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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, 2001
[ ] 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.)
1010 Noteware Drive, Traverse City, Michigan 49686
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (231) 933-6045
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. | |
The aggregate market value of the common stock held by non-affiliates of the
Registrant, based on a per share price of $7.12 as of March 1, 2002, was $45.1
million. As of March 1, 2002, 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 2001 Annual
Report to Shareholders are incorporated by reference into Parts I and II of this
Report.
Portions of the Corporation's Proxy Statement for the Annual Meeting of
Shareholders to be held April 16, 2002 are incorporated by reference into Part
III of this Report.
PART I
ITEM 1: BUSINESS
North Country Financial Corporation (the "Registrant" or "Corporation") was
incorporated under the laws of the state of Michigan on December 16, 1974. The
Corporation changed its name from "First Manistique Corporation" to "North
Country Financial Corporation" on April 14, 1998. The Registrant owns all of the
outstanding stock of its banking subsidiary, North Country Bank and Trust (the
"Bank"). The Registrant also owns eight 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 for nonprofit
organizations; North Country Financial Group, a corporation which provides
tax-exempt lease/purchase financing to municipalities; North Country Capital
Trust, a statutory business trust which was formed solely for the issuance of
trust preferred securities; NCB Real Estate Company, which owns several
properties used by the Bank; North Country Mortgage Company LLC and American
Financial Mortgage Corporation, entities 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 Registrant. The Registrant and its subsidiary Bank are
engaged in a single industry segment, commercial banking, broadly defined to
include commercial and retail banking activities along with other permitted
activities closely related to banking.
The Registrant became a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, on April 1, 1976, when it acquired First
Northern Bank and Trust ("First Northern"). On May 1, 1986, Manistique Lakes
Bank merged with First Northern. The Registrant acquired all of the outstanding
stock of the Bank of Stephenson on February 8, 1994, in exchange for cash and
common stock. The Bank of Stephenson was operated as a separate banking
subsidiary of the Registrant until September 30, 1995, when it was merged into
First Northern. 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 Registrant acquired all of the outstanding stock of
South Range State Bank ("South Range") on January 31, 1996, in exchange for cash
and notes. On August 12, 1996, First Northern and South Range changed their
names to North Country Bank and Trust and North Country Bank, respectively. On
February 4, 1997, the Registrant acquired all of the outstanding stock of UP
Financial Inc., the parent holding company of First National Bank of Ontonagon
("Ontonagon"). Ontonagon was merged into North Country Bank. North Country Bank
was operated as a separate banking subsidiary of the Registrant until March 10,
1998, when it was merged into North Country Bank and Trust. 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. 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
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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 Central Savings Bank in exchange
for cash.
The Bank has 17 branch offices located in the Upper Peninsula of Michigan and
ten branch offices located in Michigan's Lower Peninsula. The Bank maintains
offices in Grand Traverse, Otsego, Wexford, Manistee, Antrim, Leelanau, Emmet,
Schoolcraft, Menominee, Delta, Dickinson, Houghton, Baraga, Ontonagon,
Marquette, Luce, Alger, Chippewa and Charlevoix counties. The Bank provides
drive-in convenience at 20 branch locations and has automatic teller machines
operating at 14 locations. The Bank has no foreign offices.
The Corporation is headquartered in Traverse City, Michigan. The executive
offices and mailing address of the Corporation are located at 1011 Noteware
Drive, Traverse City, Michigan 49686.
FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K and the documents incorporated
herein by reference, which are not statements of historical fact (including
statements in the future tense and those which include terms such as "believe,"
"will," "expect," and "anticipate") contain forward-looking statements that
involve risks and uncertainties. The Corporation's actual future results could
materially differ from those discussed. Factors that might cause actual results
to differ from the results discussed in forward-looking statements include, but
are not limited to:
o General economic conditions, either nationally or the state in which
the Corporation does business;
o Legislation or regulatory changes which adversely affect the
businesses in which the Corporation is engaged;
o Changes in the interest rate environment which increase or decrease
interest rate margins;
o 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;
o Significant increases in competition in the banking and financial
services industry resulting from industry consolidation, regulatory
changes and other factors, as well as actions taken by particular
competitors;
o Changes in consumer spending, borrowing and savings habits;
o Technological changes;
o Acquisitions and unanticipated occurrences which delay or reduce the
expected benefits of acquisitions;
o The Corporation's ability to increase market share and control
expenses;
o The effect of compliance with legislation or regulatory changes;
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o The effect of changes in accounting policies and practices;
o The costs and effects of unanticipated litigation and of unexpected or
adverse outcomes in such litigation; and
o The factors discussed in Item 1 in this Report and in the Management's
Discussion and Analysis in Item 7, as well as those discussed
elsewhere in this Report and the documents incorporated herein by
reference.
All forward-looking statements contained in this report are based upon
information presently available and the Corporation assumes no obligation to
update any forward-looking statements.
OPERATIONS
The principal business the Corporation is engaged in, through the Bank, is
in the general commercial banking business, providing a full range of loan and
deposit products. These banking services include customary retail and commercial
banking services, including checking and savings accounts, time deposits,
interest bearing transaction accounts, safe deposit facilities, real estate
mortgage lending, commercial lending, commercial and governmental lease
financing, and direct and indirect consumer financing. Funds for the Bank's
operation are also provided 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 loan, investments and other interest-bearing assets and (ii) expenses
incurred in payment of interest on deposit accounts and borrowings, and general
operating expenses.
GENERAL DEVELOPMENTS
The principal source of revenue for the Registrant is interest and fees on loans
and investment income. The sources of income for the three most recent years are
as follows (in thousands):
2001 2000 1999
---- ---- ----
Interest and fees on loans $44,778 $50,063 $40,457
Investment income 5,392 4,105 1,670
Other interest income 500 515 422
Noninterest income 9,892 6,853 3,538
COMPETITION
Banking is in 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,
3
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.
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. The Bank also utilizes its ability to sell loans in the secondary
market. 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. To successfully compete management has
developed a sales and service culture, stresses and rewards quality customer
service, and designs products to meet the needs of the customer.
The Corporation continues to offer its premium-based certificate of deposit
program. Customers can elect to receive one of several products in place of cash
interest payments on term certificates. The Corporation offers firearms, golf
clubs, various other sporting equipment, and grandfather clocks under these
programs. The most successful and long-standing of the programs is the firearm
program, which is offered to sports enthusiasts nationally. Under this program,
the Corporation records the cost of the product given as a discount from the
face amount of the certificate of deposit and recognizes interest expense on the
effective interest method over the life of the certificate.
EMPLOYEES
As of March 1, 2002, the Corporation and its subsidiaries employed, in the
aggregate, 189 employees equating to 163.85 full-time equivalents. The
Corporation places a high priority on staff development including extensive
sales, product and technical training. New employees are selected on the basis
of customer sales and service abilities and technical skills. 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. The Bank also finances commercial and governmental leases
throughout the country. Leases are originated by the Registrant's subsidiary,
North Country Financial Group, and unrelated entities. The Bank reviews the
credit quality of each lease before entering into a financing agreement.
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 hotel and tourism industry. This
concentration represents $97.7 million or
4
24.3% of the commercial loan portfolio. 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 Federal Home Loan Bank of Indianapolis. The Federal
Home Loan Bank of Indianapolis provides an additional source of liquidity and
long-term funds. Membership in the Federal Home Loan Bank also provides access
to 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.
The Bank regularly assesses its ability to raise funds through the issuance of
certificates of deposit in denominations of $100,000 or more in the local and
regional market area and has established guidelines for the total funding to be
provided by these deposits. The Bank also uses brokered deposits to attract
certificates of deposits in denominations of $100,000 or more.
The Bank uses federal funds purchased from correspondent banks to respond to
deposit fluctuations and temporary loan demands.
As of December 31, 2001, 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 Registrant's foreign account activity.
Compliance with federal, state, and local statutes and/or ordinances relating to
the protection of the environment is not expected to have a material effect upon
the Bank's capital expenditures, earnings, or competitive position.
SUPERVISION AND REGULATION
As a registered bank holding company, the Corporation is subject to regulation
and examination by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act, as amended (the
"BHCA"). The Bank is subject to regulation and examination by the Michigan
Financial Institutions Bureau and the FDIC.
Under the BHCA, the Corporation is subject to periodic examination by the
Federal Reserve Board, and is required to file with the Federal Reserve Board
periodic reports of its operations and such additional information as the
Federal Reserve Board may require. In accordance with Federal Reserve Board
policy, the Corporation is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where the
Corporation might not do so absent such policy. In addition, there are numerous
federal and state laws and regulations which regulate the activities of the
Corporation, the Bank and the nonbank subsidiaries, including requirements and
limitations relating to capital and reserve requirements, permissible
investments and lines of business, transactions with affiliates, loan limits,
mergers and acquisitions, issuances of securities, dividend payments,
inter-affiliate liabilities, extensions of credit and branch banking.
5
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 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. The Federal Reserve Board has not advised the Corporation of any
specific minimum Tier 1 capital leverage ratio applicable to it.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' power depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." To be well capitalized under the regulatory framework, the
Tier 1 capital ratio must meet or exceed 6%, the total capital ratio must meet
or exceed 10% and the leverage ratio must meet or exceed 5%. At December 31,
2001 and 2000, the most recent notification from the Federal Reserve categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Bank's category. The Bank's risk-based
capital and leverage ratios meet or exceed the defined minimum requirements, and
the Bank has been deemed well capitalized as of December 31, 2001 and 2000.
Current federal law provides that adequately capitalized and managed bank
holding companies from any state may acquire banks and bank holding companies
located in any other state, subject to certain conditions. Banks are permitted
to create interstate branching networks in states that do not "opt out" of
interstate branching.
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.
6
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 has determined no to become certified as a financial holding company
at this time. The Corporation may reconsider this determination in the future.
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 charges 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 average daily balance sheet for
each year - including the components of earning assets and supporting
obligations - the related interest income on a fully tax equivalent basis and
interest expense, as well as the average rates earned and paid on these assets
and obligations is contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
2001 Annual Report, and is incorporated herein by reference.
An analysis of the changes in net interest income from period-to-period and the
relative effect of the changes in interest income and expense due to changes in
the average balances of earning assets and interest-bearing obligations and
changes in interest rates is contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's 2001 Annual Report, and is incorporated herein by reference.
7
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):
2001 2000 1999
---- ---- ----
U.S. Treasury and federal agencies $3,128 $10,882 $9,392
State and political subdivisions 5,418 15,542 16,210
Corporate securities 8,571 4,740 3,008
Mortgage-related securities 44,768 40,902 14,733
------ ------ ------
TOTAL $61,885 $72,066 $43,343
====== ====== ======
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, 2001 (fully
taxable equivalent, in thousands):
1 Year or Less 1-5 Years 5-10 Years Over 10 Years
-------------- --------- ---------- -------------
U.S. Treasury and federal agencies $3,128
State and political subdivisions $55 $250 $1,040 4,073
Corporate securities 1,987 498 6,086
Mortgage-related securities 44,768
Weighted average yield (1) 8.33% 7.86% 9.65% 6.54%
(1) Weighted average yield includes the effect of tax-equivalent
adjustments using a 34% tax rate.
III. Loan Portfolio
A. Type of Loans
The following table sets forth the major categories of loans outstanding for
each category at December 31 (in thousands):
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Commercial, financial and
agricultural $314,853 $308,421 $258,592 $219,027 $181,683
Real estate - construction 4,027 9,208 12,539 11,923 10,940
Real estate - mortgage 93,574 113,834 107,750 97,415 95,543
Consumer 9,516 13,059 17,051 23,160 26,795
Leases 82,442 97,167 70,689 60,195 57,558
-------- -------- -------- -------- --------
TOTAL $504,412 $541,689 $466,621 $411,720 $372,519
======== ======== ======== ======== ========
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Included in loan totals for December 31, 2001, 2000, and 1999 are $6.4 million,
$6.6 million, and $6.5 of loans to Canadian obligators.
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, 2001, based on scheduled principal
repayments (in thousands). The amounts due after one year are classified
according to the sensitivity to changes in interest rates.
Commercial,
Financial and Real Estate Real Estate
Agricultural Construction Mortgage Consumer Leases
-------------- ------------- ----------- -------- ------
In one year or less $61,202 $3,436 $1,232 $2,099 $23,138
After one year but within five
years:
Variable interest rates 131,060 -- 622 238 1,343
Fixed interest rates 44,544 -- 9,818 6,690 29,104
After five years:
Variable interest rates 49,358 -- 38,746 33 314
Fixed interest rates 28,689 591 43,156 456 28,543
-------- ------ ------- ------ -------
TOTAL $314,853 $4,027 $93,574 $9,516 $82,442
======== ====== ======= ====== =======
C. Risk Elements
The following table presents a summary of non-performing assets and problem
loans as of December 31 (in thousands):
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Nonaccrual loans $4,015 $10,547 $95 $2,174 $1,956
Interest income that would
have been recorded for
nonaccrual loans
under original
terms 1,597 413 3 207 93
Interest income recorded
during period for
nonaccrual loans 1,521 143 -- -- --
9
2001 2000 1999 1998 1997
------ ------ ----- ----- ------
Accruing loans 9,131 3,117 2,452 1,238 698
past due 90 days or more
Restructured loans not included above 16,151 3,654 -- -- --
There were no Canadian loans included in nonaccrual category as of December 31,
2001.
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):
10
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Balance of allowance for loan
losses at beginning of period $ 9,454 $ 6,863 $ 6,112 $ 5,600 $ 4,591
Loans charged off:
Commercial, financial and agricultural 2,385 1,284 405 406 351
Real estate -- construction -- -- -- -- --
Real estate -- mortgage 320 328 74 31 37
Consumer 253 263 329 368 413
Leases -- 1,553 -- -- --
------- ------- ------- ------- -------
TOTAL LOANS CHARGED OFF 2,958 3,428 808 805 801
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 640 66 9 47 2
Real estate -- construction -- -- -- -- --
Real estate -- mortgage 20 9 10 -- 7
Consumer 88 69 83 70 77
Leases -- -- -- -- 27
------- ------- ------- ------- -------
TOTAL RECOVERIES 748 144 102 117 113
------- ------- ------- ------- -------
Net loans charged off 2,210 3,284 706 688 688
Provisions charged to expense 3,200 5,875 1,457 1,200 2,398
Allowance from acquisitions -- -- -- -- 299
------- ------- ------- ------- -------
BALANCE AT END OF PERIOD $10,444 $ 9,454 $ 6,863 $ 6,112 $ 5,600
======= ======= ======= ======= =======
Ratio of net charge-offs during period
to average loans outstanding 0.4% 0.7% 0.2% 0.2% 0.2%
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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.
2001 2000 1999 1998 1997
---------------- ---------------- --------------- ------------- ---------------
Amount % Amount % Amount % Amount % Amount %
------- ----- ------- ------ ------ ----- ------ ----- ------ -----
Commercial, financial and agricultural $ 7,099 62.4% $3,407 56.9% $2,443 55.4% $1,789 53.2% $2,873 48.8%
Real estate - construction -- 0.8% -- 1.7% 114 2.7% 65 2.9% -- 2.9%
Real estate - mortgage 1,191 18.6% 136 21.0% 835 23.1% 622 23.7% 99 25.6%
Consumer 152 1.9% 371 2.4% 326 3.7% 299 5.6% 416 7.2%
Leases 1,228 16.3% 1,507 18.0% 1,049 15.1% 880 14.6% 350 15.5%
Unallocated 774 N/A 4,033 N/A 2,096 N/A 2,507 N/A 1,862 N/A
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
TOTAL $10,444 100% $9,454 100% $6,863 100% $6,112 100% $5,600 100%
======= ===== ====== ===== ====== ===== ====== ===== ====== =====
V. Deposits
At December 31, 2001, $3.7 million of total deposits are from Canadian
customers.
The following table presents the maturities of certificates of deposits and
other time deposits of $100,000 or more as of December 31, 2001 (in thousands):
3 months or less $20,051
Over 3 months through 6 months 7,408
Over 6 months through 12 months 4,231
Over 12 months 30,661
-------
Total $62,351
=======
VI. Return on Equity and Assets
Selected financial data of the Registrant is contained in the Corporation's 2001
Annual Report and is incorporated herein by reference.
See Item 6, "Selected Financial Data."
VII. Financial Instruments with Off-Balance Sheet Risk
The Registrant is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet financial needs of its customers. These
financial instruments include commitments to make loans, unused lines of credit,
and standby letters of credit. The Registrant's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument is
represented by the contractual amount of those instruments. The
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Registrant follows the same credit policy to make such commitments as it uses
for on-balance-sheet items.
The Registrant had the following fixed and variable rate commitments outstanding
at December 31 (in thousands):
2001 2000
------------------ ------------------
Fixed Variable Fixed Variable
------- -------- ------- --------
Outstanding letters of credit -- $13,967 -- $14,601
Unused lines of credit $12,554 75,442 $12,225 73,491
Loan commitments outstanding 21,298 8,687 6,585 33,074
Fixed rates on unused lines of credit and loan commitments ranged from 4.25% to
18% at December 31, 2001.
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower and may include real estate, vehicles, business assets, deposits,
and other items.
ITEM 2: PROPERTIES
The Registrant's headquarters are located at 1011 Noteware Drive, Traverse City,
Michigan 49686. The headquarters location is owned by the Registrant and not
subject to any mortgage.
The Bank conducts business from 27 offices at locations described below in Grand
Traverse, Otsego, Wexford, Manistee, Antrim, Leelanau, Emmet, Schoolcraft,
Menominee, Delta, Dickinson, Hougton, Baraga, Ontonagon, Marquette, Luce, Alger,
Chippewa and Charlevoix counties. The Corporation continually reviews the
possibility of applying for additional branch locations, depending on
management's assessment of market and economic conditions, the availability of
locations, and the proximity of branches of competing institutions. The
following table lists each of the Bank's offices.
Traverse City Traverse City
3530 North Country Drive 333 East State Street
Traverse City, MI 49684 Traverse City, MI 49684
Grand Traverse County Grand Traverse County
Gaylord Cadillac
145 North Otsego Avenue 220 South Mitchell Street
Gaylord, MI 49735 Cadillac, MI 49601
Otsego County Wexford County
13
Kaleva Mancelona
14429 Wouski Avenue 625 North Williams Street
Kaleva, MI 49645 Mancelona, MI 49659
Manistee County Antrim Country
Glen Arbor Alanson
6545 Western 6230 River Street
Glen Arbor, MI 49636 Alanson, MI 49706
Leelanau County Emmet County
Petoskey Manistique
3890 Charlevoix Avenue 130 South Cedar Street
Petoskey, MI 49770 Manistique, MI 49854
Emmet County Schoolcraft County
Menominee Stephenson
1111 10th Street 245 Menominee Street
Menominee, MI 49858 Stephenson, MI 49887
Menominee County Menominee County
Escanaba Iron Mountain
837 North Lincoln Road 1890 South Stephenson Avenue
Escanaba, MI 49829 Iron Mountain, MI 49801
Delta County Dickinson County
South Range Ripley
47 Trimountain Avenue 106 Royce Road
South Range, MI 49963 Franklin Township, MI 49930
Houghton County Houghton County
Calumet L'anse
1175 Calumet Avenue 117 US Highway 41
Calumet, MI 49913 L'anse, MI 49946
Houghton County Baraga County
Ontonagon Marquette Main
601 River Street 300 North McClellan Street
Ontonagon, MI 49953 Marquette, MI 49855
Ontonagon County Marquette County
Marquette Presque Isle Newberry Main
1400 Presque Isle 414 Newberry Avenue
Marquette, MI 49855 Newberry, MI 49868
Marquette County Luce County
14
Munising Ishpeming
301 East Superior Street 1336 US 41 West
Munising, MI 49862 Ishpeming, MI 49849
Alger County Marquette County
Boyne City Sault Main
128 Water Street 138 Ridge Street
Boyne City, MI 49712 Sault Ste. Marie, MI 49783
Charlevoix County Chippewa County
Sault Cascade
4250 I-75 Business Spur
Sault Ste. Marie, MI 49783
Chippewa County
All of the above locations are designed for use and operation as a bank, are
well maintained, and are suitable for current operations. Of the 27 branch
locations, 9 are leased and 18 are owned.
North Country Financial Group leases space in a professional office building
located at 1860 Blake Street, Denver, Colorado 80202.
ITEM 3: LEGAL PROCEEDINGS
As the date hereof, there were no material pending legal proceedings, other than
routine litigation incidental to the business of banking to which the Registrant
or any of its subsidiaries is a party of or which any of its properties is the
subject.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 2001 to a vote of
the Registrant's stockholders.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market information pertaining to the Registrant's common stock is contained
under the caption "Market Information" in the Registrant's 2001 Annual Report,
and is incorporated herein by reference.
15
The number of common shareholders of the Registrant is contained under the
caption "Market Summary" on page 2 in the Registrant's 2001 Annual Report, and
is incorporated herein by reference.
The holders of the Registrant's common stock are entitled to dividends when, as
and if declared by the Board of Directors of the Registrant out of funds legally
available for that purpose. Dividends have been paid on a quarterly basis. In
determining dividends, the Board of Directors considers the earnings, capital
requirements and financial condition of the Registrant and its subsidiary bank,
along with other relevant factors. The Registrant's principal source of funds
for cash dividends is the dividends paid by the subsidiary bank. The ability of
the Registrant and the subsidiary bank to pay dividends is subject to regulatory
restrictions and requirements.
The cash dividends declared, by quarter for 2001 and 2000, are included in the
Corporation's 2001 Annual Report under the caption "Comparative Highlights" and
is incorporated herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
Selected financial data of the Registrant is contained in the Corporation's 2001
Annual Report and is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference to the Management's Discussion and Analysis in the
Corporation's 2001 Annual Report to Shareholders.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk and foreign exchange risk. The Corporation has no
market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets and therefore has minimal significant
exposure to changes in commodity prices. Any impact that changes in foreign
exchanges rates and commodity prices would have on interest rates are assumed to
be insignificant.
Interest rate risk is the exposure of the Corporation's financial condition to
adverse movements in interest rates. The Corporation derives its income
primarily from the excess of interest collected on its interest-earning assets
over the interest paid on its interest-bearing obligations. The rates of
interest the Corporation earns on its assets and owes on its obligations
generally are established contractually for a period of time. Since market
interest rates change over time, the Corporation is exposed to lower
profitability if it cannot adapt to interest rate changes. Accepting interest
rate risk can be an important source of profitability and shareholder value;
however, excess levels of interest rate risk could pose a significant threat to
the Corporation's
16
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risk at prudent levels is essential to the Corporation's safety
and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Corporation's interest rate risk management process seeks
to ensure that appropriate policies, procedures, management information systems
and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Corporation assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and asset 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, 2001 (in thousands):
Principal/Notional Amount Maturing in:
Fair Value
2002 2003 2004 2005 2006 Thereafter Total 12/31/01
-------- -------- -------- -------- -------- ---------- -------- ----------
Rate Sensitive Assets
Fixed interest rate securities $ 11,845 $ 12,670 $ 6,267 $ 1,583 $ 2,511 $ 27,009 $ 61,885 $ 61,885
Average interest rate 6.06 6.07 6.46 8.15 8.12 6.50 6.42
Fixed interest rate loans 50,834 25,634 24,678 12,955 20,619 48,574 183,294 185,380
Average interest rate 7.59 8.80 8.49 8.59 8.42 7.51 7.92
Variable interest rate loans 81,665 43,098 35,317 35,150 33,800 92,088 321,118 321,118
Average interest rate 6.20 5.96 6.18 5.89 5.76 7.66 6.51
Other assets 12,218 4,375 16,593 16,593
Average interest rate 1.70 6.81 2.13
Total rate sensitive assets $156,562 $ 81,402 $ 66,262 $ 49,688 $ 56,930 $172,046 $582,890 $584,976
Rate Sensitive Obligations
Savings, money market and
interest-bearing demand $247,864 $247,864 $247,864
Average interest rate 1.92 1.92
Time deposits 148,704 $ 19,002 $ 16,550 $ 2,749 $ 99 $ 1,214 188,318 192,412
Average interest rate 5.13 5.56 6.38 5.02 5.60 3.98 5.33
Fixed interest rate borrowings 734 788 1,987 881 2,810 1,349 8,549 7,886
Average interest rate 7.01 6.96 6.88 6.73 7.04 1.00 6.01
17
Fair Value
2002 2003 2004 2005 2006 Thereafter Total 12/31/01
Variable interest rate- borrowings 80,000 80,000 85,740
Average interest rate 5.42 5.42
Subordinated debentures 12,450 12,450 12,450
Average interest rates 4.53 4.53
Total rate sensitive obligations $397,302 $ 19,790 $ 18,537 $ 3,630 $ 2,909 $ 95,013 $537,181 $546,352
There have been no material changes in the Corporation's annual net maturity
levels of interest-earning assets and interest-bearing obligations as well as
the net fair value of those assets and liabilities from December 31, 2000 to
December 31, 2001.
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of variables, including: the growth,
composition and levels of loans, deposits, and other earning assets and
interest-bearing obligations, and economic and competitive conditions; potential
changes in lending, investing and deposit strategies; customer preferences; and
other factors.
ITEM 8: FINANCIAL STATEMENTS
Incorporated by reference to the Registrant's Consolidated Financial Statements
for the years ended December 31, 2001, 2000 and 1999 in the Corporation's 2001
Annual Report to Shareholders.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information set forth under the caption "Election of Directors" of the
Registrant's definitive Proxy Statement dated March 12, 2002, is hereby
incorporated by reference.
The following are the executive officers of the Corporation. The executive
officers serve at the pleasure of the Board of Directors and are appointed by
the Board annually. There are no
18
arrangements or understandings between any officer and any other person pursuant
to which the officer was elected.
Name Age Position
- ---- --- --------
Ronald G. Ford 54 Chairman and Chief Executive Officer
Sherry L. Littlejohn 42 President and Chief Operating Officer
Gary W. Klein 53 Executive Vice President and Chief Financial Officer
ITEM 11: EXECUTIVE COMPENSATION
Information relating to compensation of the Registrant's executive officers and
directors is contained under the captions "Remuneration of Directors" and
"Executive Compensation," in the Registrant's definitive Proxy Statement dated
March 12, 2002, and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is contained under the caption "Beneficial Ownership of Common Stock"
in the Registrant's definitive Proxy Statement dated March 12, 2002, and is
incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
contained under the caption "Indebtedness of and Transactions With Management"
in the Registrant's definitive Proxy Statement dated March 12, 2002, and is
incorporated herein by reference.
19
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements.
1. The following documents are filed as part of Item 8 of this report:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the years ended December 31,
2001, 2000, and 1999
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000, and 1999
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 page of this
report.
The Registrant will furnish a copy of any exhibits listed on the Exhibit Index
to any shareholder of the Registrant without charge upon written request of Gary
Klein, 1011 Noteware Drive, Traverse City, Michigan 49688.
(b) Reports on Form 8-K
During the fourth quarter of 2001, the Registrant did not filed a Current Report
on Form 8-K.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, dated March 25, 2002.
NORTH COUNTRY FINANCIAL CORPORATION
/s/ Ronald G. Ford
- ------------------------------------
Ronald G. Ford
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 25, 2002, by the following persons on
behalf of the Registrant and in the capacities indicated. Each director of the
Registrant, whose signature appears below, hereby appoints Ronald G. Ford,
Sherry L. Littlejohn and Michael C. Henricksen, and each of them severally, as
his attorney-in-fact, to sign in his name and on his behalf, as a director of
the Registrant, and to file with the Commission any and all Amendments to this
Report on Form 10-K.
Signature
/s/ Ronald G. Ford
- --------------------------------------------
Ronald G. Ford - Director, Chairman
and Chief Executive Officer
(Principal Executive Officer)
/s/ Sherry L. Littlejohn /s/ Wesley W. Hoffman
- -------------------------------------------- ---------------------------------------
Sherry L. Littlejohn - President, Wesley W. Hoffman - Director
Chief Operating Officer and Treasurer
/s/ Gary W. Klein /s/ John D. Lindroth
- -------------------------------------------- ---------------------------------------
Gary W. Klein - Chief Financial Officer John D. Lindroth - Director
(Principal Financial and Accounting Officer)
/s/ Dennis Bittner
- -------------------------------------------- ---------------------------------------
Dennis Bittner - Director Steve Madigan - Director
- -------------------------------------------- ---------------------------------------
Bernard A. Bouschor - Director John P. Miller - Director
/s/ Stanley J. Gerou II /s/ Spencer Shunk
- -------------------------------------------- ---------------------------------------
Stanley J. Gerou II - Director Spencer Shunk - Director
- -------------------------------------------- ---------------------------------------
Michael C. Henricksen - Director Glen Tolksdorf - Director
21
EXHIBIT INDEX
Number Exhibit
- ------ -------
3.1 Articles of Incorporation, as amended, incorporated herein by
reference to exhibit 3.1 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999.
3.2 Amended and Restated Bylaws, incorporated herein by reference to
exhibit 3.1 of the Registrant'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 Registrant
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 Registrant's
Current Report on Form 8-K filed on July 31, 2000.
4.2 Certain borrowings and guaranteed preferred beneficial interests
in the Registrant's subordinated debentures are described in
Notes 9 and 13 of the Registrant's Notes to Consolidated
Financial Statements. The Registrant 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 Registrant's
definitive proxy statement for its annual meeting of shareholders
held April 21, 1994.
10.2 Deferred Compensation, Deferred Stock, and Current Stock Purchase
Plan for Nonemployee Directors, incorporated herein by reference
to exhibit 10.2 of the Registrant'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
Registrant'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
Registrant'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
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000.
22
10.6 Employment Agreement dated July 3, 2000 between the Registrant
and Ronald G. Ford, incorporated herein by reference to exhibit
10 of the Registrant'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 Registrant and Ronald G. Ford.
10.8 Consulting Agreement dated September 15, 1999 between the
Registrant and Ronald G. Ford, incorporated herein by reference
to exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
10.9 Amended and Restated Consulting Agreement dated December 21, 2001
between the Registrant and Ronald G. Ford.
10.10 Employment Agreement dated September 30, 2000 between the
Registrant and Sherry L. Littlejohn, incorporated herein by
reference to exhibit 10 of the Registrant'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 Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
13 2001 Annual Report to Shareholders. This exhibit, except for
those portions expressly incorporated by reference in this
filing, is furnished for the information of the Securities and
Exchange Commission and is not deemed "filed" as part of this
filing.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
23