. During the Employment Period, the Company shall pay Executive a
salary (the "Base Salary") at the rate herein provided, payable in
arrears in accordance with the Company's normal payroll payment
schedule for salaried employees, but not less often than monthly.
Such payments of Base Salary shall be subject to all withholding
with respect thereto as is required by applicable tax law, but shall
otherwise be paid without deduction, offset or counterclaim unless
Executive shall otherwise agree. The Base Salary shall initially be
a the rate of $200,000 per year, but may be increased from time to
time by the Company Board; and, upon the effectiveness of any such
increase, such increased rate of salary shall become the "Base
Salary" hereunder. In no event shall Executive's Base Salary in
effect and any time during the Employment Period be reduced without
Executive's consent.
b. After the Effective Date, but prior to March 31, 2005, the Company
and Executive shall develop and implement an incentive plan or plans
("Incentive Plan(s)"), pursuant to which annual cash awards
("Bonus") may be earned by and paid to eligible employees (including
Executive). In addition to Executive's Base Salary, Executive shall
be entitled to receive an annual bonus in cash in accordance with
such Incentive Plan(s), except that his Bonus for 2005 shall not be
less than $25,000 and shall be paid no later than the first
anniversary of the Effective Date, regardless of when such Incentive
Plan(s) are put into effect.
c. In addition to the Base Salary and Bonus, Executive shall receive
such Additional Benefits as may be provided for him or to which he
may become entitled from time to time, and nothing in this Agreement
shall diminish any existing or future rights which Executive may
have as to any Additional Benefits; provided, that the Company shall
provide Executive, during the Employment Period, at least
substantially all Additional Benefits which it generally provides at
the time to its other management employees holding positions of
comparable responsibility.
d. The Company shall reimburse Executive for all reasonable
out-of-pocket expenses incurred by him in connection with his
employment in accordance with the Company's expense reimbursement
policies and procedures from time to time in effect and applicable
to management employees. Such reimbursement shall include (i) a car
allowance of $750 per month; (ii) a per diem reimbursement to
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Executive for each day he is in Manistique, Michigan during the term
of this Agreement to cover Executive's living expenses, in the
amount of at least One Hundred Dollars ($100.00) per day, not to
exceed One Thousand Dollars ($1,000.00) in any calendar month;
subject, however, to upward adjustment in the event Executive
demonstrates his reasonable ordinary living expenses, including
housing and meals, exceeds such per diem amount.
e. During the Employment Period, and unless and until the Company shall
provide Executive with an office and support staff in Oakland
County, Michigan for his principal office, the Company shall pay the
reasonable costs of the office in Oakland County and personal
secretarial and other assistance presently maintained by him.
4. Stock Options. As evidenced by a Stock Option Agreement to be entered
into between Executive and the Company (the "Option Agreement"), on the
Effective Date Executive shall be granted under the Company's 2000 Stock
Incentive Plan (the "Plan") so-called non-qualified stock options to purchase an
aggregate of 25% of the Option Pool of the Company at a price per share equal to
the price paid by Investors under the Stock Purchase Agreement and such other
terms and conditions specified in the Option Agreement. The Option Agreement
shall provide that if this Agreement is terminated other than pursuant to
Section 5.b. (death) or 5.d. (Cause), all such options (vested and unvested)
shall continue and may be exercised by Executive in accordance with their terms
as if this Agreement (and Executive's employment with the Company) had not
terminated. If this Agreement is terminated pursuant to Section 5.b. or 5.d.,
the options shall continue and shall be exercisable as provided in the Option
Agreement and the Plan.
5. Termination of Employment. Executive's employment hereunder shall
continue until the first to occur during the Employment Period of the following
(the "Termination Date"):
a. That date specified in a written notice of termination (i) given by
the Company to the Executive if such termination by the Company is
other than for Cause or Disability, or (ii) given by the Executive
if the Termination is for Good Reason; or
b. The date of Executive's death; or
-4-
c. That date, after the occurrence of Executive's Disability, specified
in a written notice of termination given by the Company on or prior
to such date; or
d. Provided Cause actually exists, the date on which the Company gives
Executive written notice of termination for Cause; or
e. Following the Change of Control, either (i) the date on which
Executive gives the Company written notice of termination for Good
Reason; or (ii) the date on which the Company terminates Executive's
employment hereunder otherwise than (A) for Cause pursuant to clause
(d) or (B) by reason of Executive's Disability pursuant to clause
(c); or
f. After a Change in Control occurs, that date specified in a written
notice of termination without Good Reason given by Executive to the
Company, provided such notice is given within one year after the
occurrence of such Change in Control; or
g. Such other Termination Date to which the Company and Executive may
mutually agree in writing.
6. Termination Payments. Upon the Termination Date under the circumstances
described below, but in any event subject to Section 7 hereof, Executive shall
be entitled to receive from the Company, and the Company shall be obligated to
pay to Executive (or Executive's Beneficiary, as the case may be), the payments
(the "Termination Payments") described below (subject to adjustment as provided
in Section 7), in addition to all Base Salary, Bonus and expense reimbursement
theretofore accrued and otherwise payable to Executive, without deduction,
offset or counterclaim (other than such withholding with respect thereto as is
required by applicable law):
a. If the Termination Date is determined pursuant to Section 5(d)
(i.e., by the Company for Cause), then no Termination Payments shall
be payable.
b. If the Termination Date is determined pursuant to Section 5(a) (i.e.
by the Company without Cause and not due to Executive's Disability),
then for a period equal to three (3) years after the Termination
Date, the Company shall pay to Executive (or Executive's Beneficiary
if Executive shall die during such three-year period), (i) at the
times at which Executive's Base Salary would have been payable had
his employment continued during such period amounts equal to the
Base Salary in effect on the Termination Date; and (ii) at the times
Bonuses are to be paid under the Incentive Plan(s) or otherwise, a
Bonus equal to the highest
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Bonus or Bonuses awarded to Executive during any fiscal year of the
Company, including the fiscal year in which the Termination Date
occurs. In addition, for the same three (3) year period plus the
Company shall continue benefits to Executive and Executive's family
at least equal to those described in Clauses (b) and (c) of the
definition of "Additional Benefits" and provided to Executive as of
the Termination Date.
c. If the Termination Date is determined pursuant to Section 5(b)
(i.e., by reason of Executive's death), then for a period of one (1)
year following the Termination Date the Company shall pay to
Executive's Beneficiary, at the times at which Executive's Base
Salary would have been payable had his employment continued during
such period, amounts equal to the Base Salary (as in effect on the
Termination Date) which would have been payable during such period
and shall continue for the same period benefits to Executive and
Executive's family at least equal to those described in Clauses (b)
and (c) of the definition of "Additional Benefits" and provided to
Executive as of the Termination Date.
d. If the Termination Date is determined pursuant to Section 5(c)
(i.e., by reason of Executive's Disability), then for a period of
two (2) years following the Termination Date the Company shall pay
to Executive (or, if Executive shall die during such two-year
period, then to Executive's Beneficiary), at the times at which
Executive's Base Salary would have been payable had the his
employment continued during such period, amounts equal to the Base
Salary (as in effect on the Termination Date) which would have been
payable during such period and shall continue for the same period
benefits to Executive and Executive's family at least equal to those
described in Clauses (b) and (c) of the definition of "Additional
Benefits" and provided to Executive as of the Termination Date. The
amount of Base Salary payable to Executive under this Section 6.d.
may be reduced by the amounts actually received by Executive under
any long term disability insurance policy obtained and paid for by
the Company.
e. If the Termination Date is determined pursuant to Section 5(e) (i.e.
following a Change of Control, by Executive for Good Reason or by
the Company without Cause and not due to Executive's Disability),
then within ten (10) days after the Termination Date the Company
shall pay to Executive in cash or equivalent a lump sum Termination
Payment equal to 300% of the aggregate of (i) Executive's annual
Base Salary in effect on the Termination Date; and (ii) the highest
Bonus or Bonuses awarded to Executive during any fiscal year of the
Company, including the fiscal year in which the Termination Date
occurs. In addition, for the period of three (3) years after the
Termination Date the Company shall continue benefits to Executive
and Executive's family equal to those described in Clause (b) and
(c) of the definition of "Additional Benefits" and provided to the
Executive as of the Termination Date.
f. If the Termination Date is determined pursuant to Section 5(f)
(i.e., by Executive after a Change of Control but without Good
Reason), then within ten (10) days after the Termination Date the
Company shall pay to Executive in cash or
-6-
equivalent a lump sum Termination Payment equal to 100% of the
aggregate of (i) Executive's annual Base Salary in effect on the
Termination Date; and (ii) the highest Bonus or Bonuses awarded to
Executive during any fiscal year of the Company, including the
fiscal year in which the Termination Date occurs.
g. If the Termination Date is determined pursuant to Section 5(g)
(i.e., by mutual written agreement), then the amount and time of
payment of any Termination Payment, if any, in connection therewith
shall be as determined by mutual written agreement of the Company
and Executive.
7. Adjustment of Termination Payments in Certain Events. Any provisions of
Section 6 hereof to the contrary notwithstanding, if a Change of Control shall
occur pursuant to which any Termination Payments to Executive are made, or if
and to the extent that any Termination Payments are "contingent on" (within the
meaning of such phrase as used in Section 280G(b)(i) of the Code) a Change of
Control, and in either case if the "aggregate present value" (as determined
pursuant to Section 280G of the Code) of the Termination Payments payable under
Section 6, plus any other payments required to be taken into account for
purposes of clause (ii) of Section 280G(b)(2)(A) of the Code, equals or exceeds
an amount equal to 300% of the Base Amount, then the amount of such Termination
Payments shall be reduced to that amount the aggregate present value of which,
when added to that of such other payments so required to be taken into account,
is equal to 295% of the Base Amount; provided, that no such reduction shall be
made unless, within 30 days after the Termination Date, the Company and
Executive shall have received an opinion of counsel having a favorable
reputation for expertise in matters of federal taxation (who may be counsel for
the company or for Executive) to the effect that in the absence of such
reduction the payment of the termination Payments as provided in Section 7 would
more likely than not constitute a "parachute payment" within the meaning of
Section 280G(b)(2) of the Code. Any required reduction of Termination Payments
payable pursuant to Section 6(b), 6(c) or 6(d) shall be made by applying the
amount of the reduction to installments of such payments in inverse order of
their due dates.
-7-
8. Interest, Collection Costs, Etc.
(a) In the event that the Company shall fail to pay to executive (or
Executive's Beneficiary, as the case may be) any Base Salary or Termination
Payments when due, then (a) the Company shall pay interest on any such unpaid
amount at the Applicable Interest Rate, computed from the due date of such
payment to the date it is paid, and (b) the Company shall indemnify Executive
(or Executive's Beneficiary, as the case may be) for, and pay over to Executive
(or Executive's Beneficiary, as the case may be) on demand, all costs and
expenses (including reasonable attorneys' and consultants' fees and expenses and
court costs) incurred by Executive (or Executive's Beneficiary, as the case may
be) in connection with his efforts to collect such payments and enforce the
obligations of the Company hereunder.
(b) Without limiting the Company's obligations under Section 8(a), in the
event of any dispute or controversy (including as to interpretation,
enforceability, breach or default) between the Employee and the Company relating
to this Agreement, the Option Agreement, the employment relationship between the
Employee and the Company, or any other matter related hereto or thereto, the
Company shall pay and reimburse Employee, as and when incurred, all costs and
expenses (including reasonable attorneys' and consultants' fees and expenses and
all court costs) incurred by Employee in, or as a result of, the dispute or
controversy, regardless of the eventual outcome of the dispute or controversy.
(c) All ambiguities arising under this Agreement or the Option Agreement,
or the interpretation of this Agreement or the Option Agreement, shall be
resolved in favor of the Employee.
9. No Obligation to Mitigate. Executive shall not be required to mitigate
the benefits or amounts of any Termination payments provided for in this
Agreement by seeking
-8-
other employment or otherwise, nor shall the amount of any Termination Payment
be reduced by any compensation earned by Executive as a result of employment by
another employer after the Termination Date, or otherwise.
10. Certain Continuing Obligations of Employee. Throughout the period of
his employment hereunder and thereafter, Executive agrees to keep confidential
all trade secrets, customer lists, business strategies, financial and marketing
information, and other data concerning the private affairs of the Company and
the Bank or any of their affiliates, made known to or developed by Executive
during the course of his employment hereunder ("Confidential Information"), not
to use any Confidential Information or supply Confidential Information to others
other than in furtherance of the Company's or Bank's business, and to return to
the Company upon termination of his employment all copies, in whatever form, of
all Confidential Information and all other documents relating to the business of
the Company or any of its affiliates which may then be in the possession or
under the control of Employee.
At the request of the Company Board, whether or not made during the period
of his employment hereunder, Employee agrees to execute such confidentiality
agreements, assignments of intellectual property rights, and other documents as
hereafter may be reasonably determined by the Company Board to be appropriate to
carry out the purposes of this Section.
11. Noncompetition.
(a) Executive agrees that, except as otherwise permitted or contemplated
by the terms hereof, he shall not engage in competitive activities (i) while
employed by the Company or the Bank; and (ii) if Executive's Termination Date is
determined under 5.a., 5.c. or 5.g. above or if the Executive terminates his
employment without Good Reason, pursuant to Section 5.f. above, during the
Restricted Period. Executive shall be deemed to engage in competitive activities
if he
-9-
shall, without the prior written consent of the Company, (i) within a
twenty-five (25) mile radius of the main office or any branch office of the
Bank, render services directly or indirectly, as an employee, officer, director,
consultant, advisor, partner or otherwise, for any organization or enterprise
which competes directly or indirectly with the business of Company or any of its
affiliates in providing financial products or services (including, without
limitation, banking or other services) then being offered by the Company and
such affiliates (and in the case of Executive's Termination Date being
determined under 5.a., 5.c. or 5.g., such business as of the Termination Date)
to consumers and businesses, or (ii) directly or indirectly acquires any
financial or beneficial interest in (except as provided in the next sentence)
any organization which conducts or is otherwise engaged in a business or
enterprise within a twenty-five (25) mile radius of the main office or any
branch office of the Bank, which competes directly or indirectly with the
business of the Company or the Bank or any of their affiliates in providing
financial products or services (including, without limitation, banking,
insurance or securities products or services) to consumers and businesses.
Notwithstanding the preceding sentence, Employee shall not be prohibited from
owning less than 5 percent of any publicly traded corporation whether or not
such corporation is in competition with the Company. For purposes hereof, the
term "Restricted Period" shall equal the period during which payments in full
are actually made to Executive pursuant to Section 6.b., 6.d. or 6.g. above and
in the case of a termination by the Executive without Good Reason pursuant to
section 5.f. above, one year from the effective date of the termination.
12. Assignment, Delegation and Assumption.
a. Executive may assign his rights hereunder to Executive's Beneficiary
effective upon Executive's death.
b. The Company may assign its rights and delegate its duties hereunder
to a Person succeeding to all or substantially all of the Company's
business and assets
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(whether by operation of law or otherwise), provided that such
successor at the time of such succession assumes by operation of law
or by express agreement all of the Company's obligations and duties
hereunder; and the Company shall so assign its rights and delegate
its duties, and cause such successor to so assume all of its duties
and obligations hereunder, upon any transfer by the Company of all
or substantially all of its business and assets to another Person
(whether by operation of law or otherwise) during the Employment
Period, as it may be extended. Notwithstanding such assignment,
delegation and assumption, the Company shall not be released from
its primary liability for its obligations hereunder without
Executive's written consent.
c. Except as otherwise expressly provided above, neither party may
assign its rights or delegate its duties hereunder without the
written consent of the other party.
13. Miscellaneous.
a. Notices. Any notice to be given to a party in connection with this
Agreement shall be in writing addressed to such party at such
party's "Notice Address" set forth below such party's signature
hereto, which Notice Address may be changed from time to time by
such party by notice thereof to the other party as herein provided.
Any such notice shall be deemed effectively given to a party when
mailed to such party by first class registered or certified United
States Mail, postage prepaid, addressed to such party at such
party's Notice Address, or, if earlier, when actually delivered to
such party's Notice Address directed to such party.
b. Integration. This Agreement constitutes the final, complete and
exclusive statement of the agreement between the parties hereto as
to the subject matter hereof, and all other prior or contemporaneous
oral or written agreements of the parties hereto with respect to the
subject matter hereof are merged herein and superseded hereby.
c. Amendment. This Agreement may be modified or amended only by express
agreement of the parties in writing, assenting to such modification
or amendment.
d. Waivers. No waiver by any party of any provision hereof or part
thereof at any time shall constitute or evidence a waiver by such
party of any other provision or other part of such provision or of
the same provision or part at any other time.
e. Severability. The parties have entered into this Agreement for the
purposes herein expressed, with the intention that this Agreement be
given full effect to carry out such purposes. Therefore, consistent
with the effectuation of the purposes hereof, the invalidity or
unenforceability of any provision hereof or part thereof shall not
affect the validity or enforceability of any other provision hereof
or an other part of such provision.
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f. Benefits and Binding Effect. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective heirs, successors, personal representatives and permitted
assigns.
g. Governing Law. The validity, construction and effect of this
Agreement shall be governed by the substantive laws of the State of
Michigan.
h. Headings and Captions. The headings and captions of the Sections and
subsections of this Agreement are for convenience of reference only,
and shall not affect the construction hereof.
i. Counterparts. This Agreement may be executed by the parties in
multiple counterparts, each of which shall be deemed an original.
j. Regulatory Approval. The Company and Executive agree to use their
respective best efforts to obtain such approval of bank regulatory
authorities as may be required for the payment of any Termination
Payments as shall be or become subject to the prior approval of such
regulatory authorities in accordance with the provisions of any
statute or regulation applicable to the Company or any affiliate
thereof at the time payment is to be made in accordance with this
Agreement.
14. Definitions. As used in this Agreement, the following terms have the
following respective meanings:
"Additional Benefits" means (a) participations in bonus and incentive
compensation plans or pools, stock option, bonus, award or purchase plans,
retirement plans, and other employee benefit plans of the Company; (b) life,
health, medical, dental, accident, and other personal insurance coverage
provided by the Company for employees or their dependents; (c) directors' and
officers' liability insurance coverage provided by the Company and charter or
bylaw provisions or contracts providing for indemnification of corporate
personnel or elimination or limitation of their liabilities as such; (d) club
memberships, use of the Company automobiles, use of other Company property and
facilities and other perquisites of employment with the Company; (e) paid
vacation, leave or holidays; and (f) any and all other compensation, benefits
and perquisites of employment with the Company other than Base Salary.
"Applicable Interest Rate" means (i) if a Change of Control shall occur
pursuant to which any payments to Executive are made, or if payment of the
amount upon which interest at such rate is computed is contingent on a Change of
Control, the rate per annum equal to 120% of the "applicable federal rate"
(determined under Section 1274(d) of the Code), compounded semiannually, or (ii)
if no Change of Control shall occur and payment of the amount upon which
interest at such rate is computed is not contingent on a Change of Control, the
greater of the rate described in clause (i) of this definition or 4% plus the
rate of interest per annum announced by Comerica Bank (or a successor to
substantially all of the commercial banking business of such bank) as its prime
rate as from time to time in effect, but (iii) in any event, not in excess of
the highest rate of interest permitted by applicable law.
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"Bank" means North Country Bank and Trust, a Michigan banking corporation
and a wholly-owned subsidiary of the Company.
"Base Amount" means Executive's "base amount" as defined in Section 280G
(b)(3)(A) of the Code.
"Base Salary" means the amount per annum so designated as described in
Section 2(a) of this Agreement.
"Cause" means: (i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company (other than any
such failure resulting from incapacity due to physical or mental illness or
following the Executive's delivery of a notice of termination for Good Reason),
after a written demand for substantial performance is delivered to the Executive
by the Company Board that specifically identifies the manner in which the
Company Board believes that the Executive has not substantially performed the
Executive's duties, or (ii) the willful engaging by the Executive in illegal
conduct or gross misconduct that is materially and demonstrably injurious to the
Company. No act, or failure to act, on the part of the Executive shall be
considered "willful" unless it is done, or omitted to be done, by the Executive
in bad faith or without reasonable belief that the Executive's action or
omission was in the best interests of the Company. Any act, or failure to act,
based upon authority given pursuant to a resolution duly adopted by the Company
Board or a senior officer of the Company or based upon the advice of counsel for
the Company shall be conclusively presumed to be done, or omitted to be done, by
the Executive in good faith and in the best interests of the Company. The
cessation of employment of the Executive shall not be deemed to be for Cause
unless and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Company Board (excluding the Executive) at a
meeting of the Board called and held for such purpose (after reasonable notice
is provided to the Executive and the Executive is given an opportunity, together
with counsel for the Executive, to be heard before the Company Board), finding
that, in the good faith opinion of the Company Board, the Executive is guilty of
the conduct described and specifying the particulars thereof in detail.
"Change of Control" shall occur if:
i. Any person or group (as such terms are used in connection with
Sections 13(d) and 14(d) of the Exchange Act) becomes the
"beneficial owner" (as defined in Rule 13(d)(3) and 13(d)(5) under
the Exchange Act), directly or indirectly, of securities of the
Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities;
ii. A merger, consolidation, sale of assets, reorganization, or proxy
contest is consummated and, as a consequence of which, members of
the Company Board in office immediately prior to such transaction or
event constitute less than a majority of the Board thereafter;
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iii. During any period of 24 consecutive months, individuals who at the
beginning of such period constitute the Company Board (including for
this purpose any new director whose election or nomination for
election by the Company's stockholders was approved by a vote of at
least one-half of the directors then still in office who were
directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Company Board; or
iv. A merger, consolidation or reorganization is consummated with any
other corporation pursuant to which the shareholders of the Company
immediately prior to the merger, consolidation or reorganization do
not immediately thereafter directly or indirectly own more than
fifty percent (50%) of the combined voting power of the voting
securities entitled to vote in the election of directors of the
merged, consolidated or reorganized entity.
Notwithstanding the foregoing, no trust department or designated fiduciary
or other trustee of such trust department of the Company or a subsidiary
of the Company, or other similar fiduciary capacity of the Company with
direct voting control of the stock shall be treated as a person or group
within the meaning of subsection (i)(a) hereof. Further, no
profit-sharing, employee stock ownership, employee stock purchase and
savings, employee pension, or other employee benefit plan of the Company
or any of its subsidiaries, and no trustee of any such plan in its
capacity as such trustee, shall be treated as a person or group within the
meaning of subsection (i)(a) hereof.
"Code" means the Internal Revenue Code of 1986, as amended, and includes
any successor federal tax code. Any reference herein to a particular provision
of the Code shall include the valid regulations adopted thereunder and shall
also include any similar successor provisions or regulations hereafter in
effect, even though they may not bear the same designations or section numbers
as now in effect.
"Company" includes the successors and assigns of the Company that become
bound by this Agreement.
"Disability" means the inability of Executive, due to the condition of his
physical, mental or emotional health, to regularly and satisfactorily perform
the duties of his employment hereunder for a continuous period in excess of 180
days in a period of twelve (12) months. In the event that the existence of
Executive's Disability shall be disputed by either party, the determination by
two (2) physicians duly licensed to practice medicine in Michigan that such
Disability exists shall be necessary to establish such Disability, unless
Executive refuses to submit to appropriate examinations at the request of the
Company Board, which case the determination of the Company Board in good faith
and after the requisite period of Disability shall be conclusive as to whether
such Disability exists. If, after any period of Disability, Executive shall
resume the regular and satisfactory performance of the duties of his employment
hereunder for a continuous period of at least three (3) months, then such prior
Disability shall not thereafter be the basis for the establishment of a
Termination Date by reason of Disability.
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"Executive's Beneficiary" means, at any time, the Person or Persons most
recently designated as such in writing by Executive and given to the Company, in
such form as the Company Board may reasonably prescribe if it so prescribes such
a form, or, in the absence of any such designation, Executive's estate.
"Good Reason" means any of the following occurrences without the written
consent of Executive: (a) the assignment to Executive of any duties inconsistent
with his duties described in Section 1(a) hereof or any removal of Executive
from or any failure to reelect Executive to his positions described in Section
1(a) hereof, except in connection with promotions to higher office; provided,
that the suspension of Executive from the duties of his employment and any
positions held by him during the pendency of any criminal proceedings against
Executive as to which a conviction would constitute "Cause" shall not be deemed
"Good Reason" so long as during the period of such suspension the Company
continues to pay the Base Salary and provide the Additional Benefits to which
Executive is entitled; (b) the material reduction at any time of the Additional
Benefits theretofore provided to Executive; provided, that (i) reductions in the
actual economic value of Additional Benefits in accordance with the objective
terms of such Additional Benefits (e.g., changes in the amounts of bonus
payments from time to time in accordance with the objective terms of a bonus
formula) shall not be deemed a reduction of such Additional Benefits for this
purpose, and (ii) the replacement of Additional Benefits with other new
Additional Benefits having substantially equivalent economic value to Executive
shall not be deemed a reduction of Additional Benefits for this purpose; (c) the
relocation of Executive's office to anywhere other than a location within 25
miles of Executive's office provided for herein or the Company requiring
Executive to be based anywhere other than within 25 miles of Executive's office
on the date hereof, except for a required travel on the Company's business to an
extent consistent with Executive's business travel obligations; or (d) the
failure of the Company to pay Executive the Base Salary and provide the
Additional Benefits as and when required by Section 2 hereof; (e) any other
failure of the Company to perform its obligations to Executive hereunder if such
failure continues uncured for ten (10) days after written notice thereof,
specifying the nature of such failure and requesting that it be cured, is given
by Executive to the Company; or (f) the failure of the Company to obtain the
assumption of this Agreement by any successor of the Company as provided in
Section 12(b) hereof.
"Option Pool" means the total number of issued and outstanding shares of
common stock of the Company following the consummation of the transactions
provided for in, and contemplated by, the Stock Purchase Agreement multiplied by
..125.
"Person" means an individual, corporation, partnership or other entity, or
a group of Persons acting in concert.
"Termination Date" means the date so designated in Section 5 hereof.
"Termination Payments" means the payments so designated in Section 6
hereof.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NORTH COUNTRY FINANCIAL
CORPORATION
By________________________________
Its _______________________
__________________________________
Eliot R. Stark
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Schedule 5-2
Employment Agreement - Tobias
See attached
EMPLOYMENT AGREEMENT
(PAUL D. TOBIAS)
This Agreement, dated as of the 10th day of August, 2004, by and among
NORTH COUNTRY FINANCIAL CORPORATION, a Michigan corporation (the "Company"), and
PAUL D. TOBIAS ("Executive")
W I T N E S S E T H:
WHEREAS, the Company desires to engage the services of Executive, and
Executive is willing to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
undertakings set forth herein the parties hereto agree as follows:
1. Employment and Duties; Board Appointment. In accordance with actions
taken and authorized by the Board of Directors of the Company (the "Company
Board"), effective upon the Closing of the transactions provided for in the
Stock Purchase Agreement dated August 10, 2004 between the Company and NCFC
Recapitalization, LLC (the "Effective Date") Executive shall become employed and
appointed as the Chairman of the Board and Chief Executive Officer of the
Company and Chairman of the Board of the Bank and shall have the duties and
responsibilities commensurate with such titles and offices, including, without
limitation, all such duties and responsibilities as now are or hereafter may be
set forth with respect to such offices in the by-laws of the Company. In the
event, for whatever reason, Executive is not elected by the Company's
shareholders to the Company Board prior to the Effective Date, then as promptly
as practicable following the Effective Date, the Company Board shall take
necessary and appropriate action to appoint Executive as a director of the
Company and the Bank. During the period of his employment hereunder, Executive
also shall serve as an
officer of such other affiliates of the Company and in such other capacities as
he may be requested by the Company Board and shall assume such additional duties
and responsibilities as from time to time may be assigned to him by the Company
Board, all without additional compensation therefor. Excluding any periods of
vacation (not less than 6 weeks per year) and sick leave to which the Executive
is entitled, the Executive agrees to devote his primary attention and time
during normal business hours to the business and affairs of the Company and, to
the extent necessary to discharge the responsibilities assigned to the Executive
hereunder, to use the Executive's reasonable best efforts to perform faithfully
and efficiently such responsibilities. During the Employment Period, it shall
not be a violation of this Agreement for the Executive to (a) serve on
corporate, civic or charitable boards or committees, (b) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (c) own,
operate and manage investments or businesses other than banking institutions,
including Mackinac Partners, LLC, so long as such activities do not interfere
with the performance of the Executive's primary responsibilities as an executive
of the Company in accordance with this Agreement. It is expressly understood and
agreed that, to the extent that any such activities have been conducted by
Executive prior to the Effective Date, the continued conduct of such activities
(or the conduct of activities similar in nature and scope thereto) subsequent to
the Effective Date shall not thereafter be deemed to interfere with the
performance of the Executive's responsibilities to the Company.
2. Term of Employment. The "Employment Period" of Executive hereunder
shall commence on the Effective Date and shall continue thereafter through the
third (3rd) anniversary of the Effective Date; provided, however, that,
commencing on the date one year after the Effective Date, and on each annual
anniversary of such date (such date and each annual
-2-
anniversary thereof, the "Renewal Date"), unless previously terminated, the
Employment Period shall be automatically extended so as to terminate three (3)
years from such Renewal Date, unless, at least 60 days prior to the Renewal
Date, the Company shall give notice to the Executive that the Employment Period
shall not be so extended. The Company shall employ Executive in accordance with
this Agreement for the Employment Period, unless Executive's employment is
terminated sooner as provided herein.
3. Compensation and Benefits.
a. During the Employment Period, the Company shall pay Executive a
salary (the "Base Salary") at the rate herein provided, payable in
arrears in accordance with the Company's normal payroll payment
schedule for salaried employees, but not less often than monthly.
Such payments of Base Salary shall be subject to all withholding
with respect thereto as is required by applicable tax law, but shall
otherwise be paid without deduction, offset or counterclaim unless
Executive shall otherwise agree. The Base Salary shall initially be
a the rate of $225,000 per year, but may be increased from time to
time by the Company Board; and, upon the effectiveness of any such
increase, such increased rate of salary shall become the "Base
Salary" hereunder. In no event shall Executive's Base Salary in
effect and any time during the Employment Period be reduced without
Executive's consent.
b. After the Effective Date, but prior to March 31, 2005, the Company
and Executive shall develop and implement an incentive plan or plans
("Incentive Plan(s)"), pursuant to which annual cash awards
("Bonus") may be earned by and paid to eligible employees (including
Executive). In addition to Executive's Base Salary, Executive shall
be entitled to receive an annual bonus in cash in accordance with
such Incentive Plan(s), except that his Bonus for 2005 shall not be
less than $25,000 and shall be paid no later than the first
anniversary of the Effective Date, regardless of when (or whether)
such Incentive Plan(s) are put into effect.
c. In addition to the Base Salary and Bonus, Executive shall receive
such Additional Benefits as may be provided for him or to which he
may become entitled from time to time, and nothing in this Agreement
shall diminish any existing or future rights which Executive may
have as to any Additional Benefits; provided, that the Company shall
provide Executive, during the Employment Period, at least
substantially all Additional Benefits which it generally provides at
the time to its other management employees holding positions of
comparable responsibility.
d. The Company shall reimburse Executive for all reasonable
out-of-pocket expenses incurred by him in connection with his
employment in accordance with
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the Company's expense reimbursement policies and procedures from
time to time in effect and applicable to management employees. Such
reimbursement shall include (i) a car allowance of $750 per month;
(ii) a per diem reimbursement to Executive for each day he is in
Manistique, Michigan during the term of this Agreement to cover
Executive's living expenses, in the amount of at least One Hundred
Dollars ($100.00) per day, not to exceed One Thousand Dollars
($1,000.00) in any calendar month; subject, however, to upward
adjustment in the event Executive demonstrates his reasonable
ordinary living expenses, including housing and meals, exceeds such
per diem amount.
e. During the Employment Period, and unless and until the Company shall
provide Executive with an office and support staff in Oakland
County, Michigan for his principal office, the Company shall pay the
reasonable costs of the office in Oakland County and personal
secretarial and other assistance presently maintained by him.
4. Stock Options. As evidenced by a Stock Option Agreement to be entered
into between Executive and the Company (the "Option Agreement"), on the
Effective Date Executive shall be granted under the Company's 2000 Stock
Incentive Plan (the "Plan") so-called non-qualified stock options to purchase an
aggregate of 35% of the Option Pool of the Company at a price per share equal to
the price paid by Investors under the Stock Purchase Agreement and such other
terms and conditions specified in the Option Agreement. The Option Agreement
shall provide that if this Agreement is terminated other than pursuant to
Section 5.b. (death) or 5.d. (Cause), all such options (vested and unvested)
shall continue and may be exercised by Executive in accordance with their terms
as if this Agreement (and Executive's employment with the Company) had not
terminated. If this Agreement is terminated pursuant to Section 5.b. or 5.d.,
the options shall continue and shall be exercisable as provided in the Option
Agreement and the Plan.
5. Termination of Employment. Executive's employment hereunder shall
continue until the first to occur during the Employment Period of the following
(the "Termination Date"):
a. That date specified in a written notice of termination (i) given by
the Company to the Executive if such termination by the Company is
other than for Cause or
-4-
Disability, or (ii) given by the Executive if the Termination is for
Good Reason; or
b. The date of Executive's death; or
c. That date, after the occurrence of Executive's Disability, specified
in a written notice of termination given by the Company on or prior
to such date; or
d. Provided Cause actually exists, the date on which the Company gives
Executive written notice of termination for Cause; or
e. Following the Change of Control, either (i) the date on which
Executive gives the Company written notice of termination for Good
Reason; or (ii) the date on which the Company terminates Executive's
employment hereunder otherwise than (A) for Cause pursuant to clause
(d) or (B) by reason of Executive's Disability pursuant to clause
(c); or
f. After a Change in Control occurs, that date specified in a written
notice of termination without Good Reason given by Executive to the
Company, provided such notice is given within one year after the
occurrence of such Change in Control; or
g. Such other Termination Date to which the Company and Executive may
mutually agree in writing.
6. Termination Payments. Upon the Termination Date under the circumstances
described below, but in any event subject to Section 7 hereof, Executive shall
be entitled to receive from the Company, and the Company shall be obligated to
pay to Executive (or Executive's Beneficiary, as the case may be), the payments
(the "Termination Payments") described below (subject to adjustment as provided
in Section 7), in addition to all Base Salary, Bonus and expense reimbursement
theretofore accrued and otherwise payable to Executive, without deduction,
offset or counterclaim (other than such withholding with respect thereto as is
required by applicable law):
a. If the Termination Date is determined pursuant to Section 5(d)
(i.e., by the Company for Cause), then no Termination Payments shall
be payable.
b. If the Termination Date is determined pursuant to Section 5(a) (i.e.
by the Company without Cause and not due to Executive's Disability),
then for a period equal to three (3) years after the Termination
Date, the Company shall pay to Executive (or Executive's Beneficiary
if Executive shall die during such three-
-5-
year period), (i) at the times at which Executive's Base Salary
would have been payable had his employment continued during such
period amounts equal to the Base Salary in effect on the Termination
Date; and (ii) at the times Bonuses are to be paid under the
Incentive Plan(s) or otherwise, a Bonus equal to the highest Bonus
or Bonuses awarded to Executive during any fiscal year of the
Company, including the fiscal year in which the Termination Date
occurs. In addition, for the same three (3) year period plus the
Company shall continue benefits to Executive and Executive's family
at least equal to those described in Clauses (b) and (c) of the
definition of "Additional Benefits" and provided to Executive as of
the Termination Date.
c. If the Termination Date is determined pursuant to Section 5(b)
(i.e., by reason of Executive's death), then for a period of one (1)
year following the Termination Date the Company shall pay to
Executive's Beneficiary, at the times at which Executive's Base
Salary would have been payable had his employment continued during
such period, amounts equal to the Base Salary (as in effect on the
Termination Date) which would have been payable during such period
and shall continue for the same period benefits to Executive and
Executive's family at least equal to those described in Clauses (b)
and (c) of the definition of "Additional Benefits" and provided to
Executive as of the Termination Date.
d. If the Termination Date is determined pursuant to Section 5(c)
(i.e., by reason of Executive's Disability), then for a period of
two (2) years following the Termination Date the Company shall pay
to Executive (or, if Executive shall die during such two-year
period, then to Executive's Beneficiary), at the times at which
Executive's Base Salary would have been payable had the his
employment continued during such period, amounts equal to the Base
Salary (as in effect on the Termination Date) which would have been
payable during such period and shall continue for the same period
benefits to Executive and Executive's family at least equal to those
described in Clauses (b) and (c) of the definition of "Additional
Benefits" and provided to Executive as of the Termination Date. The
amount of Base Salary payable to Executive under this Section 6.d.
may be reduced by the amounts actually received by Executive under
any long term disability insurance policy obtained and paid for by
the Company.
e. If the Termination Date is determined pursuant to Section 5(e) (i.e.
following a Change of Control, by Executive for Good Reason or by
the Company without Cause and not due to Executive's Disability),
then within ten (10) days after the Termination Date the Company
shall pay to Executive in cash or equivalent a lump sum Termination
Payment equal to 300% of the aggregate of (i) Executive's annual
Base Salary in effect on the Termination Date; and (ii) the highest
Bonus or Bonuses awarded to Executive during any fiscal year of the
Company, including the fiscal year in which the Termination Date
occurs. In addition, for the period of three (3) years after the
Termination Date the Company shall continue benefits to Executive
and Executive's family equal to those described in Clause (b) and
(c) of the definition of "Additional Benefits" and provided to the
Executive as of the Termination Date.
-6-
f. If the Termination Date is determined pursuant to Section 5(f)
(i.e., by Executive after a Change of Control but without Good
Reason), then within ten (10) days after the Termination Date the
Company shall pay to Executive in cash or equivalent a lump sum
Termination Payment equal to 100% of the aggregate of (i)
Executive's annual Base Salary in effect on the Termination Date;
and (ii) the highest Bonus or Bonuses awarded to Executive during
any fiscal year of the Company, including the fiscal year in which
the Termination Date occurs.
g. If the Termination Date is determined pursuant to Section 5(g)
(i.e., by mutual written agreement), then the amount and time of
payment of any Termination Payment, if any, in connection therewith
shall be as determined by mutual written agreement of the Company
and Executive.
7. Adjustment of Termination Payments in Certain Events. Any provisions of
Section 6 hereof to the contrary notwithstanding, if a Change of Control shall
occur pursuant to which any Termination Payments to Executive are made, or if
and to the extent that any Termination Payments are "contingent on" (within the
meaning of such phrase as used in Section 280G(b)(i) of the Code) a Change of
Control, and in either case if the "aggregate present value" (as determined
pursuant to Section 280G of the Code) of the Termination Payments payable under
Section 6, plus any other payments required to be taken into account for
purposes of clause (ii) of Section 280G(b)(2)(A) of the Code, equals or exceeds
an amount equal to 300% of the Base Amount, then the amount of such Termination
Payments shall be reduced to that amount the aggregate present value of which,
when added to that of such other payments so required to be taken into account,
is equal to 295% of the Base Amount; provided, that no such reduction shall be
made unless, within 30 days after the Termination Date, the Company and
Executive shall have received an opinion of counsel having a favorable
reputation for expertise in matters of federal taxation (who may be counsel for
the company or for Executive) to the effect that in the absence of such
reduction the payment of the termination Payments as provided in Section 7 would
more likely than not constitute a "parachute payment" within the meaning of
Section 280G(b)(2) of the Code. Any required reduction of Termination Payments
payable
-7-
pursuant to Section 6(b), 6(c) or 6(d) shall be made by applying the amount of
the reduction to installments of such payments in inverse order of their due
dates.
8. Interest, Collection Costs, Etc.
(a) In the event that the Company shall fail to pay to executive (or
Executive's Beneficiary, as the case may be) any Base Salary or Termination
Payments when due, then (a) the Company shall pay interest on any such unpaid
amount at the Applicable Interest Rate, computed from the due date of such
payment to the date it is paid, and (b) the Company shall indemnify Executive
(or Executive's Beneficiary, as the case may be) for, and pay over to Executive
(or Executive's Beneficiary, as the case may be) on demand, all costs and
expenses (including reasonable attorneys' and consultants' fees and expenses and
court costs) incurred by Executive (or Executive's Beneficiary, as the case may
be) in connection with his efforts to collect such payments and enforce the
obligations of the Company hereunder.
(b) Without limiting the Company's obligations under Section 8(a), in the
event of any dispute or controversy (including as to interpretation,
enforceability, breach or default) between the Employee and the Company relating
to this Agreement, the Option Agreement, the employment relationship between the
Employee and the Company, or any other matter related hereto or thereto, the
Company shall pay and reimburse Employee, as and when incurred, all costs and
expenses (including reasonable attorneys' and consultants' fees and expenses and
all court costs) incurred by Employee in, or as a result of, the dispute or
controversy, regardless of the eventual outcome of the dispute or controversy.
(c) All ambiguities arising under this Agreement or the Option Agreement,
or the interpretation of this Agreement or the Option Agreement, shall be
resolved in favor of the Employee.
-8-
9. No Obligation to Mitigate. Executive shall not be required to mitigate
the benefits or amounts of any Termination payments provided for in this
Agreement by seeking other employment or otherwise, nor shall the amount of any
Termination Payment be reduced by any compensation earned by Executive as a
result of employment by another employer after the Termination Date, or
otherwise.
10. Certain Continuing Obligations of Employee. Throughout the period of
his employment hereunder and thereafter, Executive agrees to keep confidential
all trade secrets, customer lists, business strategies, financial and marketing
information, and other data concerning the private affairs of the Company and
the Bank or any of their affiliates, made known to or developed by Executive
during the course of his employment hereunder ("Confidential Information"), not
to use any Confidential Information or supply Confidential Information to others
other than in furtherance of the Company's or Bank's business, and to return to
the Company upon termination of his employment all copies, in whatever form, of
all Confidential Information and all other documents relating to the business of
the Company or any of its affiliates which may then be in the possession or
under the control of Employee.
At the request of the Company Board, whether or not made during the period
of his employment hereunder, Employee agrees to execute such confidentiality
agreements, assignments of intellectual property rights, and other documents as
hereafter may be reasonably determined by the Company Board to be appropriate to
carry out the purposes of this Section.
11. Noncompetition and Nonsolitiation.
(a) Executive agrees that, except as otherwise permitted or contemplated
by the terms hereof, he shall not engage in competitive activities (i) while
employed by the Company or the Bank; and (ii) if Executive's Termination Date is
determined under 5.a., 5.c. or 5.g. above or if
-9-
the Executive terminates his employment without Good Reason, pursuant to Section
5.f. above, during the Restricted Period. Executive shall be deemed to engage in
competitive activities if he shall, without the prior written consent of the
Company, (i) within a twenty-five (25) mile radius of the main office or any
branch office of the Bank, render services directly or indirectly, as an
employee, officer, director, consultant, advisor, partner or otherwise, for any
organization or enterprise which competes directly or indirectly with the
business of Company or any of its affiliates in providing financial products or
services (including, without limitation, banking or other services) then being
offered by the Company and such affiliates (and in the case of Executive's
Termination Date being determined under 5.a., 5.c. or 5.g., such business as of
the Termination Date) to consumers and businesses, or (ii) directly or
indirectly acquires any financial or beneficial interest in (except as provided
in the next sentence) any organization which conducts or is otherwise engaged in
a business or enterprise within a twenty-five (25) mile radius of the main
office or any branch office of the Bank, which competes directly or indirectly
with the business of the Company or the Bank or any of their affiliates in
providing financial products or services (including, without limitation,
banking, insurance or securities products or services) to consumers and
businesses. Notwithstanding the preceding sentence, Employee shall not be
prohibited from owning less than 5 percent of any publicly traded corporation
whether or not such corporation is in competition with the Company. For purposes
hereof, the term "Restricted Period" shall equal the period during which
payments in full are actually made to Executive pursuant to Section 6.b., 6.d.
or 6.g. above and in the case of a termination by the Executive without Good
Reason pursuant to section 5.f. above, one year from the effective date of the
termination.
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12. Assignment, Delegation and Assumption.
a. Executive may assign his rights hereunder to Executive's
Beneficiary effective upon Executive's death.
b. The Company may assign its rights and delegate its duties
hereunder to a Person succeeding to all or substantially all
of the Company's business and assets (whether by operation of
law or otherwise), provided that such successor at the time of
such succession assumes by operation of law or by express
agreement all of the Company's obligations and duties
hereunder; and the Company shall so assign its rights and
delegate its duties, and cause such successor to so assume all
of its duties and obligations hereunder, upon any transfer by
the Company of all or substantially all of its business and
assets to another Person (whether by operation of law or
otherwise) during the Employment Period, as it may be
extended. Notwithstanding such assignment, delegation and
assumption, the Company shall not be released from its primary
liability for its obligations hereunder without Executive's
written consent.
c. Except as otherwise expressly provided above, neither party
may assign its rights or delegate its duties hereunder without
the written consent of the other party.
13. Miscellaneous.
a. Notices. Any notice to be given to a party in connection with
this Agreement shall be in writing addressed to such party at
such party's "Notice Address" set forth below such party's
signature hereto, which Notice Address may be changed from
time to time by such party by notice thereof to the other
party as herein provided. Any such notice shall be deemed
effectively given to a party when mailed to such party by
first class registered or certified United States Mail,
postage prepaid, addressed to such party at such party's
Notice Address, or, if earlier, when actually delivered to
such party's Notice Address directed to such party.
b. Integration. This Agreement constitutes the final, complete
and exclusive statement of the agreement between the parties
hereto as to the subject matter hereof, and all other prior or
contemporaneous oral or written agreements of the parties
hereto with respect to the subject matter hereof are merged
herein and superseded hereby.
c. Amendment. This Agreement may be modified or amended only by
express agreement of the parties in writing, assenting to such
modification or amendment.
d. Waivers. No waiver by any party of any provision hereof or
part thereof at any time shall constitute or evidence a waiver
by such party of any other provision or other part of such
provision or of the same provision or part at any other time.
e. Severability. The parties have entered into this Agreement for
the purposes herein expressed, with the intention that this
Agreement be given full effect to carry out such purposes.
Therefore, consistent with the effectuation of the
-11-
purposes hereof, the invalidity or unenforceability of any
provision hereof or part thereof shall not affect the validity
or enforceability of any other provision hereof or an other
part of such provision.
f. Benefits and Binding Effect. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective heirs, successors, personal representatives and
permitted assigns.
g. Governing Law. The validity, construction and effect of this
Agreement shall be governed by the substantive laws of the
State of Michigan.
h. Headings and Captions. The headings and captions of the
Sections and subsections of this Agreement are for convenience
of reference only, and shall not affect the construction
hereof.
i. Counterparts. This Agreement may be executed by the parties in
multiple counterparts, each of which shall be deemed an
original.
j. Regulatory Approval. The Company and Executive agree to use
their respective best efforts to obtain such approval of bank
regulatory authorities as may be required for the payment of
any Termination Payments as shall be or become subject to the
prior approval of such regulatory authorities in accordance
with the provisions of any statute or regulation applicable to
the Company or any affiliate thereof at the time payment is to
be made in accordance with this Agreement.
14. Definitions. As used in this Agreement, the following terms
have the following respective meanings:
"Additional Benefits" means (a) participations in bonus and incentive
compensation plans or pools, stock option, bonus, award or purchase plans,
retirement plans, and other employee benefit plans of the Company; (b) life,
health, medical, dental, accident, and other personal insurance coverage
provided by the Company for employees or their dependents; (c) directors' and
officers' liability insurance coverage provided by the Company and charter or
bylaw provisions or contracts providing for indemnification of corporate
personnel or elimination or limitation of their liabilities as such; (d) club
memberships, use of the Company automobiles, use of other Company property and
facilities and other perquisites of employment with the Company; (e) paid
vacation, leave or holidays; and (f) any and all other compensation, benefits
and perquisites of employment with the Company other than Base Salary.
"Applicable Interest Rate" means (i) if a Change of Control shall occur
pursuant to which any payments to Executive are made, or if payment of the
amount upon which interest at such rate is computed is contingent on a Change of
Control, the rate per annum equal to 120% of the "applicable federal rate"
(determined under Section 1274(d) of the Code), compounded semiannually, or (ii)
if no Change of Control shall occur and payment of the amount upon which
interest at such rate is computed is not contingent on a Change of Control, the
greater of the rate described in clause (i) of this definition or 4% plus the
rate of interest per annum announced by
-12-
Comerica Bank (or a successor to substantially all of the commercial banking
business of such bank) as its prime rate as from time to time in effect, but
(iii) in any event, not in excess of the highest rate of interest permitted by
applicable law.
"Bank" means North Country Bank and Trust, a Michigan banking corporation
and a wholly-owned subsidiary of the Company.
"Base Amount" means Executive's "base amount" as defined in Section
280G(b)(3)(A) of the Code.
"Base Salary" means the amount per annum so designated as described in
Section 2(a) of this Agreement.
"Cause" means: (i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company (other than any
such failure resulting from incapacity due to physical or mental illness or
following the Executive's delivery of a notice of termination for Good Reason),
after a written demand for substantial performance is delivered to the Executive
by the Company Board that specifically identifies the manner in which the
Company Board believes that the Executive has not substantially performed the
Executive's duties, or (ii) the willful engaging by the Executive in illegal
conduct or gross misconduct that is materially and demonstrably injurious to the
Company. No act, or failure to act, on the part of the Executive shall be
considered "willful" unless it is done, or omitted to be done, by the Executive
in bad faith or without reasonable belief that the Executive's action or
omission was in the best interests of the Company. Any act, or failure to act,
based upon authority given pursuant to a resolution duly adopted by the Company
Board or a senior officer of the Company or based upon the advice of counsel for
the Company shall be conclusively presumed to be done, or omitted to be done, by
the Executive in good faith and in the best interests of the Company. The
cessation of employment of the Executive shall not be deemed to be for Cause
unless and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Company Board (excluding the Executive) at a
meeting of the Board called and held for such purpose (after reasonable notice
is provided to the Executive and the Executive is given an opportunity, together
with counsel for the Executive, to be heard before the Company Board), finding
that, in the good faith opinion of the Company Board, the Executive is guilty of
the conduct described and specifying the particulars thereof in detail.
"Change of Control" shall occur if:
i. Any person or group (as such terms are used in connection with
Sections 13(d) and 14(d) of the Exchange Act) becomes the
"beneficial owner" (as defined in Rule 13(d)(3) and 13(d)(5) under
the Exchange Act), directly or indirectly, of securities of the
Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities;
ii. A merger, consolidation, sale of assets, reorganization, or proxy
contest is consummated and, as a consequence of which, members of
the Company Board in
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office immediately prior to such transaction or event constitute
less than a majority of the Board thereafter;
iii. During any period of 24 consecutive months, individuals who at the
beginning of such period constitute the Company Board (including for
this purpose any new director whose election or nomination for
election by the Company's stockholders was approved by a vote of at
least one-half of the directors then still in office who were
directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Company Board; or
iv. A merger, consolidation or reorganization is consummated with any
other corporation pursuant to which the shareholders of the Company
immediately prior to the merger, consolidation or reorganization do
not immediately thereafter directly or indirectly own more than
fifty percent (50%) of the combined voting power of the voting
securities entitled to vote in the election of directors of the
merged, consolidated or reorganized entity.
Notwithstanding the foregoing, no trust department or designated fiduciary
or other trustee of such trust department of the Company or a subsidiary
of the Company, or other similar fiduciary capacity of the Company with
direct voting control of the stock shall be treated as a person or group
within the meaning of subsection (i)(a) hereof. Further, no
profit-sharing, employee stock ownership, employee stock purchase and
savings, employee pension, or other employee benefit plan of the Company
or any of its subsidiaries, and no trustee of any such plan in its
capacity as such trustee, shall be treated as a person or group within the
meaning of subsection (i)(a) hereof.
"Code" means the Internal Revenue Code of 1986, as amended, and includes
any successor federal tax code. Any reference herein to a particular provision
of the Code shall include the valid regulations adopted thereunder and shall
also include any similar successor provisions or regulations hereafter in
effect, even though they may not bear the same designations or section numbers
as now in effect.
"Company" includes the successors and assigns of the Company that become
bound by this Agreement.
"Disability" means the inability of Executive, due to the condition of his
physical, mental or emotional health, to regularly and satisfactorily perform
the duties of his employment hereunder for a continuous period in excess of 180
days in a period of twelve (12) months. In the event that the existence of
Executive's Disability shall be disputed by either party, the determination by
two (2) physicians duly licensed to practice medicine in Michigan that such
Disability exists shall be necessary to establish such Disability, unless
Executive refuses to submit to appropriate examinations at the request of the
Company Board, which case the determination of the Company Board in good faith
and after the requisite period of Disability shall be conclusive as to whether
such Disability exists. If, after any period of Disability, Executive shall
resume the regular and satisfactory performance of the duties of his employment
-14-
hereunder for a continuous period of at least three (3) months, then such prior
Disability shall not thereafter be the basis for the establishment of a
Termination Date by reason of Disability.
"Executive's Beneficiary" means, at any time, the Person or Persons most
recently designated as such in writing by Executive and given to the Company, in
such form as the Company Board may reasonably prescribe if it so prescribes such
a form, or, in the absence of any such designation, Executive's estate.
"Good Reason" means any of the following occurrences without the written
consent of Executive: (a) the assignment to Executive of any duties inconsistent
with his duties described in Section 1(a) hereof or any removal of Executive
from or any failure to reelect Executive to his positions described in Section
1(a) hereof, except in connection with promotions to higher office; provided,
that the suspension of Executive from the duties of his employment and any
positions held by him during the pendency of any criminal proceedings against
Executive as to which a conviction would constitute "Cause" shall not be deemed
"Good Reason" so long as during the period of such suspension the Company
continues to pay the Base Salary and provide the Additional Benefits to which
Executive is entitled; (b) the material reduction at any time of the Additional
Benefits theretofore provided to Executive; provided, that (i) reductions in the
actual economic value of Additional Benefits in accordance with the objective
terms of such Additional Benefits (e.g., changes in the amounts of bonus
payments from time to time in accordance with the objective terms of a bonus
formula) shall not be deemed a reduction of such Additional Benefits for this
purpose, and (ii) the replacement of Additional Benefits with other new
Additional Benefits having substantially equivalent economic value to Executive
shall not be deemed a reduction of Additional Benefits for this purpose; (c) the
relocation of Executive's office to anywhere other than a location within 25
miles of Executive's office provided for herein or the Company requiring
Executive to be based anywhere other than within 25 miles of Executive's office
on the date hereof, except for a required travel on the Company's business to an
extent consistent with Executive's business travel obligations; or (d) the
failure of the Company to pay Executive the Base Salary and provide the
Additional Benefits as and when required by Section 2 hereof; (e) any other
failure of the Company to perform its obligations to Executive hereunder if such
failure continues uncured for ten (10) days after written notice thereof,
specifying the nature of such failure and requesting that it be cured, is given
by Executive to the Company; or (f) the failure of the Company to obtain the
assumption of this Agreement by any successor of the Company as provided in
Section 12(b) hereof.
"Option Pool" means the total number of issued and outstanding shares of
common stock of the Company following the consummation of the transactions
provided for in, and contemplated by, the Stock Purchase Agreement multiplied by
..125.
"Person" means an individual, corporation, partnership or other entity, or
a group of Persons acting in concert.
"Termination Date" means the date so designated in Section 5 hereof.
"Termination Payments" means the payments so designated in Section 6
hereof.
-15-
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NORTH COUNTRY FINANCIAL CORPORATION
By ______________________________________
Its ______________________________
_________________________________________
Paul D. Tobias
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Schedule 5-3
Employment Agreement - Bess
See attached
EMPLOYMENT AGREEMENT
(C. JAMES BESS)
This Agreement, dated as of the _____ day of August, 2004, by and among
NORTH COUNTRY FINANCIAL CORPORATION, a Michigan corporation (the "Company"), and
C. JAMES BESS ("Employee")
W I T N E S S E T H:
WHEREAS, the Company desires to engage the services of Employee, and
Employee is willing to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
undertakings set forth herein the parties hereto agree as follows:
1. Employment and Duties. In accordance with actions taken and
authorized by the Board of Directors of the Company (the "Company Board"),
effective upon the Closing of the transactions provided for in the Stock
Purchase Agreement dated August __, 2004 between the Company and NCFC
Recapitalization, LLC (the "Effective Date"), Employee shall become employed and
appointed as the President and Chief Operating Officer of the Company's
wholly-owned subsidiary, North Country Bank and Trust (the "Bank"), and shall
have the duties and responsibilities commensurate with such titles and offices,
including, without limitation, all such duties and responsibilities as now are
or hereafter may be set forth with respect to such offices in the by-laws of the
Bank. During the period of his employment hereunder, Employee also shall serve
as an officer of such other affiliates of the Bank or the Company and in such
other capacities as he may be requested by the Company Board and shall assume
such additional duties and responsibilities as from time to time may be assigned
to him by the Company Board, all without additional compensation therefor.
Throughout the period of his employment
hereunder, Employee shall devote his business time, attention, and energy on a
full-time basis exclusively to the affairs of the Bank and the Company and its
affiliates.
2. Term of Employment. The employment of Employee hereunder shall
commence on the Effective Date and shall continue thereafter through the end of
the eighteenth (18th) month following the Effective Date (the "Employment
Period"), unless earlier terminated as hereinafter provided. After the initial
Employment Period, the term of this Agreement shall be automatically extended
for additional one-year periods unless written notice is given by one party to
the other of his or its intention to terminate Employee's employment hereunder
at the end of the Employment Period or any extended term, as the case may be.
3. Cash Compensation. As full cash compensation for all services to be
performed by Employee hereunder, the Company shall pay to Employee the
following:
(a) salary at the rate of $250,000 per year (to be reviewed
annually by the Company Board), payable at the intervals at which other
executive officers of the Company and the Bank are paid;
(b) an additional incentive bonus (if earned) payable after fiscal
year-end in accordance with the Company's or Bank's policy or plan.
4. Certain Fringe Benefits. During the period of his employment
hereunder, the Company will provide a per diem reimbursement to Employee for
each day he is in Manistique, Michigan during the term of this Agreement to
cover Employee's living expenses, in the amount of at least One Hundred Dollars
($100.00) per day, not to exceed One Thousand Dollars ($1,000.00) in any
calendar month, subject however, to upward adjustment with the consent of the
Company on which shall not unreasonably be withheld, in the event the Employee
demonstrates his reasonable ordinary living expenses, including housing and
meals, exceeds
-2-
such per diem amount. In addition, the Company will provide Employee with the
use of the 2004 GMC Denali presently used by him.
5. Other Employee Benefits. During the period of his employment
hereunder, Employee also shall be entitled to participate in such Company
employee benefit plans as from time to time are maintained, sponsored, or made
available to the executive employees of the Company and the Bank generally, in
each case on the same terms and subject to the same conditions and limitations
generally applicable to other executive officers with respect to participation
therein. Employee shall be entitled to six weeks of vacation per year, for a
total of nine weeks over the Employment Period. Vacation time not taken during
an applicable period will terminate and will not be compensated for.
6. Certain Expenses. The Company shall pay or reimburse Employee for
the reasonable travel, entertainment and other incidental expenses (including
the cost of business publications and professional associations) incurred on
business of the Company or the Bank with the approval of the Chairman of the
Company, and in accordance with the Company's practices as in effect during the
term of this Agreement as applied to executive officers.
7. Certain Continuing Obligations of Employee. Throughout the period of
his employment hereunder and thereafter, Employee agrees to keep confidential
all trade secrets, customer lists, business strategies, financial and marketing
information, and other data concerning the private affairs of the Company and
the Bank or any of their affiliates, made known to or developed by Employee
during the course of his employment hereunder ("Confidential Information"), not
to use any Confidential Information or supply Confidential Information to others
other than in furtherance of the Company's or Bank's business, and to return to
the Company upon termination of his employment all copies, in whatever form, of
all
-3-
Confidential Information and all other documents relating to the business of the
Company or any of its affiliates which may then be in the possession or under
the control of Employee.
At the request of the Company Board, whether or not made during the period
of his employment hereunder, Employee agrees to execute such confidentiality
agreements, assignments of intellectual property rights, and other documents as
hereafter may be reasonably determined by the Company Board to be appropriate to
carry out the purposes of this Section.
8. Termination of Employment; Effect.
(a) Employee's employment hereunder will be terminated in any of
the following ways:
(i) Immediately upon the death of the Employee;
(ii) Immediately upon the Employee becoming disabled due to
his physical or mental condition to regularly and satisfactorily
perform his duties hereunder (as determined by the Company Board)
for a period of three (3) continuous months;
(iii) By either the Employee or the Company giving notice of
his or its intention not to extend this Agreement's term as provided
in Section 2 above, in which case Employee's employment will
terminate at the end of the Employment Period or extended term, as
the case may be; or
(iv) By either the Employee or the Company, without or with
Cause (as hereinafter defined), by 30 days' prior written notice to
the other, effective as of the date specified in such notice.
(b) Upon the termination of Employee's employment in any of the
ways provided in subsection (a), then this Agreement and all rights and
obligations of
-4-
Employee and the Company hereunder (as opposed to rights and obligations
under any Company employee benefit plan in which Employee participated)
shall terminate and cease immediately, except for (i) Employee's rights to
the payments provided in Section 9 below; and (ii) the rights and
obligations set forth in Section 7 above and Section 12 below.
9. Payments On Termination. Employee shall be entitled to the following
payments and benefits upon termination of his employment:
(a) If Employee's employment is terminated under Section 8(a)(i)
above (by reason of death), or if Employee's employment is terminated by
Employee under Section 8(a)(iii) above (no extension), or if Employee's
employment is terminated (either voluntarily by Employee or for Cause by
the Company) under Section 8(a)(iv) above, then Employee shall be entitled
to the cash compensation under Section 3(a) above, and the benefits to
which Employee is entitled under Sections 4 and 5 above, through the date
of termination of employment.
(b) If Employee's employment is terminated under Section 8(a)(ii)
above (disability), or by the Company, either without Cause under Section
8(a)(iv) above or pursuant to Section 10(a)(iii) above (no extension),
Employee shall be entitled to the cash compensation payable under Section
3(a) above, for a period of one year following the effectiveness of such
termination of employment; provided, however, that in the event
termination of employment occurs during the initial Employment Period,
such payments and benefits shall continue for the shorter of one year
following termination, or the balance of the initial Employment Period.
10. Definition. For purposes of this Agreement, "Cause" means any of the
following:
-5-
(a) Material breach of any of the terms of this Agreement or of
the Company's or Bank's policies and procedures applicable to employees
and/or directors;
(b) Conviction of or plea of guilty or nolo contendere to a crime
involving moral turpitude or involving any violation of securities or
banking law or regulation, or the issuance of any court or administrative
order enjoining or prohibiting Employee from violating any such law or
regulation;
(c) Repeated or habitual intoxication with alcohol or drugs while
on the premises of the Company or the Bank or any of their affiliates, or
during the performance by Employee of any of his duties hereunder;
(d) Embezzlement of any property belonging or entrusted to the
Company or the Bank, or any of their affiliates;
(e) Willful misconduct or gross neglect of duties, or failure to
act with respect to duties or actions previously communicated to Employee
in writing by the Company Board;
(f) Any other act or omission of kind or nature similar to any of
the foregoing, or determined in good faith by the Company Board to be of
comparable seriousness, which in the good faith judgment of the Company
Board may have adversely affected or may in the future adversely affect
the Company, the Bank or any of their affiliates, or has irreparably
damaged Employee's continued ability to function effectively in any of the
capacities contemplated by this Agreement.
11. Integration; Amendment. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof and thereof, and together
supersede and replace in their entirety any prior agreements or understandings
concerning such subject matter, including
-6-
the Employment Agreement dated August 1, 2003 between the Company and Employee.
This Agreement may not be waived, changed, modified, extended, or discharged
orally, but only by agreement in writing signed in the case of the Company by
the Chairman or Vice Chairman of the Company Board.
12. Arbitration. Any controversy, dispute, or claim arising out of or
relating to Employee's employment or to this Agreement or breach thereof shall
be settled by arbitration in accordance with the commercial rules of the
American Arbitration Association at its Southfield, Michigan offices. Judgment
upon any award may be entered in any circuit court or other court having
jurisdiction thereof, without notice to the opposite party or parties. Anything
contained herein to the contrary notwithstanding, this agreement to arbitrate
shall not be deemed to be a waiver of the Company's right to secure equitable
relief including injunction (whether as part of or separate from the arbitration
proceeding) if and when otherwise appropriate.
13. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan applicable to contracts made
and to be performed within such State.
14. Regulatory Approval. The Company and Employee agree to use their
respective best efforts to obtain such approval of bank regulatory authorities
as may be required for the payment of any termination payments as shall be or
become subject to the prior approval of such regulatory authorities in
accordance with the provisions of any statute or regulation applicable to the
Company or any affiliate thereof at the time payment is to be made in accordance
with this Agreement.
-7-
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NORTH COUNTRY FINANCIAL CORPORATION
By ______________________________________
Its ______________________________
_________________________________________
C. James Bess
-8-
Schedule 6
RESERVED
Schedule 7
Additional Indemnification and Other Covenants of North Country
Section 1. Indemnification.
(a) Indemnification of NCFC Recapitalization. North Country agrees to
indemnify and hold harmless NCFC Recapitalization and each person, if any, who
controls NCFC Recapitalization within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
(i) against any and all Damages whatsoever, as incurred, arising
out of any untrue statement or alleged untrue statement of a material fact
contained in the Offering Documents, the Proxy Statement, any related
materials or this Agreement (or any amendment to any of them) or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all Damages whatsoever, as incurred, to the
extent of the aggregate amount paid in settlement of any litigation, or
any investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, provided that (subject to subsection (c) below) any such
settlement is effected with the written consent of North Country; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by NCFC Recapitalization),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission;
provided, however, that this indemnity provision shall not apply to any Damages
or expense to the extent arising out of any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with written information referred to in the last sentence of Section 7.13(b).
(b) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. Counsel to the indemnified parties shall be selected by NCFC
Recapitalization. An indemnifying party may participate at its own expense in
the defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. In no event shall the indemnifying
parties be liable for
7-1
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Schedule 7 (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent: (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim; and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party.
(c) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
this Section effected without its written consent if: (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request; (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into; and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
Section 2. Contribution. If the indemnification provided for in Section 1 of
this schedule 7 is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any Damages referred to therein,
then each indemnifying party shall contribute to the aggregate amount of such
Damages incurred by such indemnified party, as incurred: (i) in such proportion
as is appropriate to reflect the relative benefits received by North Country on
the one hand and NCFC Recapitalization on the other hand from the Offering of
the North Country Shares pursuant to the Offering Documents and this Agreement;
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above, but also the relative fault of North
Country on the one hand and of NCFC Recapitalization on the other hand in
connection with the statements or omissions which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by North Country on the one hand and NCFC
Recapitalization on the other hand in connection with the Offering of the North
Country Shares pursuant to the Offering Documents and this Agreement shall be
deemed to be in the same respective proportion as the total net proceeds from
the Offering (before deducting expenses) received by North Country and the
reimbursement of expenses received by NCFC as set forth in this Agreement.
The relative fault of North Country on the one hand and NCFC
Recapitalization on the other hand shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by North Country or by NCFC Recapitalization and the
parties'
7-2
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
North Country and NCFC Recapitalization agree that it would not be just
and equitable if contribution pursuant to this Section 2 of this schedule 7 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above in this
Section. The aggregate amount of Damages incurred by an indemnified party and
referred to above in this Section shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section, NCFC Recapitalization
shall not be required to contribute any amount in excess of the total expense
reimbursement received by NCFC Recapitalization as set forth herein.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section, each person, if any, who controls NCFC
Recapitalization within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as NCFC
Recapitalization, and each director of North Country and each executive officer
of North Country shall have the same rights to contribution as North Country.
7-3
FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment") is
executed and delivered as of September 28, 2004, by and between North Country
Financial Corporation, a Michigan corporation registered as a bank holding
company ("North Country"), and NCFC Recapitalization, LLC, a Michigan limited
liability company ("NCFC Recapitalization"), individually and on behalf of the
"Investors" that subscribe for shares of North Country common stock and become a
party to the Agreement as contemplated in Section 2.1 of the Agreement.
Capitalized terms used in this Amendment and not otherwise defined have the
respective meanings in the Agreement.
WITNESSETH:
WHEREAS, the parties hereto executed and delivered a Stock Purchase
Agreement dated as of August 10, 2004 (the "Original Agreement"); and
WHEREAS, the parties hereto desire to amend the Original Agreement as set
forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. The preamble of the Original Agreement is hereby amended to delete
"(the Agreement")" and Schedule 1 of the Agreement is hereby amended to add a
definition of "Agreement' as follows:
"Agreement" means the Stock Purchase Agreement dated as of August
10, 2004 by and between the parties hereto, as amended by the First
Amendment, and as the same may be further amended from time to time
pursuant to its terms.
2. Section 3.1(b)(iii)(F) of the Original Agreement is hereby amended
to read in its entirety as follows:
(F) take any action (including any action by its Board of Directors (or
any committee thereof) to adjust in any way either the number of shares of
North Country covered by any outstanding North Country Stock Options, or
the exercise price of any of the options, whether pursuant to the terms of
such Plans or otherwise (except only as contemplated by Section 29 of Part
I of Schedule 3).
3. Section 3.2(b) of the Original Agreement is hereby amended to add
the following to the end of the Section:
NCFC Recapitalization shall use its Best Efforts to provide to North
Country as soon as reasonably practicable the names of the new directors,
their backgrounds and other information required to be furnished by North
Country to its shareholders in compliance with Rule 14f-1 under the
Securities Exchange Act, if applicable.
4. The Original Agreement is hereby amended to add a new Section 3.8
which reads in its entirety as follows:
3.8 Reverse Stock Split. North Country shall take all required
action so that the issued and outstanding shares of North Country common
stock shall be changed into a fewer number of shares on a 1 for 20 basis,
effective not later than immediately prior to the Closing. The changes
described in this Section 3.8 are referred to as the "Reverse Stock
Split". No fractional shares shall be issued as a result of the Reverse
Stock Split. Instead, in the event that the number of shares into which
the shares held by a particular shareholder are to be changed would result
in a fractional share, the number of shares shall instead be rounded
upwards to the next whole share. Effective at the time that the Reverse
Stock Split shall become effective under applicable law, all certificates
evidencing shares of North Country common stock shall automatically, and
for all purposes, represent the number of shares into which the shares
shall have been changed pursuant to the Reverse Stock Split. After the
Reverse Stock Split shall become effective, not more than 350,958 shares
of common stock of North Country will be issued and outstanding (subject
to adjustment to account for fractional shares as contemplated by this
Section 3.8 and the issuance of shares of North Country common stock upon
the exercise prior to the Closing of outstanding North Country Stock
Options).
5. Section 4.5 is hereby amended to add a new subsection (i) which
reads in its entirety as follows:
(i) In the event and effective the time that the Pre-Closing
Outstanding Shares are reduced as the result of the Reverse Stock Split
contemplated by Section 3.8 of this Agreement, then the number
"39,775,195" appearing in two places in Section 4.5(b) shall be changed to
1,988,762 (subject to adjustment for fractional shares described below).
In the event that for any reason the Pre-Closing Outstanding Shares shall
exceed 350,958, the minimum number of shares to be issued shall be
increased to the number (rounded upward to the nearest whole share) equal
to (a) the Pre-Closing Outstanding Shares divided by 0.15 less (b) the
Pre-Closing Outstanding Shares.
6. Section 4.6(i) of the Original Agreement is hereby amended to change
the reference therein to Section 4.5(g) to Section 4.5(f).
7. Section 4.7 of the Original Agreement is hereby amended to change
the reference therein to Article 8 to Article 7.
8. Section 5.1(g) is hereby amended to add the following sentences to
the end of the Section:
When the Reverse Stock Split is approved by the shareholders of North
Country as contemplated by Section 3.4(a), the Reverse Stock Split shall
have been duly authorized, and the Reverse Stock Split shall become
effective at the time that an appropriate amendment to the Articles of
Incorporation of North Country is filed with the Michigan Department of
Labor & Economic Growth as provided under the Michigan Business
Corporation Act. When the Reverse Stock Split becomes effective prior to
the Closing as
contemplated by Section 3.8, 350,958 shares of common stock of North
Country will be issued and outstanding (subject to adjustment to account
for fractional shares as contemplated by Section 3.8 and the issuance of
shares of North Country common stock pursuant to the exercise prior to the
Closing of North Country Stock Options) and no shares of common stock will
be held in treasury."
9. The definition of "Pre-Closing Equity Adjustments" in Schedule 1 is
hereby amended to change paragraph (a) of the definition to read as follows:
(a) Reduce stockholders' equity by the full amount of the
following, whether or not then due, accrued or incurred:
(i) the full amount by which all costs and expenses of North
Country and its Subsidiaries with respect to the transactions
contemplated by this Agreement, including investment banking, legal
and accounting fees and expenses, exceed $75,000; and
(ii) the full amount of the settlement or other resolution of
the Identified Claims and any other litigation or claims, including
all attorneys fees and any contingent or deferred amounts; and
(iii) $100,000, representing a portion of additional expenses
incurred by NCFC Recapitalization and the Placement Agents in
connection with the transactions contemplated by this Agreement.
10. The definition of "Pre-Closing Outstanding Shares" in Schedule 1 is
hereby amended to add the following sentence to the end of the definition:
Based on the representation and warranty contained in Section 5.1(g), the
Pre-Closing Outstanding Shares as of the time the Reverse Stock Split
shall become effective will be 350,958 shares (subject to adjustment for
fractional shares as described in Section 3.8 and the issuance of shares
of North Country common stock pursuant to the exercise prior to the
Closing of North County Stock Options).
11. The definition of "Shareholder Approval Items" in Schedule 1 is
hereby amended to read in its entirety as follows:
"Shareholder Approval Items" means and includes approval of (a) the
issuance of the North Country Shares to the Investors as contemplated by
this Agreement, (b) an amendment to the Articles of Incorporation of North
Country to make the Reverse Stock Split contemplated by Section 3.8
effective, (c) an amendment to the Articles of Incorporation of North
Country to change its name to "Mackinac Financial Corporation", (d) the
amendment of North Country's 2000 Stock Incentive Plan to increase the
authorized number of shares of common stock of North Country under the
plan, to permit the awards to be made as contemplated in certain of the
Employment Agreements to be priced at a per share price equal to the price
per share in the Offering (see Section 15 of Part 1 of Schedule 3), to
permit such options to continue to vest and be exercisable notwithstanding
termination of the Employment Agreements, and otherwise to permit
such options to be awarded under the Plan, and (e) any other action by the
shareholders of North Country required under applicable law or the NASDAQ
Rules, or reasonably requested by NCFC Recapitalization, in connection
with this Agreement or any of the transactions contemplated by this
Agreement.
12. The "Total Number of Shares" section of Schedule 2 is hereby amended
to read in its entirety as follows:
Not less than 39,775,195 shares of common stock of North Country except
that if the Reverse Stock Split contemplated by Section 3.8 becomes
effective the number of shares shall not be less than 1,988,762 shares
(subject to adjustment as contemplated by Section 4.5). The precise number
of shares of North Country to be issued will be determined by Section 4.5.
Minimum Closing Date Equity of $3 million. See Schedule 3.
13. The "Amendments to North Country Stock Option Plans" section of
Schedule 2 is hereby amended to read in its entirety as follows:
The North Country Stock Option Plans to be amended to increase the number
of shares that may be subject to awards made at or after the Closing under
the plans to 12.5% of the total number of shares to be outstanding after
the Closing Date. The number of shares to be subject to each plan shall be
determined prior to Closing by NCFC Recapitalization, provided that there
shall be reserved under each plan a sufficient number of shares to be
available for issuance upon the exercise of outstanding North Country
Stock Options under the plan. The 2000 Stock Incentive Plan will be
further amended to permit the options to be awarded as contemplated under
certain of the Employment Agreements (see Schedule 5) to be priced at the
per share price in the Offering, to continue to vest and be exercisable
notwithstanding termination of the Employment Agreements as contemplated
in the Employment Agreements and otherwise to permit such options to be
awarded under the Plan.
14. The "Expenses" section of Schedule 2 is hereby amended to delete the
third sentence.
15. Section 9 of Part I of Schedule 3 is hereby amended to read in its
entirety as follows:
9. Effective upon the Closing, the Board of Directors of North
Country shall have been duly reconstituted as specified by NCFC
Recapitalization (including that all directors other than Mr. Bess and Mr.
Lindroth shall have duly resigned and new directors designated by NCFC
Recapitalization shall have been duly appointed) and North Country shall
have taken all required action to duly reconstitute the Boards of
Directors of its Subsidiaries as specified by NCFC Recapitalization. Mr.
Bess and Mr. Lindroth, two (2) current directors of North Country, shall
continue as directors of North Country following the Closing. North
Country shall have taken all required action so that the new directors
shall take office as directors effective at the Closing.
16. Part I of Schedule 3 is hereby amended to add new Sections 28 and 29
which read in their entirety as follows:
28. The Reverse Stock Split contemplated by Section 3.8 shall have
become effective.
29. All required actions shall have been taken so that the numbers
of shares of common stock of North Country subject to outstanding North
Country Stock Options shall have been duly adjusted downward (divided by
20), and the exercise prices shall have been duly adjusted upwards
(multiplied by 20), proportionately in view of the Reverse Stock Split.
17. As amended by this Amendment, the Original Agreement shall remain in
full force and effect.
18. This Amendment may be executed in multiple counterparts, each of
which shall be deemed an original and all of which shall constitute one
agreement.
19. Facsimile signatures to this Amendment shall be considered originals
hereof, with any party executing this Amendment by facsimile signature agreeing
to provide promptly to the other parties an original signature evidencing the
same.
20. This Amendment shall be construed and enforced in accordance with
and governed by the laws of the State of Michigan (without regard to conflicts
of law principles).
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
NORTH COUNTRY FINANCIAL CORPORATION
By: /s/ C. James Bess
-------------------------------------
Name: C. James Bess
Title: President and Chief Executive
Officer
NCFC RECAPITALIZATION, LLC
By: /s/ Eliot R. Stark
-------------------------------------
Name: Eliot R. Stark
Title: A Member
and
By: /s/ Paul D. Tobias
-------------------------------------
Name: Paul D. Tobias
Title: A Member
APPENDIX B
FAIRNESS OPINION
See attached.
August 9, 2004
PERSONAL & CONFIDENTIAL
Board of Directors
North Country Financial Corporation
130 South Cedar Street
Manistique, MI 49854
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to North Country Financial Corporation ("North Country") and its
shareholders ("Shareholders") of the terms of the Stock Purchase Agreement dated
as of August 10, 2004 (the "Agreement") and related agreements between North
Country and NCFC Recapitalization, LLC ("NCFC") to recapitalize North Country
(the "Recapitalization"). Austin Associates, LLC ("Austin Associates") was a
party to the negotiations leading to the execution of the Agreement.
The terms of the Agreement and Recapitalization provide for the following:
(i) North Country will issue, in a private placement, at least
39,775,195 common shares which represents no less than 85% of the
pro forma outstanding common shares of North Country in exchange for
gross proceeds of $30 million from NCFC and Investors; net proceeds
after placement fees and other offering costs are estimated at $27.7
million; Shareholders of North Country will not be provided a right
to purchase their pro rata interest in the offering;
(ii) The precise number of shares to be issued by North Country will be
determined by Section 4.5 of the Agreement and considers the
adjusted equity capital of North Country as of the month-end prior
to closing and the net proceeds of the offering, as defined in the
Agreement;
(iii) The Agreement provides for an additional number of shares to be
granted under an existing stock option plan for up to 12.5% of the
pro forma outstanding shares of North Country; 60% of the total
options will be granted to principals of NCFC at the offering price
with certain vesting requirements; and,
Page 2
Members of the Board
August 9, 2004
(iv) Closing is subject to certain conditions including, but not limited
to, the following:
- The approval by Shareholders of the Agreement and
Recapitalization;
- The removal of the Cease and Desist Order (the "Order") with
regulatory agencies;
- The final settlement of all material litigation involving
North Country;
- The redemption of all outstanding trust preferred securities
of North Country at a substantial discount to par value; and,
- A loan and lease reserve at North Country equal to the greater
of 4% of total loans or $10 million.
Austin Associates was engaged in August 2003 to assist North Country in the
evaluation of strategic options including the sale of assets and branches, sale
of the company as a whole, recapitalization of the company, and other
strategies. Austin Associates as part of its investment banking practice is
customarily engaged in the valuation of financial institutions in connection
with mergers and acquisitions and other corporate purposes. In connection with
rendering this opinion, we have among other factors considered the following:
(i) We prepared and circulated confidential information packages on
North Country including the disclosure of certain nonpublic
information to various parties; since its engagement, we have
contacted, or been aware of contact, with over fifty different
organizations or individuals with varying strategic, business and
transaction interests; since its engagement Austin Associates has
facilitated the sale or pending sale of five branch offices of North
Country to three separate parties; in addition, another investment
banking firm had been previously engaged by North Country in 2002-03
to contact parties and explore varying transactions and business
combinations;
(ii) We are not aware of any other parties that have expressed interest
in North Country's remaining branches at terms that, even if
collectively considered, would allow North Country to meet its
capital requirements under the Order;
(iii) While many inquiries have been made, we are not aware of any other
parties that have recently performed due diligence or made an offer
to purchase all of the outstanding shares or to recapitalize North
Country;
(iv) The negative prospects of a public offering including the expected
costs to be incurred without any certainty of the amount of capital
to be raised; North Country's management and board of directors have
indicated that a public offering to shareholders would be unlikely
to raise sufficient funds to meet the capital requirements of the
Order;
Page 3
Members of the Board
August 9, 2004
(v) Our review of the audited financial statements of North Country for
the years-ended 2001-2003 and the unaudited financial statements for
the six months-ended June 30, 2004; North Country and its subsidiary
bank have realized operating losses for nine consecutive quarters
and for each of the fiscal years ended 2002 and 2003; North Country
has realized net losses of $3.3 million for the six-months ended
June 30, 2004; management of North Country has indicated that it
expects operating losses to continue through 2005;
(vi) North Country's consolidated equity capital position was $5.9
million as of June 30, 2004 and parent-company cash on-hand was just
$97,000 as of the same date;
(vii) Our due diligence of certain other internal information, primarily
financial in nature, relating to the respective businesses,
earnings, assets and prospects of North Country without the
Recapitalization;
(viii) Our due diligence of the Recapitalization, including the principals
of NCFC, the business plan after the Recapitalization, and prospects
for earnings, growth, and future value of North Country with the
Recapitalization;
(ix) Discussions with principals of NCFC, and the placement agents for
the issuance, Keefe, Bruyette & Woods and Howe Barnes Investments,
Inc., regarding their collective expectations of completing the
offering given the terms of the Agreement and Recapitalization;
(x) With the Recapitalization, the ability to fund the redemption of the
$12.5 million of trust preferred securities of North Country at
significant discounts to par value;
(xi) With the Recapitalization, the ability to fund the restructuring and
related penalties of approximately $85 million of high rate federal
home loan advances;
(xii) While the offering price of the Recapitalization is significantly
below the trading values of North Country's stock, the respective
trading multiples of North Country are not consistent with peer
group levels when considering the operating losses and financial
condition of North Country; North Country's stock has limited
trading volume and lacks any stock analyst coverage;
(xiii) The terms, to the extent publicly available, of certain other
transactions, which we deemed relevant for purposes of this opinion;
and,
(xiv) The terms of the Agreement and related documents.
Page 4
Members of the Board
August 9, 2004
In our review and analysis, we relied upon and assumed the accuracy and
completeness of the information provided to us or publicly available, and have
not attempted to verify the same. We have assumed in the course of obtaining the
necessary approvals for the transaction, no condition will be imposed that will
have a material adverse effect on the contemplated benefits of the transaction
to North Country and its Shareholders.
This opinion is based on economic and market conditions and other circumstances
existing on, and information made available as of the date hereof. This opinion
is limited to the fairness, from a financial point of view, to Shareholders of
North Country of the terms of the Agreement and the Recapitalization.
Under the terms of its engagement with North Country, Austin Associates reserves
the right to review any public disclosures describing our firm or this fairness
opinion. Austin Associates will receive a contingent fee based on consummation
of the transaction. North Country has agreed to indemnify us against certain
liabilities.
Based upon our analysis and subject to the qualifications described herein, we
believe that as of the date of this letter, the terms of the Agreement and
Recapitalization are fair, from a financial point of view, to Shareholders of
North Country.
Respectfully,
/s/ Austin Associates, LLC
AUSTIN ASSOCIATES, LLC
APPENDIX C
CERTIFICATE OF AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
See attached.
BCS/CD-515 (Rev. 12/03)
--------------------------------------------------------------------------------
MICHIGAN DEPARTMENT OF LABOR & ECONOMIC GROWTH
BUREAU OF COMMERCIAL SERVICES
--------------------------------------------------------------------------------
Date Received (FOR BUREAU USE ONLY)
--------------------------
This document is effective on the date filed, unless
a subsequent effective date within 90 days after
received date is stated in the document.
--------------------------------------------------------------------------------
Name
David D. Joswick
-----------------------------------------------------
Address
840 West Long Lake Road, Suite 200
-----------------------------------------------------
City State Zip Code
Troy Michigan 48098 EFFECTIVE DATE:
--------------------------------------------------------------------------------
DOCUMENT WILL BE RETURNED TO THE NAME AND ADDRESS YOU ENTER ABOVE.
IF LEFT BLANK DOCUMENT WILL BE MAILED TO THE REGISTERED OFFICE.
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
FOR USE BY DOMESTIC PROFIT AND NONPROFIT CORPORATIONS
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
--------------------------------------------------------------------------------
1. The present name of the corporation is: NORTH COUNTRY FINANCIAL CORPORATION
2. The identification number assigned by the Bureau is: 063316
--------------------------------------------------------------------------------
3. Articles I and III of the Restated Articles of Incorporation are hereby
amended as follows:
Article I is amended to read in its entirety as set forth on Exhibit A
attached hereto.
Article III is amended by adding the provisions set forth on Exhibit B
attached hereto.
--------------------------------------------------------------------------------
4. The effective date of this Certificate of Amendment is ______, _. m., on
_________________, 2004.
--------------------------------------------------------------------------------
5. (For profit and nonprofit corporations whose Articles state the corporation
is organized on a stock or on a membership basis.)
--------------------------------------------------------------------------------
The foregoing amendment to the Articles of Incorporation was duly adopted on the
____ day of _______ 2004, by the shareholders if a profit corporation, or by the
shareholders or members if a nonprofit corporation (check one of the following):
--------------------------------------------------------------------------------
[X] at a meeting the necessary votes were cast in favor of the amendment.
--------------------------------------------------------------------------------
[ ] by written consent of the shareholders or members having not less than
the minimum number of votes required by statute in accordance with Section
407(1) and (2) of the Act if a nonprofit corporation, or Section 407(1) of
the Act if a profit corporation. Written notice to shareholders or members
who have not consented in writing has been given. (Note: Written consent
by less than all of the shareholders or members is
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
permitted only if such provision appears in the Articles of
Incorporation.)
--------------------------------------------------------------------------------
[ ] by written consent of all the shareholders or members entitled to vote
in accordance with section 407(3) of the Act if a nonprofit corporation,
or Section 407(2) of the Act if a profit corporation.
--------------------------------------------------------------------------------
[ ] by consents given by electronic transmission in accordance with Section
407(3) if a profit corporation.
--------------------------------------------------------------------------------
[ ] by the board of a profit corporation pursuant to section 611(2).
--------------------------------------------------------------------------------
Profit Corporations and Professional Nonprofit Corporations
Service Corporations
Signed this __ day of _______ 2004. Signed this ____________ day of _______________.
By _________________________________________________ By _________________________________________________________________________
(Signature of an authorized officer or agent) (Signature of President, Vice-President, Chairperson or Vice-Chairperson)
C. James Bess, President and Chief Executive Officer
(Type or Print Name) (Type or Print Name) (Type or Print Title)
EXHIBIT A
Article I
The name of the corporation is Mackinac Financial Corporation.
EXHIBIT B
Effective at the time this Certificate of Amendment to the Restated
Articles of Incorporation shall become effective as provided in Section 4 of
this Certificate of Amendment (the "Effective Time"), the filing of this
Certificate of Amendment to the Restated Articles of Incorporation shall effect
a reverse stock split on the basis of one (1) new common share for each twenty
(20) issued and outstanding common shares, while maintaining the number of
authorized common shares and preferred shares, as set forth in this Article III
(the "Reverse Split").
Immediately as of the Effective Time, and without any action by the
holders of outstanding common shares, but subject to the rounding of fractional
shares described below, outstanding certificates representing the corporation's
common shares shall represent for all purposes, and each common share issued and
outstanding immediately before the Effective Time shall automatically be
converted into, new common shares in the ratio of twenty (20) old common shares
for one (1) new common share, all by virtue of the Reverse Split and without any
action on the part of the holder of such common shares.
Notwithstanding any of the foregoing to the contrary, no fractional common
shares shall be issued in connection with the Reverse Split. In lieu thereof,
each holder of common shares as of the Effective Time who would otherwise have
been entitled to receive a fractional new common share shall, upon surrender of
such shareholder's certificate representing pre-split common shares, have the
post-split common shares to which they are entitled rounded up to the nearest
whole share. As of the Effective Time such fractional shares shall no longer
represent equity interests in the corporation, and shall not be entitled to any
voting, dividend or other shareholder rights; rather, they shall represent only
the right to receive the common shares, if any, described in this paragraph.
APPENDIX D
AMENDMENT TO 2000 STOCK INCENTIVE PLAN
See attached.
FIRST AMENDMENT TO NORTH COUNTRY FINANCIAL CORPORATION
2000 STOCK INCENTIVE PLAN
1. Section 4 of the North Country Financial Corporation 2000 Stock Incentive
Plan (the "Original Plan") is hereby amended in its entirety to read as follows:
Common Stock Available for Awards. Subject to adjustment as provided
in Section 13 hereof, the number of shares that may be issued under the
Plan for Awards during the term of the Plan is ____________________ shares
of Common Stock, all of which may be in the form of incentive stock
options. Any shares subject to any Award which are used in settlement of
tax withholding obligations shall be deemed not to have been issued for
purposes of determining the maximum number of shares available for
issuance under the Plan. Likewise, if any Stock Option is exercised by
tendering shares, either actually or by attestation, to the Company as
full or partial payment for such exercise under this Plan, only the number
of shares issued net of the shares tendered shall be deemed issued for
purposes of determining the maximum number of shares available for
issuance under the Plan. North Country Financial Corporation shall take
whatever actions are necessary to file required documents with the U.S.
Securities and Exchange Commission and any other appropriate governmental
authorities and stock exchanges to make shares of Common Stock available
for issuance pursuant to Awards.
2. The following shall be added at the end of the definition of "Fair Market
Value" defined in Section 2(j) of the Original Agreement:
Notwithstanding the forgoing, the term "Fair Market Value," as it applies
to any Stock Options issued to:
(i) Paul D. Tobias ("Tobias") pursuant to Section 18;
(ii) Eliot R. Stark ("Stark") pursuant to Section 18; and
(iii) any non-employee director of North Country Financial
Corporation who is appointed simultaneously with, or within three (3)
months after, the closing under the Stock Purchase Agreement dated August
10, 2004, as amended, by and between North Country Financial Corporation
("North Country") and NCFC Recapitalization, LLC (the "Stock Purchase
Agreement"),
shall mean an amount equal to the price per share paid by the new investors
under the Stock Purchase Agreement.
3. There shall be added a new Section 18 to the Original Plan, which shall
read as follows:
18. Mandatory Grants.
(a) Effective as of the closing of the transactions contemplated by
the Stock Purchase Agreement, Tobias shall be granted non-qualified stock
options to purchase an aggregate of 4.375% of that number of shares of
Common Stock that will be issued and outstanding immediately following the
sale of shares to the new investors under the Stock Purchase Agreement,
and on such other terms and conditions as specified in the Employment
Agreement between Tobias and North Country dated August 10, 2004 and as
provided in the Award Agreement to be entered into between Tobias and
North Country as contemplated by the Employment Agreement.
(b) Effective as of the closing of the transactions contemplated by
the Stock Purchase Agreement, Stark shall be granted non-qualified stock
options to purchase an aggregate of 3.125% of that number of shares of
Common Stock that will be issued and outstanding immediately following the
sale of shares to the new investors under the Stock Purchase Agreement,
and on such other terms and conditions as specified in the Employment
Agreement between Stark and North Country dated August 10, 2004 and as
provided in the Award Agreement to be entered into between Tobias and
North Country as contemplated by the Employment Agreement.
4. This First Amendment shall be effective immediately prior to the closing
contemplated in the Stock Purchase Agreement.
5. Defined terms not defined in this First Amendment shall have the meaning
ascribed to that term in the Original Plan.
6. Except as specifically amended by this First Amendment, the Original Plan
shall continue in full force and effect and is hereby ratified and confirmed.
7. This First Amendment has been duly adopted by the Board of Directors of
North Country on September 13, 2004.
8. This First Amendment has been duly adopted by the shareholders of North
Country at the Special Meeting of Shareholders held ___________, 2004.
APPENDIX E
NORTH COUNTRY'S ANNUAL REPORT ON FORM 10-K
See attached.
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- --------
Commission file number 0-20167
NORTH COUNTRY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 South Cedar Street, Manistique, Michigan 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 200-7032
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the common stock held by non-affiliates of the
Registrant, based on a per share price of $2.20 as of June 30, 2003, was
$15,442,134 million. As of March 14, 2004, there were outstanding 7,019,152
shares of the Corporation's Common Stock (no par value).
Documents Incorporated by Reference: Portions of the Corporation's 2003 Annual
Report to Shareholders are incorporated by reference into Parts I and II of this
Report.
Portions of the Corporation's Proxy Statement for the Annual Meeting of
Shareholders to be held May 18, 2004 are incorporated by reference into Part III
of this Report.
--------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
North Country Financial Corporation (the "Corporation") was incorporated under
the laws of the state of Michigan on December 16, 1974. The Corporation changed
its name from "First Manistique Corporation" to "North Country Financial
Corporation" on April 14, 1998. The Corporation owns all of the outstanding
stock of its banking subsidiary, North Country Bank and Trust (the "Bank"). The
Corporation also owns four non-bank subsidiaries: First Manistique Agency,
presently active, an insurance agency which sells annuities as well as life and
health insurance; First Rural Relending Company, a relending company for
nonprofit organizations; North Country Financial Group, a broker of loans and
leases including tax-exempt lease/purchase financing to municipalities,
presently inactive, and North Country Capital Trust, a statutory business trust
which was formed solely for the issuance of trust preferred securities. The Bank
also has four non-bank subsidiaries: NCB Real Estate Company, which owns several
properties used by the Bank; North Country Mortgage Company LLC, an entity
engaged in the business of mortgage lending and brokering; and North Country
Employee Leasing Company, a company that leases employees to North Country Bank
and Trust. The Bank represents the principal asset of the Corporation. The
Corporation and its subsidiary Bank are engaged in a single industry segment,
commercial banking, broadly defined to include commercial and retail banking
activities along with other permitted activities closely related to banking.
The Corporation became a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, on April 1, 1976, when it acquired First
Northern Bank and Trust ("First Northern"). On May 1, 1986, Manistique Lakes
Bank merged with First Northern. The Corporation acquired all of the outstanding
stock of the Bank of Stephenson on February 8, 1994, in exchange for cash and
common stock. The Bank of Stephenson was operated as a separate banking
subsidiary of the Corporation until September 30, 1995, when it was merged into
First Northern. First Northern acquired Newberry State Bank on December 8, 1994,
in exchange for cash. On September 15, 1995, First Northern acquired the fixed
assets and assumed the deposits of the Rudyard branch of First of America Bank,
in exchange for cash. The Corporation acquired all of the outstanding stock of
South Range State Bank ("South Range") on January 31, 1996, in exchange for cash
and notes. On August 12, 1996, First Northern and South Range changed their
names to North Country Bank and Trust and North Country Bank, respectively. On
February 4, 1997, the Corporation acquired all of the outstanding stock of UP
Financial Inc., the parent holding company of First National Bank of Ontonagon
("Ontonagon"). Ontonagon was merged into North Country Bank. North Country Bank
was operated as a separate banking subsidiary of the Corporation until March 10,
1998, when it was merged into North Country Bank and Trust. On June 25, 1999,
North Country Bank and Trust acquired the fixed assets and assumed the deposits
of the Kaleva and Mancelona branches of Huntington National Bank in exchange for
cash. On July 23, 1999, North Country Bank and Trust sold the fixed assets and
deposits of the Rudyard and Cedarville branches to Central Savings Bank in
exchange for cash.
1
On January 14, 2000, North Country Bank and Trust sold the fixed assets and
deposits of the Garden branch to First Bank, Upper Michigan in exchange for
cash. On June 16, 2000, North Country Bank and Trust acquired the fixed assets
and assumed the deposits of the Glen Arbor and Alanson branches of Old Kent
Bank, in exchange for cash. On July 13, 2001, North Country Bank and Trust sold
the fixed assets and deposits of the St. Ignace and Mackinaw Island branches to
Central Savings Bank in exchange for cash. On November 9, 2001, North Country
Bank and Trust sold the fixed assets and deposits of the Curtis and Naubinway
branches to State Savings Bank in exchange for cash. On November 22, 2002, North
Country Bank and Trust sold the fixed assets and deposits of the Menominee
branch to Stephenson National Bank and Trust in exchange for cash. During 2003,
the Bank closed branch locations at Glen Arbor, Ishpeming, L'Anse and Petoskey.
The Bank currently has 14 branch offices located in the Upper Peninsula of
Michigan and 8 branch offices located in Michigan's Lower Peninsula. The Bank
maintains offices in Alger, Antrim, Charlevoix, Chippewa, Delta, Dickinson,
Emmet, Grand Traverse, Houghton, Luce, Manistee, Marquette, Menominee,
Ontonagon, Otsego, Schoolcraft, and Wexford counties. The Bank provides drive-in
convenience at 17 branch locations and has automated teller machines operating
at 12 locations. The Bank has no foreign offices.
The Corporation is headquartered in Manistique, Michigan. The executive offices
and mailing address of the Corporation are located at 130 South Cedar Street,
Manistique, Michigan 49854.
OPERATIONS
The principal business the Corporation is engaged in, through the Bank, is the
general commercial banking business, providing a full range of loan and deposit
products. These banking services include customary retail and commercial banking
services, including checking and savings accounts, time deposits, interest
bearing transaction accounts, safe deposit facilities, real estate mortgage
lending, commercial lending, commercial and governmental lease financing, and
direct and indirect consumer financing. Funds for the Bank's operation are also
provided by Internet deposits and through borrowings from the Federal Home Loan
Bank ("FHLB") system, proceeds from the sale of loans and mortgage-backed and
other securities, funds from repayment of outstanding loans and earnings from
operations. Earnings depend primarily upon the difference between (i) revenues
from loans, investments, and other interest-bearing assets and (ii) expenses
incurred in payment of interest on deposit accounts and borrowings, maintaining
an adequate allowance for loan losses, and general operating expenses.
COMPETITION
Banking is a highly competitive business. The Bank competes for loans and
deposits with other banks, savings and loan associations, credit unions,
mortgage bankers, and investment firms in the scope and type of services
offered, pricing of loans, interest rates paid on deposits, and number and
location of branches, among other things. The Bank also faces competition for
investors' funds from mutual funds and corporate and government securities.
2
The Bank competes for loans principally through interest rates and loan fees,
the range and quality of the services it provides and the locations of its
branches. In addition, the Bank actively solicits deposit-related clients and
competes for deposits by offering depositors a variety of savings accounts,
checking accounts and other services.
EMPLOYEES
As of February 29, 2004, the Corporation and its subsidiaries employed, in the
aggregate, 120 employees equating to 117 full-time equivalents. None of the
Corporation's employees are covered by a collective bargaining agreement with
the Corporation and management believes that its relationship with its employees
is satisfactory.
BUSINESS
The Bank makes mortgage, commercial, and installment loans to customers
throughout Michigan. Fees may be charged for these services. Historically, the
Bank has predominantly sold its conforming residential mortgage loans in the
secondary market; however, during 2002 and 2003 residential loans have been
retained. The Bank has financed commercial and governmental leases throughout
the country. Leases were originated by the Corporation's subsidiary, North
Country Financial Group, and unrelated entities. In March 2003, the Corporation
made a decision to cease the operations of North Country Financial Group. This
was done in order to refocus the Corporation's lending efforts to loans in its
immediate market area; decrease the size of certain segments of the loan
portfolio; and diversify the loan portfolio. The Corporation may pursue new
lease opportunities through unrelated entities, where the credit quality and
rate of return on the transactions fit its strategies. The Bank reviews the
credit quality of each lease before entering into a financing agreement. The
Bank accounts for these transactions as loans.
The Bank supports the service industry, with its hospitality and related
businesses as well as gaming, forestry, restaurants, farming, fishing, and many
other activities important to growth in Michigan. The economy of the Bank's
market areas is affected by summer and winter tourism activities.
The Bank's most prominent concentration in the loan portfolio relates to
commercial loans to entities within the hospitality and tourism industry. This
concentration represented $76.1 million or 31.3% of the commercial loan
portfolio at December 31, 2003. No material portions of the Bank's deposits have
been received from a single person, industry, group, or geographical location.
The Bank is a member of the FHLB. The FHLB provides an additional source of
liquidity and long-term funds. Membership in the FHLB has provided access to
attractive rate advances as well as advantageous lending programs. The Community
Investment Program makes advances to be used for funding community-oriented
mortgage lending, and the Affordable Housing Program grants advances to fund
lending for long-term low and moderate income owner occupied and affordable
rental housing at subsidized interest rates.
3
The Bank regularly assesses its ability to raise funds through the issuance of
certificates of deposit and demand deposit accounts in its local branching
network and through the Internet CD network.
The Bank has a secondary borrowing line of credit available to respond to
deposit fluctuations and temporary loan demands. This line is available to the
Bank on a collateralized basis.
As of December 31, 2003, the Bank had no material risks relative to foreign
sources. See the "Interest Rate Risk" and "Foreign Exchange Risk" sections in
Management's Discussion and Analysis of Financial Condition and Results of
Operation for details on the Corporation's foreign account activity.
Compliance with federal, state, and local statutes and/or ordinances relating to
the protection of the environment is not expected to have a material effect upon
the Bank's capital expenditures, earnings, or competitive position.
SUPERVISION AND REGULATION
As a registered bank holding company, the Corporation is subject to regulation
and examination by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the Bank Holding Company Act, as amended (BHCA). The Bank
is subject to regulation and examination by the Michigan Office of Financial and
Insurance Services (OFIS) and the Federal Deposit Insurance Corporation (FDIC).
Under the BHCA, the Corporation is subject to periodic examination by the
Federal Reserve Board, and is required to file with the Federal Reserve Board
periodic reports of its operations and such additional information as the
Federal Reserve Board may require. In accordance with Federal Reserve Board
policy, the Corporation is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where the
Corporation might not do so absent such policy. The Corporation does not
presently have significant assets available for this purpose. In addition, there
are numerous federal and state laws and regulations which regulate the
activities of the Corporation, the Bank and the nonbank subsidiaries, including
requirements and limitations relating to capital and reserve requirements,
permissible investments and lines of business, transactions with affiliates,
loan limits, mergers and acquisitions, issuances of securities, dividend
payments, inter-affiliate liabilities, extensions of credit and branch banking.
Federal banking regulatory agencies established capital adequacy rules which
take into account risk attributable to balance sheet assets and off-balance
sheet activities. All banks and bank holding companies must meet a minimum total
risk-based capital ratio of 8%, of which at least one-half must be comprised of
core capital elements defined as Tier 1 capital (which consists principally of
shareholders' equity). The federal banking agencies also have adopted leverage
capital guidelines which banking organizations must meet. Under these
guidelines, the most highly rated banking organizations must meet a minimum
leverage ratio of at least 3% Tier 1 capital to total assets, while lower rated
banking organizations must maintain a ratio of at least 4% to 5%. Failure to
meet minimum capital requirements can initiate certain mandatory -- and
4
possible additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the consolidated financial statements.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' power depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." To be well capitalized under the regulatory framework, the
Tier 1 capital ratio must meet or exceed 6%, the total risk-based capital ratio
must meet or exceed 10% and the leverage ratio must meet or exceed 5%.
Information pertaining to the Corporation's capital plan is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Capital and Regulatory" in the Corporation's 2003
Annual Report, and is incorporated here by reference.
Current federal law provides that adequately capitalized and managed bank
holding companies from any state may acquire banks and bank holding companies
located in any other state, subject to certain conditions.
In 1999, Congress enacted the Gramm-Leach-Bliley Act (the "Act"), which
eliminated certain barriers to and restrictions on affiliations between banks
and securities firms, insurance companies and other financial service
organizations. Among other things, the Act repealed certain Glass-Steagall Act
restrictions on affiliations between banks and securities firms, and amended the
BHCA to permit bank holding companies that qualify as "financial holding
companies" to engage in a broad list of "financial activities," and any
non-financial activity that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines is "complementary" to a financial activity
and poses no substantial risk to the safety and soundness of depository
institutions or the financial system. The Act treats lending, insurance
underwriting, insurance company portfolio investment, financial advisory,
securities underwriting, dealing and market-making, and merchant banking
activities as financial in nature for this purpose.
Under the Act, a bank holding company may become certified as a financial
holding company by filing a notice with the Federal Reserve Board, together with
a certification that the bank holding company meets certain criteria, including
capital, management, and Community Reinvestment Act requirements. The
Corporation does not qualify as a financial holding company at this time.
Additional information pertaining to Supervision and Regulation is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Capital and Regulatory" in the Corporation's 2003
Annual Report, and is incorporated here by reference.
5
MONETARY POLICY
The earnings and business of the Corporation and the Bank depends on interest
rate differentials. In general, the difference between the interest rates paid
by the Bank to obtain its deposits and other borrowings, and the interest rates
received, by the Bank on loans extended to its customers and on securities held
in the Bank's portfolio, comprises the major portion of the Bank's earnings.
These rates are highly sensitive to many factors that are beyond the control of
the Bank, and accordingly, its earnings and growth will be subject to the
influence of economic conditions generally, both domestic and foreign, including
inflation, recession and unemployment, and also the monetary policies of the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies designed to curb inflation, combat recession, and promote growth
through, among other means, its open-market dealings in US government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements, through adjustments to the
discount rate applicable to borrowings by banks that are members of the Federal
Reserve System, and by adjusting the Federal Funds Rate, the rate charged in the
interbank market for purchase of excess reserve balances. In addition,
legislative and economic factors can be expected to have an ongoing impact on
the competitive environment within the financial services industry. The nature
and timing of any future changes in such policies and their impact on the Bank
cannot be predicted with certainty.
SELECTED STATISTICAL INFORMATION
I. Distribution of Assets, Obligations, and Shareholders' Equity; Interest
Rates and Interest Differential
The key components of net interest income, the daily average balance sheet for
each year -- including the components of earning assets and supporting
obligations -- the related interest income on a fully tax equivalent basis and
interest expense, as well as the average rates earned and paid on these assets
and obligations is contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Corporation's
2003 Annual Report, and is incorporated here by reference.
An analysis of the changes in net interest income from period-to-period and the
relative effect of the changes in interest income and expense due to changes in
the average balances of earning assets and interest-bearing obligations and
changes in interest rates is contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Corporation's 2003 Annual Report, and is incorporated here by reference.
6
II. Investment Portfolio
A. Investment Portfolio Composition
The following table presents the carrying value of investment securities
available for sale as of December 31 (in thousands):
2003 2002 2001
------------------------------------------------------------------
U.S. Treasury and federal agencies $36,225 $ -0- $ 3,128
State and political subdivisions 4,105 5,632 5,418
Corporate securities 708 11,264 8,571
Mortgage-related securities 43,736 51,059 44,768
------------------------------------------------------------------
TOTAL $84,774 $67,955 $61,885
==================================================================
B. Relative Maturities and Weighted Average Interest Rates
The following table presents the maturity schedule of securities held and the
weighted average yield of those securities, as of December 31, 2003 (fully
taxable equivalent, in thousands):
1 Year or Less 1-5 Years 5-10 Years Over 10 Years TOTAL
-----------------------------------------------------------------
U.S. Treasury and federal agencies $ -0- $36,225 $ -0- $ -0- $36,225
State and political subdivisions 60 306 495 3,244 4,105
Corporate securities 166 542 -0- -0- 708
Mortgage-related securities 2,645 41,091 -0- -0- 43,736
-----------------------------------------------------------------
TOTAL $2,871 $78,164 $ 495 $3,244 $84,774
=================================================================
Weighted average yield (1) 4.54% 3.19% 4.27% 4.47% 3.85%
(1) Weighted average yield includes the effect of tax-equivalent adjustments
using a 34% tax rate.
7
III. Loan Portfolio
A. Type of Loans
The following table sets forth the major categories of loans outstanding for
each category at December 31 (in thousands):
2003 2002 2001 2000 1999
---------------------------------------------------------------------------
Commercial real estate $ 39,571 $ 61,556 $ 77,892 $ 90,635 $ 79,000
Commercial, financial and
agricultural 203,393 290,371 319,403 314,953 250,281
1-4 family residential real estate 51,120 74,366 93,574 113,834 107,750
Consumer 3,195 5,706 9,516 13,059 17,051
Construction 567 3,044 4,027 9,208 12,539
---------------------------------------------------------------------------
TOTAL $297,846 $435,043 $504,412 $541,689 $466,621
===========================================================================
Included in loan totals for December 31, 2003, 2001, and 2000 are $4.1 million,
$6.4 million, and $6.6 million of loans to Canadian obligors.
To the extent the Corporation utilizes lease financing for its customers, the
leases are accounted for as loans.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the remaining maturity of total loans outstanding
for the categories shown at December 31, 2003, based on scheduled principal
repayments (in thousands).
Commercial, 1-4 Family
Commercial Financial and Residential
Real Estate Agricultural Real Estate Consumer Construction
--------------------------------------------------------------------------------
In one year or less $18,318 $39,123 $1,948 $814 $2,462
After one year but within five
years:
Variable interest rates 3,512 113,929 7,612 0 0
Fixed interest rates 33,057 50,941 7,580 4,892 582
After five years:
Variable interest rates 2,704 51,666 17,739 0 0
Fixed interest rates 3,965 34,712 39,487 0 0
---------------------------------------------------------------------------
TOTAL $61,556 $290,371 $74,366 $5,706 $3,044
===========================================================================
8
C. Risk Elements
The following table presents a summary of nonperforming assets and problem loans
as of December 31 (in thousands):
2003 2002 2001 2000 1999
------------------------------------------------------------------------------
Nonaccrual loans $38,660 $26,814 $ 4,015 $10,547 $ 95
Interest income that would
have been recorded for
nonaccrual loans
under original
terms 2,793 1,653 1,597 1,478 3
Interest income recorded
during period for
nonaccrual loans 1,307 1,120 1,521 1,125 0
Accruing loans
past due 90 days or more 241 401 4,878 3,117 2,452
Restructured loans not
included above 7,181 11,155 16,151 3,654 0
9
IV. Summary of Loan Loss Experience
A. Analysis of the Allowance for Loan Losses
Changes in the allowance for loan losses arise from loans charged off,
recoveries on loans previously charged off by loan category, and additions to
the allowance for loan losses through provisions charged to expense. Factors
which influence management's judgment in determining the provision for loan
losses include establishing specified loss allowances for selected loans
(including large loans, nonaccrual loans, and problem and delinquent loans) and
consideration of historical loss information and local economic conditions.
The following table presents information relative to the allowance for loan
losses for the years ended December 31 (in thousands):
2003 2002 2001 2000 1999
-------------------------------------------------------------------------
Balance of allowance for loan
losses at beginning of period $24,908 $10,444 $9,454 $6,863 $6,112
Loans charged off:
Commercial, financial and
agricultural 5,068 11,925 2,385 2,837 405
Real estate -- construction -0- -0- -0- -0- -0-
Real estate -- mortgage 1,683 504 320 328 74
Consumer 205 141 253 263 329
-------------------------------------------------------------------------
Total loans charged off 6,956 12,570 2,958 3.428 808
-------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial, financial and
agricultural 2,926 314 640 66 9
Real estate -- construction -0- -0- -0- -0- -0-
Real estate -- mortgage 931 3 20 9 10
Consumer 196 59 88 69 83
-------------------------------------------------------------------------
Total recoveries 4,053 376 748 144 102
-------------------------------------------------------------------------
Net loans charged off 2,903 12,194 2,210 3,284 706
Provisions charged to expense -0- 26,658 3,200 5,875 1,457
-------------------------------------------------------------------------
Balance at end of period $22,005 $24,908 $10,444 $9,454 $6,863
=========================================================================
Ratio of net charge-offs during
period to average loans
outstanding .80% 1.6% 0.5% 0.7% 0.2%
10
B. Allocation of Allowance for Loan Losses
The allocation of the allowance for loan losses for the years ended December 31
is shown on the following table (in thousands). The percentages shown represent
the percent of each loan category to total loans.
2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
---------------------------------------------------------------------------------------------------------------
Commercial,
financial and
agricultural $11,222 73.0% $22,703 80.9% $ 9,136 78.7% $4,914 74.9% $3,492 70.5%
Real estate-
construction -0- 0.2% -0- 0.7% -0- 0.8% -0- 1.7% 114 2.7%
1-4 family
residential
real estate 280 17.2% 2,110 17.1% 1,191 18.6% 136 21.0% 835 23.1%
Consumer -0- 1.1% 95 1.3% 152 1.9% 371 2.4% 326 3.7%
Specific reserve
on loans sold
subsequent to
year end 7,425 8.5% -0- -0- -0- -0-
---------------------------------------------------------------------------------------------------------------
Unallocated 3,078 N/A -0- N/A 774 N/A 4,033 N/A 2,096 N/A
---------------------------------------------------------------------------------------------------------------
TOTAL $22,005 100% $24,908 100% $11,253 100% $9,454 100% $6,863 100%
===============================================================================================================
V. Deposits
Deposit information is contained in Note 11 of the Annual Report.
VI. Return on Equity and Assets
Selected financial data of the Corporation is contained in the Corporation's
2003 Annual Report, under the caption "Selected Financial Data," and is
incorporated here by reference.
See Item 6 of this Form 10-K, "Selected Financial Data"
VII. Financial Instruments with Off-Balance Sheet Risk
Information relative to commitments, contingencies, and credit risk are
discussed in Note 22 of the Corporation's 2003 Annual Report and is hereby
incorporated by reference.
11
ITEM 2. PROPERTIES
The Corporation's headquarters are located at 130 South Cedar Street,
Manistique, Michigan 49854. The headquarters location is owned by the
Corporation and not subject to any mortgage.
The Bank conducts business from 22 offices at the following locations:
ALANSON MANCELONA SAULT CASCADE
6230 River Street 625 North Williams Street 4250 I-75 Business Spur
Alanson, MI 49706 Mancelona, MI 49659 Sault Ste. Marie, MI 49783
EMMET COUNTY ANTRIM COUNTRY CHIPPEWA COUNTY
BOYNE CITY MANISTIQUE SAULT MAIN
128 Water Street 130 South Cedar Street 138 Ridge Street
Boyne City, MI 49712 Manistique, MI 49854 Sault Ste. Marie, MI 49783
CHARLEVOIX COUNTY SCHOOLCRAFT COUNTY CHIPPEWA COUNTY
CADILLAC MARQUETTE MAIN SOUTH RANGE
218 South Mitchell Street 300 North McClellan Street 47 Trimountain Avenue
Cadillac, MI 49601 Marquette, MI 49855 South Range, MI 49963
WEXFORD COUNTY MARQUETTE COUNTY HOUGHTON COUNTY
CALUMET MARQUETTE PRESQUE ISLE STEPHENSON
56730 Calumet Avenue, Ste. L 1400 Presque Isle 245 Menominee Street
Calumet, MI 49913 Marquette, MI 49855 Stephenson, MI 49887
HOUGHTON COUNTY MARQUETTE COUNTY MENOMINEE COUNTY
ESCANABA MUNISING TRAVERSE CITY
837 North Lincoln Road 301 East Superior Street 333 East State Street
Escanaba, MI 49829 Munising, MI 49862 Traverse City, MI 49684
DELTA COUNTY ALGER COUNTY GRAND TRAVERSE COUNTY
GAYLORD NEWBERRY MAIN TRAVERSE CITY
145 North Otsego Avenue 414 Newberry Avenue 3530 North Country Drive
Gaylord, MI 49735 Newberry, MI 49868 Traverse City, MI 49684
OTSEGO COUNTY LUCE COUNTY GRAND TRAVERSE COUNTY
IRON MOUNTAIN ONTONAGON
1890 South Stephenson Avenue 601 River Street
Iron Mountain, MI 49801 Ontonagon, MI 49953
DICKINSON COUNTY ONTONAGON COUNTY
KALEVA RIPLEY
14429 Wouski Avenue 106 Royce Road
Kaleva, MI 49645 Hancock, MI 49930
MANISTEE COUNTY HOUGHTON COUNTY
All of the above locations are designed for use and operation as a bank, are
well maintained, and are suitable for current operations. Of the 22 branch
locations, 16 are owned and 6 are leased.
12
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are subject to routine litigation
incidental to the business of banking. In addition, the Corporation or the
Bank are subject to the Order referred to below, and the litigation and
arbitration described below. Information regarding the Order is contained
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "Capital Adequacy" in the Corporation's 2003
Annual Report, and is incorporated here by reference. The litigation and
arbitration that is not routine and incidental to the business of banking is
described below.
In an action styled Lanctot v. Littlejohn, et al., filed in the U.S. District
Court for the Western District of Michigan on June 13, 2003, a shareholder of
the Corporation brought a class action against the Corporation, its former
chairman and chief executive officer and current director, Ronald G. Ford, and
its former chief executive officer and director, Sherry L. Littlejohn, for
alleged violations of Federal securities laws.
In another action styled Rosen v. North Country Financial Corporation, et al.,
filed in the U.S. District Court for the Western District of Michigan on June
23, 2003, a former shareholder of the Corporation has brought a class action
against the Corporation, its former chairman and chief executive officer and
current director, Ronald G. Ford, and its former chief executive officer and
director, Sherry L. Littlejohn, for alleged violations of Federal securities
laws.
On September 2, 2003, pursuant to 15 U.S.C. ss. 78-u-4(a)(3)(B), plaintiff
Charles Lanctot filed a motion requesting the Court to consolidate the two
securities class action cases (Lanctot and Rosen) under the caption In re North
Country Financial Corporation Securities Litigation, to appoint him as "Lead
Plaintiff" in the consolidated cases, and to approve the selection of his
counsel as "Lead Plaintiff's Counsel." In an Order dated September 29, 2003, the
Court among other things consolidated the Lanctot and Rosen actions, designated
Charles D. Lanctot and John F. Stevens as "Lead Plaintiffs," and designated
"Co-Lead Counsel" and "Liaison Counsel" for the class.
On December 1, 2003, the plaintiffs filed their Corrected Consolidated Amended
Class Action Complaint ("Amended Complaint"), which adds John F. Stevens as a
plaintiff. The Amended Complaint, which demands a jury trial, is brought on
behalf of all persons, subject to certain exceptions, who purchased the
Corporation's common stock during the period from November 13, 2000, through
April 15, 2003. It alleges that the Corporation and the individual defendants
violated section 10(b) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 of the Securities and Exchange Commission (the "SEC")
issued under the Exchange Act, by disseminating materially false and misleading
statements and/or concealing material adverse facts concerning the financial
condition and operations of the Corporation, with knowledge, or in reckless
disregard, of the materially false and misleading character thereof. The Amended
Complaint also alleges violations of Section 20 of the Exchange Act by the
individual defendants, by reason of their control, at relevant times, of the
Corporation. Among other things, the Amended Complaint is based upon allegations
of deficiencies in the Corporation's policies and procedures for safe and sound
operation, including its directorate and management personnel and practices,
credit underwriting, credit administration, and policies regarding
asset/liability management, liquidity, funds management, and investments, and
its compliance with all applicable laws and regulations, including Regulations O
and U of the Board of Governors of the Federal Reserve System (the "Board"), the
Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations, and the
Michigan Banking Code of 1999. The Amended Complaint further alleges that the
Corporation's acquisition of American Financial Mortgage, which had an
"unusually large number of defaulted loans . . . which triggered the attention
of banking regulators;" that a Cease and Desist Order, dated March 26, 2002,
which is attached as Exhibit 1 to the Amended Complaint, demonstrates how
defendants made "false statements" in public
13
filings and other communications, and were required to take "corrective
actions;" that various public filings were "false because the Company's
operations resulted in an excessive level of adversely classified assets,
delinquent loans, and nonaccrual loans as well as an inadequate level of capital
protection for the kind and qualify of assets held;" that, "according to former
employees, loans for Company insiders and their related entities were often
approved regardless of the quality of the loan;" and, that the Corporation
incorrectly attributed its performance to the World Trade Center disaster and
other factors impacting tourism and hospitality businesses, instead of
disclosing "insider loans," a "disproportionately high loan concentration" in
the hospitality industry, and information about the Corporation's banking
practices and loan loss reserves. The Amended Complaint seeks certification of a
class consisting of all persons who purchased the common stock of the
Corporation on the open market between the dates noted above, compensatory
damages on a joint and several basis against all defendants, including the
Corporation, plus interest and costs, including attorney's fees and expert's
fees.
On January 23, 2004, the Corporation and the other defendants filed their Joint
Motion to Dismiss the Corrected Consolidated Amended Class Action Complaint,
principally based on the ground that plaintiffs have not adequately plead that
the Corporation, through its officers and directors, acted with the intent to
defraud the investing public under the standard articulated in Helwig v. Vencor,
Inc., 251 F.3d 540 (6th Cir. 2001), cert. dismissed, 536 U.S. 935, 122 S.Ct.
2616 (2002). During the pendency of the motion to dismiss, a stay of "all
discovery and other proceedings" automatically is imposed under 15 U.S.C.ss.
78u-4(b)(3)(B). Plaintiffs filed their Brief in Opposition to Defendants' Motion
to Dismiss on March 8, 2004. Defendants filed a reply brief in support of their
Motion to Dismiss on March 23, 2004. The Court has scheduled an oral argument on
the Motion to Dismiss for March 30, 2004.
Shareholder's Derivative Litigation
In an action styled Virginia M. Damon Trust v. North Country Financial
Corporation, Nominal Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald
G. Ford, Sherry L. Littlejohn, Stanley J. Gerou II, John D. Lindroth, Stephen
Madigan, Spencer Shunk, Michael Henrickson, Glen Tolksdorf, and Wesley Hoffman,
filed in the U.S. District Court for the Western District of Michigan on July 1,
2003, a shareholder of the Corporation has brought a shareholder's derivative
action under Section 27 of the Exchange Act against the Corporation and certain
of its current and former directors and senior executive officers. The
Complaint, which demands a jury trial, is brought on behalf of the Corporation
against the individual defendants. It alleges that the individual defendants
have caused loss and damage to the Corporation through breaches of their
fiduciary duties of oversight and supervision by failing (i) adequately to
safeguard the assets of the Corporation, (ii) to ensure that adequate
administrative, operating, and internal controls were in place and implemented,
(iii) to ensure that the Corporation was operated in accordance with
legally-prescribed procedures, and (iv) to oversee the audit process to ensure
that the Corporation's assets were properly accounted for and preserved. The
Complaint further alleges that the individual defendants violated Section 14(a)
of the Exchange Act by making materially false and misleading statements in the
proxy statement mailed to shareholders in connection with the annual meeting of
the Corporation held May 29, 2000, and the adoption by the shareholders at that
meeting of the Corporation's 2000 Stock Incentive Plan. The Complaint also
alleges that Mr. Ford and Ms. Littlejohn, through a series of compensation
arrangements,
14
stock options, and employment agreements obtained by them through improper means
resulting from the offices they held with the Corporation, received excessive
compensation, to the injury of the Corporation. Among other things, the
Complaint is based upon allegations of material misstatements or omissions in
filings made by the Corporation with the SEC, and deficiencies in the
Corporation's policies and procedures for safe and sound operation, including
its directorate and management personnel and practices, credit underwriting,
credit administration, and policies regarding asset/liability management,
liquidity, funds management, and investments, and its compliance with all
applicable laws and regulations, including Regulations O and U of the Board,
FDIC Rules and Regulations, and the Michigan Banking Code of 1999. The Complaint
seeks (i) rescission of the approval of the 2000 Stock Incentive Plan and return
of all stock and options granted under the Plan, (ii) a declaration that the
individual defendants breached their fiduciary duty to the Corporation, (iii) an
order to the individual defendants to account to the Corporation for all losses
and/or damages by reason of the acts and omissions alleged, (iv) an order to
each of the individual defendants to remit to the Corporation all salaries and
other compensation received for periods during which they breached their
fiduciary duties, (v) compensatory damages in favor of the Corporation, (vi)
injunctive relief, and (vii) interest, costs, and attorney's and expert's fees.
On September 18, 2003, the Corporation filed a motion to dismiss the Damon
action because plaintiff did not satisfy the mandatory precondition, under
Section 493a of the Michigan Business Corporation Act ("MBCA"), M.C.L.ss.
450.1493a, for filing a shareholder derivative action that the shareholder must
first have submitted a written demand that the Corporation pursue in its own
right the claims asserted by the shareholder (the plaintiff here). Certain of
the individual defendants in the Damon action filed their own motion to dismiss
on November 25, 2003, in which motion the other individual defendants later
joined. The plaintiff filed an Opposition to both motions to dismiss on January
9, 2004, and on January 30, 2004, the defendants filed reply briefs in support
of their motions to dismiss.
By letter dated September 17, 2003, and expressly without prejudice to the
argument that any such written demand is not required, plaintiff's counsel
purported to make a written demand that the Corporation pursue a number of
indicated putative claims against: (1) present and former officers and directors
of the Corporation who also are the individual defendants in the Damon action,
and (2) the certified public accounting firm of Wipfli, Ullrich, Bertelson, LLP.
The MBCA grants the Corporation ninety (90) days in which to respond to a proper
written demand. On November 11, 2003, the Corporation filed a motion, as
permitted by section 495 of the MBCA, M.C.L.ss. 450.1495, requesting the Court
to appoint a disinterested person to conduct a reasonable investigation of the
claims made by the plaintiff and to make a good faith determination whether the
maintenance of the derivative action is in the best interests of the
Corporation. On January 9, 2004, the plaintiff filed a Supplemental Response to
the Corporation's motion to dismiss, requesting that the Court appoint two
persons other than the one nominated by the Corporation, to act as a
disinterested person for such purpose. Following an in camera conference and
telephone conference held by the Court, plaintiff is understood to have
withdrawn its objection to the individual nominated by the Corporation in its
motion to the Court for appointment as a disinterested person. The parties,
through their respective counsel, are currently negotiating a stipulated form of
order to be entered by the Court making the appointment of the disinterested
person. It is anticipated that the disinterested person, once
15
appointed, will complete his investigation of the claims made by the plaintiff
and will make his good faith determination whether the maintenance of the
derivative action is in the best interests of the Corporation within 120 days of
his appointment.
On March 22, the Court issued an Opinion and Order granting in part and denying
in part the motions to dismiss in the Damon case. The Court dismissed the
Section 14(a) claim against all of the defendants as barred by the statute of
limitations and, as further grounds, dismissed that claim as to those who were
not directors at the time of the mailing of the proxy statement. The Court has
permitted the plaintiff to proceed with its breach of fiduciary duty claims
against the Directors on the grounds that the plaintiff cured its procedural
failings by subsequently transmitting a demand letter as required by Section 493
of the MBCA. However, the Court has asked that by April 16, 2004, the parties
submit additional briefs on the question of whether the Court should exercise
"supplemental jurisdiction" over the state law breach of fiduciary duty claims
or, by implication, whether these claims should be dismissed without prejudice
for pursuit in an appropriate state court.
Employment Agreement Arbitration
On September 16, 2003, Ronald G. Ford, the former chairman and chief executive
officer and a current director of the Corporation, initiated an arbitration
proceeding with the American Arbitration Association against the Corporation
seeking monetary damages for alleged breach by the Corporation of his Amended
and Restated Employment Agreement, Chairman Agreement, and Amended and Restated
Consulting Agreement, each with the Corporation. The Corporation has denied the
alleged breach and asserted a counterclaim to recover all amounts paid to Mr.
Ford under the Chairman Agreement, as required by the Cease and Desist Order
entered by the FDIC and the OFIS, in addition to other amounts. On March 19,
2004, at the request of Mr. Ford, the American Arbitration Association
reactivated the arbitration proceeding, and the parties are in the process of
selecting an arbitrator. The Corporation intends to defend the arbitration.
Litigation of the types involved in the actions described above can be complex,
time-consuming, and often protracted. The Corporation has incurred and
anticipates that it will continue to incur substantial additional expense for
legal and other professional fees as a result of the filing and defense of these
actions. At this stage of the proceedings, the Corporation cannot accurately
assess the impact which these proceedings will have on the Corporation. An
ultimate determination of any of these actions adverse to the Corporation could
have a material adverse effect on the Corporation's financial condition and
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 2003 to a vote of
the Corporation's shareholders.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Corporation are listed below. The executive
officers serve at the pleasure of the Board of Directors and are appointed by
the Board annually. There are no arrangements or understandings between any
officer and any other person pursuant to which the officer was elected.
Name Age Position
---- --- --------
C. James Bess 66 President and Chief Executive Officer
Jani Blake 44 Executive Vice President and Chief Operating Officer
Kelly George 36 Senior Vice President and Chief Lending Officer
Joseph Petterson 57 Executive Vice President and Chief Financial Officer
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information pertaining to the Corporation's common stock is contained
under the caption "Market Information" in the Corporation's 2003 Annual Report,
and is incorporated herein by reference.
The Corporation had 1,805 shareholders of record as of March 9, 2004.
The holders of the Corporation's common stock are entitled to dividends when, as
and if declared by the Board of Directors of the Corporation out of funds
legally available for that purpose. Dividends had been paid on a quarterly basis
until the fourth quarter in 2002. In determining dividends, the Board of
Directors considers the earnings, capital requirements and financial condition
of the Corporation and its subsidiary bank, along with other relevant factors.
The Corporation's principal source of funds for cash dividends is the dividends
paid by the Bank. The ability of the Corporation and the Bank to pay dividends
is subject to regulatory restrictions and requirements. In the fourth quarter of
2002, the Corporation suspended payment of a dividend and the Corporation's and
Bank's Boards of Directors adopted resolutions providing for prior regulatory
approval of the declaration or payment of any dividend by the Corporation or the
Bank. Further, the Order prohibits the Bank from declaring or paying dividends
without the prior written consent of the OFIS and FDIC.
17
The cash dividends declared, by quarter for 2003 and 2002, are included in the
Corporation's 2003 Annual Report under the caption "Comparative Highlights" and
are incorporated here by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of the Corporation is contained in the Corporation's
2003 Annual Report, under the caption "Selected Financial Data," and is
incorporated here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Incorporated by reference to the Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Corporation's 2003 Annual
Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to the Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Corporation's 2003 Annual
Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to the Corporation's Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001 in the Corporation's 2003
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A change in the Corporation's independent public accountants occurred during
2002. The change has been reported on Form 8-Ks filed during 2002.
On August 28, 2002, Wipfli Ullrich Bertelson LLP ("Wipfli") resigned as the
independent auditor of the Corporation's financial statements for the year
ending December 31, 2002. The reason for the decision to resign was solely the
Corporation's desire to outsource internal audit, regulatory compliance, and
financial reporting services to Wipfli, which would preclude Wipfli from serving
as the Corporation's independent auditor.
Wipfli's report on the Corporation's financial statements for the year ended
December 31, 2001, and prior thereto, did not contain any adverse opinion nor
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
During the Corporation's two most recent fiscal years, and for the interim
periods following December 31, 2001, through the date of Wipfli's resignation,
there had been no disagreements
18
with Wipfli on any matter of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Wipfli, would have caused Wipfli to make a
reference to the subject matter of the disagreements in connection with its
reports.
The Corporation provided Wipfli with a copy of the Form 8-K disclosure and
Wipfli furnished a letter addressed to the SEC stating Wipfli agreed with the
foregoing statements. A copy of Wipfli's letter to the SEC was filed as Exhibit
16.1 to the report on Form 8-K dated August 28, 2002.
The firm of Rehmann Robson of Saginaw, Michigan, had initially been engaged to
perform the audit of the Corporation's financial statements for the fiscal year
ending December 31, 2002.
On November 11, 2002, Rehmann Robson resigned as the independent auditor of the
Corporation's financial statements for the year ending December 31, 2002.
Rehmann Robson did not audit any year-end financial statements included on Form
10-K nor review any quarterly reports of the Corporation on Form 10-Q.
The Corporation provided Rehmann Robson with a copy of the disclosure regarding
Rehmann Robson and Rehmann Robson furnished a letter addressed to the SEC
stating Rehmann Robson agreed with the foregoing statements regarding Rehmann
Robson. A copy of Rehmann Robson's letter to the SEC was filed as Exhibit 16.1
to the report on Form 8-K dated November 11, 2002.
As noted on Form 8-K dated December 16, 2002, the firm of Plante & Moran, PLLC
of Grand Rapids, Michigan, was engaged to perform an audit of the Corporation's
financial statements for the year ending December 31, 2002. Subsequently, Plante
& Moran, PLLC was engaged to also perform an audit on the Corporation's
financial statements for the year ending December 31, 2003.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 13, 2003, an evaluation was performed under the supervision of
and with the participation of the Corporation's management, including the
President and Chief Executive Officer, and Chief Financial Officer of the
effectiveness of the design and operation of the Corporation's disclosure
controls and procedures. Based on that evaluation, the Corporation's management,
including the President and Chief Executive Officer, and Chief Financial Officer
concluded that the Corporation's disclosure controls and procedures were
effective as of December 31, 2003. There have been no significant changes in the
Corporation's internal controls or in other factors that could significantly
affect internal controls subsequent to December 31, 2003.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The information set forth under the captions "Information About Directors and
Nominees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Corporation's definitive Proxy Statement for its May 18, 2004, Annual Meeting of
Shareholders (the "Proxy Statement"), a copy of which will be filed with the SEC
prior to the meeting date, is incorporated here by reference.
The Corporation has a separately designated standing Audit Committee established
in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934.
The members of the Audit Committee consist of Dennis Bittner, Stephen Madigan
and Spencer Shunk. The Board of Directors has determined that it does not have a
member of the Audit Committee that is qualified as an audit committee financial
expert, as that term is defined in the rules of the Securities and Exchange
Commission. The Board of Directors of the Corporation believes that the Audit
Committee members have the overall business acumen to participate as a member of
the Audit Committee, based upon many years of direct business experience.
The Corporation has adopted a code of ethics that applies to all of the
directors, officers and employees, including the principal executive officer,
principal financial officer, principal accounting officer or controller, and
persons performing similar functions. The code of ethics is filed as Exhibit 14
to this report.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to compensation of the Corporation's executive officers and
directors is contained under the captions "Remuneration of Directors" and
"Executive Compensation," in the Corporation's Proxy Statement and is
incorporated here by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners and
management is contained under the caption "Beneficial Ownership of Common Stock"
in the Corporation's Proxy Statement and is incorporated here by reference.
The following table provides information as of December 31, 2003 with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of the Corporation are authorized for issuance. All such
compensation plans were previously approved by security holders.
20
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted average equity compensation
issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a)
----------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation
plans approved by
security 549,732 $ 13.94 358,238
Equity compensation
plans not approved by
security holders -0- -0- -0-
-------------------------- -------------------- -------------------------
Total 549,732 $ 13.94 358,238
========================== ==================== =========================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
contained under the caption "Indebtedness of and Transactions With Management"
in the Corporation's Proxy Statement and is incorporated here by reference.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information relating to principal accountant fees and services is contained
under the caption "Principal Accountant Fees and Services" in the Corporation's
Proxy Statement and is incorporated here by references.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements.
1. The following documents are filed as part of Item 8 of this
report:
Independent Auditor's Reports
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the years ended December 31,
2003, 2002, and 2001
Consolidated Statements of Changes in Shareholders' Equity for the
years ended
21
December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
2. Schedules to the consolidated financial statements required by
Article 9 of Regulation S-X are not required under the related
instructions or are inapplicable, and therefore have been omitted.
3. The following exhibits are filed as part of this report:
Reference is made to the exhibit index that follows the signature and
certification pages of this report.
The Corporation will furnish a copy of any exhibits listed on the Exhibit
Index to any shareholder of the Corporation without charge upon written request
of the Shareholders' Relations Department, North Country Financial Corporation,
130 South Cedar Street, Manistique, Michigan 49854.
(b) Reports on Form 8-K
Forms 8-K filed since 3rd quarter 10-Q Filing:
- Form 8-K dated November 16, 2003 announced the signing of a letter of
intent that included a non-binding offer by another entity to purchase
all of the common stock of the Corporation. The Form 8-K further
announced the withdrawal of the non-binding offer and subsequent
voidance of the letter of intent on November 19, 2003.
- Form 8-K dated February 17, 2004 announced the earnings for the year
ended December 31, 2003.
- Form 8-K dated February 17, 2004 announced the Corporation's entrance
into a Definitive Agreement to sell two branch offices, located in
Alanson, Michigan and Mancelona, Michigan.
- Form 8-K/A dated February 17, 2004, amending the earnings results for
the year ended December 31, 2003.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, dated March 24,
2004.
NORTH COUNTRY FINANCIAL CORPORATION
/s/ C. James Bess
-----------------------------------------------------
C. James Bess
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 24, 2004, by the following persons on
behalf of the Corporation and in the capacities indicated. Each director of the
Corporation, whose signature appears below, hereby appoints C. James Bess and
John D. Lindroth, and each of them severally, as his attorney-in-fact, to sign
in his name and on his behalf, as a director of the Corporation, and to file
with the Commission any and all Amendments to this Report on Form 10-K.
Signature
/s/ C. James Bess /s/ Ernie R. Krueger
-------------------------------------- -------------------------------
C. James Bess -- President Vice President / Controller
Chief Executive Officer, and Director (principal accounting officer)
/s/ Joseph E. Petterson
--------------------------------------
Joseph E. Petterson
Executive Vice President and Chief
Financial Officer
(chief financial officer)
/s/ Dennis Bittner /s/ Bernard A. Bouschor
-------------------------------------- -------------------------------
Dennis Bittner -- Director Bernard A. Bouschor -- Director
/s/ Stanley J. Gerou II /s/ Steve Madigan
-------------------------------------- -------------------------------
Stanley J. Gerou II -- Director Steve Madigan -- Director
/s/ John Lindroth /s/ Spence Shunk
-------------------------------------- -------------------------------
John Lindroth -- Director Spence Shunk -- Director
23
EXHIBIT INDEX
Number Exhibit
3.1 Articles of Incorporation, as amended, incorporated herein by reference
to exhibit 3.1 of the Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999.
3.2 Amended and Restated Bylaws, incorporated herein by reference to
exhibit 3.1 of the Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001.
4.1 Rights Agreement dated as of June 21, 2000 between the Corporation and
Registrar and Transfer Company, as Rights Agent, which includes as
Exhibit A the attachment to the Certificate of Amendment, as Exhibit B
the Form of Right Certificate, and as Exhibit C the Summary of Rights
to Purchase Preferred Shares, incorporated herein by reference to
exhibit 4 of the Corporation's Current Report on Form 8-K filed on July
31, 2000.
4.2 Certain borrowings and guaranteed preferred beneficial interests in the
Corporation's subordinated debentures are described in Notes 12 and 17
of the Corporation's Notes to Consolidated Financial Statements. The
Corporation agrees to furnish to the Commission, upon request, copies
of any instruments defining the rights of holders of any such
securities.
10.1 Stock Option Plan, incorporated by reference to the Corporation's
definitive proxy statement for its annual meeting of shareholders held
April 21, 1994.
10.2 Deferred Compensation, Deferred Stock, and Current Stock Purchase Plan
for Nonemployee Directors, incorporated herein by reference to exhibit
10.2 of the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
10.3 North Country Financial Corporation Stock Compensation Plan,
incorporated herein by reference to exhibit 10.3 of the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
10.4 North Country Financial Corporation 1997 Directors' Stock Option Plan,
incorporated herein by reference to exhibit 10.4 of the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
10.5 North Country Financial Corporation 2000 Stock Incentive Plan,
incorporated herein by reference to exhibit 10.1 of the Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
10.6 Employment Agreement dated July 3, 2000 between the Corporation and
Ronald G. Ford, incorporated herein by reference to exhibit 10 of the
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000.
10.7 Amended and Restated Employment Agreement dated December 21, 2001
between the Corporation and Ronald G. Ford, incorporated herein by
reference to Exhibit 10.7 of the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
10.8 Consulting Agreement dated September 15, 1999 between the Corporation
and Ronald G. Ford, incorporated herein by reference to exhibit 10.1 of
the Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.9 Amended and Restated Consulting Agreement dated December 21, 2001
between the Corporation and Ronald G. Ford, incorporated herein by
reference to Exhibit 10.9 of the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
10.10 Employment Agreement dated September 30, 2000 between the Corporation
and Sherry L. Littlejohn, incorporated herein by reference to exhibit
10 of the Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000.
10.11 North Country Financial Corporation Supplemental Executive Retirement
Plan, incorporated herein by reference to exhibit 10.6 of the
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.12 Consulting Agreement effective January 15, 2003, between the Bank and
W. Fitzgerald Consulting, LLC., incorporated herein by reference to
Exhibit 10.12 of the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
10.13 Chairman Agreement dated April 12, 2002, between the Corporation and
Ronald G. Ford, incorporated herein by reference to Exhibit 10.1 of the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002.
10.14 Employment agreement dated August 1, 2003, between the Corporation and
C. James Bess, incorporated herein by reference to Exhibit 10.1 of the
Corporation's 10-Q for the quarter ended June 30, 2003.
10.15 Employment agreement dated August 18, 2003 between the Corporation and
Joseph E. Petterson, incorporated herein by reference to Exhibit 10.1
of the Corporation's 10-Q for the quarter ended September 30, 2003.
10.16 Employment agreement dated September 1, 2003 between the Corporation
and Jani Blake, incorporated herein by reference to Exhibit 10.2 of the
Corporation's 10-Q for the quarter ended September 30, 2003.
10.17 Employment agreement dated September 3, 2003 between the Corporation
and Kelly W. George, incorporated herein by reference to Exhibit 10.3
of the Corporation's 10-Q for the quarter ended September 30, 2003.
13 2003 Annual Report to Shareholders. This exhibit, except for those
portions expressly incorporated by reference in this filing, is
furnished for the information of the Securities and Exchange Commission
and is not deemed "filed" as part of this filing.
14 Conflict of Interest -- Code of Ethics
21 Subsidiaries of the Corporation.
23.1 Consent of Independent Public Accountants - Plante & Moran, PLLC
23.2 Consent of Independent Public Accountants - Wipfli Ulrich Bertelson LLP
31 Rule 13(a)-- 14 (a) Certification
32.1 Section 1350 Chief Executive Officer Certification
32.2 Section 1350 Chief Financial Officer Certification
99.1 Order to Cease and Desist entered by the Federal Deposit Insurance
Corporation and the Michigan Office of Financial and Insurance Services
with the consent of the Bank, incorporated herein by reference to
exhibit 99.1 of the Corporation's Current Report on Form 8-K filed
April 11, 2003.
EXHIBIT 13
NORTH
COUNTRY
FINANCIAL
CORPORATION
2003
ANNUAL
REPORT
TO OUR SHAREHOLDERS
NORTH COUNTRY FINANCIAL CORPORATION
March 15, 2004
Dear Shareholder:
The challenges and difficulties encountered by the Corporation in 2003 have also
served as a catalyst for the implementation of essential cultural and business
practice adjustments that were needed to provide a proper foundation for going
forward with the Corporation's business on a prudent, safe and sound, profitable
basis for the benefit of all Shareholders.
The 2003 financial results, although disappointing, represent an operating loss
reduction year over year of $17.1 million; from a loss of $26.7 million in 2002
to a loss of $9.6 million in 2003. We cannot change the results of 2002 or 2003,
but we have made adjustments that we believe will have a significant positive
impact on the Company's overall condition and operating performance in 2004.
We expect major savings in the areas of consulting, legal, collections,
accounting, data processing, and branch related expenses in 2004. Management is
also taking steps to improve loan and deposit products, strengthen staff,
enhance delivery systems and increase marketing efforts in order to foster
public confidence and provide better service to existing customers and
prospective new customers.
At this point, I will take a moment to discuss with you, in outline form, what
has been accomplished since August of 2003 and some of the issues that are
pending for 2004 and beyond.
- As I have discussed with you in previous communications, key
management staff were put in place during the last half of
2003. Middle management and other staff positions have also
been filled and are continuing to be shored-up as necessary.
We are striving to have the best prepared people and acquire
and provide superior process in order to compete successfully
in the marketplace. We know that the right people with the
right leadership are primary keys to a successful future.
- An outside, independent and comprehensive Loan Review was
conducted in September of 2003 that confirmed the adequacy of
the allowance for potential loan and lease losses.
- A detailed Strategic Rehabilitation Plan was developed and
adopted during the third quarter of 2003 that addresses the
goals, objectives, priorities, and time-lines to improve the
financial soundness of the Company. Best efforts have and are
being made to implement these plans.
- Budgets for 2004 and 2005 have been developed and were
approved by the Board of Directors in December of 2003.
- In order to improve the risk profile, reduce related expenses,
and comply with regulatory requirements, management recently
completed the sale of $25.4 million of nonperforming loans.
The result of the transaction had no adverse impact on
earnings or further erosion of capital. A portfolio of
previously charged-off loans was sold for $1.1 million in
December of 2003 with proceeds credited to the Bank's
Allowance for Loan and Lease Losses.
- Initiatives are underway to reduce the geographic "footprint"
of the Bank through a combination of sales of branch deposits,
branch consolidations, and branch closures that could reduce
the total number of branches by nine unprofitable units. These
initiatives, if successful, would reduce the number of
branches to thirteen, reduce expenses, reduce oversight and
management burden, and improve the Bank's Tier I Capital/Asset
Ratio. It is hoped these activities can be completed by the
end of the second quarter of 2004.
- Management is currently engaged in discussions with investment
banking firms to determine the feasibility of recapitalizing
the Company through various means. Preliminary discussions are
also ongoing with regard to the potential sale of control of
the Company.
Page 2 - Shareholder Letter
- Progress is being made toward further improving the Bank's
Internal Auditing function in the areas of work product and
scope, cost reduction, Audit Committee involvement, risk
assessment, reporting and response, and the
tracking/verification process.
- The Bank's Asset/Liability Management function is being
expanded and improved by engaging a facilitator who will
provide documentation enhancements and expertise that should
strengthen the process. This activity includes how we monitor
asset and liability balances, maintain liquidity, manage
investments, deal with rising and falling interest rates, etc.
- Management continues to work diligently with the Bank's State
and Federal Regulators to comply with the Order to Cease and
Desist. Progress has and is being made toward this end.
As you can see, a good deal has been accomplished in a relatively short period
of time. However, many important issues remain and need to be completed and/or
resolved for the Bank to be successful; the most important and critical of which
is the acquisition of adequate capital. Without sufficient capital, a successful
turn-around and the future viability of the Company is threatened. Every effort
is being made to address this issue.
While Management cannot guarantee the results of our efforts or the Company's
future success, you may be assured that Management is continuing to provide the
best effort it is capable of every day for the benefit of all Shareholders.
Thank you for your continuing support and loyalty. Please remember that your
banking business and that of your family, friends, and business associates is of
great importance to the Corporation's future success.
Sincerely,
NORTH COUNTRY FINANCIAL CORPORATION
/s/ C. James Bess
-------------------------------
C. James Bess
President and Chief Executive Officer
COMPARATIVE HIGHLIGHTS
Dollars in thousands, except per share data
BALANCE SHEET STATISTICS 2003 2002
Assets $ 422,539 $ 565,306
Net loans 275,841 410,135
Deposits 305,794 437,494
Shareholders' equity 10,700 20,503
Shares of stock outstanding 7,019,152 7,019,152
Book value per share 1.52 2.92
OPERATING STATISTICS
Total income $ 26,872 $ 41,227
Total expense 34,131 45,152
Provision for loan losses -0- 26,658
Income (loss) before income taxes (7,259) (30,583)
Net income (loss) (9,588) (26,713)
Basic earnings per share (1.37) (3.81)
Diluted earnings per share (1.37) (3.81)
DIVIDEND SUMMARY (CASH DIVIDENDS DECLARED PER COMMON SHARE)
Quarter Ending
March 31 $ .00 $ .10
June 30 .00 .10
September 30 .00 .05
December 31 .00 .00
--------- ---------
Total dividends $ .00 $ .25
========= =========
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 North Country Mortgage Company LLC, North Country
Employee Leasing Company LLC, and NCB Real Estate Company. North Country
Mortgage Company LLC is engaged in the business of mortgage lending and
brokering. North Country Employee Leasing Company LLC provides employees to
North Country Bank and Trust. NCB Real Estate Company owns several properties
used by the Bank. North Country Financial Group is an inactive subsidiary. North
Country Capital Trust was formed solely for the issuance of trust preferred
securities. First Rural Relending Company is a rural lending corporation. First
Manistique Agency has limited activity and was formed for 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 the Shareholders' Relations
Department, North Country Financial Corporation, 130 South Cedar Street,
Manistique, Michigan, 49854.
MARKET SUMMARY
The Corporation's common stock is traded on the Nasdaq Small Cap Market under
the symbol NCFC. The Corporation had 1,812 shareholders of record as of January
31, 2004.
FIVE YEAR COMPARISONS
ASSETS
Total assets on a consolidated basis decreased by 23% during 2003 to $422.5
million.
[BAR CHART]
1999 2000 2001 2002 2003
568 667 637 565 422.5
SECURITIES
The portfolio of securities increased during 2003 by 25% to $84.4 million.
[BAR CHART]
1999 2000 2001 2002 2003
43.342 72 62 68 68
NET LOANS
Total net loans decreased 33% to $275.8 million in 2003.
[BAR CHART]
1999 2000 2001 2002 2003
460 532 494 410 275.8
FIVE YEAR COMPARISONS
DEPOSITS
Total deposits decreased by 30% to $305.8 million.
[BAR CHART]
1999 2000 2001 2002 2003
462.998 531.883 482.524 437 437
SHAREHOLDERS' EQUITY
During 2003 shareholders' equity decreased by $9.8 million, or 48%, to $10.7
million.
[BAR CHART]
1999 2000 2001 2002 2003
40.82 44.6 47.889 21 -9.8
NET INCOME(LOSS)
The net loss for 2003 was $9.6 million as compared to net income of $26.7
million for 2002.
[BAR CHART]
1999 2000 2001 2002 2003
6.356 5.183 5.774 -27.000 -9.6
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORTS
TO THE SHAREHOLDERS OF
NORTH COUNTRY FINANCIAL CORPORATION
MANISTIQUE, MICHIGAN
INDEPENDENT AUDITOR'S REPORT
Independent Auditor's Report
Board of Directors and Shareholders
North Country Financial Corporation
Manistique, Michigan
We have audited the accompanying consolidated balance sheet of North Country
Financial Corporation and Subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations and changes in stockholders'
equity and cash flows for the years then ended. These consolidated 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 auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of North Country Financial
Corporation and Subsidiaries as of December 31, 2003 and 2002, and the results
of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Notes 2 and 10 the Corporation changed its method of accounting
for goodwill effective January 1, 2002.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. As discussed in Notes 19 and 26 to
the financial statements, the Corporation has suffered significant losses from
operations resulting in a decrease to regulatory capital below the minimum
required in their Cease and Desist Order. Losses are expected to continue in
2004. These factors raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 26. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Plante & Moran, PLLC
-----------------------------
Plante & Moran, PLLC
March 24, 2004
Grand Rapids, Michigan
INDEPENDENT AUDITOR'S REPORT
Independent Auditor's Report
Board of Directors and Shareholders
North Country Financial Corporation
Manistique, Michigan
We have audited the accompanying consolidated statement of operations, changes
in shareholders' equity, and cash flows of North Country Financial Corporation
and Subsidiaries for the year ended December 31, 2001. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
North Country Financial Corporation and Subsidiaries for the year ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States.
/s/ Wipfli Ullrich Bertelson LLP
------------------------------------
Wipfli Ullrich Bertelson LLP
January 25, 2002
Appleton, Wisconsin
CONSOLIDATED BALANCE SHEETS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2003 and 2002
(Dollars in Thousands)
2003 2002
--------------- ---------------
ASSETS
Cash and due from banks $ 7,433 $ 17,542
Federal funds sold 15,600 26,250
--------------- ---------------
Cash and cash equivalents 23,033 43,792
Interest-bearing deposits in other financial institutions 6,048 2,010
Securities available for sale 84,774 67,955
Federal Home Loan Bank stock 4,544 4,375
Total loans 297,846 435,043
Allowance for loan losses (22,005) (24,908)
---------------- ---------------
Net loans 275,841 410,135
Premises and equipment 13,747 15,592
Other real estate held for sale 4,356 5,409
Other assets 10,196 16,038
--------------- ---------------
TOTAL ASSETS $ 422,539 $ 565,306
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 26,179 $ 40,797
Interest-bearing deposits 279,615 396,697
--------------- ---------------
Total deposits 305,794 437,494
Borrowings 87,026 87,815
Subordinated debentures 12,450 12,450
Other liabilities 6,569 7,044
--------------- ---------------
Total liabilities 411,839 544,803
Shareholders' equity:
Preferred stock - No par value:
Authorized 500,000 shares, no shares outstanding -0- -0-
Common stock - No par value:
Authorized - 18,000,000 shares
Issued and outstanding - 7,019,152 16,175 16,175
Retained earnings (6,502) 3,086
Accumulated other comprehensive income 1,027 1,242
--------------- ---------------
Total shareholders' equity 10,700 20,503
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 422,539 $ 565,306
=============== ===============
CONSOLIDATED STATEMENTS OF OPERATIONS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2003, 2002, and 2001
(Dollars in Thousands,Except Per Share Data)
2003 2002 2001
-------------- --------------- ---------------
Interest income:
Interest and fees on loans:
Taxable $ 18,999 $ 29,615 $ 41,178
Tax-exempt 1,534 2,256 3,405
Interest on securities:
Taxable 2,277 3,360 4,725
Tax-exempt 230 266 327
Other interest income 601 472 840
-------------- --------------- ---------------
Total interest income 23,641 35,969 50,475
-------------- --------------- ---------------
Interest expense:
Deposits 8,695 12,444 21,205
Borrowings 4,832 5,100 4,814
Subordinated debentures 488 545 823
-------------- --------------- ---------------
Total interest expense 14,015 18,089 26,842
-------------- --------------- ---------------
Net interest income 9,626 17,880 23,633
Provision for loan losses -0- 26,658 3,200
-------------- --------------- ---------------
Net interest income (loss) after provision for loan losses 9,626 (8,778) 20,433
-------------- --------------- ---------------
Other income:
Service fees 1,529 1,899 1,851
Other loan and lease income 58 1,095 5,540
Net security gains 427 746 1,073
Net gains on sale of loans 136 506 549
Gain on sale of branches -0- 464 1,386
Other 1,081 548 37
-------------- --------------- ---------------
Total other income 3,231 5,258 10,436
-------------- --------------- ---------------
Other expenses:
Salaries, commissions, and related benefits 5,973 7,589 11,882
Furniture and equipment expense 1,367 1,437 1,734
Occupancy expense 1,387 1,629 1,659
Data processing 1,517 1,894 1,609
Accounting, legal, and consulting fees 3,145 1,800 1,435
Loan and deposit expense 1,992 1,111 1,387
Telephone 1,382 1,305 1,153
Impairment loss on intangibles 60 3,647 -0-
Impairment loss on other real estate held for sale 400 2,418 -0-
Loss on sale of premises, equipment, and other real estate
held for sale 362 648 349
Advertising expense 182 545 794
Amortization of acquisition intangibles 460 420 1,057
Other 1,889 2,620 1,248
-------------- --------------- ---------------
Total other expenses 20,116 27,063 24,307
-------------- --------------- ---------------
Income (loss) before provision (credit) for income taxes (7,259) (30,583) 6,562
Provision (credit) for income taxes 2,329 (3,870) 788
-------------- --------------- ---------------
Net income (loss) $ (9,588) $ (26,713) $ 5,774
============== =============== ===============
Earnings (loss) per share:
Basic $ (1.37) $ (3.81) $ 0.82
============== =============== ===============
Diluted $ (1.37) $ (3.81) $ 0.82
============== =============== ===============
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2003, 2002, and 2001
(Dollars in Thousands,Except Per Share Data)
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Income (Loss) Total
--------------- -------------- -------- ------------- ----------
Balance, January 31,
2001 6,993,684 $ 16,029 $ 27,887 $ 701 $ 44,617
Net income 5,774 5,774
Other comprehensive loss:
Net unrealized loss on
securities available for
sale (541) (541)
----------
Total comprehensive income 5,233
Dividends declared ($.30
per share) (2,107) (2,107)
Issuance of common stock 30,533 239 239
Retirement of common stock (5,065) (93) (93)
--------------- -------------- -------- ------------ ----------
Balance, December 31,
2001 7,019,152 16,175 31,554 160 47,889
Net loss (26,713) (26,713)
Other comprehensive loss:
Net unrealized gain on
securities available for
sale 1,082 1,082
------------ ----------
Total comprehensive loss (25,631)
Dividends declared ($.25
per share) (1,755) (1,755)
--------------- -------------- -------- ------------ ----------
Balance, December 31,
2002 7,019,152 . 16,175 3,086 1,242 20,503
Net loss (9,588) (9,588)
Other comprehensive loss:
Net unrealized loss on
securities available for
sale (215) (215)
--------------- -------------- -------- ------------ ----------
Total comprehensive loss (9,803)
Balance, December 31,
2003 7,019,152 $ 16,175 $ (6,502) $ 1,027 $ 10,700
=============== ============== ======== ============ ==========
CONSOLIDATED STATEMENTS OF CASH FLOWS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2003, 2002, and 2001
(Dollars in Thousands)
2003 2002 2001
----------------- ----------------- ---------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) $ (9,588) $ (26,713) $ 5,774
----------------- ----------------- ---------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for loan losses -0- 26,658 3,200
Provision for impairment of intangible assets 60 3,647 -0-
Provision for impairment of other real estate
held for sale 400 2,418 -0-
Provision for impairment of bank premises
and equipment 669 -0- -0-
Provision for depreciation and net
amortization 2,546 2,424 2,683
Credit for deferred taxes (543) (6,580) (522)
Net (gains) losses on sales of:
Securities (427) (746) (1,073)
Premises, equipment, and other real estate
held for sale 356 648 349
Branches -0- (464) (1,386)
Change in other assets 6,881 2,291 528
Change in other liabilities (475) 1,850 (1,481)
----------------- ----------------- ---------------
Total adjustments 9,467 32,146 2,298
---------------- ----------------- ---------------
Net cash provided by operating activities 2,499 5,433 8,072
---------------- ----------------- ---------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits in other financial institutions (4,038) (492) (1,518)
Payment for purchases of securities available for sale (70,680) (110,582) (85,917)
Proceeds from sale of securities available for sale 36,601 95,245 74,681
Proceeds from calls and maturities of securities
available for sale 15,928 11,234 21,715
Purchase of Federal Home Loan Bank stock (169) -0- (386)
Net decrease in loans 129,589 52,470 30,643
Proceeds from sale of premises, equipment,
and other real estate held for sale 4,620 1,912 1,693
Capital expenditures -0- (878) (1,535)
Purchase of other real estate held for sale -0- -0- (763)
Net cash paid for branch sales -0- (6,437) (20,565)
---------------- ----------------- ---------------
Net cash provided by investing activities 111,851 42,472 18,048
---------------- ----------------- ---------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2003, 2002, and 2001
(Dollars in Thousands)
2003 2002 2001
--------------- ------------------ ---------------
Cash flows from financing activities:
Net decrease in deposits $ (131,700) $ (37,487) $ (26,639)
Net decrease in federal funds
purchased -0- -0- (1,800)
Proceeds from borrowings -0- -0- 20,000
Principal payments on borrowings (789) (734) (686)
Proceeds from issuance of common stock -0- -0- 239
Retirement of common stock -0- -0- (93)
Dividends paid -0- (1,755) (2,107)
--------------- ------------------ ---------------
Net cash used in financing activities (132,489) (39,976) (11,086)
--------------- ------------------ ---------------
Net increase (decrease) in cash and cash
equivalents (20,759) 7,929 15,034
Cash and cash equivalents at beginning 43,792 35,863 20,829
--------------- ----------------- ---------------
Cash and cash equivalents at end $ 23,033 $ 43,792 $ 35,863
=============== ================= ===============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 14,456 $ 17,943 $ 27,853
Income taxes paid or (refunded) (2,137) 292 1,175
Noncash investing and financing activities:
Transfer of foreclosures from loans to
other real estate held for sale 4,340 4,705 4,413
Transfer of property from premises and equipment to
other real estate held for sale -0- 1,226 -0-
Lease receivable recorded in sale/leaseback transaction -0- 154 -0-
Assets and liabilities divested in branch sales:
Loans -0- 4 11
Premises and equipment -0- 665 705
Other assets -0- -0- 89
Deposits -0- 7,547 22,720
Other liabilities -0- 23 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of North Country Financial Corporation (the
"Corporation") and Subsidiaries conform to accounting principles generally
accepted in the United States 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 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
banking activities. The Bank's primary market area is the upper peninsula and
the northern portion of the lower peninsula of 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. Approximately 1% of
the Corporation's business activity is with Canadian customers and denominated
in Canadian dollars.
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 Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, and
the valuation of foreclosed real estate, deferred tax assets, impairment of
intangible assets and goodwill.
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, 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 recorded on the trade date and
determined using the specific-identification method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to
hold stock in the FHLB based on the anticipated level of borrowings to be
advanced. This stock is recorded at cost, which approximates fair value.
Transfer of the stock is substantially restricted.
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. Loans are returned to accrual status when all
principal and interest amounts contractually due are brought current and future
payments are reasonably assured. Interest income on impaired and nonaccrual
loans is recorded on the cash basis. Loan-origination fees are credited to
income when received and the related loan-origination costs are expensed as
incurred. Management has determined that the deferral of loan fees and costs
would not be material.
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 collectability 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 collectability.
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 Held for Sale
Other real estate held for sale consists of assets acquired through, or in lieu
of, foreclosure and other long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. Other real estate held for sale is
initially recorded at the lower of cost or fair value, less costs to sell,
establishing a new cost basis. Valuations are periodically performed by
management, and the assets' carrying value is adjusted to the lower of cost
basis or fair value less costs to sell. Impairment losses are recognized for any
initial or subsequent write-downs. Net revenue and expenses from operations of
other real estate held for sale is included in other expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
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 over the estimated useful lives of the
assets.
Intangible Assets and Goodwill
Intangible assets attributable to the value of core deposits and the excess of
purchase price over fair value of net assets (goodwill) acquired are stated at
cost less accumulated amortization. The core deposit premium is amortized on a
straight-line basis over a period of ten years and is subject to an annual
impairment test based on the change in deposit base. Prior to 2002, goodwill was
being amortized over a period of 15 years. During 2002 goodwill was written off
in its entirety. (Note 10).
The Corporation reviews intangible assets and goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The evaluation includes assessing the estimated fair
value of the intangible asset based on market prices for similar assets, where
available, and the present value of the estimated future cash flows associated
with the intangible asset. Adjustments are recorded if it is determined that the
benefit of the intangible asset has decreased.
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.
Stock Option Plans
The Corporation sponsors three stock option plans. One plan was approved during
2000 and applies to officers, employees, and nonemployee directors. A total of
500,000 shares were made available for grant under this plan. The other two
plans, one for officers and employees and the other for nonemployee directors,
were approved in 1997. A total of 600,000 shares were made available for grant
under these plans. Options under all of the plans are granted at the discretion
of a committee of the Corporation's Board of Directors. Options to purchase
shares of the Corporation's stock are granted at a price equal to the market
price of the stock at the date of grant. The committee determines the vesting of
the options when they are granted as established under the plan.
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, 2003 and 2001.
There were no options granted in 2002.
2003 2002 2001
------ ---- ------
Dividend yield 0.00% N/A 3.90%
Risk-free interest rate 1.25% 1.62%
Weighted average expected life (years) 7.0% 7.0%
Expected volatility 29.85% 32.07%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The weighted average fair value of options granted as of their grant date, using
the assumptions shown above, was computed at $2.69 per share for options granted
in 2001. Options granted in 2003 were forfeited as a result of the grantee's
resignation.
The Corporation accounts for stock options using the intrinsic value method. For
all options granted, the intrinsic value was zero; therefore, 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 (dollars in thousands, except per share
data) as follows:
2003 2002 2001
--------------- -------------- ---------------
Net income (loss):
As reported $ (9,588) $ (26,713) $ 5,774
Total stock-based compensation expense
determined under fair value-based method,
net of tax (36) (94) (461)
--------------- -------------- ---------------
Pro forma $ (9,624) $ (26,807) $ 5,313
=============== ============== ===============
Earnings (loss) per share - Basic:
As reported $ (1.37) $ (3.81) $ 0.82
=============== ============== ===============
Pro forma $ (1.37) $ (3.82) $ 0.76
=============== ============== ===============
Earnings (loss) per share - Diluted:
As reported $ (1.37) $ (3.81) $ 0.82
=============== ============== ===============
Pro forma $ (1.37) $ (3.82) $ 0.76
=============== ============== ===============
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available for sale, which are
recognized as a separate component of equity, accumulated other comprehensive
income (loss).
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 (credit) 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit and indemnifications. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair or market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations would not apply
to guarantees accounted for as derivatives. The initial recognition and
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. See Note 22 for the disclosures currently
required under FIN 45.
Reclassifications
Certain amounts in the 2002 and 2001 consolidated financial statements have been
reclassified to conform to the 2003 presentation.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142
addresses how intangible assets acquired outside of a business combination
should be initially recognized. SFAS No. 142 eliminates the amortization for
goodwill and other intangible assets with indefinite lives. Other intangible
assets with a finite life will be amortized over their useful life. Goodwill and
other intangible assets with indefinite useful lives shall be tested for
impairment annually or more frequently if events or changes in circumstances
indicate that the asset may be impaired. The effect of the adoption of SFAS No.
142 and SFAS No. 147 is detailed in Note 10.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," as an amendment to SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The Corporation does not
currently anticipate voluntarily changing to the fair value based method of
accounting for stock-based employee compensation; therefore, this statement has
disclosure only impact on the consolidated financial statements.
SFAS No 149 - In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain embedded derivatives, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement amends SFAS No. 133 to reflect the decisions made as
part of the Derivatives Implementation Group (DIG) and in other FASB projects or
deliberations. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Adoption of this Standard did not have a material effect on the
Corporation's financial statements.
SFAS No. 150 - In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". This Statement establishes standards for how an entity classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. This Statement is effective for financial instruments entered into
or modified after May 31, 2003. Adoption of this Standard had no financial
statement impact to the Corporation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
FIN 46 - In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". This Interpretation clarifies the
application of ARB No. 51, "Consolidated Financial Statements", for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. The Corporation early adopted the provisions of FIN 46 related to
the consolidation of one wholly-owned finance entity involved in the issuance of
trust preferred securities. Effective July 1, 2003, the Corporation
de-consolidated the wholly-owned issuing trust entity. The result of the
de-consolidation had no impact to the financial statements of the Corporation.
NOTE 3 - ACQUISITIONS AND DIVESTITURES
In July 2001, the Corporation sold deposits and certain assets of the St. Ignace
and Mackinaw Island branches and in November 2001, sold deposits and certain
assets of the Curtis and Naubinway branches. Deposits of $22,720,000, other
liabilities of $36,000, and assets of $805,000 were divested in transactions
that resulted in a gain on sale of $1,386,000.
In November 2002, the Corporation sold deposits and certain assets of the branch
in Menominee. Deposits of $7,547,000, other liabilities of $23,000, and assets
of $669,000 were divested in the transaction which resulted in a net gain on
sale of $464,000.
NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $682,000 were restricted on December
31, 2003 to meet the reserve requirements of the Federal Reserve System.
In the normal course of business, the Corporation maintains cash and due from
bank balances with correspondent banks. Balances in these accounts may exceed
the Federal Deposit Insurance Corporation's insured limited of $100,000.
Management believes that these financial institutions have strong credit ratings
and the credit risk related to these deposits is minimal.
NOTE 5 - SECURITIES AVAILABLE FOR SALE
The carrying value and estimated fair value of securities available for sale are
as follows (dollars in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------- ----------- ------------ ---------------
DECEMBER 31, 2003
U S Agencies $ 36,017 $ 208 $ -0- $ 36,225
Obligations of states and political subdivisions 3,772 333 -0- 4,105
Corporate securities 666 42 -0- 708
Mortgage-related securities 43,292 446 2 43,736
---------------- ----------- ------------ ---------------
Total securities available for sale $ 83,747 $ 1,029 $ 2 $ 84,774
================ =========== ============ ===============
DECEMBER 31, 2002
Obligations of states and political subdivisions 5,172 460 -0- 5,632
Corporate securities 10,593 701 30 11,264
Mortgage-related securities 50,355 704 -0- 51,059
---------------- ----------- ------------ ---------------
Total securities available for sale $ 66,120 $ 1,865 $ 30 $ 67,955
================ =========== ============ ===============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 5 - SECURITIES AVAILABLE FOR SALE (CONTINUED)
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 (dollars
in thousands):
2003 2002 2001
--------------- --------------- ---------------
Proceeds from sale of securities $ 36,601 $ 95,245 $ 74,681
Gross gains on sales 588 799 1,116
Gross losses on sales 161 53 43
The carrying value and estimated fair value of securities available for sale at
December 31, 2003, by contractual maturity, are shown below (dollars in
thousands). 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 $ 226 $ 226
Due after one year through five years 36,802 37,073
Due after five years through ten years 450 495
Due after ten years 2,977 3,244
--------------- ---------------
Subtotal 40,455 41,038
Mortgage-related securities 43,292 43,736
--------------- ---------------
Total $ 83,747 $ 84,774
=============== ===============
The carrying value and estimated fair value of securities pledged to secure
treasury deposits was $991,000, as of December 31, 2003. See Note 12 for
information on securities pledged to secure borrowings from the Federal Home
Loan Bank.
NOTE 6 - LOANS
The composition of loans at December 31 (dollars in thousands) is as follows:
2003 2002
--------------- ---------------
Commercial real estate $ 39,571 $ 61,556
Commercial, financial, and agricultural 203,393 290,371
One- to four-family residential real estate 51,120 74,366
Consumer 3,195 5,706
Construction 567 3,044
--------------- ---------------
Total loans $ 297,846 $ 435,043
=============== ===============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 6 - LOANS (CONTINUED)
An analysis of the allowance for loan losses for the years ended December 31
(dollars in thousands) is as follows:
2003 2002 2001
--------------- --------------- --------------
Balance, January 1 $ 24,908 $ 10,444 $ 9,454
Provision for loan losses -0- 26,658 3,200
Recoveries on loans 4,053 376 748
Loans charged off (6,956) (12,570) (2,958)
--------------- --------------- --------------
Balance, December 31 $ 22,005 $ 24,908 $ 10,444
=============== =============== ==============
The aggregate amount of nonperforming residential and consumer loans was
approximately $2,047,000 and $2,212,000 at December 31, 2003 and 2002,
respectively. Nonperforming loans are those which are contractually past due 90
days or more as to interest or principal payments, on nonaccrual status, or
loans, the terms of which have been renegotiated to provide a reduction or
deferral of interest or principal. The interest income recorded and that which
would have been recorded had residential and consumer nonaccrual and
renegotiated loans been current or not troubled, are not material to the
consolidated financial statements for the years ended December 31, 2003 and
2002. The nonperforming commercial loans are reflected in the information
regarding impaired loans.
Information regarding impaired loans (dollars in thousands) is as follows:
As of December 31:
2003 2002 2001
-------------- --------------- --------------
Total impaired loans $ 43,827 $ 51,602 $ 25,524
Impaired loans with a valuation allowance 39,993 51,331 25,524
Impaired loans on nonaccrual 36,646 23,992 3,055
Valuation allowance related to impaired loans 7,648 6,739 3,708
For the years ended December 31:
2003 2002 2001
-------------- --------------- --------------
Average investment in impaired loans $ 46,693 $ 25,073 $ 23,154
Interest income recognized during impairment 1,307 1,120 1,521
Interest income that would have been recognized
on an accrual basis 2,793 1,653 1,597
Cash-basis interest income recognized 718 531 1,072
The Bank, in the ordinary course of 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 is summarized below (dollars
in thousands).
2003 2002
--------------- --------------
Loans outstanding, January 1 $ 10,987 $ 16,625
New loans -0- 1,645
Repayment (4,480) (991)
Increase related to new executive officers and new directors 98 -0-
Decrease related to retired executive officers and directors (91) (6,292)
--------------- --------------
Loans outstanding, December 31 $ 6,514 $ 10,987
=============== ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 6 - LOANS (CONTINUED)
Two related-party loans had balances of approximately $6,055,000 and $-0- at
December 31, 2003 and $6,608,000 and $3,025,000 at December 31, 2002. Loans to
related-parties of approximately $-0- and $9,182,000 were classified substandard
at December 31, 2003 and 2002, respectively.
Late in March 2004, the Corporation sold $25.4 million of loans which were
primarily nonperforming. Refer to Management's Discussion and Analysis for
additional information regarding this sale.
NOTE 7 - PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 (dollars in thousands) is as
follows:
2003 2002
--------------- ---------------
Land $ 2,503 $ 2,503
Buildings and improvements 13,424 13,745
Furniture, fixtures, and equipment 9,705 9,995
--------------- ---------------
Totals 25,632 26,243
Less - Accumulated depreciation and amortization 11,885 10,651
--------------- ---------------
Net book value $ 13,747 $ 15,592
=============== ===============
Depreciation and amortization of premises and equipment charged to operating
expenses amounted to $1,378,000 in 2003, $1,633,000 in 2002, and $1,672,000 in
2001.
NOTE 8 - OTHER REAL ESTATE HELD FOR SALE
An analysis of other real estate held for sale for the years ended December 31
(dollars in thousands) is as follows :
2003 2002 2001
-------------- --------------- --------------
Balance, January 1 $ 5,409 $ 4,211 $ 908
Additions:
Through, or in lieu of, foreclosure 4,340 4,705 4,413
Previously held -0- 1,226 -0-
Newly acquired -0- -0- 763
Impairment losses (848) (2,418) -0-
Other real estate sold (4,545) (2,315) (1,873)
-------------- --------------- --------------
Balance, December 31 $ 4,356 $ 5,409 $ 4,211
============== =============== ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 9 - INTANGIBLE ASSET
Included in other assets are core deposit premiums acquired through
acquisitions. These core deposit premiums are considered an intangible asset.
The carrying amount of the intangible asset for the years ended December 31
(dollars in thousands) is as follows:
2003 2002
---------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ---------------- -------------- ---------------
Core deposit premium $ 5,403 $ 4,336 $ 5,403 $ 3,816
======== ================ =============== ==============
The aggregate amortization expense for the years ended December 31, 2003, 2002,
and 2001 was $520,000, $420,000, and $519,000, respectively.
The following table shows the estimated future amortization expense for the
intangible asset. The projections of amortization expense are based on existing
asset balances as of December 31, 2003 (dollars in thousands).
2004 346
2005 219
2006 174
2007 140
2008 134
Thereafter 54
---------------
Total $ 1,067
===============
NOTE 10 - GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31
(dollars in thousands) are as follows:
2003 2002 2001
--------------- -------------- -------------
Balance, January 1 $ -0- $ 3,647 $ 4,184
Goodwill acquired -0- -0- -0-
Amortization -0- -0- (537)
Impairment loss -0- (3,647) -0-
--------------- -------------- -------------
Balance, December 31 $ -0- $ -0- $ 3,647
=============== ============== =============
As required by SFAS No. 142, adopted January 1, 2002, the Corporation is
required to perform an annual impairment test on goodwill. The impairment test
is based in large part on a comparison of the fair value of the Corporation's
outstanding stock, with the carrying value of its net assets. During the fourth
quarter of 2002, events occurred which were determined to more likely than not
reduce the fair value of the Corporation. Therefore, as required by SFAS No.
142, an additional impairment test was completed. This test resulted in an
identified potential impairment. Based on the size of the identified potential
impairment, the entire balance of goodwill as of the beginning of the year was
determined to be impaired and the impairment loss shown in the table above was
recorded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 - GOODWILL (CONTINUED)
The following table illustrates the effect amortization of goodwill had on net
income previous to the adoption of SFAS No. 142 for the years ended December 31
(dollars in thousands, except for share data):
2003 2002 2001
------------- ------------- --------------
Net income (loss) $ (9,588) $ (26,713) $ 5,774
Goodwill amortization, net of tax -0- -0- 487
------------- ------------- --------------
Adjusted net income (loss) $ (9,588) $ (26,713) $ 6,261
============= ============== ==============
Adjusted basic earnings per share $ (1.37) $ (3.81) $ .89
============= ============= ==============
Adjusted diluted earnings per share $ (1.37) $ (3.81) $ .89
============= ============= ==============
NOTE 11 - DEPOSITS
The distribution of deposits at December 31 (dollars in thousands) is as
follows:
2003 2002
--------------- ---------------
Non-interest-bearing demand deposits $ 26,179 $ 40,797
Savings, money market, and interest-bearing demand deposits 91,835 159,297
Time deposits 187,780 237,400
--------------- ---------------
Total deposits $ 305,794 $ 437,494
=============== ===============
As of December 31, 2003, $2.4 million of deposits are from Canadian customers.
Non-brokered time deposits of $100,000 or more were $18,599,000 and $37,386,000
at December 31, 2003 and 2002, respectively. Interest expense on non-brokered
time deposits of $100,000 or more was $785,000, $1,510,000, and $2,731,000, for
the years ended December 31, 2003, 2002, and 2001, respectively.
Maturities of time deposits outstanding at December 31, 2003, (dollars in
thousands) are as follows:
2004 $ 120,445
2005 39,058
2006 20,865
2007 6,160
2008 -0-
Thereafter 1,252
----------------
$ 187,780
================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 12 - BORROWINGS
Borrowings consist of the following at December 31 (dollars in thousands):
2003 2002
--------------- -----------------
Federal Home Loan Bank:
Fixed-rate advance at 7.37%, maturing April 15, 2004 $ 64 $ 79
Fixed-rate advance at 7.59%, maturing May 17, 2004 112 139
Fixed-rate advance at 6.35%, maturing July 7, 2004 1,000 1,000
Fixed-rate advance at 6.50%, maturing October 17, 2005 904 1,295
Fixed-rate advance at 7.06%, maturing May 15, 2006 3,395 3,685
Convertible - Fixed-rate advance at 5.49%, callable quarterly,
maturing June 23, 2008 10,000 10,000
Convertible - Fixed-rate advance at 5.66%, callable quarterly,
maturing October 21, 2009 10,000 10,000
Convertible - Fixed-rate advance at 6.22%, callable quarterly,
maturing February 22, 2010 10,000 10,000
Convertible - Fixed-rate advance at 6.50%, callable quarterly,
maturing June 22, 2010 10,000 10,000
Convertible - Fixed-rate advance at 5.99%, callable quarterly,
maturing June 23, 2010 5,000 5,000
Convertible - Fixed-rate advance at 4.98%, callable quarterly,
maturing December 20, 2010 5,000 5,000
Convertible - Fixed-rate advance at 5.16%, callable quarterly,
maturing December 28, 2010 10,000 10,000
Convertible - Fixed-rate advance at 4.50%, callable quarterly,
maturing January 10, 2011 10,000 10,000
Convertible - Fixed-rate advance at 4.35%, callable quarterly,
maturing February 5, 2011 10,000 10,000
--------------- -----------------
85,475 86,198
Farmers Home Administration:
Fixed-rate note payable to Farmers Home Administration, maturing August 24,
2024, interest payable at 1% 1,551 1,617
--------------- -----------------
Total borrowings
$ 87,026 $ 87,815
=============== =================
The FHLB has the option to convert the above listed convertible - fixed-rate
advances to adjustable rate advances, repricing quarterly at three month LIBOR
Flat, on the original call date and quarterly thereafter.
Maturities of borrowings outstanding at December 31, 2003, (dollars in
thousands) are as follows:
2004 $ 1,176
2005 904
2006 3,395
2007 -0-
2008 -0-
Thereafter 81,551
----------------
Total $ 87,026
================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 12 - BORROWINGS (CONTINUED)
The Federal Home Loan Bank borrowings are collateralized at December 31, 2003,
by the following: a collateral agreement on the Corporation's one- to
four-family residential real estate loans with a book value of approximately
$43,280,000; commercial real estate leases with a book value of approximately
$25,174,000; U.S. government agency and mortgage-backed securities with an
amortized cost and estimated fair value of $58,287,000 and $58,765,000,
respectively; an interest-bearing deposit in the amount of $5,031,000; and
Federal Home Loan Bank stock owned by the Bank totaling $4,543,800. 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, 2003.
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling
$757,000 originated and held by the Corporation's wholly owned subsidiary, First
Rural Relending, an assignment of a demand deposit account in the amount of
$935,000, and guaranteed by the Corporation.
NOTE 13 - INCOME TAXES
The components of the federal income tax provision (credit) for the years ended
December 31 (dollars in thousands) are as follows:
2003 2002 2001
-------------- --------------- --------------
Current tax expense (credit) $ (111) $ (4,290) $ 1,310
Deferred tax credit (543) (6,580) (522)
Change in valuation allowance 2,983 7,000 -0-
-------------- --------------- --------------
Total provision (credit) for income taxes $ 2,329 $ (3,870) $ 788
============== =============== ==============
A summary of the source of differences between income taxes at the federal
statutory rate and the provision (credit) for income taxes for the years ended
December 31 (dollars in thousands) is as follows:
2003 2002 2001
-------------- --------------- --------------
Tax expense (credit) at statutory rate $ (2,468) $ (10,398) $ 2,231
Increase (decrease) in taxes resulting from:
Tax-exempt interest (540) (777) (1,115)
Intangible asset amortization and impairment 10 690 147
Change in valuation allowance 2,983 7,000 -0-
Minimum Tax 1,313 -0- -0-
Other 1,031 (385) (475)
-------------- --------------- --------------
Provision (credit) for income taxes $ 2,329 $ (3,870) $ 788
============== =============== ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 13 - INCOME TAXES (CONTINUED)
Included in the total provision for income taxes are expenses of $145,000,
$254,000, and $365,000 for the years ended December 31, 2003, 2002, and 2001,
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 (dollars in
thousands) are as follows:
2003 2002
------------------ ---------------
Deferred tax assets:
Allowance for loan losses $ 7,482 $ 8,032
Deferred compensation 436 445
Intangible assets 638 588
Other real estate 173 561
Alternative Minimum Tax Credit 1,313 -0-
Tax credit carryovers 138 230
Other 24 48
------------------ ---------------
Total deferred tax assets 10,204 9,904
------------------ ---------------
Valuation allowance (9,983) (7,000)
------------------ ---------------
Deferred tax liabilities:
Depreciation (221) (449)
Unrealized gain on securities available for sale -0- (593)
Other -0- (15)
------------------ ---------------
Total deferred tax liabilities (221) (1,057)
------------------- ---------------
Net deferred tax asset (liability) $ -0- $ 1,847
================== ===============
A valuation allowance is provided against deferred tax assets when it is more
likely than not that some or all of the deferred tax asset will not be realized.
At December 31, 2003, the Corporation established a valuation allowance against
the net deferred tax asset which would require future taxable income in order to
be utilized. The Corporation has a net operating loss carry forward for tax
purposes of approximately $5.6 million which could only be benefited if the
Corporation returns to profitability. This net operating loss carryforward will
expire in the 2023 tax year.
NOTE 14 - OPERATING LEASES
The Corporation leases space at six branch offices. The leases, expiring during
the next three years, are classified as operating leases. Future minimum
payments, by year and in the aggregate, under the noncancelable operating leases
with initial or remaining terms in excess of one year consisted of the
following:
Operating Leases
------------------
2004 $ 124,599
2005 58,368
2006 22,176
------------------
Total $ 205,143
==================
Rent expense for all operating leases amounted to $232,000 in 2003, $295,000 in
2002, and $363,000 in 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 15 - 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 $78,000, $140,000, and $180,000 for
2003, 2002, and 2001, respectively.
NOTE 16 - DEFERRED COMPENSATION PLANS
As an incentive to retain key members of management and directors, the
Corporation has a deferred compensation plan, with benefits based on the number
of years the individuals have served the Corporation. A liability is recorded on
a present value basis and discounted using the rates in effect at the time the
deferred compensation agreement is entered into. The liability may change
depending upon changes in long-term interest rates. The liability at December
31, 2003 and 2002, for vested benefits under this plan was $1,335,000 and
$1,373,000 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 the policies was $1,635,000 and $1,274,000 at December 31, 2003 and 2002,
respectively.
The Corporation sponsored a deferred stock compensation plan for directors,
which was terminated in January 2001. Directors were allowed to defer their
directors' fees under the plan. The deferred compensation was computed as stock
equivalents as the compensation was earned. Upon termination of the plan,
directors received the deferred compensation in the form of common stock or
cash.
Deferred compensation expense for the plans was $157,000, $266,000 and $104,000
for 2003, 2002 and 2001 respectively.
NOTE 17 - SUBORDINATED DEBENTURES
The Corporation owns a Delaware business trust, North Country Capital Trust (the
"Trust"). The Trust exists solely to issue capital securities. Prior to the
adoption of FIN 46, the Corporation consolidated this entity as a result of its
ownership of the outstanding common securities. This entity meets the FIN 46
definition of a VIE, but the Corporation is not the primary beneficiary in the
entity. As such, the Corporation deconsolidated this entity in 2003. 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 Corporation, through guarantees
and agreements, has fully and unconditionally guaranteed all of the Trust's
obligations under the trust preferred securities. The Federal Reserve Board has
accorded the trust preferred securities Tier I capital status up to 25% of Tier
I capital.
The trust preferred securities carry a floating rate of the three-month LIBOR
plus 2.5% and have a stated maturity date of May 14, 2029. The rate at December
31, 2003, was 3.68%. 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. The trust preferred
subordinated debenture agreement allows for the suspension of these payments for
up to 20 quarters. Management deferred the quarterly payments due from November
14, 2002 through December 31, 2003, and anticipates deferring all of the
payments due in 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are based upon the weighted average number of shares
outstanding. There was no impact of option shares on the calculation of dilutive
earnings per share since all of the options outstanding were antidilutive. The
following shows the computation of basic and diluted earnings (loss) per share
for the years ended December 31 (dollars in thousands, except per share data):
Weighted
Average Earnings
Net Number of (Loss)
Income (Loss) Shares per Share
-------------- -------------- ----------
2003
Loss per share - Basic and diluted $ (9,588) 7,019,152 $ (1.37)
============== ============== ===========
2002
Loss per share - Basic and diluted $ (26,713) 7,019,152 $ (3.81)
============== ============== ===========
2001
Earnings per share - Basic $ 5,774 7,018,921 $ 0.82
Effect of stock options - Net 2,414
Effect of deferred stock compensation 319
-------------- --------------
Earnings per share - Diluted $ 5,774 7,021,654 $ 0.82
============== ============== ==========
NOTE 19 - REGULATORY MATTERS
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 has determined that, as of December 31,
2003, the Corporation is undercapitalized.
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. In addition, federal banking regulators have established capital
classifications beyond the minimum requirements in order to risk-rate deposit
insurance premiums and to provide trigger points for prompt corrective action.
As of December 31, 2003, the Bank is also undercapitalized. As a result of this
classification, the Bank's premiums for deposit insurance will increase in 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - REGULATORY MATTERS (CONTINUED)
The Corporation's and the Bank's actual and required capital amounts and ratios
as of December 31 (dollars in thousands) are as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ---------- ------ ---------- -------
2003
Total capital (to risk-
weighted assets):
Consolidated $ 21,730 7.2% > or = $ 24,144 > or = 8.0% N/A
North Country Bank & Trust $ 24,973 8.3% > or = $ 24,070 > or = 8.0% > or = $ 30,088 > or = 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $ 10,865 3.6% > or = $ 17,244 > or = 4.0% N/A
North Country Bank & Trust $ 20,967 6.9% > or = $ 12,155 > or = 4.0% > or = $ 18,232 > or = 6.0%
Tier I capital (to average assets):
Consolidated $ 10,865 2.5% > or = $ 23,837 > or = 4.0% N/A
North Country Bank & Trust $ 20,967 4.8% > or = $ 17,472 > or = 4.0% > or = $ 21,840 > or = 5.0%
2002
Total capital (to risk-
weighted assets):
Consolidated $ 35,232 8.2% > or = $ 34,487 > or = 8.0% N/A
North Country Bank & Trust $ 34,048 7.9% > or = $ 34,328 > or = 8.0% > or = $ 42,910 > or = 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $ 22,824 5.3% > or = $ 17,244 > or = 4.0% N/A
North Country Bank & Trust $ 28,443 6.6% > or = $ 17,164 > or = 4.0% > or = $ 25,746 > or = 6.0%
Tier I capital (to average assets):
Consolidated $ 22,824 3.8% > or = $ 23,837 > or = 4.0% N/A
North Country Bank & Trust $ 28,443 4.8% > or = $ 23,736 > or = 4.0% > or = $ 29,670 > or = 5.0%
The Bank is restricted, by banking regulations, from making dividend
distributions above prescribed amounts. At December 31, 2003, the Bank was not
authorized to pay dividends to the Corporation without prior regulatory
approval. Additionally, due to restrictions in the trust preferred documents,
dividends are prohibited during the period in which interest payments are
deferred.
The Board of Directors has adopted a Shareholder Rights Plan to protect
shareholders against attempts to acquire control of the Corporation by means of
"creeping" acquisitions in the open market, a hostile tender offer made at less
than a full and fair price, and other takeover tactics that can be used to
deprive shareholders of the ability to get a full and fair price for all of
their shares in the context of a change in control. The Shareholder Rights Plan
was not adopted in response to any specific effort to acquire control of the
Corporation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - REGULATORY MATTERS (CONTINUED)
In October, 2001, the Bank was notified by the FDIC that it is a "troubled
institution" within the meaning of FDIC regulations. As a troubled institution,
the Bank is required to notify the FDIC 30 days prior to the addition or
replacement of a Board member and the employment or changes in responsibilities
of a senior executive officer.
In September, 2002, a regularly-scheduled safety and soundness examination of
the Bank was conducted by its principal regulators, the Michigan Office of
Financial and Insurance Services ("OFIS") and the FDIC. During the course of
that examination, the FDIC, the OFIS, and the Federal Reserve Bank of Chicago
("FRB") requested that the Corporation and the Bank take certain actions,
including suspending the payment of dividends and conserving the liquidity of
the Corporation.
In response to the concerns expressed by the regulators, the Board of Directors
of the Corporation and the Bank adopted resolutions providing for prior
regulatory approval of the declaration or payment of any dividend by the
Corporation or the Bank, and suspension of interest payments by the Corporation
in connection with its trust preferred securities.
The agreements relating to the trust preferred securities allow for the
suspension of payments for up to 20 quarters. Therefore, the suspension of the
interest payments does not violate the agreement. However, while interest
payments are suspended, no dividends can be paid on the Corporation's common
stock, and certain other restrictions apply. These other restrictions include a
prohibition on the sale of assets except in the ordinary course of business or
in immaterial amounts.
Following the completion of the regularly-scheduled safety and soundness
examination of the Bank by the FDIC and the OFIS in November, 2002, and the
Bank's receipt of the related Report of Examination ("Report"), the FDIC and the
OFIS, with the consent of the Bank, on March 26, 2003, entered a formal order
(the "Order") under Federal and State banking laws. The Order became effective
on April 5, 2003, and will remain in effect until modified or terminated by
action of the FDIC and the OFIS. The Order identifies deficiencies in the Bank's
policies and procedures for safe and sound operation, including its directorate
and management personnel and practices, credit underwriting, credit
administration, and policies regarding asset/liability management, liquidity,
funds management and investments, and its compliance with all applicable laws
and regulations, including Regulations O and U of the Board of Governors of the
Federal Reserve System (the "Board"), the FDIC Rules and Regulations, and the
Michigan Banking Code of 1999. The Order also requires the Bank to maintain
specified capital ratios during the life of the Order.
As of December 31, 2003, the Bank's capital ratios do not meet the minimum
requirements of the Order. Following is a summary of the strategies which
management is considering in order to restore the Bank's capital to the levels
required by the Order.
The Order requires the Bank and its directors to take specific steps, within
time periods specified in the Order, to address the operational deficiencies,
including certain violations of law and regulations, identified by the FDIC and
the OFIS in the Order and the Report. Among other things, the Bank must
establish, and submit to the FDIC and the OFIS for comment, written plans (i) to
reduce the Bank's risk position with respect to certain classified loans
identified in the Report or any subsequent Report of Examination during the life
of the Order, (ii) to reduce identified concentrations of loans to one industry
in excess of 100% of the Bank's Tier 1 capital, (iii) to reduce and collect
delinquent loans, (iv) to eliminate the classified amounts of loans to
directors, executive officers, principal shareholders of the Bank and their
respective related interests, (v) to address the Bank's relationship of volatile
liabilities to temporary investments, rate sensitivity objectives, and
asset/liability management, (vi) setting forth the Bank's strategic plan,
including financial goals and strategies to maintain adequate capital and
liquidity, to reduce problem loans, and to attract and keep qualified
management, (vii) covering the policies and procedures for review and approval
of reimbursement of customer entertainment and business development expenses of
the Bank's directors, officers and employees, (viii) for a realistic budget for
calendar year 2003 and each subsequent year during the life of the Order,
including strategies to improve the Bank's net interest margin, (ix) to reduce
the Bank's portfolio of other real estate owned as a result of foreclosure or
surrender of collateral for loans, and (x) to address procedures for the
directors to monitor, and management to implement, the requirements of the
Order.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - REGULATORY MATTERS (CONTINUED)
The Order further requires the Bank and its directors to take the following
specific steps, again within time periods specified in the Order. For the
calendar quarters ending March 31, 2003, and June 30, 2003, the Bank must have a
ratio of Tier 1 capital to total assets ("Tier 1 Capital Ratio") equal to at
least 6.4%. Commencing with the calendar quarter ending September 30, 2003, and
for each calendar quarter thereafter, the Bank must have a Tier 1 Capital Ratio
equal to at least 8.0%. If the Bank's Tier 1 Capital Ratio is below the required
percentage for any such quarter, the Bank must take steps to bring its Tier 1
Capital Ratio to the required level within 60 days. The Order also requires the
Bank to maintain its total risk-based capital ratio at 10.0% or greater for each
calendar quarter ending after the effective date of the Order. If the Bank's
total risk-based capital ratio for any such quarter is less than 10.0%, the Bank
must take steps to bring its total risk-based capital ratio to the required
level within 60 days.
Further actions the Bank must take within periods specified in the Order include
correcting all deficiencies noted in the Report with respect to certain
categories of loans, and all technical exceptions and all violations of law
noted in the Report. The Bank's loan committee, which must include at least
three outside directors who are independent of management and any principal
shareholder, is required to meet at least monthly, and to act with respect to
specified categories of loans and loan applications, including all such
applications involving directors and executive officers of the Bank and their
respective related interests. The Bank's Board of Directors is required to
review and revise the Bank's written loan policy, to submit the revised policy
to the FDIC and OFIS for review and comment, and to conduct an annual review of
the policy. The Bank's Board of Directors is also required to review and revise
the Bank's investment policy, and to submit the revised policy for comment to
the FDIC and the OFIS. The Order mandates the Bank's Board of Directors (i) to
adopt resolutions acknowledging the Bank's designation as a troubled institution
by the FDIC, (ii) to review all agreements for the provision of goods and
services between the Bank and any of its current or former directors, officers,
or employees, and their respective related interests, and to determine whether
such agreements remain in the best interest of the Bank, and (iii) to seek
restitution from Ronald G. Ford of all amounts paid by the Bank pursuant to the
Chairman Agreement entered into as of April 12, 2002, between Mr. Ford and the
Corporation. The Order also requires the Bank to submit to the FDIC and the OFIS
written reports regarding its progress under the Order, signed by each director
of the Bank, every three months following the effective date of the Order. If
the Bank fails or is unable to timely comply with the Order, there could be
material adverse effects on the Bank and the Corporation.
NOTE 20 - STOCK OPTION PLANS
The Corporation sponsors three stock option plans. One plan was approved during
2000 and applies to officers, employees, and nonemployee directors. A total of
500,000 shares were made available for grant under this plan. The other two
plans, one for officers and employees and the other for nonemployee directors,
were approved in 1997. A total of 600,000 shares were made available for grant
under these plans. Options under all of the plans are granted at the discretion
of a committee of the Corporation's Board of Directors. Options to purchase
shares of the Corporation's stock are granted at a price equal to the market
price of the stock at the date of grant. The committee determines the vesting of
the options when they are granted as established under the plan.
A summary of stock option transactions for the years ended December 31 is as
follows:
Number of Shares
-------------------------------------------------------
2003 2002 2001
---------------- --------------- --------------
Outstanding shares at beginning of year 772,397 894,797 677,997
Granted during the year 50,000 -0- 216,800
Expired / forfeited during the year (272,665) (122,400) -0-
---------------- ---------------- --------------
Outstanding shares at end of year 549,732 772,397 894,797
================ =============== ==============
Weighted average exercise price per share
at end of year $ 13.94 $ 14.11 $ 14.50
================ =============== ==============
Shares available for grant at end of year 358,238 135,573 120,573
================ =============== ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 - STOCK OPTION PLANS (CONTINUED)
Options in 2003 were granted at $2.95 per share. These same options expired in
2003 as a result of the grantee's resignation. No options were granted in 2002.
Options granted in 2001 were granted at a price of $7.80. Under these plans,
options expire ten years after the date of grant.
Following is a summary of the options outstanding and exercisable at December
31, 2003:
Weighted
Average Weighted
Remaining Average
Exercise Contractual Exercise
Price Range Number Life-Years Price
-------------- --------- ----------- ---------
$ 4.26 5,400 .13 $ 4.26
$7.80 - $12.00 254,800 5.06 9.23
$15.00 - $20.33 289,532 4.01 18.25
--------- ----------- ---------
549,732 4.46 $ 13.94
========= =========== =========
NOTE 21 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes for the years
ended December 31 (dollars in thousands) were as follows:
2003 2002 2001
-------------- --------------- --------------
Unrealized holding gains on
available for sale securities $ 212 $ 2,338 $ 255
Less reclassification adjustments for gains
later recognized in income 427 746 1,073
-------------- --------------- --------------
Net unrealized gains (losses) (215) 1,592 (818)
Tax effect -0- 510 (277)
-------------- --------------- --------------
Other comprehensive income (loss) $ (215) $ 1,082 $ (541)
============== =============== ==============
NOTE 22 - 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 consolidated balance
sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 22 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
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 (dollars in thousands) are as follows:
2003 2002
--------------- ---------------
Commitments to extend credit:
Fixed rate $ 3,870 $ 7,980
Variable rate 73,651 62,632
Standby letters of credit - Variable rate 14,498 13,161
Credit card commitments - Fixed rate 3,381 4,111
--------------- ---------------
$ 95,400 $ 87,884
=============== ===============
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 irrevocable 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. For expanded discussion on the Corporation's legal
proceedings, see Note 25.
Concentration of Credit Risk
The Bank grants commercial, residential, agricultural, and consumer loans
throughout Michigan. The Bank's most prominent concentration in the loan
portfolio relates to commercial loans to entities within the hospitality and
tourism industry. This concentration represents $86.8 million, or 32.1%, of the
commercial loan portfolio. The remainder of the commercial loan portfolio is
diversified in such categories as gaming, petroleum, forestry, and agriculture.
Due to the diversity of the Bank's locations, the ability of debtors of
residential and consumer loans to honor their obligations is not tied to any
particular economic sector.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments:
Cash, cash equivalents, and interest-bearing deposits - 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.
Federal Home Loan Bank stock - Federal Home Loan Bank stock is carried at cost,
which is its redeemable value and approximates its fair value, since the market
for this stock is limited.
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.
Deposits - 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 time deposits is based on the
discounted value of contractual cash flows applying interest rates currently
being offered on similar time deposits.
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.
Accrued interest - The carrying amount of accrued interest approximate fair
value.
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 the differences in the
current fees and those reflected to the off-balance-sheet instruments at
year-end are immaterial, no amounts for fair value are presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents information for financial instruments at December
31 (dollars in thousands):
2003 2002
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- ---------------- --------------- ---------------
Financial assets:
Cash and cash equivalents $ 23,033 $ 23,033 $ 43,792 $ 43,792
Interest-bearing deposits 6,048 6,048 2,010 2,010
Securities available for sale 84,774 84,774 67,955 67,955
Federal Home Loan Bank stock 4,544 4,544 4,375 4,375
Net loans 275,841 272,093 410,135 419,245
Accrued interest receivable 2,811 2,811 3,065 3,065
--------------- ---------------- --------------- ---------------
Total financial assets $ 397,051 $ 393,303 $ 531,332 $ 540,442
=============== ================ =============== ===============
Financial liabilities:
Deposits $ 305,794 $ 306,847 $ 437,494 $ 442,869
Borrowings 87,026 95,244 87,815 101,402
Accrued interest payable 2,090 2,090 2,624 2,624
Subordinated debentures 12,450 12,450 12,450 12,450
--------------- ---------------- --------------- ---------------
Total financial liabilities $ 407,360 $ 416,631 $ 540,383 $ 559,345
=============== ================ =============== ===============
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 24 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in Thousands)
ASSETS 2003 2002
--------------- ---------------
Cash and cash equivalents $ 423 $ 714
Securities available for sale -0- 358
Investment in subsidiaries 23,328 31,593
Other assets 590 960
--------------- ---------------
TOTAL ASSETS $ 24,341 $ 33,625
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities 805 286
Subordinated debentures 12,836 12,836
--------------- ---------------
Total liabilities 13,641 13,122
--------------- ---------------
Total shareholders' equity 10,700 20,503
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 24,341 $ 33,625
=============== ===============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 24 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
Years Ended December 31, 2003, 2002, and 2001
(Dollars in Thousands)
2003 2002 2001
-------------- --------------- --------------
Income:
Dividends received from subsidiaries $ -0- $ 2,704 $ 3,850
Security gains 102 -0- -0-
Other 17 44 25
-------------- --------------- --------------
Total income 119 2,748 3,875
-------------- --------------- --------------
Expenses:
Salaries and benefits 66 68 41
Interest 504 562 848
Accounting, legal and consulting fees 746 261 37
Other 126 150 155
-------------- --------------- --------------
Total expenses 1,442 1,041 1,081
-------------- --------------- --------------
Income (loss) before credit for income
taxes and equity in undistributed net
income (loss) of subsidiaries (1,323) 1,707 2,794
Credit for income taxes -0- (349) (368)
-------------- --------------- --------------
Income before equity in undistributed
net income (loss) of subsidiaries (1,323) 2,056 3,162
Equity in undistributed net income (loss) of
subsidiaries (8,265) (28,769) 2,612
-------------- --------------- --------------
Net income (loss) $ (9,588) $ (26,713) $ 5,774
============== =============== ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 24 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002, and 2001
(Dollars in Thousands)
2003 2002 2001
-------------- --------------- --------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) $ (9,588) $ (26,713) $ 5,774
-------------- --------------- --------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for depreciation and amortization 28 29 29
Equity in undistributed net (income) loss of subsidiaries 8,265 28,769 (2,612)
Change in other assets 486 178 (8)
Change in other liabilities 518 164 (1,312)
-------------- --------------- --------------
Total adjustments 9,297 29,140 (3,903)
-------------- --------------- --------------
Net cash provided by (used in) operating activities (291) 2,427 1,871
-------------- --------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock -0- -0- 239
Retirement of common stock -0- -0- (93)
Dividends paid -0- (1,755) (2,107)
-------------- --------------- --------------
Net cash used in financing activities -0- (1,755) (1,961)
-------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents (291) 672 (90)
Cash and cash equivalents at beginning 714 42 132
-------------- --------------- --------------
Cash and cash equivalents at end $ 423 $ 714 $ 42
============== =============== ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 25 - Legal Proceedings
As of the date hereof, except for the Order, the two lawsuits, and the
arbitration referred to below, there were no material pending legal proceedings,
other than routine litigation incidental to the business of banking to which the
Corporation or any of its subsidiaries is a party or of which any of its
properties is the subject. Information pertaining to the Order is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Capital and Regulatory" and is incorporated here
by reference.
There is currently pending in the U.S. District Court for the Western District
of Michigan an action styled In re North Country Financial Corporation
Securities Litigation, which is the consolidation of two cases, Lanctot v.
Littlejohn, et al. and Rosen v. North Country Financial Corporation, et al.,
filed on June 13, 2003 and June 23, 2003, respectively. On December 1, 2003, the
plaintiffs, purportedly representing a class of all shareholders (excluding the
defendants) who purchased common stock between November 13, 2000 and April 15,
2003, filed a Consolidated Amended Class Action Complaint (the "Complaint")
asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 (the "Exchange Act") and Rule 10b-5 promulgated by the Securities and
Exchange Commission. The Complaint names as defendants the Company and Ronald G.
Ford (the Company's former chairman and chief executive officer and current
director) and Sherry L. Littlejohn (the company's former chief executive officer
and director). The Complaint is 39 pages in length and contains 110 paragraphs;
but as its gravamen the Complaint asserts that the defendants misrepresented the
Company's business operations and financial performance by failing to disclose
allegedly "unsafe and unsound banking practices" which "enabled defendants to
post better financial results than was actually the case." The Complaint, which
requests a jury trial, does not plead any specific damages.
On January 23, 2004, the defendants filed a motion to dismiss the Complaint,
asserting a number of defenses, including that the plaintiffs' allegations, even
if accepted as true, do not state a claim for violations of the Exchange Act. On
March 8, 2004, the plaintiffs' filed a brief in opposition to the defendants'
motion to dismiss. On March 23, 2004, defendants filed a reply brief in support
of their motion to dismiss. The court has scheduled a hearing on the motion for
March 30, 2004.
There is also currently pending in the U.S. District Court for the Western
District of Michigan an action styled Virginia M. Damon Trust v. North Country
Financial Corporation Nominal Defendant, and Dennis Bittner, Bernard A.
Bouschor, Ronald G. Ford, Sherry L. Littlejohn, Stanley J. Gerou II, John D.
Lindroth, Stephen Madigan, Spencer Shunk, Michael Henricksen, Glen Tolksdorf,
and Wesley Hoffman, which was filed in July 1, 2003. The individual defendants
are present and former members of the Company's Board of Directors (the
"Directors"). The Company is named as a "nominal" defendant, but the action is
brought on behalf of the Company, and, as a matter of law, any recovery in that
action would inure to the Company.
In the Damon case, the plaintiff, as a shareholder, asserts claims on behalf of
the Company: (1) to rescind the shareholders adoption of the Company's 2000
Stock Incentive Plan due to alleged misrepresentations in the proxy statement
mailed to shareholders in connection with the annual meeting of the Company held
on May 29, 2000, and (2) to recover damages for the Directors' alleged breaches
of fiduciary duties owed to the Company, principally for alleged failures to
safeguards the Company's assets, implement appropriate internal controls and/or
to oversee and adequate audit process. The former claim is brought under Section
14(a) of the Exchange Act, which provides the basis for federal court
jurisdiction under Section 27 of the Exchange Act. The latter claims, for breach
of fiduciary duty, are brought under Michigan law and seek damages of "at least
$40 million."
In September, October, and November 2003, the defendants filed a series of
motions to dismiss the Damon case. In their supporting briefs, the defendants
argued that the claim under Section 14 of the Exchange Act is barred by the
applicable statute of limitations, fails to allege fraud with the required
specificity and improperly names as defendants individuals who were not
directors at the time the proxy statement was mailed. The defendants also sought
dismissal of the breach of fiduciary duty claims because the plaintiff did not
satisfy the mandatory precondition, under Section 493a of the Michigan Business
Corporation Act ("MBCA"), M.C.L. Section 450.1493a, for filing a shareholder
derivative action in that the shareholder must first have submitted a written
demand that the Company pursue in its own right the claims asserted by the
shareholder (the plaintiff here).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 25 - Legal Proceedings (CONTINUED)
On January 9, 2004, the Plaintiff filed an Opposition to all motions to dismiss.
On January 30, 2004, the defendants filed reply briefs in support of their
motions to dismiss.
In the meantime, on November 10, 2003, the Company filed a motion requesting
that the court appoint a "disinterested person" to act on behalf of the Company
to conduct, as provided under Section 495(1) of the MBCA, a reasonable
investigation and to make a recommendation and/or determination in good faith as
to whether the Company possesses any valid claims against its past and present
officers and directors and/or auditors, and, if so, whether or not pursuit of
such claims is in the best interests of the Company. On November 26, 2003 and on
January 12, 2004, the plaintiff filed briefs opposing the appointment of a
disinterested person. On January 26, 2004, the Company filed a reply brief in
support of the appointment.
The Court, through a magistrate judge, conducted an in camera conference on
January 29, 2004 upon the motion to appoint a disinterested person, and, on
March 9, 2004, the magistrate requested that parties submit a stipulated order
appointing a disinterested person. The parties continue to negotiate the content
of such order but no order has yet been entered.
On March 22, 2004, the court issued an opinion and order granting in part and
denying in part the motions to dismiss the Damon case. The court dismissed the
Section 14(a) claim against all the defendants as barred by the statute of
limitations and, as further grounds, dismissed that claim as to those who were
not directors at the time of the mailing of the proxy statement. The court has
permitted the plaintiff to proceed with its breach of fiduciary duties claims
against the Directors on the grounds that the plaintiff cured its procedural
failings by subsequently transmitting a demand letter as required by Section 493
of the MBCA. The court has asked however, that by April 16, 2004 the parties
submit additional briefs on the question of whether the court should exercise
"supplemental jurisdiction" over the state law breach of fiduciary duty claims
or, by implication, whether these claims should be dismissed without prejudice
for pursuit in an appropriate state court.
On September 16, 2003, Ronald G. Ford, the former chairman and chief executive
officer and a current director of the Company, initiated an arbitration
proceeding with the American Arbitration Association ("AAA") against the Company
seeking monetary damages for alleged breach by the Company of his Amended and
Restated Employment Agreement, Chairman Agreement, and Amended and Restated
Consulting Agreement, each with the Company. The Company has denied the alleged
breach and asserted a counterclaim to recover all amounts paid to Mr. Ford under
the Chairman Agreement, as required by the Cease and Desist Order entered March
26, 2003 by the Federal Deposit Insurance Corporation ("FDIC") and the Michigan
Office of Financial and Insurance Services ("OFIS") against the Company's bank
subsidiary, in addition to other amounts. On March 19, 2004, at the request of
Mr. Ford, AAA reactivated the arbitration proceeding, and the parties are in the
process of selecting an arbitrator. The Company intends to defend the
arbitration.
NOTE 26 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Corporation as a going concern. The Corporation sustained substantial operating
losses in 2003 and 2002, and it is expecting to suffer further losses in 2004.
As discussed in Note 19, the Bank entered into a Cease and Desist Order
("Order") with Federal and State regulators on March 26, 2003. The Order
contains numerous provisions including the requirement to maintain certain
capital levels. As of December 31, 2003, the Corporation and Bank did not meet
the minimum capital requirements of the Order. The Corporation is actively
pursuing alternatives in an effort to address capital need, including the
following:
- Reducing the size of the Bank via the sale of various branch
locations
- Offering for sale certain segments of the loan portfolio,
including problem loans, to third parties
- Soliciting additional capital from existing shareholders and
outside groups through a stock offering
- Reviewing operating expenses for reduction opportunities
Implementation of some of the foregoing alternatives, among other things, would
require prior regulatory approval under the terms of the Order and/or applicable
banking regulations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 27 - SUBSEQUENT EVENTS
Subsequent to December 31, 2003, the following events occurred. In late March, a
loan sale was consummated in which $25.4 million of loans were sold. Nonaccrual
loans of $18.5 million were included in this loan sale. There was no gain or
loss recognized as a result of this sale, since the proceeds of the sale were
equal to the net carrying value of the loans sold. These loans sold were
included in the loan balances of the Corporation at 2003 yearend since
regulatory approval was a condition of the sale. The Corporation announced in
February, the sale of two branch offices and the closing of five branch offices.
In addition to the announced branch sales and closures, the Corporation is in
discussion concerning the possible sale of three additional branch offices. The
Corporation does not anticipate any material gain or loss from these branch
sales and closures.
SELECTED FINANCIAL DATA
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
Years Ended December 31,
2003 2002 2001 2000 1999
----------- ----------- ---------- ----------- -----------
Selected Financial Condition Data:
Total assets $ 422,539 $ 565,306 $ 636,629 $ 666,996 $ 568,442
Loans 297,846 435,043 504,412 541,689 466,621
Securities 84,774 67,955 61,885 72,066 43,343
Deposits 305,794 437,494 482,524 531,883 462,998
Borrowings 87,026 87,815 88,549 69,235 46,878
Total equity 10,700 20,503 47,889 44,617 40,820
Selected Operations Data:
Interest income $ 23,641 $ 35,969 $ 50,475 $ 54,500 $ 42,549
Interest expense (14,015) (18,089) (26,842) (29,421) (20,602)
----------- ----------- ---------- ----------- -----------
Net interest income 9,626 17,880 23,633 25,079 21,947
Provision for loan losses -0- (26,658) (3,200) (5,875) (1,457)
Net security gains 427 746 1,073 110 -0-
Other income 2,804 4,512 9,363 6,891 3,538
Impairment loss on intangibles (60) (3,647) -0- -0- -0-
Other expenses (20,056) (23,416) (24,307) (20,077) (15,937)
------------ ----------- ---------- ----------- -----------
Income (loss) before income taxes (7,259) (30,583) 6,562 6,128 8,091
Provision (credit) for income taxes 2,329 (3,870) 788 945 1,735
----------- ----------- ---------- ----------- -----------
Net income (loss) $ (9,588) $ (26,713) $ 5,774 $ 5,183 $ 6,356
=========== =========== ========== =========== ===========
Per Share Data:
Earnings (loss) - Basic $ (1.37) $ (3.81) $ 0.82 $ 0.74 $ 0.90
Earnings (loss) - Diluted (1.37) (3.81) 0.82 0.73 0.89
Cash dividends declared -0- 0.25 0.30 0.34 0.18
Book value 1.52 2.92 6.82 6.38 5.83
Financial Ratios:
Return on average equity (59.15)% (61.07)% 12.48% 12.13% 15.83%
Return on average assets (1.96)% (4.31)% 0.89% 0.84% 1.22%
Dividend payout ratio N/A NM 36.48% 45.42% 20.25%
Average equity to average assets 3.32% 7.05% 7.10% 6.92% 7.70%
SUMMARY QUARTERLY FINANCIAL INFORMATION
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
Three Months Ended
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- ------------ -----------
2003
Selected Operations Data:
Interest income $ 6,973 $ 6,246 $ 5,318 $ 5,104
Interest expense 3,866 3,469 3,422 3,258
---------- --------- ------------ -----------
Net interest income 3,107 2,777 1,896 1,846
Provision for loan losses -0- -0- -0- -0-
Net security gains (losses) (23) 214 44 192
Other income 925 831 508 540
Other expenses (5,194) (5,120) (4,760) (5,042)
---------- ---------- ------------ -----------
Income (loss) before income taxes (1,185) (1,298) (2,312) (2,464)
Provision for income taxes 320 1,359 650 -0-
---------- --------- ------------ -----------
Net income (loss) $ (1,505) $ (2,657) $ (2,962) $ (2,464)
========== ========= ============ ===========
Per Share Data:
Earnings (loss) - Basic $ (0.21) $ (0.38) $ (0.42) $ (0.36)
Earnings (loss) - Diluted (0.21) (0.38) (0.42) (0.36)
2002
Selected Operations Data:
Interest income $ 9,722 $ 9,680 $ 8,677 $ 7,890
Interest expense 4,666 4,579 4,526 4,318
---------- --------- ------------ -----------
Net interest income 5,056 5,101 4,151 3,572
Provision for loan losses (50) (4,000) (13,001) (9,607)
Net security gains 66 356 247 77
Other income 1,088 1,228 901 1,295
Impairment loss on intangibles -0- -0- -0- (3,647)
Other expenses (4,950) (4,814) (5,613) (8,039)
---------- --------- ------------ -----------
Income (loss) before income taxes 1,210 (2,129) (13,315) (16,349)
Provision (credit) for income taxes 207 (1,022) (4,833) 1,778
---------- --------- ------------ -----------
Net income (loss) $ 1,003 $ (1,107) $ (8,482) $ (18,127)
========== ========= ============ ===========
Per Share Data:
Earnings (loss) - Basic $ 0.14 $ (0.15) $ (1.21) $ (2.59)
Earnings (loss) - Diluted 0.14 (0.15) (1.21) (2.59)
MARKET INFORMATION
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
MARKET INFORMATION
(Unaudited)
During 2001, the Corporation's stock began trading on the NASDAQ Small Cap
Market; effective on August 31, 2001, the Corporation changed its trading symbol
from "NCUF" to "NCFC."
The following table sets forth the range of high and low bid prices of the
Corporation's common stock from January 1, 2001 through December 31, 2003, as
reported by NASDAQ. Quotations for the NASDAQ Small Cap Market reflect
interdealer prices, without retail mark-up, markdown, or commission, and may not
reflect actual transactions.
Three Months Ended
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- ------------ -----------
2003
High $ 3.30 $ 3.10 $ 2.99 $ 2.60
Low 2.40 1.48 2.20 1.43
2002
High $ 7.57 $ 7.88 $ 8.00 $ 5.79
Low 7.00 7.22 5.48 2.05
2001
High $ 7.38 $ 9.50 $ 9.35 $ 8.50
Low 6.00 6.50 7.86 7.35
The Corporation had 1,812 shareholders of record as of January 31, 2004.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements which are based on certain assumptions
and describe future plans, strategies, or expectations of the Corporation, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project", or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause actual results to differ from the
results in forward-looking statements include, but are not limited to:
- Impact of restrictions related to the trust preferred
securities issued by the Corporation's subsidiary;
- Difficulties in raising capital on acceptable terms;
- Impact of continued operating losses;
- Restrictions and requirements imposed on the Corporation and
the Bank by formal action against them by bank regulatory
agencies;
- Failure or inability of the Bank to comply with the terms of
the Cease and Desist Order (the "Order") applicable to it;
- General economic conditions, either nationally or in the
state(s) in which the Corporation does business;
- Legislation or regulatory changes which affect the business in
which the Corporation is engaged;
- Changes in the interest rate environment which increase or
decrease interest rate margins;
- Changes in securities markets with respect to the market value
of financial assets and the level of volatility in certain
markets such as foreign exchange;
- Significant increases in competition in the banking and
financial services industry resulting from industry
consolidation, regulatory changes and other factors, as well
as action taken by particular competitors;
- The ability of borrowers to repay loans;
- The effects on liquidity of unusual decreases in deposits;
- Changes in consumer spending, borrowing, and saving habits;
- Technological changes;
- Acquisitions and unanticipated occurrences which delay or
reduce the expected benefits of acquisitions;
- Difficulties in hiring and retaining qualified management and
banking personnel;
- The Corporation's ability to increase market share and control
expenses;
- The effect of compliance with legislation or regulatory
changes;
- The effect of changes in accounting policies and practices;
- The costs and effects of existing and future litigation and of
adverse outcomes in such litigation; and
- The factors discussed in Item 1 in this Report and in the
Management's Discussion and Analysis in Item 2, as well as
those discussed elsewhere in this Report.
These risks and uncertainties should be considered in evaluating forward-looking
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission. All forward-looking statements contained in this report
are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion will cover results of operations, asset quality,
financial position, liquidity, interest rate sensitivity, and capital resources
for the years 2001 through 2003. The information included in this discussion is
intended to assist readers in their analysis of, and should be read in
conjunction with, the consolidated financial statements and related notes and
other supplemental information presented elsewhere in this report. Throughout
this discussion, the term "bank" refers to North Country Bank and Trust, the
principal banking subsidiary of the Corporation.
OVERVIEW
In March 2003, the Bank entered into a formal Cease and Desist Order (the
"Order") under Federal and State banking laws. As a result of this Order, the
Bank initiated significant management and operational changes along with balance
sheet strategies to comply with the Order. The Bank experienced substantial
adverse publicity as a result of the public notice of this Order and from the
reported financial condition of the Bank. This negative publicity resulted in
substantial deposit runoff. The Bank also incurred an inordinate amount of legal
and accounting fees, along with consulting costs during 2003 in its attempt to
address the financial and operational deficiencies which led to the issuance of
the Order. The Order is discussed in more detail in the Consolidated Notes to
the Financial Statements and later in Management's Discussion.
The Corporation reported a loss of $9.6 million in 2003, a decrease from the
$26.7 million loss recorded in 2002. The loss per share in 2003 was $1.37,
compared with $3.81 per share in 2002. In 2001, net income was $5.8 million,
which amounted to $.82 per share.
At December 31, 2003, the Corporation had total assets of $422.5 million, a
decrease of $142.8 million from December 31, 2002 assets of $565.3 million.
During 2003, total loans, before the allowance for loan losses, decreased $137.2
million, or 31.5%, to $297.8 million. Commercial loans decreased $109.0 million
and residential real estate decreased $23.2 million. These decreases were
primarily the results of customers paying off loans, charge-offs of $2.9
million, $4.3 million of loans transferred to other real estate, tighter credit
underwriting practices, and management's decision to diversify the risk of the
balance sheet.
During 2003 and 2002 results of operations were significantly impacted by high
levels of nonperforming assets. The table below shows balances of nonperforming
assets for the three years ended December 31, 2003. Results of operations also
were impacted by reductions in the loan portfolio which reduced interest income,
while at the same time, the Corporation's core deposits decreased and had to be
replaced with out-of-market deposits at above market costs. The Corporation also
incurred additional costs for legal and collection efforts and other
professional fees, as a result of the increase in nonperforming assets and an
increase in the level of outsourced services. Finally, management has had to
redirect its efforts to address nonperforming assets and the short-term
liquidity and capital needs of the Corporation, which impacted the results of
operations due to management's focus on the rehabilitation of the Bank.
2003 2002 2001
-------------- -------- -------
NONPERFORMING ASSETS:
Nonaccrual Loans $ 38,660 $ 26,814 $ 4,015
Accruing Loans past due 90 days or more 241 401 4,878
Restructured Loans 7,181 11,108 16,151
-------------- -------- -------
Total nonperforming loans 46,082 38,323 25,044
Other real estate owned 4,356 5,409 4,211
-------------- -------- -------
Total nonperforming assets $ 50,438 $ 43,732 $29,255
============== ======== =======
Nonperforming loans as a % of loans 15.47% 8.81% 4.96%
-------------- -------- -------
Nonperforming assets as a % of assets 11.94% 7.74% 4.60%
-------------- -------- -------
RESERVE FOR LOAN LOSSES:
At period end $ 22,005 $ 24,908 $10,444
-------------- -------- -------
As a % of loans 7.39% 5.73% 2.07%
-------------- -------- -------
As a % of nonperforming loans 47.75% 65.00% 74.15%
-------------- -------- -------
As a % of nonaccrual loans 56.92% 92.89% 260.12%
============== ======== =======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table details the impact of nonperforming loans on interest income
for the three years ended December 31, 2003 (in thousands):
2003 2002 2001
-------- --------- ---------
Interest income that would have
been recorded at original rate $ 2,793 $ 1,653 $ 1,597
-------- --------- ---------
Interest income that was
actually recorded 1,307 1,120 1,521
-------- --------- ---------
Net interest lost $ 1,486 $ 533 $ 76
======== ========= =========
Total deposits decreased $131.7 million or 30.1% in 2003, to $305.8 million. The
decrease was due in part to management's decision to shrink the deposit
portfolio in order to match the reduction in loans, the withdrawals of municipal
deposits, and deposit runoff from adverse publicity.
Capital decreased $9.8 million in 2003, primarily due to the 2003 net loss of
$9.6 million. As discussed in detail in the Capital and Regulatory section, the
Corporation and the Bank are subject to minimum regulatory capital requirements.
Currently the capital of the Corporation and the Bank is below the regulatory
requirements.
The following planned events could have an impact on future results of
operations and financial condition of the Corporation.
- A $25.4 million loan sale of which $17.5 million were in
nonaccrual.
- Closing of five branch offices by May 31, 2004
- Sale of four branch offices late in the second quarter, with
deposits of approximately $23 million
Upon completion of these near-term strategies, the Corporation's longer term
strategy is expected to focus on a profitable lending operation along with a
matching deposit growth in its core markets in Michigan. The Corporation's
strategies for increasing its capital and that of the Bank are discussed further
in the Capital and Regulatory section.
FINANCIAL POSITION
LOANS
Recognizing that loans are expected to provide the highest yield for earning
assets, the Corporation has historically operated with a strategy of maximizing
the level of the loan portfolio. In 2003 and 2002, management made strategic
decisions to reduce the size of the loan portfolio and the exposures to certain
industries, particularly the hotel and tourism industry. Total loans declined
$137.2 million and $69 million in 2003 and 2002, respectively. This was done in
consideration of the slowing economy and to reduce loan concentration. The
Corporation's loans to the hotel and tourism industry decreased $10.7 million in
2003.
Loans represented 70.5% of total assets at the end of 2003 compared to 77.0% at
the end of 2002. The loan to deposit ratio decreased from 99.4% at December 31,
2002, to 97.4% at December 31, 2003. The loan to deposit ratio is still higher
than the Corporation's peer group, due in part from the utilization of Federal
Home Loan Bank long-term borrowings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a summary of the Corporation's loan balances at December 31 (in
thousands):
Percent Change
---------------------
2003 2002 2001 2003/2002 2002/2001
---------- ------------- ------------ --------- ---------
Commercial real estate $ 39,571 $ 61,556 $ 77,892 (35.72) (21.00)
Commercial, financial, and agricultural 203,393 290,371 319,403 (29.95) (9.10)
1 - 4 family residential real estate 51,120 74,366 93,574 (31.26) (20.50)
Consumer 3,195 5,706 9,516 (44.01) (40.00)
Construction 567 3,044 4,027 (81.37) (24.40)
---------- ------------- ------------ --------- ---------
Total $ 297,846 $ 435,043 $ 504,412 (31.54) (13.80)
========== ============= ============ ========= =========
Every segment of the loan portfolio declined in 2003. These declines can be
attributed to the following factors:
- The continued reduction in interest rates made long-term
financing attractive for many borrowers. This is largely the
cause of the $23.2 million reduction in the residential real
estate portfolio and was a contributing factor for the
decrease in the commercial real estate portfolio.
- The continued slowdown in the economy has had a significant
impact on the local markets the Corporation serves. This has
resulted in very little new commercial loan growth in these
markets and intense competition for new projects.
- During 2003, the Corporation's lending staff undertook a
thorough review of the portfolio and lending process. As a
result of the tightened underwriting standards and the time
devoted to managing the existing portfolio, the Corporation
did not actively compete for new commercial loans.
- As a result of the Order and in conjunction with stringent
lending criteria, management has made a conscious effort to
direct some borrowers to refinance with other lenders. Those
loans which do not meet current underwriting standards or
desired industry concentrations are directed to find
alternative financing when up for renewal.
The last two factors were the most significant reasons behind the decline in the
commercial and commercial real estate segments of the portfolio. The Corporation
was not aggressively competing for new loans, it was also not willing to meet
the refinancing requests of many existing customers.
Management has strengthened its lending staff and established a central loan
underwriting, documentation, and approval process which will allow the
Corporation to again become an active participant in serving the commercial loan
needs of its local markets. The Corporation continues to feel that a properly
positioned loan portfolio is the most attractive earning asset available and is
the key to returning the Corporation to profitability. The Corporation is
planning for a further decline in the commercial loan portfolio in 2004,
primarily from the loan sale of $25.4 million and secondarily due to the desire
to diversify the portfolio to meet liquidity needs and risk tolerances.
Following is a table showing the significant industry types in the commercial
loan portfolio as of December 31 (in thousands):
2003 2002
Outstanding Percent of Percent Outstanding Percent of Percent
Balance Commercial Loans of Capital Balance Commercial Loans of Capital
----------- ---------------- ---------- ----------- ---------------- ----------
Hospitality and Tourism $ 76,131 31.3% 711.5% $ 86,802 24.7% 423.4%
Gaming 22,317 9.2 208.6 25,938 7.4 126.5
Petroleum 8,770 3.6 82.0 14,180 4.0 69.2
Forestry 1,911 0.8 17.9 5,677 1.6 27.7
Other 133,835 55.1 1,250.8 219,330 62.3 1,070.0
----------- ---------------- ---------- ----------- ---------------- ----------
Total Commercial Loans $ 242,964 100.0% $ 351,927 100.0%
=========== ================ =========== ================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management has recognized the additional risk presented by the concentration in
certain segments of the portfolio, particularly hospitality and gaming. Late in
March 2004, the Corporation completed a loan sale of $25.4 million which
includes $17.5 million in nonaccrual loans. This loan sale also included $14.2
million of hospitality and tourism loans which when sold, reduced the Bank's
loan concentration for this industry segment from 31.3% of total commercial
loans at 2003 year-end to approximately 25% after the sale. Management intends
to continue reduction of loan concentrations in hospitality and gaming by
curtailing underwriting of new loans to these industry segments along with
natural attrition through portfolio maturities and tightening of lending
criteria for new and renewal loans.
These strategies have been undertaken to meet the liquidity and capital
requirements of the Corporation as well as to diversify the risk in the overall
loan portfolio.
In March 2003, the Corporation made a decision to cease the operations of North
Country Financial Group. This was done in order to refocus the Corporation's
lending efforts and decrease the size of certain segments of the loan portfolio.
The Corporation may pursue new lease opportunities through unrelated entities,
where the credit quality and rate of return on the transactions fit its
strategies.
The Corporation has also funded leases to governmental units, including Native
American organizations. Tax-exempt leases decreased 21.5%, or $5.0 million in
2003, as the Corporation made a decision to reduce its tax-exempt portfolio due
to its lack of current and projected taxable income.
Due to the seasonal nature of many of the Corporation's commercial loan
customers, loan payment terms were historically structured around the customer's
business cycle. The lending staff evaluates the collectability of the past due
loans based on documented collateral values and payment history. The Corporation
discontinues the accrual of interest on loans when, in the opinion of
management, there is an indication that the borrower may be unable to meet the
payments as they become due. Upon such discontinuance, all unpaid accrued
interest is reversed. Loans are returned to accrual status when all principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the allowance for loan losses on a monthly basis to
determine whether the losses inherent in the portfolio are properly reserved
for. In conjunction with the Corporation's senior lending staff and the bank
regulatory examinations, management intensified the review of the Corporation's
loans, related collateral evaluations, and the overall lending process during
2003. The Corporation also utilizes a loan review consultant to perform a review
of the loan portfolio. The opinion of this consultant upon completion of the
independent review provided findings similar to management on the overall
adequacy of the reserve. The Corporation anticipates utilization of this same
consultant for loan review during 2004.
As a result of these changes in the Corporation's monitoring of delinquent
credits and more rigorous collection efforts, management believes that credit
problems will be identified earlier at which time there may be more
opportunities for favorable resolution.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation's credit quality history is demonstrated in the following table
(dollars in thousands):
2003 2002 2001
------------ ------------ -------------
Total loans, at period end $ 297,846 $ 435,043 $ 504,412
Average loans for the year 361,144 484,889 529,354
Allowance for loan losses 22,005 24,908 10,444
Allowance to total loans at end of year 7.4% 5.7% 2.1%
------------ ------------ -------------
Net charge-offs during the year $ 2,903 $ 12,194 $ 2,210
Net charge-offs to average loans 0.8% 2.6% 0.5%
Net charge-offs to beginning allowance balance 11.7% 116.8% 23.4%
------------ ------------ -------------
Nonaccrual loans at end of year $ 38,660 $ 26,814 $ 4,015
Loans past due 90 days or more 241 401 4,878
Restructured loans 7,181 11,108 5,192
------------ ------------ -------------
Total nonperforming loans $ 46,082 $ 38,323 $ 14,085
============ ============ =============
Nonperforming loans to total loans at end of year 15.5% 8.8% 2.8%
============ ============ =============
Nonaccrual loans have increased $11.8 million as a result of further
deterioration of existing loans from December 31, 2002 to December 31, 2003,
while loans 90 days or more past due and still accruing have decreased by $.2
million and restructured loans decreased $3.9 million during the year. A loan
sale consisting of $25.4 million in loans was completed in March, 2004. There
was no gain or loss on this sale of loans since the sale proceeds were equal to
the net carrying value of the loans sold. The table below shows the "proforma"
impact of this sale.
As reported Change due to "Pro Forma"
12/31/2003 loan sale 12/31/2003
----------- ------------- ------------
Total year end loans $ 297,846 $ (25,397) $ 272,449
Allowance for loan losses $ 22,005 $ (7,425) $ 14,580
----------- ------------- ------------
Allowance to total year end loans 7.4% -0- 4.0%
----------- ------------- ------------
Nonaccrual loans $ 38,660 $ (17,497) $ 21,163
Total nonperforming loans $ 46,082 $ (18,500) $ 27,582
----------- ------------- ------------
Nonperforming loans to year end loans 15.5% -0- 10.1%
----------- ------------- ------------
The computation of the required allowance for loan losses as of any point in
time is one of the critical accounting estimates made by management in the
financial statements. As such, factors used to establish the allowance could
change significantly from the assumptions made and impact future earnings
positively or negatively. The future of the national and local economies and the
resulting impact on borrowers' ability to repay their loans and the value of
collateral are examples of areas where assumptions must be made for individual
loans, as well as the overall portfolio.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation's computation of the allowance for loan losses follows the
Interagency Policy Statement on Allowance for Loan and Lease Losses
Methodologies and Documentation for Banks and Savings Associations issued by the
Federal Financial Institutions Examination Council (FFIEC) in July 2001. The
computation of the allowance for loan losses considers prevailing local and
national economic conditions as well as past and present underwriting practices.
RESERVE FOR LOAN AND LEASE LOSSES - THREE YEAR SUMMARY
(dollars in thousands) 2003 2002 2001
---------------- ---------- ---------
Balance at beginning of period $ 24,908 $ 10,444 $ 9,454
Loans charged off:
Commercial, Financial &
Agricultural 5,068 11,925 2,385
One-to-four family residential real estate 1,683 504 320
Consumer 205 141 253
---------------- ---------- ---------
Total loans charged off 6,956 12,570 2,958
---------------- ---------- ---------
Recoveries of loans previously charged off:
Commercial, Financial &
Agricultural 2,926 314 640
One-to-four family residential real estate 931 3 20
Consumer 196 59 88
---------------- ---------- ---------
Total recoveries of loans previously charged off 4,053 376 748
---------------- ---------- ---------
Net loans charged off 2,903 12,194 2,210
---------------- ---------- ---------
Provision charged to expense -0- 26,658 3,200
Balance at end of period $ 22,005 $ 24,908 $ 10,444
================ ========== =========
Reserve as a percent of loans 7.39% 5.73% 2.07%
Net loans charged off as a percent of average loans 0.80% 2.51% 0.42%
Loans outstanding at period end $ 297,846 $ 435,043 $ 504,412
---------------- ---------- ---------
Average loans outstanding during period $ 361,144 $ 484,889 $ 529,354
---------------- ---------- ---------
As part of the management of the loan portfolio, risk ratings are assigned to
all commercial loans. Through the loan review process ratings are modified as
believed to be appropriate to reflect changes in the credit. Using a historical
average loss by loan type as a base, each loan graded as higher risk is assigned
a specific percentage. Within the commercial loan portfolio, the historical loss
rates are used for specific industries such as hospitality, gaming, petroleum,
and forestry. The residential real estate and consumer loan portfolios are
assigned a loss percentage as a homogenous group. If, however, on an individual
loan the projected loss based on collateral value and payment histories is in
excess of the computed allowance, the allocation is increased for the higher
anticipated loss. These computations provide the basis for the allowance for
loan losses as recorded by the Corporation.
Following is a table showing the allocation of the allowance for loan losses at
December 31, 2003 (in thousands):
Commercial, financial and agricultural loans $ 11,222
One-to-four family residential real estate loans 280
Consumer loans -0-
Specific reserve on loans sold subsequent to year end 7,425
Unallocated 3,078
----------
Total $ 22,005
==========
At the end of 2003, the allowance for loan losses represented 7.4% of total
loans. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As part of the process of resolving problem credits, the Corporation may acquire
ownership of real estate collateral which secured such credits. The Corporation
carries this collateral in other real estate on the balance sheet.
The following table represents the activity in other real estate (in thousands):
Balance at January 1, 2002 $ 4,211
Other real estate transferred from loans 4,705
Other real estate transferred from
premises 1,226
Write downs and payments applied to
other real estate (2,418)
Other real estate sold (2,315)
-------------------
Balance at December 31, 2002 5,409
Other real estate transferred from loans 4,340
Other real estate transferred from
premises -0-
Write downs and payments applied to
other real estate (848)
Other real estate sold (4,545)
-------------------
Balance at December 31, 2003 $ 4,356
===================
Other real estate is initially valued at the lower of cost After the initial
receipt, or the fair value less selling costs. management periodically
re-evaluates the recorded balance and any additional reductions in the fair
value result in a write-down of other real estate.
SECURITIES
During 2003, the securities portfolio continued to be an important component of
the Corporation's strategy to diversify its asset base and increase liquidity.
Securities increased $16.8 million in 2003, from $68.0 million at December 31,
2002 to $84.8 million at December 31, 2003.
The carrying value of the Corporation's securities is as follows at December 31
(dollars in thousands):
2003 2002
--------- --------
U.S. Treasury securities and obligations of
U.S. government agencies $ 36,225 $ -0-
Obligations of states and political
subdivisions 4,105 5,632
Corporate securities 708 11,264
Mortgage-related securities 43,736 51,059
--------- --------
Total securities $ 84,774 $ 67,955
========= ========
The Corporation's policy is to purchase securities of high credit quality,
consistent with its asset/liability management strategies. During the year
securities were purchased and sold as steps in the process of managing the
interest-rate-risk profile of the portfolio. A net gain of approximately
$427,000 was recognized during the year with the proceeds from the sale of
securities used to purchase new The Corporation classifies all securities as
securities and increase liquidity. available for sale, in order to maintain
adequate liquidity and to maximize its ability to react to changing market
conditions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEPOSITS
Total deposits at December 31, 2003, were $305.8 million compared to $437.5
million at the end of 2002. The table below shows the deposit mix for the
periods indicated.
2003 Mix 2002 Mix 2001 Mix
-------- ------ --------- ------ --------- ------
Non-interest bearing accounts $ 26,179 8.56% $ 40,797 9.33% $ 46,342 9.60%
Savings 91,835 30.03 159,297 36.41 247,863 51.37
Time Deposits
Internet 74,405 24.33 65,094 14.88 -0- -0-
Brokered 29,964 9.80 54,964 12.56 24,964 5.18
Other 83,411 27.28 117,342 26.82 163,355 33.85
-------- ------ --------- ------ --------- ------
Total Time Deposits 187,780 61.41 237,400 54.26 188,319 39.03
-------- ------ --------- ------ --------- ------
Total Deposit Liabilities $305,794 100.00% $ 437,494 100.00% $ 482,524 100.00%
======== ====== ========= ====== ========= ======
During 2002 and 2003, the Corporation experienced a reduction in local deposits
in part due to the adverse publicity concerning the financial condition of the
Bank. A significant portion of these local deposits were from local governmental
units. To offset this deposit runoff the Corporation increased its reliance on
Brokered and Internet certificates of deposit. As of December 31, 2003 Internet
and Brokered deposits amounted to 34.1% of total deposits. This, combined with
retail deposits brought time deposits to 61.4% of total deposits at December 31,
2003, compared to 54.3% at December 31, 2002 and 39.0% at December 31, 2001. The
increase in time deposits, along with a $14.6 million decrease in
noninterest-bearing deposits, had a negative effect on the Corporation's net
interest margin, as noncore out-of-market deposits carry higher interest costs.
Management is introducing new deposit products to its local markets during 2004.
The plan is to increase core deposits sufficiently to reduce the dependence on
brokered and out-of-market deposits.
BORROWINGS
The Corporation has used alternative funding sources to provide long-term,
stable sources of funds. Borrowings have remained relatively stable from
December 31, 2002 to December 31, 2003, decreasing $.8 million to $87.0 million
of which $85.5 million were from the Federal Home Loan Bank of Indianapolis
(FHLB). The borrowings carry fixed interest rates and stated maturities ranging
through 2011. Fixed rate borrowings totaling $80.0 million are callable
quarterly at the option of the FHLB and can also be converted to variable rates,
at the option of the FHLB, should rates rise above certain index levels. These
borrowings are secured by a blanket collateral agreement on the Bank's
residential mortgage loans and specific assignment of securities, loans and
cash. The Corporation does not anticipate increasing the FHLB borrowings in the
near future.
SHAREHOLDERS' EQUITY
Changes in shareholders' equity is discussed in detail in the "Capital and
Regulatory" section of this report.
RESULTS OF OPERATIONS
SUMMARY
The Corporation incurred a net loss of $9.6 million in 2003, compared to a loss
of $26.7 million and net income of $5.8 million in 2002 and 2001, respectively.
The reduction in the pretax loss of $23.3 million in 2003 compared to 2002 is
primarily a result of a decrease in the provision for loan losses of $26.7
million, an increase in the provision for income taxes of $6.2 million, and a
decrease in noninterest expense of $6.9 million, offset by a decrease in net
interest income of $8.3 million. Basic earnings per share was a loss of $1.37 in
2003 compared to a loss of $3.81 and income of $.82 in 2002 and 2001,
respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table details changes in earnings and earnings per share for the
three years ended December 31, 2003 (dollars in thousands except for per share
data):
Income/Expense Change
------------------------------ ---------------------------------------------
2003 2002 2001 2003/2002 2002/2001
Dollars Dollars Dollars Dollars Per Share Dollars Per Share
-------- --------- --------- ---------- --------- -------- ----------
Net Income, prior period N/A N/A N/A $ (26,713) $ (3.81) $ 5,774 $ 0.82
Interest Income $ 23,641 $ 35,969 $ 50,475 (12,328) (1.76) (14,506) (2.07)
Interest Expense 14,015 18,089 26,842 (4,074) (0.58) (8,753) (1.25)
-------- --------- --------- ---------- --------- -------- ----------
Net Interest Income 9,626 17,880 23,633 (8,254) (1.18) (5,753) (0.82)
Provision for Loan Losses 0 26,658 3,200 (26,658) (3.80) 23,458 3.34
-------- --------- --------- ---------- --------- -------- ----------
Net interest income (loss) after provision 9,626 (8,778) 20,433 18,404 2.62 (29,211) (4.16)
-------- --------- --------- ---------- --------- -------- ----------
Noninterest Income:
Service fees 1,529 1,899 1,851 (370) (0.05) 48 0.01
Loan and lease fees 58 1,095 5,540 (1,037) (0.15) (4,445) (0.63)
Net security gains 427 746 1,073 (319) (0.05) (327) (0.05)
Gain on sales of loans 136 506 549 (370) (0.05) (43) (0.01)
Gain on sales of branches 0 464 1,386 (464) (0.07) (922) (0.13)
Other noninterest 1,081 548 37 533 0.08 511 0.07
-------- --------- --------- ---------- --------- -------- ----------
Total noninterest income 3,231 5,258 10,436 (2,027) (0.29) (5,178) (0.74)
-------- --------- --------- ---------- --------- -------- ----------
Noninterest Expense:
Salaries and employee benefits 5,973 7,589 11,882 (1,616) (0.23) (4,293) (0.61)
Furniture and equipment 1,367 1,437 1,734 (70) (0.01) (297) (0.04)
Occupancy 1,387 1,629 1,659 (242) (0.03) (30) (0.00)
Data processing 1,517 1,894 1,609 (377) (0.05) 285 0.04
Accounting, legal and consulting fees 3,145 1,800 1,435 1,345 0.19 365 0.05
Loan and deposit 1,992 1,111 1,387 881 0.13 (276) (0.04)
Telephone 1,382 1,305 1,153 77 0.01 152 0.02
Impairment of intangibles 60 3,647 -0- (3,587) (0.51) 3,647 0.52
ORE writedowns/impairment 400 2,418 -0- (2,018) (0.29) 2,418 0.34
Loss on sale of prop & equip & ORE 362 648 349 (286) (0.04) 299 0.04
Amortization of intangibles 460 420 1,057 40 0.01 (637) (0.09)
Other Operating 2,071 3,165 2,042 (1,094) (0.17) 1,123 0.16
-------- --------- --------- ---------- --------- -------- ----------
Total noninterest expense 20,116 27,063 24,307 (6,947) (0.99) 2,756 0.39
-------- --------- --------- ---------- --------- -------- ----------
Income (loss) before provision for income taxes (7,259) (30,583) 6,562 23,324 3.32 (37,145) (5.29)
Provision (credit) for income taxes 2,329 (3,870) 788 6,199 0.88 (4,658) (0.66)
Net Change -0- -0- -0- 17,125 2.44 (32,487) (4.63)
-------- --------- --------- ---------- --------- -------- ----------
Net Income (loss) $ (9,588) $ (26,713) $ 5,774 $ (9,588) $ (1.37) $(26,713) $ (3.81)
======== ========= ========= ========== ========= ======== ==========
Net interest income is the Corporation's primary source of core earnings. Net
interest income decreased $8.3 million, to $9.6 million in 2003, from $17.9
million in 2002. In 2002, net interest income decreased $5.7 million, from $23.6
million in 2001.
The decrease in rates in 2003 and 2002 was a significant factor in the
decreasing trend in net interest income as the Corporation's balance sheet was
asset sensitive. In 2003, the net interest income was further impacted by the
decrease in loans, the increased level of nonaccrual loans, and liquidity
strategies which resulted in higher costs for deposits and lower earnings on
investments.
The decrease in the provision for loan losses of $26.7 million in 2003 is
discussed in detail in the loans section.
Noninterest income decreased $2.0 million in 2003, of which $1.0 million was
attributable to fee income earned in 2002 by a mortgage subsidiary not in
operation in 2003. Salaries, commissions, and benefits decreased by $1.6 million
in 2003 as a result of ceasing operations of the subsidiary and an ongoing
reevaluation of staffing needs compared to current operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
obligations. The net interest income is impacted by economic and competitive
factors that influence rates, loan demand, and the availability of funding.
Because the Corporation has a significant portion of its commercial loans at
rates that adjust with changes to the prime rate, these rate reductions have a
significant impact on the Corporation's interest income.
In 2003, the Corporation's net interest margin was 2.25%, a decrease of 111
basis points from the 2002 net interest margin of 3.36%. This continued the
trend from 2002 when the net interest margin declined 82 basis points from the
2001 margin of 4.18%. Management believes that its interest margin has
stabilized and expects to show future improvement from the decline in nonaccrual
loans as a result of the loan sale discussed elsewhere in this report.
The following table details sources of net interest income for the three years
ended December 31, 2003 (in thousands):
2003 Mix 2002 Mix 2001 Mix
----------- ------- -------- ------- -------- ------
Interest Income
Loans $ 21,323 86.9% $ 33,032 88.6% $ 46,532 88.5%
Funds sold 312 1.3 204 0.6 500 1.0
Taxable securities 2,566 10.4 3,628 9.7 5,065 9.6
Nontaxable securities 348 1.4 403 1.1 495 0.9
----------- ------- -------- ------- -------- ------
Total earning assets $ 24,549 100.0% $ 37,267 100.0% $ 52,592 100.0%
----------- ------- -------- ------- -------- ------
Interest Expense
NOW and money market deposits $ 1,433 10.2% $ 3,484 19.3% $ 8,122 30.3%
Savings deposits 208 1.5 368 2.0 915 3.4
Time deposits 7,053 50.3 8,592 47.5 12,168 45.3
Borrowings 4,832 34.5 5,100 28.2 4,814 17.9
Subordinated debentures 489 3.5 545 3.0 823 3.1
----------- ------- -------- ------- -------- ------
Total interest-bearing funds $ 14,015 100.0% $ 18,089 100.0% $ 26,842 100.0%
----------- ------- -------- ------- -------- ------
Net interest income-
taxable equivalent basis $ 10,534 $ 19,178 $ 25,750
=========== ======== ========
Average Rates
Earning assets 5.25% 6.53% 8.56%
----------- -------- --------
Interest-bearing funds 3.15 3.42 4.74
----------- -------- --------
Net yield on earning assets 2.25 3.36 4.18
=========== ======== ========
While a majority of the Corporation's loan portfolio is repriced downward with
each rate decrease due to floating rate loans and the refinancing of residential
real estate loans into the long-term secondary market, the 2003 rate decreases
did not impact the pricing of interest-bearing liabilities to nearly the same
degree. The mix of time deposits was also impacted by the Corporation's need to
utilize the brokered and Internet certificate of deposit markets in 2003 to
replace deposit withdrawals in its local markets which resulted in a higher cost
source of funds.
The cost of interest-bearing obligations also declined less than the rates on
interest-earning assets due to the fact that the Corporation's borrowings from
the FHLB, all of which were entered into prior to 2003, are at fixed rates and,
therefore, did not decrease in 2003. Given the Corporation's liquidity needs and
the economic effect of the prepayment penalties, it is anticipated that these
borrowings will continue until the various maturity dates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
One final factor that negatively impacted the Corporation's net interest margin
in 2003 and 2002 was the high level of nonaccrual. The average balance of
nonaccrual loans in 2003 was $36.4 million compared to average balances of $11.8
million in 2002 the 2003 and 2002 loans been performing and accruing interest,
the Corporation's yield on loans would have increased approximately 65 basis
points and 29 basis points, respectively.
following table presents the amount of interest income from average
interest-earning assets and the yields earned on those assets, well as the
interest expense on average interest-bearing obligations and the rates paid on
those obligations. All average balances average balances.
Years ended December 31
2003 2002 2001
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(1,2,3) $ 361,144 $ 21,323 5.90% $ 484,889 $ 33,032 6.81% $ 529,354 $ 46,532 8.79%
Taxable securities 68,850 2,277 3.31 63,116 3,360 5.32 62,411 4,725 7.57
Nontaxable securities(2) 3,997 348 8.71 4,609 403 8.74 5,615 495 8.82
Federal funds sold 27,991 312 1.11 13,469 204 1.51 12,116 500 4.13
Other interest-earning assets 5,829 289 4.96 4,618 268 5.80 4,821 340 7.05
----------- -------- ------ ----------- -------- ------ ----------- -------- -------
Total interest-
earning assets 467,811 24,549 5.25 570,701 37,267 6.53 614,317 52,592 8.56
----------- -------- ------ ----------- -------- ------ ----------- -------- -------
Interest-bearing obligations:
Savings deposits 134,126 1,642 1.22 215,980 3,852 1.78 265,652 9,037 3.40
Time deposits 210,993 7,053 3.34 212,015 8,592 4.05 199,796 12,168 6.09
Borrowings 87,496 4,832 5.52 88,671 5,100 5.75 88,268 4,814 5.45
Subordinated debentures 12,450 488 3.93 12,450 545 4.38 12,450 823 6.61
----------- -------- ------ ----------- -------- ------ ----------- -------- -------
Total interest-bearing
obligations 445,065 14,015 3.15 529,116 18,089 3.42 566,166 26,842 4.74
----------- -------- ------ ----------- -------- ------ ----------- -------- -------
Net interest income $ 10,534 $ 19,178 $ 25,750
======== ======== ========
Net interest rate spread 2.10% 3.11% 3.82%
====== ====== =======
Net earning assets $ 22,746 $ 41,585 $ 48,151
=========== =========== ===========
Net yield on average interest-
earning assets 2.25% 3.36% 4.18%
====== ====== =======
Average interest-earning assets
to average interest-bearing
obligations 105% 108% 109%
=========== =========== ===========
(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 using a 34% tax rate.
(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 levels and fluctuations in
interest rates. For each category of interest-earning assets and
interest-bearing obligations, information 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 have been allocated
proportionately to the change due to volume and the change due to rate.
Years ended December 31,
2003 vs. 2002 2002 vs. 2001
Increase Increase
(Decrease) Total (Decrease)
Due to Increase Due to
Volume Rate (Decrease) Volume Rate (Decrease)
---------- --------- ----------- ----------- ---------- ---------
Interest-earning assets:
Loans $ (7,692) $ (4,017) $ (11,709) $ (3,670) $ (9,830) $ (13,500)
Taxable securities 342 (1,425) (1,083) 54 (1,419) (1,365)
Nontaxable securities (53) (2) (55) (88) (4) (92)
Federal funds sold 143 (35) 108 63 (359) (296)
Other interest-earning assets 47 (26) 21 (14) (58) (72)
---------- --------- ----------- ----------- ---------- ---------
Total interest-earning assets $ (7,213) $ (5,505) $ (12,718) $ (3,655) $ (11,670) $ (15,325)
========== ========= =========== =========== ========== =========
Interest-bearing obligations:
Savings deposits $ (1,209) $ (1,001) $ (2,210) $ (1,463) $ (3,722) $ (5,185)
Time deposits (41) (1,498) (1,539) 800 (4,376) (3,576)
Borrowings (67) (201) (268) 22 264 286
Subordinated debentures -0- (57) (57) -0- (278) (278)
---------- --------- ----------- ----------- ---------- ---------
Total interest-bearing obligations $ (1,317) $ (2,757) $ (4,074) $ (641) $ (8,112) $ (8,753)
========== ========= =========== =========== ========== =========
Net interest income $ (8,644) $ (6,572)
=========== =========
discussed in the Deposits section, the Corporation is developing new deposit
products for its local markets to raise funds to be replace the higher rate
out-of-market certificates. This, coupled with renewed efforts to decrease the
level of nonperforming assets increase lending n its local markets, is
anticipated to increase the net interest margin. However, in order to execute
certain strategies of the Corporation's capital and liquidity plans, the
Corporation may need to sell portions of the existing loan portfolio. these
loans represent the highest yielding assets of the Corporation, the net interest
margin could decline further in the short term.
PROVISION FOR LOAN LOSSES
Corporation records a provision for loan losses when it believes it is necessary
to adjust the allowance for loan losses to maintain adequate level after
considering factors such as loan charge-offs and recoveries, changes in
identified levels of risk in the portfolio, changes in the mix of loans in the
portfolio, loan growth, and other economic factors. There was no provision for
losses for the year ended December 31, 2003. In 2002, the provision for loan
losses was $26.7 million compared to $3.2 million 2001. The provision expense
during 2002 was due to increased charge-offs, along with significant increases
in all areas nonperforming loans and a high degree of uncertainty pertaining to
the credit quality of the total loan portfolio. The provision for losses as a
percentage of average loans for the years ended December 31, 2003, 2002 and 2001
was 0.0%, 5.5% and .6% respectively Management will continue to monitor the loan
portfolio for changes which may impact the required allowance for loan losses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONINTEREST INCOME
Noninterest income was $3.2 million, $5.3 million, and $10.4 million in 2003,
2002, and 2001, respectively. The principal sources of noninterest income are
fees for services related to deposit and loan accounts, as well as gains
recognized on the sale of securities, loans, and branch locations.
The most significant reason for the $2.1 million decrease in 2003 relates to
other loan and lease income, which decreased $1.0 million, in 2003 after a
reduction of $4.5 million from 2001. This can be attributed entirely to the fee
income generated during the first three quarters of 2002 and for all of 2001 by
the Corporation's mortgage The subsidiary. mortgage subsidiary ceased operations
during the third quarter of 2002.
The following table details noninterest income for the three years ended
December 31, 2003 (in thousands):
% Increase (Decrease)
2003 2002 2001 2003-2002 2002-2001
--------- ------- -------- ----------- ---------
Service fees $ 1,529 $ 1,899 $ 1,851 (19.48) 2.59
Loan and lease fee income 58 1,095 5,540 (94.70) (80.23)
Gain on sales of branches -0- 464 1,386 (100.00) (66.52)
Gain on sale of loans 136 506 549 (73.12) (7.83)
Other non interest income 1,081 548 37 97.26 1381.08
--------- ------- -------- ----------- ---------
Subtotal 2,804 4,512 9,363 (37.85) (51.81)
--------- ------- -------- ----------- ---------
Net Securities gains (losses) 427 746 1,073 (42.76) (30.48)
--------- ------- -------- ----------- ---------
Total noninterest income $ 3,231 $ 5,258 $ 10,436 (38.55) (49.62)
========= ======= ======== =========== =========
Service fees on customer accounts have remained virtually unchanged over the
period of 2001 through 2003, despite significant declines in deposit balances.
Service fees as a percentage of average non-interest-bearing deposits for the
year ended December 31, 2003, was 5.8%, compared to 4.7% and 3.9% for 2002 and
2001, respectively. The Corporation has been able to increase this ratio by
pricing its services properly and collecting the fees allowed per the account
agreements. The addition of the Generation Gold account is the most significant
reason the Corporation has been able to maintain the level of its service fee
income. Generation Gold account holders are assessed a fee for the variety of
services related to this product. Management expects to continue to fairly price
its fees for services rendered.
NONINTEREST EXPENSE
Noninterest expense was $20.1 million in 2003 compared to $27.1 million, and
$24.3 million in 2001, 2002 and respectively.
Noninterest expense declined $6.9 million from 2002 to 2003. The primary reason
for the decline were reductions in writedowns of ORE and acquisition intangibles
which accounted for $5.6 million of the decrease between years. Increases in
accounting, legal and consulting of $1.3 million from 2002 to 2003 are from the
increased level of outside expertise that the Corporation utilized in its
attempt to address all areas of concern related to the Cease and Desist Order.
Management is currently reviewing all areas of noninterest expense to determine
areas of cost reduction. Areas that are expected to decline in future periods
include but are not limited to accounting, legal and consulting fees, data
processing and telephone expense. These areas of noninterest expense will
decrease as a result of less reliance on outside consultants due to more capable
management, lower levels of nonperforming loans and overall reduction in the
number of existing branch locations.
The following table details noninterest expense for the three years ended
December 31, 2003 (in thousands):
% Increase (Decrease)
2003 2002 2001 2003-2002 2002-2001
------- ------- -------- --------- ---------
Salaries and Employee Benefits $ 5,973 $ 7,589 $ 11,882 (21.29) (36.13)
Furniture and Equipment Expense 1,367 1,437 1,734 (4.87) (17.13)
Occupancy Expense 1,387 1,629 1,659 (14.86) (1.81)
Data Processing Expense 1,517 1,894 1,609 (19.90) 17.71
Accounting, legal and consulting fees 3,145 1,800 1,435 74.72 25.44
Loan and Deposit Expense 1,992 1,111 1,387 79.30 (19.90)
Telephone expense 1,382 1,305 1,153 5.90 13.18
Impairment of acquisition intangibles 60 3,647 -0- (98.35) -0-
ORE writedowns/impairment 400 2,418 -0- (83.46) -0-
Loss (Gain) on sale of prop & equip
& ORE 362 648 349 (44.14) 85.67
Amortization of intangibles 460 420 1,057 9.52 (60.26)
Other Operating Expenses 2,071 3,165 2,042 (34.57) 55.00
------- ------- -------- --------- ---------
Total noninterest expense $20,116 $27,063 $ 24,307 (25.67) 11.34
======= ======= ======== ========= =========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FEDERAL INCOME TAXES
The income tax expense recorded in 2003 was $2.3 million, compared to an income
tax benefit of $3.9 million in 2002 and a provision for income taxes of $.8
million in 2001. The differences in each year between the tax provision or
benefit and the federal corporate income tax rate of 34% is primarily due to
permanent and temporary differences between book and taxable income. The loss
generated for tax purposes in 2003 will be carried back to prior years. This
will result in the Corporation receiving a refund of previously paid taxes of
approximately $1.4 million. The 2002 tax benefit was reduced by a valuation
allowance against the net deferred tax assets of $7 million. A valuation
allowance is provided against deferred tax assets when it is more likely than
not that some or all of the deferred tax assets will not be realized. The $2.3
million provision in 2003 was recorded to write off all remaining deferred tax
benefits of the Corporation. As of December 31, 2003, the Corporation had an NOL
carryforward of approximately $5.6 million along with various credit
carryforwards. This NOL and credit carryforward benefit is dependent upon the
future profitability of the Corporation, therefore no future benefit has been
recorded.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In general, the Corporation attempts to manage interest rate risk by investing
in a variety of assets which afford it an opportunity to reprice assets and
increase interest income at a rate equal to or greater than the interest expense
associated with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in
interest rates. The Corporation derives its income primarily from the excess of
interest collected on its interest-earning assets over the interest paid on its
interest-bearing obligations. The rates of interest the Corporation earns on its
assets and owes on its obligations generally are established contractually for a
period of time. Since market interest rates change over time, the Corporation is
exposed to lower profitability if it cannot adapt to interest rate changes.
Accepting interest rate risk can be an important source of profitability and
shareholder value; however, excess levels of interest rate risk could pose a
significant threat to the Corporation's earnings and capital base. Accordingly,
effective risk management that maintains interest rate risk at prudent levels is
essential to the Corporation's safety and soundness.
Loans are the most significant earning asset. Management offers commercial and
real estate loans priced at interest rates which fluctuate with various indices
such as the prime rate or rates paid on various government issued securities.
When loans are made with longer term fixed rates, the Corporation attempts to
match these balances with sources of funding with similar maturities in order to
mitigate interest rate risk. In addition, the Corporation prices loans so it has
an opportunity to reprice the loan within 12 to 36 months.
The Bank has $83.7 million of securities, of which $43.3 million are mortgage
backed securities providing for scheduled monthly principal and interest
payments as well as unanticipated prepayments of principal. These cash flows are
then reinvested into other earning assets at current market rates. The
Corporation also has investments in federal funds sold to correspondent banks as
well as other interest bearing deposits with correspondent banks. These funds
are generally repriced on a daily basis.
The Corporation offers deposit products with a variety of terms ranging from
deposits whose interest rates can change on a weekly basis to certificates of
deposit with repricing terms of up to five years. Longer term deposits generally
include penalty provisions for early withdrawal.
Beyond general efforts to shorten the 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.
Exposure to interest rate risk is reviewed on a regular basis. 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 of interest rate changes on net interest income and to structure the
composition of the balance sheet to minimize interest rate risk and at the same
time maximize income.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management realizes certain risks are inherent and that the goal is to identify
and minimize Tools used by the risks. management include maturity and repricing
analysis and interest rate sensitivity analysis.
The difference between repricing assets and liabilities for a specific period is
referred to An excess of as the GAP. repricable assets over liabilities is
referred to An excess of repricable liabilities over assets is referred to as a
positive gap. as a negative gap. The cumulative gap is the summation of the gap
for all periods to the end of the period for which the cumulative gap is being
measured.
Assets and liabilities scheduled to reprice are reported in the following
timeframes. Those instruments with a variable interest rate tied to an index and
considered immediately repricable are reported in the 1 to 90 day The timeframe.
estimates of principal amortization and prepayments are assigned to the
following timeframes.
The following is the Corporation's repricing opportunities at December 31, 2003
(dollars in thousands):
1-90 91-365 2- 5 Over 5
Days Days Years Years Total
------------ ----------- ---------- -------- ----------
Interest-earning assets:
Loans $ 147,983 $ 50,607 $ 48,846 $ 50,410 $ 297,846
Securities 35,930 13,301 38,375 7,760 95,366
Other 15,600 -0- -0- -0- 15,600
------------ ----------- ---------- -------- ----------
Total interest-earning assets 199,513 63,908 87,221 58,170 408,812
------------ ----------- ---------- -------- ----------
Interest-bearing obligations:
Savings deposits 91,835 -0- -0- -0- 91,835
Time deposits 33,518 86,927 66,592 743 187,780
Borrowings -0- 1,176 14,299 71,551 87,026
Subordinated debentures 12,450 -0- -0- -0- 12,450
------------ ----------- ---------- -------- ----------
Total interest-bearing
obligations 137,803 88,103 80,891 72,294 379,091
------------ ----------- ---------- -------- ----------
GAP $ 61,710 $ (24,195) $ 6,330 $(14,124) $ 29,721
============ =========== ========== ======== ==========
Cumulative GAP $ 61,710 $ 37,515 $ 43,845 $ 29,721
============ =========== ========== ========
The above analysis indicates that at December 31, 2003, the Corporation had a
cumulative asset sensitivity GAP position of $37.5 million within the one-year
The Corporation's cumulative asset sensitive GAP suggests that if market
timeframe. interest rates increase in the next twelve months, the Corporation
has the potential to earn more net interest income. Conversely, if market
interest rates continue to decrease in the next twelve months, the above GAP
position suggests the Corporation's net interest income would decrease.
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
repricing within 90 days, while experience suggests that these categories of
deposits are actually comparatively resistant to rate sensitivity.
The borrowings in the table above and on the next page include FHLB advances as
fixed-rate A significant advances. portion of these advances give the FHLB the
option to convert from a fixed-rate advance to an adjustable rate advance with
quarterly repricing at three month The exercise of this conversion feature by
the FHLB would impact the LIBOR Flat. maturity dates currently assumed in the
tables.
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk and foreign exchange risk. The Corporation has no
market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets and therefore has minimal significant
exposure to changes in commodity prices. Any impact that changes in foreign
exchange rates and commodity prices would have on interest rates are assumed to
be insignificant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Corporation's interest rate risk management process seeks
to ensure that appropriate policies, procedures, management information systems
and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Corporation assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and asset quality.
The table below measures current maturity levels of interest-earning assets and
interest-bearing obligations, along with average stated rates and estimated fair
values at December 31, 2003 (dollars in thousands). Nonaccrual loans of $38.7
million are included in the table at an average interest rate of 0.0% and a
maturity greater than five years.
Principal/Notional Amount Maturing in:
Fair Value
2004 2005 2006 2007 2008 Thereafter Total 12/31/2003
------------- ------- -------- --------- ------- ---------- -------- ----------
RATE SENSITIVE ASSETS
Fixed interest rate
securities $ 38,893 $10,609 $ 11,358 $ 11,855 $ 5,006 $ 7,053 $ 84,774 $ 84,774
Average interest rate 3.37% 4.12% 4.66% 4.3% 4.28% 5.16% 3.97%
Fixed interest rate loans 66,939 18,324 14,407 12,111 4,004 50,410 166,195 162,447
Average interest rate 7.52 7.23 7.39 6.28 7.05 1.53 5.59
Variable interest rate
loans 131,651 -0- -0- -0- -0- -0- 131,651 131,651
Average interest rate 5.38 -0- -0- -0- -0- -0- 5.38
Other assets 26,192 -0- -0- -0- -0- -0- 26,192 26,192
Average interest rate 1.72 -0- -0- -0- -0- -0- 1.72
Total rate sensitive assets $ 263,422 $28,875 $ 25,543 $ 23,890 $ 8,913 $ 57,142 $408,812 $ 405,064
============= ======= ======== ========= ======= ========== ======== ==========
Average interest rate 5.26% 6.10% 6.20% 5.31% 5.52% 1.92% 4.92%
============= ======= ======== ========= ======= ========== ========
RATE SENSITIVE LIABILITIES
Interest-bearing savings $ 91,835 $ -0- $ -0- $ -0- $ -0- $ -0- $ 91,835 $ 91,835
Average interest rate 1.28% -0-% -0-% -0-% -0-% -0-% 1.28%
Time deposits 120,445 39,058 20,865 6,160 509 743 187,780 188,833
Average interest rate 2.98 3.23 3.23 4.46 3.6 6.37 3.12
Fixed interest rate
borrowings 1,176 904 3,395 -0- -0- 1,551 7,026 6,527
Average interest rate 6.52 6.50 7.06 -0- -0- -0- 5.56
Variable interest rate
borrowings -0- -0- -0- -0- 10,000 70,000 80,000 88,717
Average interest rate 0.00 0.00 0.00 0.00 5.49 5.42 5.43
Variable interest rate
subordinated debentures 12,450 -0- -0- -0- -0- -0- 12,450 12,450
Average interest rate 3.68 -0- -0- -0- -0- -0- 3.68
Total rate sensitive
liabilities $ 225,906 $39,962 $ 24,260 $ 6,160 $10,509 $ 72,294 $379,091 $ 388,362
============= ======= ======== ========= ======= ========== ======== ==========
Average interest rate 2.34% 3.30% 3.76% 4.46% 5.40% 5.34% 3.22%
============= ======= ======== ========= ======= ========== ========
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of variables, including: the growth,
composition and levels of loans, deposits, and other earning assets and
interest-bearing obligations, and economic and competitive conditions; potential
changes in lending, investing and deposit strategies; customer preferences; and
other factors.
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, 2003, the Corporation had excess Canadian assets
of $2.1 million (or $2.7 million in U.S. dollars). Management believes the
exposure to short-term foreign exchange risk is minimal and at an acceptable
level for the Corporation. Management intends to limit the Corporation's foreign
exchange risk by acquiring deposit liabilities approximately equal to its
Canadian assets.
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. See
note 22 to the consolidated financial statements for additional information.
LIQUIDITY
As a result of the Corporation's results for 2003 and the constraints of the
Cease and Desist Order discussed elsewhere in this report, sources of liquidity,
such as lines of credit from correspondent banks, borrowings from the Federal
Home Loan Bank, and the issuance of stock, which were historically available,
are currently not sources of liquidity.
The liquidity issues faced in 2003, the Corporation's actions taken to address
them, and the liquidity plans for 2004 and beyond are discussed below.
During the fourth quarter of 2002, the lines-of-credit the Corporation had with
two correspondent banks were closed by those banks. In 2003, the Corporation
established a secondary borrowing arrangement collateralized by loans.
The final 2003 results, the uncertainty relative to the Bank's ability to meet
the required minimum regulatory capital ratios, and the independent auditor's
uncertainty about the Corporation's ability to continue as a going concern,
could result in further decreases in deposits in the Bank's market area.
During 2003, the Corporation decreased cash and cash equivalents by $20.8
million. As shown on the Corporation's Statement of Cash Flows, despite the net
loss of $9.6 million in 2003, the Corporation was able to adequately manage
liquidity needs. Significant factors impacting cash flow were the continued
reduction in deposit balances of $131.7 million, which was primarily funded with
loan reductions of $129.6 million. Liquidity continues to be of primary
importance to the near term strategies of the Corporation. The uncertainty of
certain events such as pending branch sales and closings have made it necessary
to maintain excess liquidity within the Corporation. In recent months, the
Corporation has seen relative stability in its funding sources.
It is anticipated that in 2004 cash generated from decreases in certain segments
of the loan portfolio will be re-invested in securities and local market loans,
and deposits generated locally will replace a portion of the out-of-market and
brokered deposits.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the fourth quarter of 2002, the Corporation experienced an unanticipated
decrease in deposits, mainly from local governmental units, in part due to the
public reaction to the reported condition of the Bank. In reaction to this
occurrence, management developed a short-term liquidity plan which involved
obtaining deposits via the Internet CD network, and to a lesser degree the sale
of unencumbered securities available-for-sale. The Corporation has continued to
use the Internet CDs as a primary source of funding to maintain liquidity. As of
December 31, 2003 balances of Internet CDs amounted to $74.4 million.
In addition, to date, the Corporation suspended six payments of interest on its
subordinated debentures that fund quarterly distributions on the trust preferred
securities issued by its trust subsidiary, North Country Capital Trust. The
debenture agreement allows for suspension of payments for up to 20 quarters.
From a long-term perspective, the Corporation's liquidity plan for 2004 includes
strategies to increase core deposits in the Corporation's local markets. New
products and advertising are expected to commence in 2004, with a goal of
raising core deposits to reduce the dependency on noncore deposits, while also
reducing interest costs. The Corporation's liquidity plan for 2004 calls for
augmenting local deposit growth efforts with Internet CD funding to the extent
necessary.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As disclosed in the Notes to the Consolidated Financial Statements, the
Corporation has certain obligations and commitments to make future payments
under contracts. At December 31, 2003, the aggregate contractual obligations and
commitments are:
Payments Due by Period
---------------------------------------------------------------
Less than 1 1 to 3 4 to 5 After 5
Contractual Obligations Year Years Years Years Total
------------ ---------- --------- -------- -----------
Total Deposits $ 238,459 $ 59,923 $ 6,669 $ 743 $ 305,794
Long-Term Borrowings 1,176 4,299 10,000 71,551 87,026
Subordinated Debentures -0- -0- -0- 12,450 12,450
Annual Rental / Purchase Commitments
Under Noncancelable Leases / Contracts 125 80 -0- -0- 205
------------ ---------- --------- -------- -----------
TOTAL $ 239,760 $ 64,302 $ 16,669 $ 84,744 $ 405,475
============ ========== ========= ======== ===========
Other Commitments
Letters of Credit $ 14,498 -0- -0- -0- $ 14,498
Commitments to Extend Credit 77,521 -0- -0- -0- 77,521
Credit Card Commitments 3,381 -0- -0- -0- 3,381
------------ ---------- --------- -------- -----------
TOTAL $ 95,400 $ -0- $ -0- $ -0- $ 95,400
============ ========== ========= ======== ===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL AND REGULATORY
During 2003, total capitalization decreased by $9.8 million, as a result of the
net loss of $9.6 million, the decrease in the unrealized gain on securities
available for sale of $.2 million, and principal payment on borrowings of $.8
million.
The following table details sources of capital for the three years ended
December 3, 2003:
2003 2002 2001
--------- --------- ----------
CAPITAL STRUCTURE
Long-term debt (1) $ 12,450 $ 12,450 $ 12,450
Shareholders' equity 10,700 20,502 47,889
--------- --------- ----------
Total capitalization $ 23,150 $ 32,952 $ 60,339
--------- --------- ----------
Tangible equity $ 21,557 $ 30,811 $ 54,102
--------- --------- ----------
INTANGIBLE ASSETS
Subsidiaries:
Goodwill $ - $ - $ 3,536
Core deposit premium 1,067 1,587 2,118
Other identifiable intangibles 526 554 583
--------- --------- ----------
Total intangibles $ 1,593 $ 2,141 $ 6,237
--------- --------- ----------
RISK-BASED CAPITAL
Tier I capital:
Shareholders' equity $ 10,700 $ 20,502 $ 47,889
Net unrealized gains (losses) on
available for sale securities (1,027) (1,242) (160)
Minority interest 2,785 5,706 12,507
Less: intangibles (1,593) (2,141) (6,237)
--------- --------- ----------
Total Tier I capital $ 10,865 $ 22,825 $ 53,999
--------- --------- ----------
Tier II Capital:
Allowable reserve for loan losses $ 4,016 $ 5,605 $ 6,149
Qualifying long-term debt 9,734 6,803 0
--------- --------- ----------
Total Tier II capital 13,750 12,408 6,149
--------- --------- ----------
Total capital $ 24,615 $ 35,233 $ 60,148
========= ========= ==========
Risk-adjusted assets $ 303,284 $ 431,067 $ 487,642
========= ========= ==========
Capital ratios:
Tier I Capital to risk weighted assets 3.58% 5.30% 11.07%
Total Capital to risk weighted assets 8.12% 8.17% 12.33%
Tier I Capital to average assets 2.48% 3.83% 8.44%
(1) Long term debt in the Corporation's subordinated debentures.
As a bank holding 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 The federal banking regulators have also established capital
classifications beyond the minimum measurement. 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 As of December
31, 2003, the Corporation was below the minimum troubled. for Capital adequacy
purposes and the Bank did not meet the Capital requirements of the Order. See
discussions on the following pages of the regulatory requirements and the
Corporation's plans for increasing its capital ratios.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and a portion
of the deferred tax asset are examples of such assets.
Presented below is a summary of the Corporation's consolidated capital position
in comparison to generally applicable regulatory requirements:
Tier I Tier I Total
Capital to Capital to Average Risk
Average Risk Weighted Risk Weighted
Assets Assets Assets
---------- ------------- -------------
Regulatory minimum for capital adequacy purposes 4.0% 4.0% 8.0%
The Corporation:
December 31, 2003 2.5% 3.6% 7.2%
December 31, 2002 3.8% 5.3% 8.2%
The capital levels include adjustment for the capital, or trust preferred
securities, issued in May 1999, subject to certain limitations. Federal Reserve
guidelines limit the amount of trust preferred securities which can be included
in Tier I capital to 25% of total Tier I capital. As of December 31, 2003,
$2,785,000 of the $12,450,000 of capital securities were available as Tier I
capital of the Corporation. As of December 31, 2002, $5,706,000 qualified as
Tier I capital.
In October, 2001, the Bank was notified by the FDIC that it is a "troubled
institution" within the meaning of FDIC regulations. As a troubled institution,
the Bank is required to notify the FDIC 30 days prior to the addition or
replacement of a Board member and the employment or changes in responsibilities
of a senior executive officer.
In September, 2002, a regularly-scheduled safety and soundness examination of
the Bank was conducted by its principal regulators, the Michigan Office of
Financial and Insurance Services ("OFIS") and the FDIC. During the course of
that examination, the FDIC, the OFIS, and the Federal Reserve Bank of Chicago
("FRB") requested that the Corporation and the Bank take certain actions,
including suspending the payment of dividends and conserving the liquidity of
the Corporation.
In response to the concerns expressed by the regulators, the Board of Directors
of the Corporation and the Bank adopted resolutions providing for prior
regulatory approval of the declaration or payment of any dividend by the
Corporation or the Bank, and suspension of interest payments by the Corporation
in connection with its trust preferred securities.
The agreements relating to the trust preferred securities allow for the
suspension of payments for up to 20 quarters. Therefore, the suspension of the
interest payments does not violate the agreement. However, while interest
payments are suspended, no dividends can be paid on the Corporation's common
stock.
Following the completion of the 2002 regularly-scheduled safety and soundness
examination of the Bank by the FDIC and the OFIS, and the Bank's receipt of the
related Joint Report of Examination ("Report"), the FDIC and the OFIS, with the
consent of the Bank, on March 26, 2003, entered a formal Cease and Desist Order
(the "Order") under Federal and State banking laws. The Order was reported on
the Corporation's Form 8K filed on April 9, 2003 and is available on the FDIC
website www.FDIC.Gov. The Order became effective on April 5, 2003, and will
remain in effect until modified or terminated by action of the FDIC and the
OFIS. The Order identified deficiencies in the Bank's policies and procedures,
including its directorate and management personnel and practices, credit
underwriting, credit administration, and policies regarding asset/liability
management, liquidity, funds management and investments, and its compliance with
all applicable laws and regulations, including Regulations O and U of the Board
of Governors of the Federal Reserve System (the "Board"), the FDIC Rules and
Regulations, and the Michigan Banking Code of 1999. The Order also requires the
Bank to maintain specified capital ratios during the life of the Order.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation has addressed all areas of the Order and has made progress in
correcting all administrative and management deficiencies. The Bank has adopted
new policies for liquidity, investment and asset liability management. To
operate within the requirements of the Order regarding lending functions,
management has revamped current practices and procedures related to credit
underwriting, credit administration and problem loan management and is believed
to be operating within the requirements of the Order. The above changes were
initiated by a new management team, which was put in place, as a requirement of
the Order, during the second half of 2003. Progress has been made and continues
to be made from the actions initiated by this new management team in a
relatively short time frame; however, the Corporation and Bank are not in
compliance with the Order as it relates to Capital adequacy.
As of December 31, 2003, the Bank's capital ratios do not meet the minimum
requirements of the Order. Noncompliance with the minimum capital requirements
and/or other requirements of the Order may impact the ability of the Corporation
and the Bank to remain as ongoing operating entities.
The Order imposes specific prohibitions and limitations on the Bank and its
directors regarding certain matters. Without the prior approval of the FDIC and
the OFIS, the Bank may not (i) enter into any material transaction that is not
in the ordinary course of business (including any material acquisition or
disposition of assets), (ii) declare or pay any cash dividend, (iii) extend any
credit, directly or indirectly, to any borrower obligated to the Bank on any
credit which has been charged off or classified loss by bank examiners so long
as such credit remains uncollected, or (iv) authorize any "golden parachute"
payment to any person, within the meaning of the applicable FDIC regulation. In
addition, the Bank is required to notify the FDIC and the OFIS in writing of any
change in the Bank's directors or senior executive officers, and to obtain the
prior approval of the FDIC and OFIS of the addition of any person as a director
or senior executive officer of the Bank. The Bank is also prohibited from
permitting its former Chairman and director, Ronald G. Ford, from negotiating or
making any loan, overdraft, or extension of credit, serving as a member of the
Bank's loan committee, or participating in credit underwriting, other than
voting as a director on matters presented to the Board of Directors.
The Order requires the Bank and its directors to take specific steps, within
time periods specified in the Order, to address the operational deficiencies,
including certain violations of law and regulations, identified by the FDIC and
the OFIS in the Order and the Report. Among other things, the Bank must
establish, and submit to the FDIC and the OFIS for comment, written plans (i) to
reduce the Bank's risk position with respect to certain classified loans
identified in the Report or any subsequent Report of Examination during the life
of the Order, (ii) to reduce identified loan concentrations, (iii) to reduce and
collect delinquent loans, (iv) to eliminate the classified amounts of loans to
directors, executive officers, principal shareholders of the Bank and their
respective related interests, (v) to address the Bank's relationship of volatile
liabilities to temporary investments, rate sensitivity objectives, and
asset/liability management, (vi) setting forth the Bank's strategic plan,
including financial goals and strategies to maintain adequate capital and
liquidity, to reduce problem loans, and to attract and keep qualified
management, (vii) covering the policies and procedures for review and approval
of reimbursement of customer entertainment and business development expenses of
the Bank's directors, officers and employees, (viii) for a realistic budget for
calendar year 2003 and each subsequent year during the life of the Order,
including strategies to improve the Bank's net interest margin, (ix) to reduce
the Bank's portfolio of other real estate owned as a result of foreclosure or
surrender of collateral for loans, and (x) to address procedures for the
directors to monitor, and management to implement, the requirements of the
Order.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Further actions the Bank must take within periods specified in the Order include
correcting all deficiencies noted in the Report with respect to certain
categories of loans, and all technical exceptions and all violations of law
noted in the Report. The Bank's loan committee, which must include at least
three outside directors who are independent of management and any principal
shareholder, is required to meet at least monthly, and to act with respect to
specified categories of loans and loan applications, including all such
applications involving directors and executive officers of the Bank and their
respective related interests. The Bank's Board of Directors is required to
review and revise the Bank's written loan policy, to submit the revised policy
to the FDIC and OFIS for review and comment, and to conduct an annual review of
the policy. The Bank's Board of Directors is also required to review and revise
the Bank's investment policy, and to submit the revised policy for comment to
the FDIC and the OFIS. The Order mandates the Bank's Board of Directors (i) to
adopt resolutions acknowledging the Bank's designation as a troubled institution
by the FDIC, (ii) to review all agreements for the provision of goods and
services between the Bank and any of its current or former directors, officers,
or employees, and their respective related interests, and to determine whether
such agreements remain in the best interest of the Bank, and (iii) to seek
restitution from Ronald G. Ford of all amounts paid by the Bank pursuant to the
Chairman Agreement entered into as of April 12, 2002, between Mr. Ford and the
Corporation. The Order also requires the Bank to submit to the FDIC and the OFIS
written reports regarding its progress under the Order, signed by each director
of the Bank, every three months following the effective date of the Order.
If the Bank fails or is unable to timely comply with the Order, there could be
material adverse effects on the Bank and the Corporation. Since the entry of the
Order, the Bank has not been in compliance with the minimum capital ratios
specified in the Order. There can be no assurances that the Corporation can take
steps in the time limits prescribed by the Order to restore the Bank's capital
ratios to the required levels and has not done so as of the date of this report.
The Corporation and the Bank have been addressing the requirements of the Order
as the Board of Directors and management believe it is in the best interests for
the long-term financial health of the Corporation to address the issues
promptly.
The Order requires development of a comprehensive strategic plan, financial
plan, and profit plan. The development of these plans will provide the Board of
Directors and management with a road map to strengthen the Corporation in many
areas, reduce risk, improve liquidity, and return the Corporation to
profitability. By implementing these strategic plans, improved policies and
resolution of nonperforming assets, the Corporation believes it can more
effectively serve its customers, grow in its markets, return to profitability,
and increase shareholder value.
Addressing the requirements of the Order, carrying out the objectives of the
strategic plan, and returning the Corporation to profitability required the
strengthening of the executive management team. During 2003, the Corporation
added management with experience in turnaround situations, loan portfolio,
credit and problem loan administration, and financial management expertise
commensurate with the issues the Corporation must address. The addition of
management may increase expense in the short term. However, the additional
management expertise is expected to help the Corporation resolve many of its
issues more quickly, and improve customer service and financial performance.
The Board of Directors is further required to address the overall
asset/liability management practices of the Bank, interest rate risk management,
and liquidity management. Strengthening the Bank's policies, risk limits, and
procedures in these areas should increase overall liquidity and consistency of
income through interest rate cycles and reduce risk to capital.
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.
GENERAL INFORMATION
BOARD OF DIRECTORS OFFICERS CONTACT INFORMATION
------------------------------------- ------------------------ -----------------------------------
C. JAMES BESS (1) C. JAMES BESS NORTH COUNTRY FINANCIAL CORP.
President and Chief Executive Officer President 130 South Cedar Street
North Country Financial Corporation Chief Executive Officer Manistique, MI 49854
North Country Bank and Trust Employed Since: 2003 (906) 341-8401
Director Since: 2003 (800) 200-7032
DENNIS BITTNER (1) JANI BLAKE SHAREHOLDER INFORMATION
Owner and President Executive Vice President For assistance with questions,
Bittner Engineering, Inc. Chief Operating Officer please contact Investor Relations
Director Since: 2001 Employed Since: 2002 (800) 200-7032
BERNARD A. BOUSCHOR (1) KELLY GEORGE DIVIDEND REINVESTMENT PLAN
Tribal Chairman Senior Vice President AGENT
Sault Tribe of Chippewa Indians Chief Lending Officer Registrar and Transfer Company
Director Since: 1996 Employed Since: 2003 (800) 368-5948
RONALD G. FORD (3) ERNIE KRUEGER STOCK TRANSFER AGENT
Retired Vice President For questions regarding transfer of
Director Since: 1987 Controller stock, please contact Registrar and
Employed Since: 2003 Transfer Company
(800) 368-5948
STANLEY J. GEROU II (1) JOSEPH PETTERSON
Owner and President Executive Vice President
Days Inn and Comfort Inn (Munising) Chief Financial Officer
Gerou Excavating, Inc. Employed Since: 2003
Director Since: 1989
THOMAS KING (2)
Retired
Director Since: 2003
JOHN LINDROTH (1)
President
Superior State Agency, Inc.
Director Since: 1987
STEVE MADIGAN (1)
Owner and President
Madigan-Pingatore Insurance Services
Director Since: 2001
ANTHONY MAZZALI (2)
Owner and President
Capital Assets Advisory Services
Director Since: 2003
SPENCER SHUNK (1)
Owner
Shunk Furniture
Director Since: 2001
(1) Denotes Directors of North Country Financial Corporation and North
Country Bank and Trust
(2) Denotes Directors of North Country Bank and Trust only.
(3) Denotes Directors of North Country Financial Corporation only.
NORTH COUNTY BANK TRUST
BRANCH LOCATION
GAYLORD STEPHENSON PENDING CLOSURES
145 North Otsego Avenue 245 Menominee Street
Gaylord, MI 49735 Stephenson, MI 49887
(989) 732-3750 (906) 753-2225 BOYNE CITY
128 Water Street
KALEVA Boyne City, MI 49712
14429 Wouski Avenue SOUTH RANGE (231) 582-2098
Kaleva, MI 49645 47 Trimountain Avenue TARGET DATE: 5/7/04
(231) 362-3223 South Range, MI 49963
(906) 482-1170
CADILLAC
MANISTIQUE 218 South Mitchell Street
130 South Cedar Street TRAVERSE CITY Cadillac, MI 49601
Manistique, MI 49854 3530 North Country Drive (231) 876-3400
(906) 341-8401 Traverse City, MI 49684 TARGET DATE: 5/7/04
(231) 929-5253
MARQUETTE MAIN CALUMET
300 N. McClellan Street 56730 Calumet Ave. Suite L
Marquette, MI 49855 PENDING BRANCH SALES Calumet, MI 49913
(906) 226-5000 (906) 337-2801
TARGET DATE: 5/7/04
ALANSON
MARQUETTE PRESQUE ISLE 6230 River Street
1400 Presque Isle Alanson, MI 49706 SAULT STE. MARIE CASCADE
Marquette, MI 49855 (231) 548-2922 4250 I-75 Business Spur
(906) 228-3640 TARGET DATE 5/31/04 Sault Ste. Marie, MI 49783
(906) 632-2020
MUNISING ESCANABA TARGET DATE: 5/14/04
301 East Superior Street 837 North Lincoln Road
Munising, MI 49862 Escanaba, MI 49829 TRAVERSE CITY
(906) 387-3931 (906) 789-7991 333 East State Street
TARGET DATE: 5/31/04 Traverse City, MI 49684
NEWBERRY (231) 995-6600
414 Newberry Avenue IRON MOUNTAIN TARGET DATE: 5/14/04
Newberry, MI 49868 1890 S. Stephenson Ave.
(906) 293-5165 Iron Mountain, MI 49801
(906) 779-2141
ONTONAGON TARGET DATE: 5/31/04
601 River Street
Ontonagon, MI 49953 MANCELONA
(906) 884-4115 625 North Williams Street
Mancelona, MI 49659
RIPLEY (231) 587-9144
106 Royce Road TARGET DATE: 5/31/04
Hancock, MI 49930
(906) 482-1269
SAULT STE. MARIE MAIN
138 Ridge Street
Sault Ste, Marie, MI 49783
(906) 635-3992
EXHIBIT 14
NORTH COUNTRY FINANCIAL CORPORATION -- BUSINESS CONDUCT AND CODE OF ETHICS
POLICY
--------------------------------------------------------------------------------
Organizational Functional Area: Executive
Policy For: Business Conduct and
Code of Ethics
Board Approved: March 2004
Last Revision Date: March 2004
Department/Individual Responsible
For Maintaining/Updating Policy: C. James Bess
--------------------------------------------------------------------------------
INTRODUCTION:
This Code of Business Conduct and Ethics covers a wide range of business
practices and procedures. It does not cover every issue that may arise, but it
sets out basic principles to guide all employees, officers and directors of the
North Country Financial Corporation and its subsidiaries (NCFC). All of our
employees, officers and directors must conduct themselves accordingly and seek
to avoid even the appearance of improper behavior. The Code should also be
provided to and followed by agents and representatives and consultants of NCFC.
If a law conflicts with a policy in this Code, you must comply with the law;
however, if a local custom or policy conflicts with this Code, you must comply
with the Code. If you have any questions about these conflicts, you should ask
your supervisor how to handle the situation.
Employees who violate the standards in this Code will be subject to disciplinary
action, which depending on the severity of the situation may include dismissal.
If you are in a situation, which you believe may violate or lead to a violation
of this Code, follow the guidelines described under the "Compliance Procedures"
section of this Code.
REGULATORY RISK ISSUE:
Receiving or soliciting gifts to influence a financial transaction is strictly
prohibited and may result in stiff penalties. The Bank Bribery Act of 1984
increased the urgency for financial institutions to educate all of their
employees against participating in such transactions, by creating substantial
penalties. The Bank Bribery Act and the adoption of Regulation O or the
Financial Institutions Regulatory Act (FIRA) underscored the need for sufficient
policy regarding proper employee/customer relationships.
MAJOR POLICY ELEMENTS:
- Guidelines for employees to use "reasonable" standard regarding normal
amenities when conducting business
- Disclosure of business and other relationships that may result in conflicts
of interest
1
- Prevention of possible compromising situations through prior knowledge and
proper handling
- Preservation of respectability
STATEMENT OF NEED AND DEFINITION:
The board of directors acknowledges the risk that conflicts of interest may
arise in obtaining persons involved in the business and civic community to act
as directors, senior officers, and employees of the bank. Due to the worth of
such persons in attracting and maintaining business relationships, the board
feels it prudent to adopt a conflict of interest policy.
THE PURPOSE:
Realizing excessive activities, gratuities and access to information my lead to
conflicts of interest for employees, directors, and principal shareholders, the
bank has developed this policy to prevent a loss of objectivity by requiring
appropriate trustworthy conduct.
CONFLICTS OF INTEREST:
A "conflict of interest" exists when a person's private interest interferes or
appears to interfere with the interests of NCFC. A conflict situation can arise
when an employee, officer or director takes actions or has interests that may
make it difficult to perform his or her Company work objectively and
effectively. Conflicts of interest may also arise when an employee, officer or
director, or a member of his or her family, receives improper personal benefits
as a result of his or her position in the Company.
The general objective of this policy is to require immediate disclosure of any
potential conflict of interest and to prevent such a situation from rising.
Adherence to this policy should prevent the development of improper
relationships between financial institution directors, officers, employees, and
the customers they serve.
SPECIFIC GOALS:
The specific goals of this policy are to:
- Establish a monetary limit on nominal gifts and gratuities
- Describe situations in which possible conflicts of interest may occur
- Require proper conduct of all employees and directors
- Require reporting of conflicts to superiors
- Provide written disclosures of business interests.
POLICY ELEMENTS:
DEFINITIONS:
For the purposes of this policy, the following definitions apply:
Officer or Employee A part time or full time salaried officer or employee
of North Country Bank and Trust
Gift May include cash or property, special discounts,
price concessions, special personal items,
special personal
2
entertainment (other than of a normal social nature),
special personal services, gratuitous personal
services, personal favors, or special dispensations
of any kind that could be attributed to the
recipient's position or responsibilities with the
bank.
Immediate Family Spouse, minor child, and or other dependent of the
officer, employee, or director
*For definitions of company, control of a company, control of a bank, and
principal shareholder and/or related interest, refer to 12 CFR 215, Regulation
O.
POLICY STATEMENT:
Due to the increased number of financial institution failures resulting from
self-dealing, fraud, and misconduct of directors, management, and employees, the
board of directors of North Country Bank and Trust intends to hold its employees
and directors to this strict code of ethics and to require reporting of
conflicts of interest. Individuals associated with this bank have a primary
responsibility to uphold its standards.
Failure to comply with all policies herein described may result in the
termination of employment.
All employees and representatives of the bank are required to act in a
responsible and respectable manner and to remain free of influences that may
result in the loss of objectivity regarding business conducted with the bank's
customers or with the bank itself. Each employee must disclose and avoid any
interests or activities involving another organization or individual that may
result in a conflict of interest between the bank and that organization or
individual.
While this policy does not intend to interfere with the personal lives of
employees and representatives, it requires those persons to recognize situations
where conflicts of interest may arise and to avoid them when possible. If these
situations cannot be avoided, they must be reported immediately to a direct
superior. Subsequently, the employee or representative should remove himself or
herself from any compromising situations, whether it involves advising the other
person or entity or approving or voting on extensions of credit.
CONFIDENTIAL INFORMATION:
All employees and directors must acknowledge that all information concerning
bank, customer, depositor, and director information is considered confidential
and is to be used for bank purposes only. The use of such information for
personal, familial, or other gain is unethical and illegal under securities
rulings and the National Bank Act. Information regarding any business conducted
cannot be disclosed to outside individuals (unless authorized by the bank or its
customer, etc.) and may not be used for personal gain.
3
Use of confidential information for other than the bank's business purposes may
result in disclosure of insider information. Insider information is defined as
information of a material nature used to affect the price of stock involved.
Insider information may not be used to purchase, trade, or solicit securities
until that information is available to the general public.
In addition, all published information (both for internal and external use),
developed programs, equipment, etc. are the property of the bank and are
reserved for use by employees of the bank. Use of these materials for any other
purpose may constitute copyright infringement and theft.
INSIDER TRADING:
Directors, officers and employees who have access to confidential information
are not permitted to use or share that information for stock trading purposes or
for any other purpose except the conduct of our business. All non-public
information about NCFC or our customers should be considered confidential
information. To use non-public information for personal financial benefit or to
"tip" others who might make an investment decision on the basis of this
information is not only unethical but also illegal.
The employees of the bank are encouraged to purchase and hold stock of the bank
for long-term investment. While the bank may not delve into the personal lives
of its employees, employment in a bank requires prudent and proper conduct in
investment and other situations. Speculation or trading in the stock of the bank
is prohibited, as is the purchase or sales based on insider information, as
previously discussed.
GIFTS AND ENTERTAINMENT:
Business should be done on an "arms-length basis". The purpose of business
entertainment and gifts in a commercial setting is to create good will and sound
working relationships, not to gain unfair advantage with customers. No gift or
entertainment should ever be offered, given, provided or accepted by any NCFC
employee, family member of an employee or agent unless it: (1) is not a cash
gift, (2) is consistent with customary business practices, (3) is not excessive
in value, (4) cannot be construed as a bribe or payoff and (5) does not violate
any laws or regulations.
The Federal Bank Bribery Law prohibits the receipt or solicitation of gifts if
given or solicited corruptly with the intent to influence or reward bank
employees in connection with any business or transaction of the bank or Company.
Violations of this law are felonies and are punishable by imprisonment up to
five years, as well as substantial monetary penalties. Please discuss with your
supervisor any gifts or proposed gifts which you are not certain are
appropriate.
Employees of the bank are not to solicit gifts from prospective or current
customers, associates, or any other individual or business. Any gifts received
shall be of nominal value. Nominal value is considered to by anything below
$25.00.
4
Employees of the bank are expected to participate in entertainment and amenities
of reasonable cost to facilitate business. Payment by anyone other than the bank
of excessive costs or travel not customary or within acceptable business
practice must not be accepted. Any questionable circumstances must be reported
to your immediate supervisor.
Tickets for sporting, cultural, or other events purchased by the bank are to be
used in entertaining potential or actual customers, vendors, or others for
business purposes only. If it is determined three or four days before the event
that the tickets will not be used, an officer may offer them to someone else at
his or her discretion.
EXTERNAL INVOLVEMENT:
While the bank encourages its employees to be involved in outside activities,
including charitable and political functions, federal law prohibits the bank
from making political contributions. At no time will employees solicit other
employees for political contributions or coerce others into contributing to any
organization. Conduct must not give the perception that benefit to the bank or
connections are sought or desired.
Additionally, offers of directorship to any outside organization that has or
desires a business relationship with the bank, or to any institution within the
financial industry, must be reported to executive management, prior to
acceptance.
Capitalizing on opportunities for personal gain or compensation outside of that
provided by the bank for the performance of services for the bank is strictly
prohibited. Employment outside and in addition to employment at the bank must be
reported to your immediate supervisor.
CONSULTATION:
Refer any questions regarding proper code of conduct to an immediate supervisor
or executive management. Actions or acceptance of gifts that are not
specifically mentioned above must be reviewed as to intent and purpose.
Employees should ask themselves: "If a situation were to be made public, would
my conduct be embarrassing or come into question?"
CONDUCT OF INSIDERS:
12CFR & 215, or federal Regulation O, defines "insiders" as directors, executive
officers, and principal shareholders. These people must take care that their
conduct does not violate rules relating to self-dealing and personal gains. At
no time are members of this group allowed to take advantage of their position
with the bank for personal profit or influence over credit and other decisions
with regard to their business or personal interests.
Directors and officers are prohibited from being involved in the loan approval
process of insiders who may benefit directly or indirectly from the decision to
grant credit. This prohibition extends to professional relationships with any
company or firm receiving benefit as a result of the decision to grant credit.
5
Decisions regarding the sale or purchase of bank assets and services must be
made in the best interests of the bank, with no influence on insiders resulting
from gifts, entertainment, or gratuities. All conduct of such business must be
at "arm's length."
DISCLOSURES:
Employees and officers of the bank must make annual disclosures of any
relationships, receipt of gifts, compensation, or other situations leading to
possible conflicts in the following manner:
- Employees report to immediate supervisor
- Officers report to president or chief operating officer
- Directors, president and chief executive officer report to the board of
directors
Directors, principal shareholders, and executive officers must make
annual disclosures to the entire board of any actual and potential conflicts of
interest and any potential conflicts of their related interests.
RECORDKEEPING/PERSONAL TRANSACTIONS:
NCFC requires honest and accurate recording and reporting of information in
order to make responsible business decisions.
Personal financial obligations should be handled in an exemplary fashion.
Personal transactions must be completed through normal distribution channels
(e.g., ATM, teller). Employees cannot perform transactions to their own
accounts, including submitting these transactions with daily department proof
work.
Many employees regularly use business expense accounts, which must be documented
and recorded accurately. If you are not sure whether a certain expense is
legitimate, ask your supervisor or the Accounts Payable Department. Rules and
guidelines are also available from the Accounting Department.
All of NCFC's books, records, accounts and financial statements must be
maintained in reasonable detail, must appropriately reflect NCFC's transactions
and must conform both to applicable legal requirements and to NCFC's system of
internal controls. Unrecorded or "off-the-books" funds or assets should not be
maintained unless permitted by applicable law or regulation.
Business records and communications often become public, and we should avoid
exaggeration, derogatory remarks, guesswork, or inappropriate characterizations
of people and companies that can be misunderstood. This applies to e-mail,
internal memos, and formal reports. Records should always be retained or
destroyed according to NCFC's record retention policies.
All employees are encouraged to maintain their bank accounts at the bank to
allow the bank to provide service and direct deposit of payroll checks. However,
under no circumstances will the bank pay a rate of interest in excess of the
rate available to all customers.
6
All applicable fees, including overdraft charges, will be assessed on all
accounts of directors, principal shareholders, and executive officers. At no
time will overdraft fees be waived.
CONSEQUENCES OF NONCOMPLIANCE:
As previously stated, failure to comply with this policy may result in the
termination of employment. The action taken will be commensurate with the
seriousness of the conduct and an evaluation of the situation.
All violations of this policy will be brought to the attention of the board of
directors. An officer who is the direct or indirect supervisor of an employee
that has failed to comply with the policy may terminate the employment of the
person involved.
COMPLIANCE PROCEDURES:
As a NCFC employee, you have a continuing responsibility to follow the standards
of this Code both at work and in your personal actions with others, whether they
are a disinterested observer, customer, supplier, shareholder, acquaintance,
examiner or a government representative.
We must all work to ensure prompt and consistent action against violations of
this Code. However, in some situations it is difficult to know right from wrong.
Since we cannot anticipate every situation that will arise, it is important that
we have a way to approach a new question or problem. These are the steps to keep
in mind:
-- Make sure you have all the facts. In order to reach the right
solutions, we must be as fully informed as possible.
-- Ask yourself: What specifically am I being asked to do? Does it seem
unethical or improper? This will enable you to focus on the specific
question you are faced with, and the alternatives you have. Use your
judgment and common sense; if something seems unethical or improper, it
probably is.
-- Clarify your responsibility and role. In most situations, there is
shared responsibility. Are your colleagues informed? It may help to get
others involved and discuss the problem.
-- Discuss the problem with your supervisor. This is the basic guidance
for all situations. In many cases, your supervisor will be
knowledgeable about the question, and will appreciate being brought
into the decision-making process.
-- Seek help from Company resources. In the rare case where it may not be
appropriate to discuss an issue with your supervisor or where you do
not feel comfortable approaching your supervisor with your question,
discuss it locally with your manager. If that is not appropriate, you
may contact Corporate Human Resources at (906) 341-7270, or if you
prefer to write, address your concerns to
7
the Director of Corporate Human Resources at 130 S. Cedar Street,
Manistique, Michigan 49854.
-- You may report ethical violations in confidence and without fear of
retaliation. If your situation requires that your identity be kept
secret, your anonymity will be protected. NCFC does not permit
retaliation of any kind against employees for good faith reports of
ethical violations.
-- Always ask first, act later. If you are unsure of what to do in any
situation, seek guidance before you act.
Management is responsible for developing and implementing procedures to ensure
proper disclosure as required by this policy. Management is also responsible for
maintaining documentation of compliance with this policy.
On an annual basis, the audit department will conduct a review of procedures,
documentation, and minutes of the board of directors meeting to test for
compliance with this policy. It will report its findings to the audit committee
of the board of directors.
8
EXHIBIT 21 - SUBSIDIARIES OF NORTH COUNTRY FINANCIAL CORPORATION
First Manistique Agency - 100% owned
(incorporated as a Michigan corporation)
First Rural Relending Company - 100% owned
(incorporated as a Michigan corporation)
North Country Financial Group -- 100% owned
(incorporated as a Michigan corporation)
North Country Capital Trust -- 100% owned
(organized as a Delaware business trust)
North County Bank and Trust - 100% owned
(incorporated as a Michigan banking corporation)
Subsidiaries of North Country Bank and Trust
NCB Real Estate Company -- 100% owned
(incorporated as a Michigan corporation)
American Financial Mortgage Corporation -- 100% owned
(incorporated as a Michigan corporation)
North Country Mortgage Company LLC -- 99.9% owned
(incorporated as a Michigan corporation)
North Country Employee Leasing Company LLC -- 51% owned
(incorporated as a Michigan corporation)
North Country Financial Corporation directly owns the first five subsidiaries
listed above. North Country Bank and Trust owns the remaining four subsidiaries.
Exhibit 23.1 -- Consent of Independent Public Accountants
Independent Auditor's Consent
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-75959, 333-75961 and 333-76180) and Form S-3 (No. 33-61533)
of North Country Financial Corporation and Subsidiaries of our report dated
March 24, 2004 on the financial statements of North Country Financial
Corporation and Subsidiaries for the year ended December 21, 2003, appearing in
the North Country Financial Corporation 2003 Annual Report to Shareholders which
is incorporated by reference into this Form 10-K.
/s/ Plante & Moran, PLLC
Plante & Moran, PLLC
Grand Rapids, Michigan
March 24, 2004
Exhibit 23.2 -- Consent of Independent Public Accountants
Independent Auditor's Consent
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-61533, 333-75959, 333-75961, and 333-76180) of North Country
Financial Corporation of our report dated January 25, 2002, relating to North
Country Financial Corporation and Subsidiaries and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year ended December 31, 2001, which report is included in the 2003 Annual
Report of North Country Financial Corporation and to the continued reference to
our firm as experts in the prospectus which is a part of the Registration
Statements.
/s/ Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
Appleton, Wisconsin
March 24, 2004
EXHIBIT 31
RULE 13(A) -- 14(A) CERTIFICATIONS
I, C. James Bess, President and Chief Executive Officer of North Country
Financial Corporation certify that:
1. I have reviewed this report on Form 10-K of North Country Financial
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 24, 2004 /s/ C. James Bess
------------------------------------
C. James Bess
President and Chief Executive Officer
(principal executive officer)
I, Joseph E. Petterson, Executive Vice President and Chief Financial Officer of
North Country Financial Corporation, certify that:
1. I have reviewed this report on Form 10-K of North Country Financial
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 24, 2004 /s/ Joseph E. Petterson
-------------------------------
Executive Vice President and
Chief Financial Officer
(principal financial officer)
EXHIBIT 32.1
NORTH COUNTRY FINANCIAL CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C ss. 1350, and accompanies the annual report on Form 10-K for
the year ended December 31, 2003, (the "Form 10-K") of North Country Financial
Corporation (the "Issuer").
I, C. James Bess, President and Chief Executive Office of the Issuer,
certify that:
(1) The Form 10-K fully complies with the requirements of Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of
operation of the Issuer.
/s/ C. James Bess
------------------------------------
C. JAMES BESS
President and Chief Executive Officer
(chief executive officer)
March 24, 2004
EXHIBIT 32.2
NORTH COUNTRY FINANCIAL CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C ss. 1350, and accompanies the annual report on Form 10-K for
the year ended December 31, 2003, (the "Form 10-K") of North Country Financial
Corporation (the "Issuer").
I, Joseph E. Petterson Executive Vice President and Chief Financial Officer
of the Issuer, certify that:
(1) The Form 10-K fully complies with the requirements of Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of
operation of the Issuer.
/s/ Joseph E. Petterson
--------------------------------------------
Joseph E. Petterson
Executive Vice President and Chief Financial Officer
(chief financial officer)
March 24, 2004
APPENDIX F
NORTH COUNTRY'S QUARTERLY REPORT ON FORM 10-Q/A
See attached.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from <> to <>
Commission file number: 0-20167
NORTH COUNTRY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 SOUTH CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 200-7032
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of June 30, 2004, there were outstanding 7,019,152 shares of the registrant's
common stock, no par value.
EXPLANATORY NOTE
North Country Financial Corporation files this Amendment No. 1 on Form 10-Q/A to
amend its Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as
filed with the Securities and Exchange Commission on August 2, 2004. In this
Amendment No. 1, North Country Financial Corporation hereby amends Part I, Items
2 and 4, and Part II, Items 4 and 6 of its Quarterly Report to do the following:
(1) correct the disclosure of average outstanding loan balances and related
charge off percentages for the 6 and 12 month periods ended June 30, 2004 and
December 31, 2003, respectively, as contained in Management's Discussion and
Analysis of Financial Condition and Results of Operation; (2) correct disclosure
regarding the amount of risk adjusted assets, Tier II capital components and
make a rounding adjustment to Tier I capital ratio in the Capital Structure
Table contained in the Management's Discussion and Analysis of Financial
Condition and Results of Operations; (3) provide disclosure regarding the
absence of material changes to its internal controls; (4) include the results of
the voting for the election of directors at the annual meeting of shareholders
held on May 18, 2004; and (5) include as an exhibit the amendment to an
employment agreement between the Corporation and C. James Bess, its President
and Chief Executive Officer, dated May 18, 2004.
i
NORTH COUNTRY FINANCIAL CORPORATION
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2004 (Unaudited) and December 31, 2003.................................... 1
Condensed Consolidated Statements of Operations - Three and Six
Months Ended June 30, 2004 (Unaudited) and
June 30, 2003 (Unaudited)........................................................ 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three and Six Months Ended June 30, 2004
(Unaudited) and June 30, 2003 (Unaudited)........................................ 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2004 (Unaudited) and
June 30, 2003 (Unaudited)........................................................ 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 25
Item 4. Controls and Procedures............................................................ 29
PART II. Other Information
Item 1. Legal Proceedings.................................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders................................ 33
Item 6. Exhibits and Reports on Form 8-K................................................... 34
SIGNATURES...................................................................................... 35
NORTH COUNTRY FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 5,707 $ 7,433
Federal funds sold 9,333 15,600
--------- ---------
Cash and cash equivalents 15,040 23,033
Interest-bearing deposits in other financial institutions 15,726 6,048
Securities available for sale 64,552 84,774
Federal Home Loan Bank stock 4,652 4,544
Total loans 233,032 297,846
Allowance for loan losses (10,850) (22,005)
--------- ---------
Net loans 222,182 275,841
Premises and equipment 12,430 13,747
Other real estate held for sale 3,557 4,356
Other assets 6,903 10,196
--------- ---------
Total assets $ 345,042 $ 422,539
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 21,477 $ 26,179
Interest-bearing deposits 214,169 279,615
--------- ---------
Total deposits 235,646 305,794
Borrowings: 86,637 87,026
Subordinated debentures 12,450 12,450
Other liabilities 4,424 6,569
--------- ---------
Total liabilities 339,157 411,839
Shareholders' equity:
Preferred stock - No par value:
Authorized - 500,000 shares, no shares outstanding -0- -0-
Common stock - No par value:
Authorized - 18,000,000 shares
Issued and outstanding - 7,019,152 16,175 16,175
Accumulated deficit (9,769) (6,502)
Accumulated other comprehensive income (loss) (521) 1,027
--------- ---------
Total shareholders' equity 5,885 10,700
--------- ---------
Total liabilities and shareholders' equity $ 345,042 $ 422,539
========= =========
See accompanying notes to condensed consolidated financial statements.
1.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Interest and fees on loans:
Taxable $ 4,069 $ 5,071 $ 7,865 $ 10,712
Tax-exempt 324 429 643 851
Interest on securities:
Taxable 574 520 1,272 1,212
Tax-exempt 43 66 86 132
Other interest income 143 160 263 312
------- ------- ------- --------
Total interest income 5,153 6,246 10,129 13,219
------- ------- ------- --------
Interest expense:
Deposits 1,378 2,133 3,043 4,678
Borrowings 1,189 1,213 2,370 2,412
Subordinated debentures 119 123 238 245
------- ------- ------- --------
Total interest expense 2,686 3,469 5,651 7,335
------- ------- ------- --------
Net interest income 2,467 2,777 4,478 5,884
Provision for loan losses -0- -0- -0- -0-
------- ------- ------- --------
Net interest income after provision for loan losses 2,467 2,777 4,478 5,884
------- ------- ------- --------
Other income:
Service fees 287 413 580 843
Loan and lease fee income 4 11 9 38
Net security gains -0- 214 -0- 191
Net gains on sale of loans 8 51 20 106
Gain on sale of property and equipment 37 94 85 113
Other 18 356 371 769
------- ------- ------- --------
Total other income 354 1,139 1,065 2,060
------- ------- ------- --------
Other expense:
Salaries and employee benefits 1,354 1,356 2,853 3,033
Furniture and equipment expense 235 355 493 721
Occupancy expense 279 351 626 750
Data processing 348 380 703 787
Accounting, legal, and consulting fees 572 836 978 1,666
Loan and deposit expense 600 334 1,093 908
Telephone 19 364 232 697
Advertising 26 95 43 144
Other 988 1,143 1,789 1,721
------- ------- ------- --------
Total other expense 4,421 5,214 8,810 10,427
------- ------- ------- --------
Loss before provision for income taxes (1,600) (1,298) (3,267) (2,483)
Provision for income taxes -0- 1,359 -0- 1,679
------- ------- ------- --------
Net loss $(1,600) $(2,657) $(3,267) $ (4,162)
======= ======= ======= ========
Loss per common share:
Basic $ (.23) $ (.38) $ (.47) $ (.59)
======= ======= ======= ========
Diluted $ (.23) $ (.38) $ (.47) $ (.59)
======= ======= ======= ========
See accompanying notes to condensed consolidated financial statements.
2.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Balance, beginning of period $ 9,371 $ 18,896 $10,700 $ 20,503
Net loss for period (1,600) (2,657) (3,267) (4,162)
Net unrealized gain (loss) on securities
available for sale (1,886) 100 (1,548) (2)
------- ------- ------- --------
Total comprehensive income (loss) (3,486) (2,557) (4,815) (4,164)
Dividends declared -0- -0- -0- -0-
------- ------- ------- --------
Balance, end of period $ 5,885 $ 16,339 $ 5,885 $ 16,339
======= ======= ======= ========
See accompanying notes to condensed consolidated financial statements.
3.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2004 2003
---- ----
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net loss $ (3,267) $ (4,162)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 914 1,455
Provision for impairment of intangible assets -0- 60
Provision for impairment of other real estate held for sale 22 216
Gain on sales of securities -0- (191)
(Gain) loss on sales of premises, equipment, and other real estate (33) (113)
FHLB stock dividend (108) (58)
Change in other assets 3,120 3,306
Change in other liabilities (2,145) (826)
-------- --------
Net cash provided by (used in) operating activities (1,497) (313)
-------- --------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in other financial institutions (9,678) (9,827)
Purchase of securities available for sale (10,000) -0-
Proceeds from sales of securities available for sale 20,000 6,543
Proceeds from maturities, calls or paydowns of securities available for sale 8,494 6,131
Net decrease in loans 49,997 71,858
Purchase of premises and equipment (19) (30)
Proceeds from sales of premises, equipment, and other real estate 5,247 2,459
-------- --------
Net cash provided by investing activities 64,041 77,134
-------- --------
Cash flows from financing activities:
Net decrease in deposits (70,148) (84,046)
Proceeds from issuance of debt 100 -0-
Principal payments on borrowings (489) (332)
-------- --------
Net cash used in financing activities (70,537) (84,378)
-------- --------
Net change in cash and cash equivalents (7,993) (7,557)
Cash and cash equivalents at beginning of period 23,033 43,792
-------- --------
Cash and cash equivalents at end of period $ 15,040 $ 36,235
======== ========
Supplemental cash flow information:
Cash paid (refunded) for:
Interest $ 5,929 $ 7,854
Income taxes -0- (500)
Noncash investing activities - Transfers of foreclosures from loans to other real estate 3,662 1,865
See accompanying notes to condensed consolidated financial statements.
4.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of North Country
Financial Corporation (the "Corporation") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month
period ended June 30, 2004, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. The unaudited
consolidated financial statements and footnotes thereto should be read in
conjunction with the audited consolidated financial statements and
footnotes thereto included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2003.
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,
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.
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
effects 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.
Stock Option Plans
The Corporation sponsors three stock option plans. One plan was approved
in 2000 and applies to officers, employees, and nonemployee directors. A
total of 500,000 shares were made available for grant under this plan. The
other two plans, one for officers and employees and the other for
nonemployee directors, were approved in 1997. A total of 600,000 shares
were made available for grant under these plans. Options under all of the
plans are granted at the discretion of a committee of the Corporation's
Board of Directors. Options to purchase shares of the Corporation's stock
are granted at a price equal to the market price of the stock at the date
of grant. The committee determines the vesting of the options when they
are granted as established under the plan.
5.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 six months ended June
30, 2003. There were no options granted in 2004.
June 30,
2003
----
Dividend yield 0.00%
Risk-free interest rate 1.25%
Weighted average expected life (years) 7.0
Expected volatility 29.85%
The weighted average fair value of options granted as of their grant date,
using the assumptions shown above, was computed at $.75 per share for
options granted in 2003.
The Corporation accounts for stock options using the intrinsic value
method. For all options granted, the intrinsic value was zero; therefore,
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 six months ended June 30, 2004
and 2003 as follows (dollars in thousands, except per share data):
June 30,
2004 2003
---- ----
June 30, June 30,
2004 2003
---- ----
Net Loss:
As reported $ (3,267) $ (4,162)
========
Total stock-based compensation expense determined under
fair value-based method, net of tax -0- (23)
-------- --------
Pro forma $ (3,267) $ (4,185)
======== ========
Loss per share - Basic:
As reported $ (.47) $ (.59)
======== ========
Pro forma $ (.47) $ (.60)
======== ========
Loss per share - Diluted:
As reported $ (.47) $ (.59)
======== ========
2. RECENT ACCOUNTING PRONOUNCEMENT
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," as an amendment
to SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148
provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee
compensation. The adoption of this change had no material impact on the
Corporation.
6.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are based upon the weighted average number of
shares outstanding.
The following shows the computation of basic and diluted earnings (loss)
per share for the three and six months ended June 30, 2004 and 2003
(dollars in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Basic (loss) per common share:
Net (loss) $(1,600) $(2,657) $(3,267) $(4,162)
======= ======= ======= =======
Weighted average common shares outstanding 7,019 7,019 7,019 7,019
======= ======= ======= =======
Basic (loss) per common share $ (.23) $ (.38) $ (.47) $ (.59)
======= ======= ======= =======
Diluted (loss) per common share:
Net (loss) $ (.23) $ (.38) $ (.47) $ (.59)
======= ======= ======= =======
Weighted average common shares outstanding for
basic (loss) per common share 7,019 7,019 7,019 7,019
Add: Dilutive effect of assumed exercise of stock options -0- -0- -0- -0-
Add: Dilutive effect of directors' deferred stock compensation -0- -0- -0- -0-
------- ------- ------- -------
Average shares and dilutive potential common shares 7,019 7,019 7,019 7,019
======= ======= ======= =======
Diluted (loss) per common share $ (.23) $ (.38) $ (.47) $ (.59)
======= ======= ======= =======
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
available for sale as of June 30, 2004, and December 31, 2003, are as
follows (dollars in thousands):
June 30, 2004 December 31, 2003
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
US Agencies $26,018 $25,621 $36,017 $36,225
Obligations of states and political subdivisions 3,711 3,855 3,772 4,105
Corporate securities 666 695 666 708
Mortgage-related securities 34,678 34,381 43,292 43,736
------- ------- ------- -------
Total securities available for sale $65,073 $64,552 83,747 $84,774
======= ======= ======= =======
The amortized cost and estimated fair value of investment securities
pledged at June 30, 2004 amount to $55.7 million and $55.0 million,
respectively. These securities are pledged to secure Federal Home Loan
Bank borrowings, and Treasury Tax and Loan deposits and borrowings.
7.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS
The composition of loans at June 30, 2004 and December 31, 2003 is as
follows (dollars in thousands):
June 30, December 31,
2004 2003
---- ----
Commercial real estate $ 33,061 $ 39,571
Commercial, financial, and agricultural 152,091 203,393
One-to-four-family residential real estate 44,457 51,120
Consumer 2,678 3,195
Construction 745 567
-------- ---------
Total loans $233,032 $ 297,846
======== =========
An analysis of the allowance for loan losses for the six months ended June 30,
2004, and 2003 is as follows (dollars in thousands):
June 30,
2004 2003
---- ----
Balance at beginning of period $22,005 $24,908
Recoveries on loans 344 137
Loans charged off (11,499) (1,713)
------- -------
Balance at end of period $10,850 $23,332
======= =======
The allowance for loan losses was significantly impacted by loan charge
offs in the first six months of 2004. The Corporation completed the sale
of $25.2 million of loans, primarily nonperforming, during the first
quarter of 2004 which resulted in a previously allocated specific reserve
on these loans being recognized as a charge off. This specific reserve
charge off amounted to $7.4 million.
The aggregate amount of nonperforming residential and consumer loans was
approximately $523,000 and $2,047,000 at June 30, 2004 and December 31,
2003, respectively. Nonperforming loans are those which are contractually
90 days or more past due as to interest or principal payments, on
nonaccrual status, or loans, the terms of which have been renegotiated to
provide a reduction or deferral of interest or principal. The interest
income recorded and that which would have been recorded had residential
and consumer nonaccrual and renegotiated loans been current, or not
troubled, are not material to the consolidated financial statements for
the six months ended June 30, 2004 and 2003. The nonperforming commercial
loans are reflected in the information regarding impaired loans.
Information regarding impaired loans as of June 30, 2004 and December 31,
2003 is as follows (dollars in thousands):
June 30, December 31,
2004 2003
---- ----
Total impaired loans $8,789 $43,827
Impaired loans with a valuation allowance 8,265 39,993
Impaired loans on nonaccrual 8,789 36,646
Valuation allowance related to impaired loans 906 7,648
The average investment in impaired loans was approximately $25.0 million
and $46.7 million for the six months ended June 30, 2004 and the year
ended December 31, 2003, respectively.
8.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (CONTINUED)
The Bank, in the ordinary course of 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 is
summarized below (dollars in thousands):
June 30, December 31,
2004 2003
---- ----
Loans outstanding beginning of period $6,514 $10,987
New loans 40 -0-
Repayment (331) (4,480)
Increase related to new executive officers and directors -0- 98
Decrease related to retired executive officers and directors -0- (91)
------ ------
Loans outstanding end of period $6,223 $6,514
====== ======
There were no loans to related-parties classified at June 30, 2004 and
December 31, 2003, respectively.
6. BORROWINGS
Borrowings consist of the following at June 30, 2004 and December 31, 2003
(dollars in thousands):
June 30, December 31,
2004 2003
---- ----
Federal Home Loan Bank advances at rates ranging from 4.35% to 7.59% with
maturities from less than one year to seven years $84,986 $85,475
Farmers' Home Administration, fixed rate note payable, maturing
August 24, 2024, interest payable at 1% 1,551 1,551
Director loans, fixed rate notes payable, maturing May 1, 2006
interest payable at 3% 100 -0-
------- -------
Borrowings outstanding end of period $86,637 $87,026
======= =======
The Federal Home Loan Bank borrowings are collateralized at June 30, 2004,
by the following: a collateral agreement on the Corporation's one- to
four-family residential real estate loans with a book value of
approximately $39.0 million; commercial real estate leases with a book
value of approximately $13.2 million; U.S. government agency and
mortgage-backed securities with an amortized cost and estimated fair value
of $54.7 million and $54.0 million, respectively; an interest-bearing
deposit in the amount of $15.7 million; and Federal Home Loan Bank stock
owned by the Bank totaling $4.7 million. 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 June 30, 2004.
The U.S.D.A. Rural Development borrowing is collateralized by loans
totaling $670 thousand originated and held by the Corporation's wholly
owned subsidiary, First Rural Relending, and an assignment of a demand
deposit account in the amount of $1.0 million, and guaranteed by the
Corporation.
9.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. STOCK OPTION PLANS
A summary of stock option transactions for the six months ended June 30,
2004 and the year ended December 31, 2003, is as follows:
Number of Shares
June 30, December 31,
2004 2003
---- ----
Outstanding shares at beginning of year 549,732 772,397
Granted during the period -0- 50,000
Expired during the period (14,000) (272,665)
-------- ---------
Outstanding shares at end of period 535,732 549,732
======== =========
Weighted average exercise price per share at end of period $ 14.02 $ 13.94
======== =========
Shares available for grant at end of period 372,238 358,238
======== =========
Options granted in 2003 were granted at a price of $2.95 per share. These
same options terminated in 2003 as a result of the grantee's resignation.
Under these plans, options expire ten years after the date of grant.
Following is a summary of the options outstanding and exercisable at June
30, 2004:
Weighted
Average Weighted
Remaining Average
Exercise Contractual Exercise
Price Range Number Life-Years Price
----------- ------ ---------- -----
$7.80 - $12.00 249,800 4.65 $ 9.18
$15.00 - $20.33 285,932 3.72 $18.26
------- ---- ------
Total options outstanding 535,732 4.07 $14.02
======= ==== ======
8. 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 consolidated balance sheets.
10.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
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 are as follows (dollars in
thousands):
June 30, December 31,
2004 2003
---- ----
Commitments to extend credit:
Fixed rate $ 847 $ 3,870
Variable rate 5,935 73,651
Standby letters of credit - Variable rate 18,771 14,498
Credit card commitments - Fixed rate 3,184 3,381
------- -------
$28,737 $95,400
======= =======
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. For expanded discussion on the Corporation's legal
proceedings, see Part II, Item 1, "Legal Proceedings" in this report.
Concentration of Credit Risk
The Bank grants commercial, residential, agricultural, and consumer loans
throughout its market, primarily Michigan. The Bank's most prominent
concentration in the loan portfolio relates to commercial loans to
entities within the hospitality and tourism industry. This concentration
represents $45.9 million, or 24.8%, of the commercial loan portfolio at
June 30, 2004. The remainder of the commercial loan portfolio is
diversified in such categories as gaming, petroleum, forestry, and
agriculture. Due to the diversity of the Bank's locations, the ability of
debtors of residential and consumer loans to honor their obligations is
not tied to any particular economic locality.
11.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion will cover results of operations, asset quality,
financial position, liquidity, interest rate sensitivity, and capital resources
for the periods indicated. The information included in this discussion is
intended to assist readers in their analysis of, and should be read in
conjunction with, the consolidated financial statements and related notes and
other supplemental information presented elsewhere in this report. This
discussion should be read in conjunction with the consolidated financial
statements and footnotes contained in the Corporation's Annual Report and Form
10-K for the year-ended December 31, 2003. Throughout this discussion, the term
"Bank" refers to North Country Bank and Trust, the principal banking subsidiary
of the Corporation.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements which are based on certain assumptions
and describe future plans, strategies, or expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause actual results to differ from the
results in forward-looking statements include, but are not limited to:
- Impact of restrictions related to the trust preferred securities issued by
the Corporation's subsidiary;
- Liquidity of the Corporation and the Bank;
- Difficulties in raising capital on acceptable terms;
- Impact of continued operating losses;
- Restrictions and requirements imposed on the Corporation and the Bank by
formal action against them by bank regulatory agencies;
- Failure or inability of the Bank to comply with the terms of the Cease and
Desist Order (the "Order") applicable to it;
- General economic conditions, either nationally or in the state(s) in which
the Corporation does business;
- Legislation or regulatory changes which affect the business in which the
Corporation is engaged;
- Changes in the interest rate environment which increase or decrease
interest rate margins;
- Changes in securities markets with respect to the market value of
financial assets and the level of volatility in certain markets such as
foreign exchange;
- Significant increases in competition in the banking and financial services
industry resulting from industry consolidation, regulatory changes and
other factors, as well as action taken by particular competitors;
- The ability of borrowers to repay loans;
- The effects on liquidity of unusual decreases in deposits;
- Changes in consumer spending, borrowing, and saving habits;
- Technological changes;
- Acquisitions and unanticipated occurrences which delay or reduce the
expected benefits of acquisitions;
- Difficulties in hiring and retaining qualified management and banking
personnel;
- The Corporation's ability to increase market share and control expenses;
- The effect of compliance with legislation or regulatory changes;
- The effect of changes in accounting policies and practices;
- The costs and effects of existing and future litigation and of adverse
outcomes in such litigation.
These risks and uncertainties should be considered in evaluating forward-looking
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission. All forward-looking statements contained in this report
are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements
12.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FINANCIAL OVERVIEW
In March 2003, the Bank entered into a formal Cease and Desist Order (the
"Order") under Federal and State banking laws. As a result of this Order, the
Bank initiated significant management and operational changes along with balance
sheet strategies to comply with the Order. The Bank experienced substantial
adverse publicity as a result of the public notice of this Order and from the
reported financial condition of the Bank. This negative publicity resulted in
substantial deposit runoff. The Bank also incurred an inordinate amount of legal
and accounting fees, along with consulting costs during 2003 in its attempt to
address the financial and operational deficiencies which led to the issuance of
the Order. During the first six months of 2004 the Bank has shown continued
progress in addressing the commercial and operational deficiencies detailed in
The Order, however, high operational costs along with a low net interest margin
resulted in continued losses. The Order is discussed in more detail in the
Consolidated Notes to the Financial Statements and later in Management's
Discussion, under the heading "Capital and Regulatory".
Year-to-date consolidated net loss was $3.3 million through June 30, 2004,
compared to net loss of $4.2 million for the same period in 2003. Basic loss per
share was $.47 for the six months ended June 30, 2004, compared to a loss of
$.59 for the same period in 2003. There was no provision for loan losses for the
six months ended June 30, 2004 and 2003. Total assets declined $22.1 million
from December 31, 2003 to June 30, 2004. The loan portfolio declined $64.8
million in the first six months of 2004, from December 31, 2003 balances of
$297.8 million. Deposits have declined $70.1 million since December 31, 2003.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased $8.0 million through the first six months of
2004. This was due to a decreased need to maintain liquidity, after funding
pending branch sales and deposit maturities during the quarter. See further
discussion of the change in cash and cash equivalents in the Liquidity section.
INVESTMENT SECURITIES
Available-for-sale securities decreased $20.2 million, or 23.9%, from December
31, 2003 to June 30, 2004, with the balance on June 30, 2004, totaling $64.6
million. The decrease during the first quarter was due to a combination of
maturities, calls and paydowns of agencies and mortgage related securities.
Investment securities are utilized in an effort to manage interest rate risk and
liquidity. As of June 30, 2004, investment securities with an estimated fair
value of $55.0 million were pledged.
LOANS
Through the first six months of 2004, loan balances decreased by $64.8 million,
or 21.8% from December 31, 2003 balances of $297.8 million. As planned, the Bank
continues to decrease certain segments of its loan portfolio through tightened
underwriting and credit practices and controls. The Bank completed the sale of
$25.2 million of loans on March 31, 2004. This sale was composed of primarily
non-performing loans and resulted in a reduction in non-accrual loans of $17.5
million and a total reduction in non-performing loans of $18.5 million. This
loan sale also reduced concentration exposure in the hotel and tourism industry.
Enhancements to the loan approval process and exception reporting further
provide for a more effective management of risk in the loan portfolio.
Management continues to actively manage the loan portfolio seeking to identify
and resolve problem assets at an early stage. Management believes a properly
positioned loan portfolio provides the most attractive earning asset yield
available to the Corporation and, with changes to the loan approval process and
exception reporting, management can effectively manage the risk in the loan
portfolio. As shown in the table below, most segments of the loan portfolio
declined in the first six months of 2004. Management intends to increase lending
activities in its market for
13.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
mortgage, consumer and commercial loan products while concentrating on loan
quality, industry concentration issues and competitive pricing.
Following is a summary of the loan portfolio at June 30, 2004 and December 31,
2003 (dollars in thousands):
June 30, Percent of December 31 Percent of
2004 Total 2003 Total
---- ----- ---- -----
Commercial real estate $ 33,061 14.2% $ 39,571 13.3%
Commercial, financial, and agricultural 152,091 65.3 203,393 68.3
One-to-four family residential real estate 44,457 19.1 51,120 17.1
Consumer 2,678 1.1 3,195 1.1
Construction 745 .3 567 .2
-------- ----- -------- -----
Total loans $233,032 100.0% $297,846 100.0%
======== ===== ======== =====
Following is a table showing the significant industry types in the commercial
loan portfolio as of June 30, 2004 and December 31, 2003 (dollars in thousands):
June 30, 2004 December 31, 2004
Percent of Percent of Percent of Percent of
Outstanding Commercial Shareholders' Outstanding Commercial Shareholders'
Balance Loans Equity Balance Loans Equity
------- ----- ------ ------- ----- ------
Hospitality and tourism $ 45,932 24.8% 780.5% $ 76,131 31.3% 711.5%
Gaming 19,344 10.5 328.7% 22,317 9.2 208.6%
Other 119,876 64.7 2,037.0% 144,516 59.5 1,350.7%
--------- ----- ------- -------- ----- -------
Total Commercial Loans $ 185,152 100.0% $242,964 100.0%
========= ===== ======== =====
Management has made considerable progress in reducing concentrations of
hospitality and tourism loans, which reduced exposure to this economic segment
and lowered overall loan portfolio risk. Management expects further reductions
in concentrations of hospitality and tourism loans through a combination of new
loans in other industries and paydowns and maturities of current portfolio loans
in this sector.
CREDIT QUALITY
The allowance for loan losses is maintained by management at a level considered
to be adequate to cover probable losses related to specifically identified
loans, as well as losses inherent in the balance of the loan portfolio. At June
30, 2004, the allowance for loan losses decreased to 4.66% of total loans
outstanding from 7.39% at December 31, 2003.
Management analyzes the allowance for loan losses in detail on a monthly basis
to determine whether the losses inherent in the portfolio are properly reserved
for. Net charge-offs to average loans outstanding amounted to 4.18% compared to
1.47 % for the six months ended June 30, 2004 and 2003, respectively. Net
charge-offs for the six-month period ended June 30, 2004 amounted to $11,155,000
compared to $1,576,000 for the same period in 2003. Charge offs during the first
six months of 2004 include $7.4 million of charge offs incurred as a result of
the sale of $25.2 million of primarily non-performing loans. The sale of these
non-performing loans did not result in any gain or loss since the total reduced
carrying value was previously recognized as a specific reserve allocation. The
Corporation did not recognize a provision for loan losses for the six months
ended June 30, 2004, and June 30, 2003.
14.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The table below shows period end balances of non-performing assets (dollars in
thousands):
June 30, December 31,
2004 2003
-------- -------
NONPERFORMING ASSETS:
Nonaccrual Loans $ 8,789 $38,660
Loans past due 90 days or more -0- 241
Restructured Loans 4,473 7,181
-------- -------
Total nonperforming loans 13,262 46,082
Other real estate owned 3,557 4,356
-------- -------
Total nonperforming assets $ 16,819 $50,438
======== =======
Nonperforming loans as a % of loans 5.69% 15.47%
-------- -------
Nonperforming assets as a % of assets 4.87% 11.94%
-------- -------
RESERVE FOR LOAN LOSSES:
At period end $ 10,850 $22,005
-------- -------
As a % of loans 4.66% 7.39%
-------- -------
As a % of nonperforming loans 81.81% 47.75%
-------- -------
As a % of nonaccrual loans 123.45% 56.92%
======== =======
Following is the allocation of the allowance for loan losses as of June 30, 2004
and December 31, 2003 (dollars in thousands):
June 30, December 31,
2004 2003
---- ----
Commercial financial and agricultural loans $ 3,893 $11,222
One-to-four family residential real estate loans 125 280
Reserve allocation based upon historical loss rate 2,926 N/A
Specific reserve on loans sold in first quarter of 2004 -0- 7,425
Unallocated 3,906 3,078
------- -------
Totals $10,850 $22,005
======= =======
The following ratios assist management in the determination of the Corporation's
credit quality:
Six Months Ended Twelve Months Ended
June 30, December 31,
2004 2003
---- ----
Allowance to total loans 4.66% 7.39%
Average loans outstanding, for the six month period and year end
respectively $266,791 $361,144
Net charge-offs to average outstanding loans 4.18% 0.80%
Nonperforming loans to gross loans 5.69% 15.47%
Total nonperforming loans decreased $32.8 million since December 31, 2003, after
the net charge-offs of $11.2 million which have been recognized through June 30,
2004. Contributing to the significant reduction in non-performing loans was the
sale of $25.2 million in loans of which $18.5 million were non-performing.
Management continues to address market issues impacting its loan customer base.
In conjunction with the Corporation's senior lending staff and the bank
regulatory examinations, management intensified the review of the Corporation's
loans, related collateral evaluations, and the overall lending process during
2003 and for the first half of 2004. The Corporation also utilized a loan review
consultant in 2003 and 2004 to perform a review of the loan
15.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
portfolio. The opinion of this consultant upon completion of the independent
review provided findings similar to management on the overall adequacy of the
reserve.
As part of the process of resolving problem credits, the Corporation may acquire
ownership of collateral which secured such credits. The Corporation carries this
collateral in other real estate.
The following table represents the activity in other real estate for the six
months of 2004 (dollars in thousands):
Balance at December 31, 2003 $4,356
Other real estate transferred from loans 3,662
Other real estate sold/written down (4,461)
------
Balance at June 30, 2004 $3,557
======
During the first six months of 2004, the Corporation received real estate in
lieu of loan payments of $3.7 million. Other real estate is initially valued at
the lower of cost or the fair value less selling costs. After the initial
receipt, management periodically re-evaluates the recorded balance. Any
additional reduction in the fair value results in a write-down of other real
estate. Write-downs on other real estate may be recorded based on subsequent
evaluations of current realizable fair values.
DEPOSITS
The Corporation had a reduction in total deposits of $70.1 million, or 22.9%, in
the first six months of 2004. Due to the reduction in the loan portfolio,
management was able, over the last six months, to reduce its reliance on
brokered and noncore certificates of deposits over $100,000. Brokered deposits
decreased by $30.0 million during the first six months of 2004, while
certificates of deposit over $100,000 showed a decrease of $1.9 million during
the first half of 2004 to $16.4 million at June 30, 2004. The Corporation's
other deposit categories decreased by $38.2 million in the first six months of
2004. Contributing to the decrease in deposits for the six month period was the
sale of two branch offices with deposits of $12.1 million.
BORROWINGS
The Corporation has used alternative funding sources to provide long-term,
stable sources of funds. Total borrowings amounted to $86.6 million at June 30,
2004 of which $85.0 million were from the Federal Home Loan Bank of Indianapolis
(FHLB). The FHLB borrowings carry fixed interest rates and stated maturities
ranging through 2011. Fixed rate borrowings totaling $80 million are callable
quarterly at the option of the FHLB and can also be converted to variable rates,
at the option of the FHLB, should rates rise above certain index levels. These
borrowings are secured by a blanket collateral agreement on the Bank's
residential mortgage loans and specific assignment of other assets. Management
does not anticipate increasing the FHLB borrowings in the near future. In the
second quarter of 2004 the corporation borrowed $100 thousand in total from
several of its directors. The borrowings, considering the financial condition of
the corporation, were at favorable terms.
SUBORDINATED DEBENTURES
In 1999, the Corporation's business trust subsidiary, North Country Capital
Trust, completed a private offering of its trust preferred securities, in the
amount of $12,450,000. The proceeds from the sale of the trust preferred
securities were used by North Country Capital Trust to purchase a like amount of
subordinated debentures of the Corporation. Under regulatory guidelines, the
amount of such trust preferred securities is eligible as regulatory capital, as
defined, subject to certain limitations. The Board of Directors of the
Corporation adopted a resolution to apply for the deferment of interest payments
on the Corporation's subordinated debentures, which fund quarterly distributions
on the trust preferred securities. The governing documents allow for such a
deferral of payments for up to 20 quarters. Management has deferred the
quarterly payments beginning with the November 14, 2002, payment and it is
16.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
expected that interest will continue to be deferred during the pendency of the
Order and until the Board of Directors believes it is prudent to resume
payments. As of June 30, 2004, the balance of deferred interest payable amounted
to $956,000.
SHAREHOLDERS' EQUITY
Total shareholders' equity decreased $4.8 million from December 31, 2003 to June
30, 2004. The decrease is comprised of a net loss of $3.3 million and a decrease
in the net unrealized gain on securities of $1.5 million. The Board of Directors
does not anticipate declaring any dividends in the near future. The declaration
of dividends is contingent on a variety of factors to include satisfaction of
requirements in the Order.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income before provision for loan losses for the six months ended
June 30, 2004, decreased by $1.4 million, or 23.9% compared to the same period
one year ago. The decrease in loan volume offset by the decrease in deposit
volume, combined with the impact of nonaccrual loans, and a continued low
interest rate environment have resulted in the decline in net interest income.
Net interest income, before provision for loan losses for the three months
ending June 30, 2004, showed a decrease of $310 million compared to the second
quarter in 2003. This decrease can be attributed to the downsizing of the Bank.
PROVISION FOR LOAN LOSSES
The Corporation records a provision for loan losses at a level it believes is
necessary to maintain the allowance at an adequate level after considering
factors such as loan charge-offs and recoveries, changes in the mix of loans in
the portfolio, loan growth, and other economic factors. There was no provision
for loan losses for the six months ended June 30, 2004 and June 30, 2003.
Management continues to monitor the loan portfolio for changes which may impact
the required allowance for loan losses.
OTHER INCOME
Other income decreased by $995,000 for the six months ended June 30, 2004
compared to the six months ended June 30, 2003. Service fees decreased $263,000,
while loan and lease income declined $29,000. The decline in service fees is
primarily due to the significant decline in deposits from June 30, 2003 to June
30, 2004. Other income was positively impacted in the first half of 2004 from a
gain of $258,000 on the sale of a limited partnership interest. Other income for
the six months ended June 30, 2003 included $541,000 of gains due to foreign
exchange activities.
Other income for the second quarter of 2004 declined by $785,000 compared to the
second quarter of 2003. Service fees declined $126,000, due primarily to the
decrease in deposit accounts and balances. The second quarter of 2003 also
benefited by gains in foreign exchange activity, which provided income of
$248,000, along with gains on the sale of fixed assets of $97,000.
17.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table details other income for the three and six months ended June
30, 2004 and 2003 (dollars in thousands):
For the Three Months Ended % Increase For the Six Months Ended % Increase
June 30, (Decrease) June 30, (Decrease)
2004 2003 2004-2003 2004 2003 2004-2003
---- ---- --------- ---- ---- ---------
Service fees $ 287 $ 413 (30.5) $ 580 $ 843 (31.1)
Loan and lease fee income 4 11 (63.6) 9 38 (76.3)
Net gains on sale of loans 8 51 (84.3) 20 106 (81.1)
Gain on sale of property and equipment 37 94 (60.6) 85 113 (24.8)
Other 18 356 (94.8) 371 769 (51.8)
------ ------ ----- ------ ------ -----
Subtotal 354 925 (61.7) 1,065 1,869 (43.0)
------ ------ ----- ------ ------ -----
Net securities gains -0- 214 N/A -0- 191 N/A
------ ------ ----- ------ ------ -----
Total other income $ 354 $1,139 (68.9) $1,065 $2,060 (48.3)
====== ====== ===== ====== ====== =====
OTHER EXPENSES
Other expenses decreased $1,617,000 for the six months ended June 30, 2004,
compared to the same period in 2003. Salaries, commissions, and related benefits
decreased by $180,000 during the first six months of 2004 compared to the first
six months of 2003. During the first half of 2004, the Corporation recognized
the cost of the planned closing of five branch offices. The total cost
associated with these branch office closings amounted to $438,000 and is
included in other operating expenses. The Corporation also recognized a loss of
$254,000 in 2004 from the sale of two branch offices. The Corporation has taken
action, since the fall of 2003, to reduce reliance on external accounting and
consulting services. The Corporation has also reduced costs in most other areas
of expense. These expense reductions are expected to continue as a result of
lower costs associated with non-performing assets and less overhead due to the
previously discussed branch closings.
Other expenses decreased $793,000 in the second quarter of 2004 compared to the
same period in 2003. This decrease was primarily due to decreased expenses
related to occupancy, furniture, and equipment due to closures and sales of
branch offices. The reduction in accounting, legal, and consulting fees of
$264,000 was due to the added expertise of new management which places less
reliance on external sources. The increase in loan and deposit expenses in the
second quarter of 2004 compared to the same period in 2003 was due to the costs
related to problem loan administration. These loan collection costs are expected
to decrease in future periods due to lower levels of nonperforming loans.
The following table details other expense for the three and six months ended
June 30, 2004 and 2003 (dollars in thousands):
18.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended % Increase Six Months Ended % Increase
June 30, (Decrease) June 30, (Decrease)
2004 2003 2004-2003 2004 2003 2004-2003
---- ---- --------- ---- ---- ---- ----
Salaries and employee benefits $ 1,354 $ 1,356 -0- $ 2,853 $ 3,033 (5.9)
Furniture and equipment expense 235 355 (33.8) 493 721 (31.6)
Occupancy expense 279 351 (20.5) 626 750 (16.5)
Data processing 348 380 (8.4) 703 787 (10.7)
Accounting, legal and consulting fees 572 836 (31.6) 978 1,666 (41.3)
Loan and deposit expense 600 334 79.6 1,093 908 20.0
Telephone 19 364 (94.8) 232 697 (66.7)
Advertising 26 95 (72.6) 43 144 (70.1)
Other 988 1,143 (13.6) 1,789 1,721 4.0
------- ------- ----- ------- ------- -----
Total other expense $ 4,421 $ 5,214 (15.2) $ 8,810 $10,427 (15.5)
======= ======= ===== ======= ======= =====
FEDERAL INCOME TAXES
The income tax provision of $1.7 million for the six months ended June 30, 2003
was the result of an addition to the valuation allowance provided against the
deferred tax asset. This provision increases the valuation allowance to $8.7
million at June 30, 2003, from $7.0 million at December 31, 2002. The
Corporation's current year net losses are currently anticipated to more likely
than not expire prior to their utilization; therefore, no tax credit is being
recorded in anticipation of a future tax benefit from the use of loss
carryovers.
LIQUIDITY
As a result of the Corporation's 2003 annual and six month 2004 results, and the
constraints of the Order, sources of liquidity, such as lines of credit from
correspondent banks, additional borrowings from the Federal Home Loan Bank,
brokered deposits, and the issuance of stock, which were historically available,
are currently not short-term sources of liquidity. The liquidity issues faced,
the Corporation's actions taken to address them, and the liquidity plan for 2004
are discussed below.
The Corporation is dependent upon its primary operating subsidiary, the Bank,
for sources of cash to fund its operating needs. As a result of the Order, and
the restrictions placed upon the Bank as it relates to payment of dividends, the
Corporation faces a short-term liquidity crisis. Early in the second quarter,
the parent company addressed the immediate cash needs of day-to-day operations
and payment of legal and professional costs by borrowing $125,000 in total, from
members of its board of directors. This $125,000 will be advanced to the
Corporation over a three month period. The terms of these borrowings,
considering the financial condition of the Corporation, were favorable as
compared to prevailing borrowing opportunities offered elsewhere. The
Corporation is exploring additional areas for cash infusion into the
corporation, including the sale of stock or the investment in the Corporation by
a third party.
During the first six months of 2004, the Corporation decreased cash and cash
equivalents by $8.0 million. As shown on the Corporation's condensed
consolidated statement of cash flows, liquidity was primarily impacted from cash
provided by investing activities. In the first six months of 2004, the
Corporation funded the reduction of deposits of $70.1 million primarily through
the balance sheet reductions of loans, $50.0 million, and investments, $20.2
million. These asset reductions allowed the Corporation to maintain adequate
liquidity and provide the necessary funding for branch sales along with
maturities of brokered and other time deposits. The Corporation had adequate
liquidity as of June 30, 2004. Early in the third quarter of 2004 the Bank will
increase its liquidity by increasing deposits through a
19.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
combination of existing branch markets and by offering and obtaining Internet
CDs in order to fund the branch sales occurring later this year.
As of June 30, 2004, the Corporation has suspended seven quarterly payments of
interest on its subordinated debentures that fund quarterly distributions on the
trust preferred securities issued by its trust subsidiary, North Country Capital
Trust. The debenture agreement allows for suspension of payments for up to 20
quarterly payments.
The Corporation's liquidity plan for 2004 includes strategies to increase core
deposits in the Corporation's local markets. New products and advertising
commenced in 2004, with a goal of increasing core deposits to reduce the
dependency on noncore deposits. The Corporation's liquidity plan for 2004 calls
for augmenting local deposit growth efforts with Internet CD funding to the
extent necessary. There is no assurance that Internet CDs will be available in
adequate amounts or at economically feasible pricing, however, the Bank's
experience with Internet CDs has thus far shown them to be a reliable and cost
effective alternative source of funds.
During the fourth quarter of 2002, the unsecured lines of credit the Corporation
had with two correspondent banks were closed by those banks. In the first
quarter of 2003, the Corporation established a secondary borrowing arrangement
with the Federal Reserve Bank collateralized by loans.
CAPITAL AND REGULATORY
During the first six months of 2004, capital decreased by $4.8 million, as a
result of the net loss of $3.3 million and the decrease in the unrealized gain
on securities available for sale of $1.5 million. This compares to a decrease in
capital during the same period in the previous year of $4.2 million, resulting
primarily from a net loss, and changes in the unrealized gain on securities
available for sale.
As a bank holding 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. As of June 30,
2004, the Corporation, and as of December 31, 2003, the Corporation and the
Bank, were undercapitalized. See discussions on the following pages of the
regulatory requirements and the Corporation's plans for increasing its capital
ratios.
20.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table details sources of capital for the periods indicated.
June 30, December 31,
2004 2003
---- ----
CAPITAL STRUCTURE
Long-term debt (1) $ 12,450 $ 12,450
Shareholders' equity 5,885 10,700
--------- ---------
Total capitalization $ 18,335 $ 23,150
--------- ---------
Tangible capital $ 17,232 $ 21,557
--------- ---------
INTANGIBLE ASSETS
Core deposit premium $ 591 $ 1,067
Other identifiable intangibles 512 526
--------- ---------
Total intangibles $ 1,103 $ 1,593
--------- ---------
RISK-BASED CAPITAL
Tier I capital:
Shareholders' equity $ 5,885 $ 10,700
Net unrealized (gains) losses on
available for sale securities 521 (1,027)
Minority interest 1,865 2,785
Less: intangibles (1,103) (1,593)
--------- ---------
Total Tier I capital $ 7,168 $ 10,865
--------- ---------
Tier II Capital:
Allowable reserve for loan losses $ 3,173 $ 4,016
Qualifying long-term debt 3,995 6,849
--------- ---------
Total Tier II capital 7,168 10,865
--------- ---------
Total capital $ 14,336 $ 21,730
========= =========
Risk-adjusted assets $ 246,139 $ 303,284
========= =========
Capital ratios:
Tier I Capital to risk weighted assets 2.91% 3.58%
Total Capital to risk weighted assets 5.82% 7.16%
Tier I Capital to average assets 1.93% 2.48%
(1) Long term debt consists of the Corporation's subordinated debentures.
21.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Regulatory capital is not the same as shareholders' equity reported in the
accompanying condensed consolidated financial statements. Certain assets cannot
be considered assets for regulatory purposes, such as acquisition intangibles.
Presented below is a summary of the capital position in comparison to generally
applicable 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:
June 30, 2004
December 31, 2003 1.9% 2.9% 5.8%
The Bank:
June 30, 2004 5.2% 7.8% 9.1%
December 31, 2003 4.8% 6.9% 8.3%
The regulatory capital levels shown above include certain amounts of trust
preferred securities issued by the Corporation's business trust subsidiary in
1999. Federal Reserve guidelines limit the amount of trust preferred securities
and cumulative preferred stock which can be included in Tier I capital to 25% of
total Tier I capital. As of June 30, 2004 and December 31, 2003, $1,792,000 and
$2,785,000, respectively, of the $12,450,000 of trust preferred securities were
available as Tier I capital of the Corporation.
In October 2001, the Bank was notified by the FDIC that it is a "troubled
institution" within the meaning of FDIC regulations. As a troubled institution,
the Bank is required to notify the FDIC 30 days prior to the addition or
replacement of a Board member and the employment or changes in responsibilities
of a senior executive officer.
In September 2002, a regularly-scheduled safety and soundness examination of the
Bank was conducted by its principal regulators, the Michigan Office of Financial
and Insurance Services ("OFIS") and the FDIC. During the course of that
examination, the FDIC, the OFIS, and the Federal Reserve Bank of Chicago ("FRB")
requested that the Corporation and the Bank take certain actions, including
suspending the payment of dividends and conserving the liquidity of the
Corporation.
In response to the concerns expressed by the regulators, the Board of Directors
of the Corporation and the Bank adopted resolutions providing for prior
regulatory approval of the declaration or payment of any dividend by the
Corporation or the Bank, and suspension of interest payments by the Corporation
in connection with its trust preferred securities. The agreements relating to
the trust preferred securities allow for the suspension of payments for up to 20
quarters. Therefore, the suspension of the interest payments does not violate
the agreement. However, while interest payments are suspended, no dividends can
be paid on the Corporation's common stock, and certain other restrictions apply.
These other restrictions include a prohibition on the sale of assets except in
the ordinary course of business or in immaterial amounts. Those restrictions may
adversely impact the ability of the Corporation and the Bank to take certain
restructuring steps unless waivers can be obtained from the holders of the trust
preferred securities. There can be no assurance that such waivers will be given.
Following the completion of the 2002 regularly-scheduled safety and soundness
examination of the Bank by the FDIC and the OFIS, and the Bank's receipt of the
related Joint Report of Examination ("Report"), the FDIC and the OFIS, with the
consent of the Bank, on March 26, 2003, entered a formal Cease and Desist Order
(the "Order") under Federal and State banking laws. The Order was reported on
the Corporation's Form 8-K filed on April 9, 2003 and is available on the FDIC
website, www.FDIC.Gov. The Order became effective on April 5, 2003, and will
22.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
remain in effect until modified or terminated by action of the FDIC and the
OFIS. The Order identified deficiencies in the Bank's policies and procedures,
including its directorate and management personnel and practices, credit
underwriting, credit administration, and policies regarding asset/liability
management, liquidity, funds management and investments, and its compliance with
all applicable laws and regulations, including Regulations O and U of the Board
of Governors of the Federal Reserve System (the "Board"), the FDIC Rules and
Regulations, and the Michigan Banking Code of 1999. The Order also requires the
Bank to maintain specified capital ratios during the life of the Order.
The Order requires the Bank and its directors to take specific steps, within the
time specified in the Order, to address the operational deficiencies, including
certain violations of law and regulations, identified by the FDIC and the OFIS
in the Order and the Report. Among other things, the Bank must establish, and
submit to the FDIC and the OFIS for comment, written plans (i) to reduce the
Bank's risk position with respect to certain classified loans identified in the
Report or any subsequent Report of Examination during the life of the Order,
(ii) to reduce identified loan concentrations, (iii) to reduce and collect
delinquent loans, (iv) to eliminate the classified amounts of loans to
directors, executive officers, principal shareholders of the Bank and their
respective related interests, (v) to address the Bank's relationship of volatile
liabilities to temporary investments, rate sensitivity objectives, and
asset/liability management, (vi) setting forth the Bank's strategic plan,
including financial goals and strategies to maintain adequate capital and
liquidity, to reduce problem loans, and to attract and keep qualified
management, (vii) covering the policies and procedures for review and approval
of reimbursement of customer entertainment and business development expenses of
the Bank's directors, officers and employees, (viii) for a realistic budget for
calendar year 2003 and each subsequent year during the life of the Order,
including strategies to improve the Bank's net interest margin, (ix) to reduce
the Bank's portfolio of other real estate owned as a result of foreclosure or
surrender of collateral for loans, and (x) to address procedures for the
directors to monitor, and management to implement, the requirements of the
Order.
Further actions the Bank must take within periods specified in the Order include
correcting all deficiencies noted in the Report with respect to certain
categories of loans, and all technical exceptions and all violations of law
noted in the Report. The Bank's loan committee, which must include at least
three outside directors who are independent of management and any principal
shareholder, is required to meet at least monthly, and to act with respect to
specified categories of loans and loan applications, including all such
applications involving directors and executive officers of the Bank and their
respective related interests. The Bank's Board of Directors is required to
review and revise the Bank's written loan policy, to submit the revised policy
to the FDIC and OFIS for review and comment, and to conduct an annual review of
the policy. The Bank's Board of Directors is also required to review and revise
the Bank's investment policy, and to submit the revised policy for comment to
the FDIC and the OFIS. The Order mandates the Bank's Board of Directors (i) to
adopt resolutions acknowledging the Bank's designation as a troubled institution
by the FDIC, (ii) to review all agreements for the provision of goods and
services between the Bank and any of its current or former directors, officers,
or employees, and their respective related interests, and to determine whether
such agreements remain in the best interest of the Bank, and (iii) to seek
restitution from Ronald G. Ford of all amounts paid by the Bank pursuant to the
Chairman Agreement entered into as of April 12, 2002, between Mr. Ford and the
Corporation. The Order also requires the Bank to submit to the FDIC and the OFIS
written reports regarding its progress under the Order, signed by each director
of the Bank, every three months following the effective date of the Order.
The Order further requires the Bank and its directors to take the following
specific steps, again within time periods specified in the Order. For the
calendar quarters ending March 31, 2003, and June 30, 2003, the Bank must have a
ratio of Tier 1 capital average assets ("Tier 1 Capital Ratio") equal to at
least 6.4%. Commencing with the calendar quarter ending September 30, 2003, and
for each calendar quarter thereafter, the Bank must have a Tier 1 Capital Ratio
equal to at least 8.0%. If the Bank's Tier 1 Capital Ratio is below the required
percentage for any such quarter, the Bank must take steps to bring its Tier 1
Capital Ratio to the required level within 60 days. The Order also requires the
Bank to maintain its total risk-based capital ratio at 10.0% or greater for each
calendar quarter ending after the effective date of the Order. If the Bank's
total risk-based capital ratio for any such quarter is less than 10.0%, the Bank
must take steps to bring its total risk-based capital ratio to the required
level within 60 days.
23.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Addressing the requirements of the Order, carrying out the objectives of the
strategic plan, and attempting to return the Corporation to profitability
required the strengthening of the executive management team. During 2003, the
Corporation added management with experience in turnaround situations, loan
portfolio, credit and problem loan administration, and financial management
expertise commensurate with the issues the Corporation must address. The
addition of management may increase expense in the short term. However, the
additional management expertise was needed in order to help the Corporation
resolve many of its issues more quickly, and improve customer service and
financial performance.
The Corporation has attempted to address each of the matters identified in the
Order. Progress in correcting administrative and management deficiencies has
been made. The Bank has adopted new policies for liquidity, investment and asset
liability management. In regards to its lending functions, practices related to
credit underwriting, credit administration and problem loan management were
revamped and current practices and procedures are believed to be operating
within the requirements of the Order. Most of the above changes were initiated
by a new management team, which was put in place, as a requirement of the Order,
during the second half of 2003. Although improvements have been made and
continue to be made from the actions initiated by this new management team in a
relatively short time frame, completion of certain matters noted in the Order
will require further actions by the Corporation and the Bank.
Since the entry of the Order, and as of June 30, 2004, the Bank has not been in
compliance with the minimum capital ratios specified in the Order. There can be
no assurance that the Corporation can take steps in the time limits prescribed
by the Order to restore the Bank's capital ratios to the required levels, and it
has not done so as of the date of this report. Noncompliance with the minimum
capital requirements and/or other requirements of the Order may impact the
ability of the Corporation and the Bank to remain as ongoing operating entities.
24.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In general, the Corporation attempts to manage interest rate risk by investing
in a variety of assets which afford it an opportunity to reprice assets and
increase interest income at a rate equal to or greater than the interest expense
associated with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in
interest rates. The Corporation derives its income primarily from the excess of
interest collected on its interest-earning assets over the interest paid on its
interest-bearing obligations. The rates of interest the Corporation earns on its
assets and owes on its obligations generally are established contractually for a
period of time. Since market interest rates change over time, the Corporation is
exposed to lower profitability if it cannot adapt to interest rate changes.
Accepting interest rate risk can be an important source of profitability and
shareholder value; however, excess levels of interest rate risk could pose a
significant threat to the Corporation's earnings and capital base. Accordingly,
effective risk management that maintains interest rate risk at prudent levels is
essential to the Corporation's safety and soundness.
Loans are the most significant earning asset. Management offers commercial and
real estate loans priced at interest rates which fluctuate with various indices
such as the prime rate or rates paid on various government issued securities. In
addition the Corporation generally prices loans so it has an opportunity to
reprice the loan within 12 to 36 months.
The Corporation also has investment securities with a June 30, 2004 market value
of $64.6 million, of which $34.4 million are mortgage-backed securities
providing for scheduled monthly principal and interest payments as well as
unanticipated prepayments of principal. These cash flows are then reinvested
into other earning assets at current market rates.
The Corporation also has federal funds sold to correspondent banks as well as
other interest-bearing deposits with correspondent banks. These funds are
generally repriced on a daily basis.
The Corporation offers deposit products with a variety of terms ranging from
deposits whose interest rates can change on a weekly basis to certificates of
deposit with repricing terms of up to five years.
Beyond general efforts to shorten the 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 rate environment
affects borrowers and depositors differently.
Exposure to interest rate risk is reviewed on a regular basis. 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 of interest rate changes on net interest income and to structure the
composition of the balance sheet to minimize interest rate 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
maturity and repricing analysis and interest rate sensitivity analysis.
The difference between repricing assets and liabilities for a specific period is
referred to as the gap. An excess of repricable assets over liabilities is
referred to as a positive gap. An excess of repricable liabilities over assets
is referred to as a negative gap. The cumulative gap is the summation of the gap
for all periods to the end of the period for which the cumulative gap is being
measured.
Assets and liabilities scheduled to reprice are reported in the following time
frames. Those instruments with a variable interest rate tied to an index and
considered immediately repricable are reported in the 1- to 90-day time frame.
The estimates of principal amortization and prepayments are assigned to the
following time frames.
25.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The following is the Corporation's repricing opportunities at June 30, 2004
(dollars in thousands):
1-90 91 - 365 2-5 Over 5
Days Days Years Years Total
---- ---- ----- ----- -----
Interest-earning assets:
Loans $123,000 $ 11,549 $ 40,520 $ 57,963 $233,032
Securities (1) 5,604 66 26,467 37,067 69,204
Other 25,059 -0- -0- -0- 25,059
-------- -------- -------- -------- --------
Total interest-earning assets 153,663 11,615 66,987 95,030 327,295
-------- -------- -------- -------- --------
Interest-bearing obligations:
Savings deposits 78,719 -0- -0- -0- 78,719
Time deposits 13,268 68,331 53,109 742 135,450
Borrowings 1,067 -0- 14,359 71,211 86,637
Subordinated debentures 12,450 -0- -0- -0- 12,450
-------- -------- -------- -------- --------
Total interest-bearing obligations 105,504 68,331 67,468 71,953 313,256
-------- -------- -------- -------- --------
Gap $ 48,159 $(56,716) $ (481) $ 23,077 $ 14,039
======== ======== ======== ======== ========
Cumulative gap $ 48,159 $ (8,557) $ (9,038) $ 14,039
======== ======== ======== ========
(1) Includes Federal Home Loan Bank Stock
The above analysis indicates that at June 30, 2004, the Corporation had a
cumulative liability sensitivity gap position of $8.6 million within the
one-year time frame. The Corporation's cumulative liability sensitive gap
suggests that if market interest rates increase in the next twelve months, the
Corporation's net interest income could be reduced. Conversely, if market
interest rates decrease over the next twelve months, the above GAP position
suggests the Corporation's net interest income would increase.
At December 31, 2003, the Corporation had a cumulative asset sensitivity gap
position of $37.5 million within the one-year time frame. The Corporation's
cumulative asset sensitivity gap suggested that if market interest rates
increased in the next twelve months, the Corporation had the potential to earn
more net interest income. Conversely, if market interest rates continued to
decrease over a twelve-month period, the December 31, 2003 gap position
suggested the Corporation's net interest income would decrease.
The change in the gap position from December 31, 2003 to June 30, 2004 is a
result of the decreases experienced in the loans and deposits with a greater
dollar amount of the loan portfolio reductions in the one-year time frame than
the deposit reductions. 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 repricing within 90 days, while experience suggests
that these categories of deposits are actually comparatively resistant to rate
sensitivity.
The borrowings in the gap analysis include FHLB advances as fixed-rate advances.
A significant portion of these advances give the FHLB the option to convert from
a fixed-rate advance to an adjustable rate advance with quarterly repricing at
three-month LIBOR Flat. The exercise of this conversion feature by the FHLB
would impact the repricing dates currently assumed in the analysis.
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk and foreign exchange risk. The Corporation has no
market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets and therefore has minimal significant
exposure to changes in
26.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
commodity prices. Any impact that changes in foreign exchange rates and
commodity prices would have on interest rates are assumed to be insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Corporation's interest rate risk management process seeks
to ensure that appropriate policies, procedures, management information systems,
and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Corporation assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity, and asset quality.
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of variables, including: the growth,
composition and levels of loans, deposits, and other earning assets and
interest-bearing obligations, and economic and competitive conditions; potential
changes in lending, investing, and deposit strategies; customer preferences; and
other factors.
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, Michigan. 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 June 30 2004, the Corporation had excess
Canadian assets of $1.9 million (or $1.5 million in U.S. dollars). Management
believes 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 condensed 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.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying condensed consolidated 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
27.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
Corporation's performance. Changes in interest rates do not necessarily move to
the same extent as changes in the price of goods and services.
28.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2004 an evaluation was performed under the supervision of and
with the participation of the Corporation's management, including the President
and Chief Executive Officer, and the Chief Financial Officer, of the
effectiveness of the design and operation of the Corporation's disclosure
controls and procedures. Based on that evaluation, the Corporation's management,
including the President and Chief Executive Officer, concluded that the
Corporation's disclosure controls and procedures were effective in timely
alerting them to material information relating to the Corporation (including its
consolidated subsidiaries) required to be included in the Corporation's periodic
SEC filings as of June 30, 2004
There was no change in the Corporation's internal control over financial
reporting that occurred during the Corporation's fiscal quarter ended June 30,
2004 that has materially affected, or is reasonably likely to materially affect,
the Corporation's internal control over financial reporting.
29.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are subject to routine litigation
incidental to the business of banking. In addition, the Corporation or the Bank
are subject to the Order referred to below, and the litigation and arbitration
described below. Information regarding the Order is contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the caption "Capital and Regulatory" in this report, and is incorporated here by
reference. The litigation and arbitration that is not routine and incidental to
the business of banking is described below The securities litigation,
shareholders' derivative litigation, and the Ford arbitration discussed below,
were previously described in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2003.
SECURITIES LITIGATION
In an action styled Lanctot v. Littlejohn, et al., filed in the U.S. District
Court for the Western District of Michigan on June 13, 2003, a shareholder of
the Corporation brought a class action against the Corporation, its former
chairman and chief executive officer and current director, Ronald G. Ford, and
its former chief executive officer and director, Sherry L. Littlejohn, for
alleged violations of Federal securities laws.
In another action styled Rosen v. North Country Financial Corporation, et al.,
filed in the U.S. District Court for the Western District of Michigan on June
23, 2003, a former shareholder of the Corporation has brought a class action
against the Corporation, its former chairman and chief executive officer and
current director, Ronald G. Ford, and its former chief executive officer and
director, Sherry L. Littlejohn, for alleged violations of Federal securities
laws.
On September 2, 2003, pursuant to 15 U.S.C. Section 78-u-4(a)(3)(B), plaintiff
Charles Lanctot filed a motion requesting the Court to consolidate the two
securities class action cases (Lanctot and Rosen) under the caption In re North
Country Financial Corporation Securities Litigation, to appoint him as "Lead
Plaintiff" in the consolidated cases, and to approve the selection of his
counsel as "Lead Plaintiff's Counsel." In an Order dated September 29, 2003, the
Court among other things consolidated the Lanctot and Rosen actions, designated
Charles D. Lanctot and John F. Stevens as "Lead Plaintiffs," and designated
"Co-Lead Counsel" and "Liaison Counsel" for the class.
On December 1, 2003, the plaintiffs filed their Corrected Consolidated Amended
Class Action Complaint ("Amended Complaint"), which adds John F. Stevens as a
plaintiff. The Amended Complaint, which demands a jury trial, is brought on
behalf of all persons, subject to certain exceptions, who purchased the
Corporation's common stock during the period from November 13, 2000, through
April 15, 2003. It alleges that the Corporation and the individual defendants
violated section 10(b) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 of the Securities and Exchange Commission (the "SEC")
issued under the Exchange Act, by disseminating materially false and misleading
statements and/or concealing material adverse facts concerning the financial
condition and operations of the Corporation, with knowledge, or in reckless
disregard, of the materially false and misleading character thereof. The Amended
Complaint also alleges violations of Section 20 of the Exchange Act by the
individual defendants, by reason of their control, at relevant times, of the
Corporation. Among other things, the Amended Complaint is based upon allegations
of deficiencies in the Corporation's policies and procedures for safe and sound
operation, including its directorate and management personnel and practices,
credit underwriting, credit administration, and policies regarding
asset/liability management, liquidity, funds management, and investments, and
its compliance with all applicable laws and regulations, including Regulations O
and U of the Board of Governors of the Federal Reserve System (the "Board"), the
Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations, and the
Michigan Banking Code of 1999. The Amended Complaint further alleges that the
Corporation's acquisition of American Financial Mortgage, which had an
"unusually large number of defaulted loans . . . which triggered the attention
of banking regulators"; that a Cease and Desist Order, dated March 26, 2002,
which is attached as Exhibit 1 to the Amended Complaint, demonstrates how
defendants made "false statements" in public filings and other communications,
and were required to take "corrective actions;" that various public filings were
"false because the Company's operations resulted in an excessive level of
adversely classified assets, delinquent loans, and nonaccrual loans as well as
an inadequate level of capital protection for the kind and qualify of assets
held;" that, "according to former employees, loans for Company insiders and
their related entities were often approved regardless of the quality of the
loan;" and, that the Corporation incorrectly attributed its performance to the
World Trade Center disaster and other factors impacting tourism and hospitality
businesses, instead of disclosing "insider loans," a "disproportionately high
loan concentration" in the hospitality industry, and
30.
information about the Corporation's banking practices and loan loss reserves.
The Amended Complaint seeks certification of a class consisting of all persons
who purchased the common stock of the Corporation on the open market between the
dates noted above, compensatory damages on a joint and several basis against all
defendants, including the Corporation, plus interest and costs, including
attorney's fees and expert's fees.
On January 23, 2004, the Corporation and the other defendants filed their Joint
Motion to Dismiss the Corrected Consolidated Amended Class Action Complaint,
principally based on the ground that plaintiffs have not adequately plead that
the Corporation, through its officers and directors, acted with the intent to
defraud the investing public under the standard articulated in Helwig v. Vencor,
Inc., 251 F.3d 540 (6th Cir. 2001), cert. dismissed, 536 U.S. 935, 122 S.Ct.
2616 (2002). During the pendency of the motion to dismiss, a stay of "all
discovery and other proceedings" automatically is imposed under 15 U.S.C.
Section 78u-4(b)(3)(B). Plaintiffs filed their Brief in Opposition to
Defendants' Motion to Dismiss on March 8, 2004. Defendants filed a reply brief
in support of their Motion to Dismiss on March 23, 2004. The Court scheduled an
oral argument on the Motion to Dismiss for May 17, 2004.
Shortly before the hearing on the Motion to Dismiss, Plaintiffs, the Corporation
and the individual Defendants and their insurer reached a settlement in
principle of all claims asserted in the consolidated actions. On June 18, 2004,
the parties submitted to the Court their Stipulation of Settlement, which
describes in detail the terms and conditions of the settlement. The parties have
submitted two Revised and Amended Stipulations of Settlement, the most recent of
which was filed with the Court on July 16, 2004.
Completion of the settlement is conditional upon satisfaction of a number of
matters set forth in the Revised and Amended Stipulation of Settlement, and
further proceedings in the Court. At this time, there can be no assurance that
all the conditions set forth in the Revised and Amended Stipulation of
Settlement will be satisfied. Failure to satisfy any of the conditions would
terminate the settlement and return the parties and the Court to a determination
upon Defendants' Motion to Dismiss the consolidated actions.
Shareholder's Derivative Litigation
In an action styled Virginia M. Damon Trust v. North Country Financial
Corporation, Nominal Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald
G. Ford, Sherry L. Littlejohn, Stanley J. Gerou II, John D. Lindroth, Stephen
Madigan, Spencer Shunk, Michael Henrickson, Glen Tolksdorf, and Wesley Hoffman,
filed in the U.S. District Court for the Western District of Michigan on July 1,
2003, a shareholder of the Corporation has brought a shareholder's derivative
action under Section 27 of the Exchange Act against the Corporation and certain
of its current and former directors and senior executive officers. The
Complaint, which demands a jury trial, is brought on behalf of the Corporation
against the individual defendants. It alleges that the individual defendants
have caused loss and damage to the Corporation through breaches of their
fiduciary duties of oversight and supervision by failing (i) adequately to
safeguard the assets of the Corporation, (ii) to ensure that adequate
administrative, operating, and internal controls were in place and implemented,
(iii) to ensure that the Corporation was operated in accordance with
legally-prescribed procedures, and (iv) to oversee the audit process to ensure
that the Corporation's assets were properly accounted for and preserved. The
Complaint further alleges that the individual defendants violated Section 14(a)
of the Exchange Act by making materially false and misleading statements in the
proxy statement mailed to shareholders in connection with the annual meeting of
the Corporation held May 29, 2000, and the adoption by the shareholders at that
meeting of the Corporation's 2000 Stock Incentive Plan. The Complaint also
alleges that Mr. Ford and Ms. Littlejohn, through a series of compensation
arrangements, stock options, and employment agreements obtained by them through
improper means resulting from the offices they held with the Corporation,
received excessive compensation, to the injury of the Corporation. Among other
things, the Complaint is based upon allegations of material misstatements or
omissions in filings made by the Corporation with the SEC, and deficiencies in
the Corporation's policies and procedures for safe and sound operation,
including its directorate and management personnel and practices, credit
underwriting, credit administration, and policies regarding asset/liability
management, liquidity, funds management, and investments, and its compliance
with all applicable laws and regulations, including Regulations O and U of the
Board, FDIC Rules and Regulations, and the Michigan Banking Code of 1999. The
Complaint seeks (i) rescission of the approval of the 2000 Stock Incentive Plan
and return of all stock and options granted under the Plan, (ii) a declaration
that the individual defendants breached their fiduciary duty to the Corporation,
(iii) an order to the individual defendants to account to the Corporation for
all losses and/or damages by reason of the acts and omissions alleged, (iv) an
order to each of the individual defendants to remit to the Corporation all
salaries and other compensation received for periods during which they breached
their fiduciary
31.
duties, (v) compensatory damages in favor of the Corporation, (vi) injunctive
relief, and (vii) interest, costs, and attorney's and expert's fees.
By letter dated September 17, 2003, and expressly without prejudice to the
argument that any such written demand is not required, plaintiff's counsel
purported to make a written demand that the Corporation pursue a number of
indicated putative claims against: (1) present and former officers and directors
of the Corporation who also are the individual defendants in the Damon action,
and (2) the certified public accounting firm of Wipfli, Ullrich, Bertelson, LLP.
The Michigan Business Corporation Act ("MBCA") grants the Corporation ninety
(90) days in which to respond to a proper written demand.
On September 18, 2003, the Corporation filed a motion to dismiss the Damon
action because plaintiff did not satisfy the mandatory precondition, under
Section 493a of the MBCA, M.C.L. Section 450.1493a, for filing a shareholder
derivative action that the shareholder must first have submitted a written
demand that the Corporation pursue in its own right the claims asserted by the
shareholder (the plaintiff here). Certain of the individual defendants in the
Damon action filed their own motion to dismiss on November 25, 2003, in which
motion the other individual defendants later joined. The plaintiff filed an
Opposition to both motions to dismiss on January 9, 2004, and on January 30,
2004, the defendants filed reply briefs in support of their motions to dismiss.
On March 22, 2004, the Court issued an Opinion and Order granting in part and
denying in part the motions to dismiss in the Damon case. The Court dismissed
the Section 14(a) claim against all of the defendants as barred by the statute
of limitations and, as further grounds, dismissed that claim as to those who
were not directors at the time of the mailing of the proxy statement. The Court
has permitted the plaintiff to proceed with its breach of fiduciary duty claims
against the Directors on the grounds that the plaintiff cured its procedural
failings by subsequently transmitting a demand letter as required by Section 493
of the MBCA.
On April 19, 2004, the Court entered an Order Granting Stipulation to Grant
Plaintiff Leave to File Amended Complaint and to Grant Related Relief to All
Parties. On May 14, 2004, the plaintiff filed an Amended Complaint and,
thereafter, all Defendants timely filed Answers to the Amended Complaint. In its
Answer, the Corporation averred that the plaintiff's claims are asserted for and
on behalf of the Corporation, that the plaintiff does not assert any claims
against the Corporation and, therefore, the Corporation properly should be
realigned as a plaintiff in the action.
During the above described proceedings, on November 11, 2003, the Corporation
filed a motion, as permitted by section 495 of the MBCA, M.C.L. Section
450.1495, requesting the Court to appoint a disinterested person to conduct a
reasonable investigation of the claims made by the plaintiff and to make a good
faith determination whether the maintenance of the derivative action is in the
best interests of the Corporation. After additional written submissions to the
Court by the defendants and the plaintiff concerning the issues presented by
this motion, and after several conferences with the Court, on May 20, 2004, the
Court entered an Order adopting the parties' written stipulations concerning the
appointment of a disinterested person and the manner of conducting the
investigation of the claims made by the plaintiff and making recommendations as
to whether the maintenance of the derivative action is in the best interests of
the Corporation. Under the terms of the Court's May 20, 2004 order, the
court-appointed disinterested person must complete his investigation and submit
his report and recommendation no later than October 18, 2004.
The court-appointed disinterested person has retained independent counsel and,
with the assistance of his counsel, has submitted a budget to the court and
commenced his investigation, which thus far has included requesting, receiving
and reviewing certain documents and receiving written submissions from and
interviewing the attorneys representing the plaintiff, the Corporation and the
individual defendants, and interviewing the Corporation's CEO, the Corporation's
outside general counsel and representatives of an accounting firm previously
retained by the Corporation. During the week of July 19, 2004, the
court-appointed disinterested person and his counsel will review additional
documents at the Corporation's headquarters and will commence interviews of the
individual defendants (who are represented by counsel during this process).
On July 14, 2004, the Court convened a settlement conference among counsel for
all parties and counsel for the individual defendants' insurer. Although a
settlement was not achieved, at the direction of the Court, the parties'
respective counsel agreed to continue settlement discussions.
32.
Employment Agreement Arbitration
On September 16, 2003, Ronald G. Ford, the former chairman and chief executive
officer and a current director of the Corporation, initiated an arbitration
proceeding with the American Arbitration Association ("AAA") against the
Corporation seeking monetary damages for alleged breach by the Corporation of
his Amended and Restated Employment Agreement, Chairman Agreement, and Amended
and Restated Consulting Agreement, each with the Corporation. The Corporation
has denied the alleged breach and asserted a counterclaim to recover all amounts
paid to Mr. Ford under the Chairman Agreement, as required by the Cease and
Desist Order entered by the FDIC and the OFIS, in addition to other amounts.
On March 19, 2004, at the request of Mr. Ford, AAA reactivated the arbitration
proceeding. Pursuant to its procedures, on June 17, 2004, AAA appointed an
arbitrator to preside over the adjudication of these claims and counterclaims.
On July 13, 2004, the arbitrator convened a scheduling conference at which the
arbitrator adopted the parties' stipulation to stay the arbitration until the
conclusion in the Damon action of the court-appointed disinterested person's
investigation and recommendations concerning the claims of the Virginia M. Damon
Trust, asserted in the name and on behalf of the Corporation, against the
Corporation's former and present officers and directors, including Mr. Ford. The
arbitrator has scheduled another conference with the parties to take place on
October 27, 2004.
Litigation of the types involved in the actions described above can be complex,
time-consuming, and often protracted. The Corporation has incurred and
anticipates that it will continue to incur substantial additional expense for
legal and other professional fees as a result of the filing and defense of these
actions. At this stage of the proceedings, the Corporation cannot accurately
assess the impact which these proceedings will have on the Corporation. An
ultimate determination of any of these actions adverse to the Corporation could
have a material adverse effect on the Corporation's financial condition and
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Registrant's shareholders was held on May 18, 2004.
The purpose of the meeting was to elect directors, as shown below, each for a
three-year term expiring in 2007. The number of shares voted is presented in
the table below.
For Withheld
Stanley J. Gerou II 4,512,567 238,124
John D. Lindroth 4,444,140 306,551
Stephen H. Madigan 4,554,805 195,886
Spencer B. Shunk 4,498,334 252,357
33.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 3.1 Articles of Incorporation, as amended, incorporated herein
by reference to exhibit 3.1 of the Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by
reference to exhibit 3.1 of the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001.
Exhibit 10 Modification of Employment Agreement dated May 18, 2004 between
North Country Financial Corporation and C. James Bess.
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer.
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer.
(b) The following Form 8-K filings were made during the quarter for which this
report is filed:
- Form 8-K dated April 9, 2004, filed pursuant to Item 12, regarding the
issuance of a press release announcing earnings for the quarter ended
March 31, 2004.
- Form 8-K dated April 23, 2004, filed pursuant to Item 5, regarding the
issuance of a press release announcing the Corporation entered into a
definitive agreement to sell two branch offices.
- Form 8-K dated May 11, 2004, filed pursuant to Item 5, regarding the
issuance of a press release announcing that the Corporation entered into a
definitive agreement to sell a branch office.
- Form 8-K dated May 17, 2004, filed pursuant to Item 5, regarding the
issuance of a press release announcing the closing of four branch offices.
- Form 8-K dated June 23, 2004, filed pursuant to Item 9, regarding the
issuance of a press release announcing the conditional settlement of
class action securities litigation.
34.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH COUNTRY FINANCIAL, CORPORATION
------------------------------------
(Registrant)
8/9/04 By: /s/ C. James Bess
-------- ----------------------------------------
Date C. JAMES BESS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(principal executive officer)
By: /s/ Ernie R. Krueger
----------------------------------------
ERNIE R. KRUEGER,
VICE PRESIDENT / CONTROLLER
(principal accounting officer)
35.
Exhibit Index
No. Description
Exhibit 3.1 Articles of Incorporation, as amended, incorporated herein
by reference to exhibit 3.1 of the Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by
reference to exhibit 3.1 of the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001.
Exhibit 10 Modification of Employment Agreement.
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer.
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer.
36.
EXHIBIT 10
MODIFICATION OF EMPLOYMENT AGREEMENT
This Modification of Employment Agreement is made this day of May,
2004, by and between North Country Financial Corporation, a Michigan corporation
(the "Corporation") and C. James Bess (the "Employee").
WHEREAS, the Corporation and Employee are parties to that certain
Employment Agreement dated the first day of August, 2003; and
WHEREAS, the parties wish to amend said Agreement as hereinafter
provided.
NOW, THEREFORE, in consideration of the mutual promises of the parties
and mutual consideration, the receipt and sufficiency of which is acknowledged
by both the Corporation and the Employee, the above-referenced Employment
Agreement is modified as follows:
1. The first sentence in Paragraph 5 under the subsection (of the first
sentence) enumerated as (B) which reads ". . . and (B) one year of Employee's
then Base Pay." is modified to read as follows:
". . . and (B) two years' of Employee's then Base Pay. . . ."
2. In all other respects, the Employment Agreement dated August 1,
2003, is hereby reaffirmed in its entirety.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed on its behalf by the Chairman of its Board of Directors, and the
Employee has signed this Agreement, all as of the date and year first above
written.
NORTH COUNTRY FINANCIAL CORPORATION
By: /s/ JOHN LINDROTH
----------------------------------------
John Lindroth
Its: Chairman
/s/ C. JAMES BESS
--------------------------------------------
C. James Bess, Employee
NORTH COUNTRY FINANCIAL CORPORATION
130 S. CEDAR STREET
MANISTIQUE, MICHIGAN 49854
May 18, 2004
PRIVATE & CONFIDENTIAL
Mr. John Lindroth
Chairman & CEO
North Country Bank and Trust
130 S. Cedar Street
Manistique, MI 49854
Re: Employment Agreement of C. James Bess dated August 1, 2003, as
modified the 18th day of May, 2004 (the "Employment
Agreement")
Dear Mr. Lindroth:
Reference is made to my Employment Agreement, as modified, with North
Country Financial Corporation.
This communication will serve as a "side bar" agreement between myself
and North Country Financial Corporation regarding the Modification of Employment
Agreement dated May 18, 2004, wherein North Country Financial Corporation has
agreed to pay me two (2) years' compensation in the event of a change in control
(through modification of Paragraph 5 of the Agreement).
Notwithstanding execution of the Modification of Employment Agreement,
I hereby agree and covenant, for consideration, the receipt and sufficiency of
which is acknowledged, that if the modification of my Employment Agreement
(specifically the payment of two years' compensation upon a "change in control")
causes a negative impact or jeopardizes a potential "change in control," such as
a sale of the Corporation's sole asset (North Country Bank and Trust), that I
will voluntarily, and without additional consideration, agree to rescission of
the Modification of Employment Agreement to facilitate the change in control,
and abide by the original terms of my Employment Agreement (which provides for
payment of one years' compensation). You and I have agreed that we will mutually
determine whether or not the Modification of Employment Agreement "interferes"
with a change in control, and act in the utmost good faith (with each other) and
in the utmost best interest of North Country Financial Corporation in
determining whether or not a rescission of the Modification of Employment
Agreement dated May 18, 2004, is in order.
We both acknowledge that it is our mutual preference that the
Modification of Employment Agreement, to the extent possible, remain in place as
written, however, we equally both agree that such
Mr. John Lindroth
Page 2
modification should not jeopardize a potential change in control to the
detriment of North Country Financial Corporation and its shareholders.
Very truly yours,
NORTH COUNTRY FINANCIAL CORPORATION
By: /s/ C. JAMES BESS
-------------------------------------
C. James Bess, CEO and President
Accepted and Agreed for and on behalf
of North Country Bank and Trust
as of the date first above written.
By: /s/ JOHN LINDROTH
----------------------------------
John Lindroth
Chairman
Exhibit 31.1
CERTIFICATION
I, C. James Bess, President and Chief Executive Officer of North Country
Financial Corporation, certify that:
1. I have reviewed this report on Form 10-Q of North Country Financial
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 9, 2004 /s/ C. James Bess
--------------------------------------
President and Chief Executive Officer
(principal executive officer)
37.
Exhibit 31.2
CERTIFICATION
I, Joseph E. Petterson, Vice President and Chief Financial Officer of North
Country Financial Corporation, certify that:
1. I have reviewed this report on Form 10-Q of North Country Financial
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 9, 2004 /s/ Joseph E. Petterson
----------------------------------------
Executive Vice President and Chief
Financial Officer
(principal financial officer)
38.
Exhibit 32.1
CERTIFICATION PERSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C Section 1350, and accompanies the quarterly report on Form
10-Q for the quarter ended June 30, 2004, (the "Form 10-Q") of North Country
Financial Corporation (the "Issuer").
I, C. James Bess, President and Chief Executive Officer of the Issuer,
certify that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m(a) or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operation
of the Issuer.
/s/ C. James Bess
----------------------------------------
C. James Bess
President and Chief Executive Officer
(chief executive officer)
August 9, 2004
39.
Exhibit 32.2
CERTIFICATION PERSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C Section 1350, and accompanies the quarterly report on Form
10-Q for the quarter ended June 30, 2004, (the "Form 10-Q") of North Country
Financial Corporation (the "Issuer").
I, Joseph E. Petterson, Executive Vice President and Chief Financial
Officer of the Issuer, certify that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m(a) or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operation
of the Issuer.
Joseph E. Petterson
----------------------------------------
Executive Vice President and Chief
Financial Officer
(chief financial officer)
August 9, 2004
40.
[FRONT SIDE OF PROXY]
NORTH COUNTRY FINANCIAL CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF NORTH COUNTRY
FINANCIAL CORPORATION FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
[DAY] [DATE].
The undersigned appoints ______________ and ______________, and each of them,
with full power of substitution, as the undersigned's proxies and
attorneys-in-fact (the "Proxies") to vote all shares of common stock of North
Country Financial Corporation ("North Country") that the undersigned is entitled
to vote on all matters that come before the Special Meeting of Shareholders of
North Country referred to above and at any adjournment(s) or postponement(s) of
that meeting and in their discretion, to vote upon such other business as may
properly come before the Special Meeting of Shareholders and any adjournment(s)
or postponement(s) of that meeting.
PLEASE MARK, SIGN AND DATE THIS PROXY
RETURN THIS PROXY PROMPTLY USING THE ENCLOSED RETURN ENVELOPE
[BACK SIDE OF PROXY]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF ALL PROPOSALS.
(1) Approval of the sale of approximately $30 million of additional shares of
common stock of North Country Financial Corporation ("North Country") pursuant
to, and in accordance with the terms and conditions of the Stock Purchase
Agreement dated as of August 10, 2004, as amended (the "Stock Purchase
Agreement"), between North Country and NCFC Recapitalization, LLC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) Approval of an amendment to North Country's Restated Articles of
Incorporation to reduce the number of North Country's outstanding common shares
through a 1-for-20 reverse stock split, with all fractional shares being
replaced with one whole common share.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) Approval of an amendment to North Country's Restated Articles of
Incorporation to change the name of North Country to "Mackinac Financial
Corporation."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(4) Approval of amendments to the North Country 2000 Stock Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IF THIS PROXY IS PROPERLY EXECUTED, THEN THE SHARES OF NORTH COUNTRY REPRESENTED
BY THIS PROXY WILL BE VOTED IN THE MANNER DESIGNATED ABOVE. IF THIS PROXY IS
RETURNED SIGNED, BUT THERE IS NO INDICATION OF A VOTE OR IF IT IS NOT CLEAR
WHICH BOX IS CHECKED, THEN SUCH SHARES SHALL BE VOTED FOR ALL OF THE PROPOSALS.
THE SHARES OF NORTH COUNTRY COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED
IN THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS WHICH MAY COME BEFORE
NORTH COUNTRY'S SPECIAL MEETING OF SHAREHOLDERS.
The undersigned shareholder hereby (i) revokes any and all proxies
previously executed with respect to the Special Meeting of Shareholders of North
Country Financial Corporation to be held on _______________, 2004, and (ii)
acknowledges receipt of the Notice and Proxy Statement for North Country
Financial Corporation's Special Meeting of Shareholders to be held on such date.
SIGNATURE _________________________________
SIGNATURE _________________________________
DATED ________________________, 2004
Please sign exactly as your name appears above. When signing as attorney,
executor, administrator, trustee, guardian, etc., give full title. If stock is
held in more than one name, each all parties must sign the proxy form.