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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, 2004
[ ] 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
MACKINAC 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
(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 $37.80 as of June 30, 2004, was
$13,266,212 million. As of March 28, 2005, there were outstanding, 3,428,695
shares of the Corporation's Common Stock (no par value).
Documents Incorporated by Reference:
Portions of the Corporation's Annual Report to Shareholders for the year ended
December 31, 2004 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 25, 2005 are incorporated by reference into Part III
of this Report.
PART I
ITEM 1. BUSINESS
Mackinac 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. On December 16, 2004 the Corporation changed its
name from North Country Financial Corporation to Mackinac Financial Corporation.
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.
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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 Mackinac 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.
In 2004, the Bank sold the fixed assets and deposits of the Mancelona and
Alanson branches to First Federal of Northern Michigan in exchange for cash, the
fixed assets and deposits of the Munising branch to People's State Bank in
exchange for cash, and the fixed assets and deposits of the Iron Mountain and
Escanaba branches to the State Bank of Escanaba in exchange for cash. The Bank
also closed the branch locations of Boyne City, Cadillac, Calumet, Sault Ste.
Marie Cascade, and one of its branch locations in Traverse City.
The Bank currently has 9 branch offices located in the Upper Peninsula of
Michigan and 3 branch offices located in Michigan's Lower Peninsula. The Bank
maintains offices in Antrim, Chippewa, Emmet, Grand Traverse, Houghton, Luce,
Manistee, Marquette, Menominee, Ontonagon, Otsego, and Schoolcraft counties. The
Bank provides drive-in convenience at 10 branch locations and has 9 automated
teller machines. The Bank also has a loan production office located in Oakland
County in lower Michigan. 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.
2
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.
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 December 31, 2004, the Corporation and its subsidiaries employed, in the
aggregate, 97 employees equating to 93 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, 2003 and 2004, 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 $52.7 million or 34.4% of the commercial loan
portfolio at December 31, 2004. No material portions of the
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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.
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, 2004, 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 in the Corporation's 2004 Annual Report to Shareholders, which
sections are incorporated herein by reference, 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
4
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 I 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 I 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.
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 I 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 2004
Annual Report to Shareholders, and is incorporated herein 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
5
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 2004
Annual Report to Shareholders, and is incorporated herein by reference.
6
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
2004 Annual Report to Shareholders, 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
Corporation's 2004 Annual Report to Shareholders, 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 (dollars in thousands):
2004 2003 2002
---- ---- ----
U.S. Agencies $ 21,843 $ 36,225 $ -
State and political subdivisions 4,029 4,105 5,632
Corporate securities 681 708 11,264
Mortgage-related securities 30,522 43,736 51,059
-------- -------- -------
TOTAL $ 57,075 $ 84,774 $67,955
======== ======== =======
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, 2004 (fully
taxable equivalent, dollars in thousands):
Weighted
1 Year Over Average
or Less 1-5 Years 5-10 Years 10 Years TOTAL Yield (1)
------- --------- ---------- -------- ----- ---------
U.S. Agencies $ 6,962 $ 14,881 $ -0- $ -0- $ 21,843 2.87%
State and political subdivisions 66 317 1,263 2,383 4,029 8.12%
Corporate securities 681 -0- -0- -0- 681 6.28%
Mortgage-related securities -0- 30,522 -0- -0- 30,522 4.48%
------- -------- ------- ------- -------- ----
TOTAL $ 7,709 $ 45,720 $ 1,263 $ 2,383 $ 57,075
======= ======== ======= ======= ========
Weighted average yield (1) 2.42% 4.10% 8.11% 8.13% 4.11%
======= ======== ======= ======= ========
(1) Weighted average yield includes the effect of tax-equivalent adjustments
using a 34% tax rate.
8
III. Loan Portfolio
A. Type of Loans
The following table sets forth the major categories of loans outstanding for
each category at December 31 (dollars in thousands):
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Commercial real estate $105,619 $161,976 $234,618 $264,863 $270,392
Commercial, financial and agricultural 47,446 80,988 117,309 132,432 135,196
One to four family residential real
estate 45,292 51,120 74,366 93,574 113,834
Consumer 2,379 3,195 5,706 9,516 13,059
Construction 3,096 567 3,044 4,027 9,208
-------- -------- -------- -------- --------
TOTAL $203,832 $297,846 $435,043 $504,412 $541,689
======== ======== ======== ======== ========
Included in loan totals for December 31, 2004, 2003, and 2002 are $3.0 million,
$4.1 million, and $6.4 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, 2004, based on scheduled principal
repayments (dollars in thousands).
Commercial, 1-4 Family
Commercial Financial and Residential Real
Real Estate Agricultural Estate Consumer Construction Total
----------- ------------ ---------------- --------- ------------ -----
IN ONE YEAR OR LESS:
Variable interest rates $ 25,724 $ 3,764 $ 3,451 $ 457 $ 40 $ 33,436
Fixed interest rates 273 1,254 1,265 238 590 3,620
AFTER ONE YEAR BUT
WITHIN FIVE YEARS:
Variable interest rates 45,966 7,670 2,584 -0- 1,206 57,426
Fixed interest rates 14,557 15,245 1,974 1,537 -0- 33,313
AFTER FIVE YEARS:
Variable interest rates 14,515 4,015 35,206 -0- 1,221 54,957
Fixed interest rates 4,584 15,498 812 147 39 21,080
-------- -------- -------- -------- -------- --------
TOTAL $105,619 $ 47,446 $ 45,292 $ 2,379 $ 3,096 $203,832
======== ======== ======== ======== ======== ========
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C. Risk Elements
The following table presents a summary of nonperforming assets and problem loans
as of December 31 (dollars in thousands):
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Nonaccrual loans $ 4,307 $38,660 $26,814 $ 4,015 $10,547
Interest income that would have
been recorded for nonaccrual
loans under original terms 803 2,793 1,653 1,597 1,478
Interest income recorded during
period for nonaccrual loans 1,053 1,307 1,120 1,521 1,125
Accruing loans past due 90 days
or more 0 241 401 4,878 3,117
Restructured loans not included
above 0 7,181 11,155 16,151 3,654
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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 (dollars in thousands):
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance of allowance for loan losses
at beginning of period $ 22,005 $ 24,908 $ 10,444 $ 9,454 $ 6,863
Loans charged off:
Commercial, financial and agricultural 10,187 5,068 11,925 2,385 2,837
Real estate - construction -0- -0- -0- -0- -0-
Real estate - mortgage 3,118 1,683 504 320 328
Consumer 2,453 205 141 253 263
-------- -------- -------- -------- --------
Total loans charged off 15,758 6,956 12,570 2,958 3,428
-------- -------- -------- -------- --------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 312 2,926 314 640 66
Real estate - construction -0- -0- -0- -0- -0-
Real estate - mortgage 148 931 3 20 9
Consumer 259 196 59 88 69
-------- -------- -------- -------- --------
Total recoveries 719 4,053 376 748 144
-------- -------- -------- -------- --------
Net loans charged off 15,039 2,903 12,194 2,210 3,284
Provisions charged to expense -0- -0- 26,658 3,200 5,875
-------- -------- -------- -------- --------
Balance at end of period $ 6,966 $ 22,005 $ 24,908 $ 10,444 $ 9,454
======== ======== ======== ======== ========
Average loans outstanding 244,730 361,144 484,889 529,354 515,683
-------- -------- -------- -------- --------
Ratio of net charge-offs during period to average
loans outstanding 6.15% .80% 2.51% .42% .64%
-------- -------- -------- -------- --------
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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. The percentages shown represent the percent of
each loan category to total loans (dollars in thousands).
2004 2003 2002 2001 2000
-------------- -------------- --------------- --------------- --------------
Amount % Amount % Amount % Amount % Amount %
------- ----- ------- ----- -------- ----- -------- ----- ------- -----
Commercial,
financial and
agricultural $ 1,419 20.4% $11,222 51.0% $ 22,703 91.2% $ 9,136 81.2% $ 4,914 52.0%
Real estate-
construction -0- 0.0% -0- 0.0% -0- 0.0% -0- 0.0% -0- 0.0%
1-4 family residential
real estate 97 1.4% 280 1.3% 280 1.1% 1,191 10.5% 136 1.4%
Consumer -0- 0.0% -0- 0.0% -0- 0.0% 152 1.4% 371 3.9%
Specific reserve
on loans sold
subsequent to
year end -0- 0.0% 7,425 33.7% -0- 0.0% -0- -0-
Unallocated
and general reserves 5,450 78.2% 3,078 14.01% 1,925 7.7% 774 6.9 4,033 42.7
------- ---- ------- ----- -------- ---- ------- ---- ------- ----
TOTAL $ 6,966 100% $22,005 100% $ 24,908 100% $11,253 100% $ 9,454 100%
------- ---- ------- ----- -------- ---- ------- ---- ------- ----
V. Deposits
Deposit information is contained in Note 11 to the Corporation's Consolidated
Financial Statements contained in the Corporation's 2004 Annual Report to
Shareholders, and is incorporated herein by reference.
VI. Return on Equity and Assets
Selected financial data of the Corporation is contained in the Corporation's
2004 Annual Report to Shareholders under the caption "Selected Financial Data,"
and is incorporated herein 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 to the Corporation's Consolidated Financial Statements
contained in the Corporation's 2004 Annual Report to Shareholders and is
incorporated herein by reference.
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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 12 offices at the following locations:
GAYLORD MARQUETTE PRESQUE ISLE SAULT STE. MARIE
145 North Otsego Avenue 1400 Presque Isle 138 Ridge Street
Gaylord, MI 49735 Marquette, MI 49855 Sault Ste. Marie, MI 49783
OTSEGO COUNTY MARQUETTE COUNTY CHIPPEWA COUNTY
KALEVA NEWBERRY MAIN SOUTH RANGE
14429 Wouski Avenue 414 Newberry Avenue 47 Trimountain Avenue
Kaleva, MI 49645 Newberry, MI 49868 South Range, MI 49963
MANISTEE COUNTY LUCE COUNTY HOUGHTON COUNTY
MANISTIQUE ONTONAGON STEPHENSON
130 South Cedar Street 601 River Street S216 Menominee Street
Manistique, MI 49854 Ontonagon, MI 49953 Stephenson, MI 49887
SCHOOLCRAFT COUNTY ONTONAGON COUNTY MENOMINEE COUNTY
MARQUETTE MAIN RIPLEY TRAVERSE CITY
300 North McClellan Street 106 Royce Road 3530 North Country Drive
Marquette, MI 49855 Hancock, MI 49930 Traverse City, MI 49684
MARQUETTE COUNTY HOUGHTON COUNTY GRAND TRAVERSE 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 12 branch
locations, 11 are owned and 1 is leased. The Bank also has a loan production
office located in Oakland County in lower Michigan.
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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
is 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 the Corporation's 2004 Annual Report to
Shareholders, and is incorporated herein by reference. The litigation and
arbitration that is not routine and incidental to the business of banking is
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 of
the Corporation brought a class action against the Corporation, its former
chairman, chief executive officer and 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 brought a class action against
the Corporation, its former chairman, chief executive officer and 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 added John F. Stevens as a
plaintiff. The Amended Complaint, which demanded a jury trial, was 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 alleged 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 alleged 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 was based upon
allegations of deficiencies in the Corporation's policies and procedures for
safe and sound operation, including its directorate and management personnel
14
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 alleged 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 was attached as Exhibit 1 to the Amended Complaint,
demonstrated 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
quality 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 sought 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 had 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 was 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
described in detail the terms and conditions of the settlement. The parties
subsequently modified the Stipulation, which was reflected in the Revised and
Amended Stipulations of Settlement submitted to the Court.
On August 23, 2004, the Court granted conditional approval of the settlement as
set forth in the Second Revised and Amended Stipulation of Settlement. On
October 15, 2004, the Court preliminarily certified a class for purposes of
settlement only, approved a form of notice of hearing to be distributed to class
members, and scheduled a hearing concerning final approval of the settlement. As
modified by a Stipulated Order entered on October 29, 2004, the plaintiffs were
allowed to mail notice of the proposed settlement to members of the class.
Members of the class were permitted to opt out of the class by written request
postmarked no later than
15
November 29, 2004. Members of the class who did not opt out and who filed
written notice no later than November 24, 2004, were permitted to object to
approval of the settlement at the hearing concerning final approval before the
Court.
On December 1, 2004, the Court held the hearing concerning final approval of the
settlement. At the conclusion of the hearing, the Court entered its Order and
Final Judgment, in which the Court (i) certified the action as a class action,
(ii) certified the plaintiff class, (iii) determined the settlement (as modified
by the Order and Final Judgment) to be fair, reasonable, adequate, and in the
best interests of the plaintiff class, (iv) approved the settlement, (v)
specified the claims procedure for members of the plaintiff class, (vi) awarded
fees to counsel for the plaintiff class, and (vii) dismissed the action as to
the plaintiff class and all defendants with prejudice. Under the terms of the
settlement approved by the Court, the settlement fund for the plaintiff class
and its counsel aggregated $750,000, of which the Corporation contributed
$250,000, and the individual defendants contributed $500,000. The amount
contributed by the individual defendants was covered by insurance.
Shareholder's Derivative Litigation
Damon Trust v. Bittner, et al.
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
16
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.
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.
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. 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'
17
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.
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.
By Order of the Court dated November 2, 2004, the report of the disinterested
person was timely filed with the Corporation on October 23, 2004, and the action
was stayed until November 22, 2004. On December 22, 2004, the plaintiff filed a
motion with the Court seeking a scheduling conference among the Court and the
parties. The Court granted the plaintiff's motion on January 10, 2005. On
January 13, 2005, the parties to the action and the individual defendants'
insurer entered into an agreement regarding limited disclosure of the report of
the disinterested person to the insurer and counsel for the parties on the terms
and conditions set forth in the agreement. Also on January 13, 2005, a
scheduling conference was held with the Court, and was adjourned to February 14,
2005.
On February 9, 2005, the parties filed a joint status report with the Court. A
further status conference was held on February 14, 2005. At that time, the Court
entered a Stipulated Protective Order regarding limited dissemination of the
report of the disinterested person. Also on February 14, in a separate Order,
the Court required the parties to complete their respective review of the report
and communicate among themselves regarding their positions. Absent a negotiated
resolution, the Corporation was given the opportunity until March 21, 2005, to
file an appropriate motion to dismiss. On March 21, 2005, consistently with the
determinations of the disinterested person in his report, the Corporation filed
with the Court a motion to dismiss (i) all the breach of fiduciary duty claims
against defendants Bittner, Bouschor, Gerou, Lindroth, Madigan, Shunk,
Hendrickson, and Tolksdorf, (ii) the breach of fiduciary duty claims against
defendant Hoffman, except for one claim identified by the disinterested person
in his report, and (iii) the excess compensation claims against defendants Ford
and Littlejohn. The plaintiff has advised the Corporation that it intends to
oppose the motion to dismiss.
Damon Trust v. Wipfli
On August 27, 2004, a second shareholder's derivative action, styled Virginia M.
Damon Trust v. Wipfli Ullrich Bertelson, LLP, and North Country Financial
Corporation, Nominal Defendant, was filed in the Michigan Circuit Court for
Grand Traverse County by the same shareholder which brought the derivative
action discussed above. The complaint, which demands a jury trial, is brought on
behalf of the Corporation against Wipfli Ullrich Bertelson, LLP ("Wipfli") under
the Michigan Accountant Liability statute, M.C.L. 600.2962. It alleges that
Wipfli damaged the Corporation by (i) failing to conduct and oversee, with the
due care and competence required of professional accountants, the annual audit
of the Corporation's financial statements for its 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 the Corporation after August 28,
2002, when Wipfli resigned as its auditors to undertake such consulting
services, (iii) failing to exercise due care and competence required to ensure
that the Corporation's financial statements conformed to applicable regulatory
accounting principles ("RAP") and generally accepted accounting
18
principles ("GAAP"), (iv) failing to make full disclosure that the Corporation's
administrative, operating, and internal controls were inadequate to prevent loss
and damage to its assets, and (v) failing to conduct a diligent and careful
"review" of the Corporation's quarterly financial statements during its 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 the Corporation had sufficient systems in
place to determine whether it was 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 the Corporation's financial statements in accordance with
generally accepted auditing standards ("GAAS"), (ii) negligently represented
that the Corporation's audited annual financial statements for the year ended
December 31, 2000 were fairly presented in all material respects, (iii)
negligently conducted reviews of the Corporation's quarterly financial
statements for the interim quarters of 2000, 2001 and 2002, and (iv) negligently
audited the Corporation's 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 the
Corporation 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 the
Corporation, and substantially underestimating the Corporation's liabilities and
misrepresenting its solvency.
The complaint also alleges that Wipfli is a party responsible for the
Corporation's liability in any securities fraud action arising out of a material
overstatement of its financial results. The complaint claims contribution and
indemnification from Wipfli on behalf of the Corporation under the Private
Securities Litigation Reform Act of 1995 for any liability it may incur in any
such securities fraud action.
On October 12, 2004, Wipfli removed the second shareholder's derivative action
to the U.S. District Court for the Western District of Michigan. By stipulation
between the respective counsel for the Corporation and the plaintiff, the
Corporation was initially granted until December 10, 2004, to file its first
response to the Complaint, which period was extended by a Stipulated Order until
January, 2005.
On January 10, 2005, the Corporation filed its Answer to the Complaint in the
second shareholder's derivative action. Also on that date, a joint status report
was filed with the Court by all parties. A scheduling conference was held with
the Court on January 13, 2005. On that date, the Court entered a Preliminary
Case Management Order, affording the Corporation the opportunity until February
3, 2005, to make a motion to realign the Corporation in, or to dismiss, the
litigation.
On February 3, 2005, the Corporation filed a Motion to realign the Corporation
as the plaintiff, and to dismiss the Virginia M. Damon Trust as a party, in the
second shareholder's derivative action. The plaintiff, Virginia M. Damon Trust,
filed a brief opposing the Corporation's motion. Oral argument on the
Corporation's motion was held before the Court on March 7, 2005. The Court took
the matter under advisement.
19
Employment Agreement Arbitration
On September 16, 2003, Ronald G. Ford, the former chairman and chief executive
officer and a former 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
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. At
a further conference held on October 27, 2004, the arbitrator adopted the
parties' stipulation to stay the arbitration until another conference, scheduled
for November 18, 2004.
Following a further stipulated stay of the arbitration proceeding, the
Corporation and Mr. Ford entered into a Release and Settlement Agreement as of
December 7, 2004. The Corporation and Mr. Ford each released certain claims
against the other specified in the Release and Settlement Agreement, and the
Bank paid Mr. Ford $20,000 for his minority ownership interest in two
subsidiaries of the Bank. The Release and Settlement Agreement, the terms of
which were consented to by the FDIC and the Michigan Office of Financial and
Insurance Services, resulted in the termination with prejudice of the AAA
arbitration proceeding.
Litigation of the types involved in the actions described above can be complex,
time-consuming, and often protracted. The Corporation has incurred substantial
expense for legal and other professional fees as a result of these actions. The
Corporation anticipates that it will incur additional such expenses in
connection with the two shareholder's derivative actions described above.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the Corporation's shareholders was held on November 18,
2004. The purpose of the meeting was to seek shareholder approval for the
following proposals: stock purchase agreement for a $30 million recapitalization
plan; a 20:1 reverse stock split; a corporate name change; and approval of
amendments to a stock incentive plan. The number of shares voted on these
proposals is presented in the table below.
For Against Withheld / Abstained
--- ------- --------------------
$30 million recapitalization 4,103,481 413,332 36,276
20:1 reverse stock split 5,163,325 486,631 35,057
corporate name change 5,239,303 419,330 23,380
stock incentive plan amendments 3,841,873 593,846 95,600
21
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 selected.
Name Age Position
Paul D. Tobias 54 Chairman and Chief Executive Officer
C. James Bess 67 Vice Chairman
Joseph E. Petterson 58 Executive Vice President
Eliot R. Stark 52 Executive Vice President and Chief
Financial Officer
Ernie R. Krueger 55 Senior Vice President and Controller
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK HOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
Market information pertaining to the Corporation's common stock is contained
under the caption "Market Information" in the Corporation's 2004 Annual Report
to Shareholders, and is incorporated herein by reference.
The Corporation had 1,858 shareholders of record as of March 28, 2005.
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 2003. 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. The Bank, under an
informal agreement with OFIS and the FDIC, is prohibited from paying dividends
without prior approval.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of the Corporation is contained in the Corporation's
2004 Annual Report to Shareholders, under the caption "Selected Financial Data,"
and is incorporated herein by reference.
There were no dividends declared or paid in 2004 and 2003.
22
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 2004 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 2004 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, 2004, 2003 and 2002 in the Corporation's 2004
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 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.
23
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 and 2004.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 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 December 31, 2004.
There was no change in the Corporation's internal control over financial
reporting that occurred during the Corporation's fiscal quarter ended December
31, 2004 that has materially affected, or is reasonably likely to materially
affect, the Corporation's internal control over financial reporting.
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 25, 2005, Annual Meeting of
Shareholders (the "Proxy Statement"), a copy of which will be filed with the SEC
prior to the meeting date, is incorporated herein 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 Randolph C. Paschke, (Chairman),
Walter J. Aspatore, and Robert H. Orley. The Board of Directors has determined
that Randolph C. Paschke is qualified
24
as an audit committee financial expert, as that term is defined in the rules of
the Securities and Exchange Commission.
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 herein 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 herein by reference.
The following table provides information as of December 31, 2004 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.
25
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available
for future issuance
Weighted average under equity
Number of securities to exercise price of compensation plans
be issued upon exercise outstanding (excluding securities
of outstanding options, options, warrants reflected in column
Plan Category warrants and rights and rights (a)
- -------------------- ----------------------- ----------------- ---------------------
(a) (b) (c)
Equity
compensation plans
approved by security 282,999 $ 34.55 138,899
Equity
compensation plans
not approved by
security holders -0- -0- -0-
------- ------- -------
Total 282,999 $ 34.55 138,899
======= ======= =======
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 herein by reference.
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 herein by reference.
26
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report
1. Consolidated Financial Statements (contained in the Annual Report
attached hereto as Exhibit 13 and incorporated herein by reference
(i) Report on Independent Registered Public Accounting Firm
(ii) Consolidated Balance Sheets as of December 31, 2004 and 2003
(iii) Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002
(iv) Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2004, 2003, and 2002
(v) Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002
(vi) Notes to Consolidated Financial Statements
2. All of the schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
either not required under the related instruction, the required
information is contained elsewhere in the Form 10-K, or the
schedules are inapplicable, and therefore have been omitted.
3. Exhibits
Exhibit
Number Document
3.1(a) Articles of Incorporation, as amended, incorporated
by reference to Exhibit 3.1 of the Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999
3.1(b) Certificate of Amendment to Restated Articles of
Incorporation, incorporated by reference to Exhibit
3.1 to the Corporation's Form 8-K filed December 15,
2004
3.2 Amended and Restated Bylaws, incorporated by reference
to Exhibit 3.1 of the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001
27
4.1 Amendment to Rights Agreement between the Corporation
and Registrar and Transfer Company dated August 9,
2004, incorporated by reference to Exhibit 10.1 to the
Corporation's Form 8-K filed August 13, 2004
4.2 Amendment No. 2 to Rights Agreement, incorporated by
reference to Exhibit 4.1 to the Corporation's Form 8-K
filed December 16, 2004
10.1 Stock Purchase Agreement between the Corporation and
NCFC Recapitalization, LLC, dated August 10, 2004,
incorporated by reference to Exhibit 10.2 to the
Corporation's Form 8-K filed August 13, 2004
10.2 Amendment to Stock Purchase Agreement between the
Corporation and NCFC Recapitalization, LLC, dated
September 28, 2004, incorporated by reference to
Exhibit 10.1 to the Corporation's Form 8-K filed
October 4, 2004
10.3 Employment agreement dated August 10, 2004, between
the Corporation and C. James Bess, incorporated by
reference to Appendix A to the Corporation's Proxy
Statement filed October 18, 2004
10.4 Modification of Employment Agreement dated May, 2004,
between the Corporation and C. James Bess,
incorporated by reference to Exhibit 10 to the
Corporation's Form 10-Q/A filed August 10, 2004
10.5 Amendment to Employment Agreement dated September 21,
2004, between the Corporation and C. James Bess
10.6 First Amendment to Employment Agreement dated December
15, 2004, between the Corporation and C. James Bess
10.7 Agreement dated December 14, 2004 between the
Corporation and Joseph E. Petterson
10.8 Employment Agreement dated August 10, 2004 between the
Corporation and Paul D. Tobias, incorporated by
reference to Appendix A to the Corporation's Proxy
Statement filed October 18, 2004
10.9 Employment Agreement dated August 10, 2004 between the
Corporation and Eliot R. Stark, incorporated by
reference to Appendix A to the Corporation's Proxy
Statement filed October 18, 2004
28
10.10 Waiver Agreement between each of Paul D. Tobias and
Eliot R. Stark and the Corporation, incorporated by
reference to Exhibit 10.1 to the Corporation's Form
8-K filed December 16, 2004
10.11 Agreement dated December 15, 2005 between the
Corporation and Ernie R. Krueger
10.12 Employment Agreement dated December 14, 2005 between
the Corporation and Kelly W. George
10.13 Employment Agreement dated December 15, 2005 between
the Corporation and David C. Crimmins
10.14 Form of Stock Option Agreement between each of Paul D.
Tobias and Eliot R. Stark and the Corporation,
incorporated by reference to Exhibit 10.2 to the
Corporation's Form 8-K filed December 16, 2004
10.15 Form of Indemnity Agreement for the Corporation's
Directors, incorporated by reference to Exhibit 10.3
to the Corporation's Form 8-K filed December 16, 2004
10.16 Form of Registration Rights Agreement, incorporated by
reference to Exhibit 10.4 to the Corporation's Form
8-K filed December 16, 2004
10.17 Stock Option Plan, incorporated by reference to the
Corporation's Proxy Statement for its annual meeting
of shareholders held April 21, 1994
10.18 Deferred Compensation, Deferred Stock, and Current
Stock Purchase Plan for the Corporations Nonemployee
Directors, incorporated by reference to Exhibit 10.2
of the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999
10.19 North Country Financial Corporation Stock Compensation
Plan, incorporated by reference to Exhibit 10.3 of the
Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999
10.20 North Country Financial Corporation 1997 Directors'
Stock Option Plan, incorporated by reference to
Exhibit 10.4 of the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999
10.21 North Country Financial Corporation 2000 Stock
Incentive Plan, incorporated by reference to Exhibit
10.1 of the Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000
29
10.22 North Country Financial Corporation Supplemental
Executive Retirement Plan, incorporated by reference
to Exhibit 10.6 of the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999
13 2004 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 Business Conduct and Code of Ethics Policy
incorporated by reference to Exhibit 14 to the
Corporation's 10-K for the fiscal year ended December
31, 2003
21 Subsidiaries of the Corporation
23 Consent of Independent Public Accountants - Plante &
Moran, PLLC
31 Rule 13(a) - 14 (a) Certifications
32.1 Section 1350 Chief Executive Officer Certification
32.2 Section 1350 Chief Financial Officer Certification
30
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 31,
2005.
MACKINAC FINANCIAL CORPORATION
/s/ Paul D. Tobias
- ------------------------------------
Paul D. Tobias
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 31, 2005, 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 Paul D. Tobias and
Eliot R. Stark, 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/ Paul D. Tobias /s/ Ernie R. Krueger
- ------------------------------------- ------------------------------------
Paul D. Tobias - Chairman, Senior Vice President and Controller
Chief Executive Officer, and Director (principal accounting officer)
/s/ Eliot R. Stark
- ------------------------------------
Eliot R. Stark
Executive Vice President and
Chief Financial Officer
(chief financial officer)
/s/ Walter J. Aspatore /s/ Robert H. Orley
- ------------------------------------- ------------------------------------
Walter J. Aspatore - Director Robert H. Orley - Director
/s/ C. James Bess /s/ Randolph C. Paschke
- ------------------------------------- ------------------------------------
C. James Bess - Vice Chairman and Randolph C. Paschke - Director
Director
/s/ Dennis Bittner
- -------------------------------------
Dennis Bittner - Director
31
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.5 Amendment to Employment Agreement dated September 21, 2004,
between the Corporation and C. James Bess
10.6 First Amendment to Employment Agreement dated December 15, 2004,
between the Corporation and C. James Bess
10.7 Agreement dated December 14, 2004 between the Corporation and
Joseph E. Petterson
10.11 Employment Agreement dated December 15, 2005 between the
Corporation and Ernie R. Krueger
10.12 Employment Agreement dated December 14, 2005 between the
Corporation and Kelly W. George
10.13 Employment Agreement dated December 15, 2005 between the
Corporation and David C. Crimmins
13 2004 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 Corporation
23 Consent of Independent Public Accountants - Plante & Moran, PLLC
31 Rule 13(a) - 14(a) Certifications
32.1 Section 1350 Chief Executive Officer Certification
32.2 Section 1350 Chief Financial Officer Certification