UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from <> to <>
Commission file number: 0-20167
NORTH COUNTRY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 S. CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 341-8401
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, (or for such shorter periods that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for
the past 90 days.
Yes X No
As of October 20, 1999, there were outstanding
7,010,253 shares of the registrant's common stock, no
par value.
NORTH COUNTRY FINANCIAL CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and December 31, 1998 1
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1999
(Unaudited) and September 30, 1998 (Unaudited) 2
Condensed Consolidated Statements of Changes in
Shareholders' Equity - Three and Nine Months Ended
September 30, 1999 (Unaudited) and
September 30, 1998 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 (Unaudited) and
September 30, 1998 (Unaudited) 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
Cash and due from banks $ 40,270 $ 16,593
Federal funds sold 411 6,048
--------- ---------
Total cash and cash equivalents 40,681 22,641
Securities available for sale 28,202 8,565
Federal Home Loan Bank stock 3,034 3,034
Total loans 446,902 411,720
Allowance for loan losses (6,253) (6,112)
--------- ---------
440,649 405,608
Premises and equipment 19,311 17,938
Other assets 15,735 13,595
--------- ---------
Total assets $ 547,612 $ 471,381
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 42,709 $ 42,077
Interest-bearing 410,736 362,885
--------- ---------
Total deposits 453,445 404,962
Other borrowings 37,145 23,270
Accrued expenses and other liabilities 4,429 3,680
--------- ---------
Total liabilities 495,019 431,912
Guaranteed preferred beneficial interests
in the Corporation's subordinated debentures 12,450 -
--------- ---------
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized, no shares outstanding
Common stock, no par value, 18,000,000 shares
authorized, 7,010,605 and 7,130,760 issued and
outstanding at September 30, 1999
and December 31, 1998 16,619 19,436
Retained earnings 23,601 19,989
Accumulated other comprehensive income, net (77) 44
--------- ---------
Total shareholders' equity 40,143 39,469
--------- ---------
Total liabilities and shareholders' equity $ 547,612 $ 471,381
========= =========
See accompanying notes to condensed consolidated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
Interest income
Loans, including fees $10,201 $9,370 $29,546 $27,720
Securities
Taxable 414 185 767 582
Exempt from federal taxation 65 14 94 18
Other 111 98 303 345
-------- -------- -------- --------
10,791 9,667 30,710 28,665
Interest expense
Deposits 4,711 4,165 13,386 12,238
Other borrowings 572 382 1,436 975
-------- -------- -------- --------
5,283 4,547 14,822 13,213
Net interest income 5,508 5,120 15,888 15,452
Provision for loan losses 213 450 639 1,125
-------- -------- -------- --------
Net interest income after
provision for loan losses 5,295 4,670 15,249 14,327
Noninterest income
Service charges on deposit accounts 529 333 1,421 1,043
Gain (loss) on sales of loans 3 28 63 83
Gain on sales of securities - - - 44
Net gain on sale of branches 430 - - -
Other 261 301 1,003 750
-------- -------- -------- --------
1,223 662 2,487 1,920
Noninterest expense
Salaries and employee benefits 1,761 1,590 4,763 4,798
Occupancy and equipment 642 632 1,894 1,798
Other 1,888 1,509 5,237 4,789
-------- -------- -------- --------
4,291 3,731 11,894 11,385
-------- -------- -------- --------
Income before income tax expense 2,227 1,601 5,842 4,862
Income tax expense 500 453 1,267 1,247
-------- -------- -------- --------
Net income $ 1,727 $ 1,148 $ 4,575 $ 3,615
======== ======== ======== ========
Basic earnings per common share $ .25 $ .16 $ .65 $ .51
======== ======== ======== ========
Diluted earnings per common share $ .24 $ .16 $ .64 $ .50
======== ======== ======== ========
Dividends paid per common share $ .05 $ .04 $ .14 $ .13
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
Balance - beginning of period $39,035 $37,760 $39,469 $36,592
Net income for period 1,727 1,148 4,575 3,615
Net change in net unrealized gain
on securities available for sale (2) 9 (121) 1
-------- -------- -------- --------
Total comprehensive income 1,725 1,157 4,454 3,616
Cash dividends (323) (315) (963) (934)
Issuance of common stock 105 594 309 875
Common stock retired (399) - (3,126) (953)
-------- -------- -------- ---------
Balance - end of period $40,143 $39,196 $40,143 $39,196
======== ======== ======== =========
See accompanying notes to condensed consolisated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine months ended
September 30,
1999 1998
Cash flows from operating activities
Net income $ 4,575 $ 3,615
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 1,706 1,574
Provision for loan losses 639 1,125
Gain on sales of securities - (44)
Net gain on sale of branches (430) -
Change in other assets 37 2,317
Change in other liabilities 804 (62)
--------- ---------
Net cash from operating activities 7,331 8,525
Cash flows from investing activities
Purchase of securities available for sale (23,634) (4,000)
Proceeds from sales of securities
available for sale 752
Proceeds from maturities, calls or paydowns
of securities available for sale 3,663 3,943
Net increase in loans (35,680) (26,929)
Purchase of premises and equipment (2,206) (1,900)
Net cash paid for sale of branches (10,801) -
Net cash received for net liabilities
assumed in acquisition of branches 15,504 -
--------- ---------
Net cash from investing activities (53,154) (28,134)
Cash flows from financial activities
Net increase in deposits 41,886 26,626
Proceeds from other borrowings 26,000 10,500
Payment on other borrowings (12,125) (6,052)
Proceeds from issuance of common stock 309 876
Retirement of common stock (3,126) (953)
Net proceeds from the issuance of guaranteed
preferred beneficial interests in the
Corporation's subordinated debentures 11,882 -
Payment of cash dividends (963) (934)
--------- ---------
Net cash from financing activities 63,863 30,063
--------- ---------
Net change in cash and cash equivalents 18,040 10,454
Cash and cash equivalents at beginning of period 22,641 11,143
--------- ---------
Cash and cash equivalents at end of period $40,681 $21,597
========= =========
Supplemental disclosures of cash flow information
Increases related to branch acquisitions:
Premises and equipment, net $ (286)
Core deposit intangibles and goodwill (1,680)
Deposits 17,463
Other liabilities 7
Decreases related to branch sales:
Premises and equipment, net 65
Deposits (10,866)
See accompanying notes to condensed consolidated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.BASIS OF PRESENTATION
The unaudited condensed consolidated financial
statements of North Country Financial Corporation
(the Registrant) have been prepared in accordance
with generally accepted accounting principles for
interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the
information and footnotes required by generally
accepted accounting principles for complete
financial statements. In the opinion of management,
all adjustments (consisting of normal recurring
accruals) considered necessary for a fair
presentation have been included. Operating results
for the nine-month period ended September 30, 1999
are not necessarily indicative of the results that
may be expected for the year ending December 31,
1999. The unaudited consolidated financial
statements and footnotes thereto should be read in
conjunction with the audited consolidated financial
statements and footnotes thereto included in the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and
expenses during the period. Actual results could
differ from those estimates.
2.FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial
Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
This Statement requires that all derivative
financial instruments be recognized as either assets
or liabilities in the Balance Sheet. Derivative
financial instruments not designated as hedges will
be measured at fair value with changes in fair value
being recognized in earnings in the period of
change. If a derivative is designated as a hedge,
the accounting for changes in fair value will depend
on the specific exposure being hedged. The
Statement is effective for fiscal years beginning
after June 15, 2000. Management, at this time,
cannot determine the effect adoption of this
Statement may have on the consolidated financial
statements of the Registrant as the effect is
dependent on the amount and nature of derivatives
and hedges held at the time of adoption of the
Statement.
3.EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
(In thousands, except per share data)
Three months Nine months
ended ended
September 30, September 30,
1999 1998 1999 1998
Basic earnings per common share:
Net income $1,727 $1,148 $4,575 $3,615
Weighted average common shares
outstanding 7,015 7,132 7,040 7,133
------- ------- ------- ------
Basic earnings per common share $ .25 $ .16 $ .65 $ .51
======= ======= ======= ======
Diluted earnings per common share:
Net income $1,727 $1,148 $4,575 $3,615
Weighted average common shares outstanding
for basic earnings per common share 7,015 7,132 7,040 7,133
Add: Dilutive effect of assumed exercises
of stock options 58 92 84 92
Add: Dilutive effect of directors'
deferred stock compensation 5 - 7 -
Average shares and dilutive potential ------- ------- ------- ------
common shares 7,078 7,224 7,131 7,225
------- ------- ------- ------
Diluted earnings per common share $ .24 $ .16 $ .64 $ .50
All share and per share amounts in this filing have
been retroactively adjusted to reflect the August of
1998 3-for-1 stock split.
4.INVESTMENT SECURITIES
The amortized cost and estimated fair value of
investment securities available for sale as of
September 30, 1999 and December 31, 1998 are as follows:
September 30, 1999 December 30, 1998
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
U.S. Treasury securities and
obligations of U.S.
Government agencies and
corporations $ 8,923,871 $ 8,649,650 $ 4,645,681 $ 4,692,221
Obligations of states and
political subdivisions 13,416,203 13,670,956 999,922 1,020,890
Other debt securities 500,000 500,000 - -
Mortgage-related securities 5,478,451 5,381,137 2,852,872 2,852,171
------------ ----------- ------------ ----------
Total investment securities
available for sale $28,318,525 $28,201,743 $8,498,475 $8,565,282
============ =========== ============ ==========
5.ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the
nine months ended September 30, 1999 and 1998, are
summarized as follows:
(In thousands of dollars)
September 30, September 30,
1999 1998
Balance at beginning of period $ 6,112 $ 5,600
Charge-offs (573) (533)
Recoveries 75 78
Provision for loan losses 639 1,125
$ 6,253 $ 6,270
Information regarding impaired loans follows:
(In thousands of dollars)
As of and As of and
for the nine for the year
months ended ended
September 30, December 31,
1999 1998
Average investment in impaired loans $ 5,438 $ 6,155
Balance of impaired loans 5,489 6,073
6.OTHER BORROWINGS
Other borrowings consist of the following at
September 30, 1999 and December 31, 1998:
September 30, December 31,
1999 1998
(In thousands of dollars)
Federal Home Loan Bank advances
at various rates with various
maturities (see annual
financial statements
as referenced in Note 1) $35,334 $20,607
Farmers Home Administration,
$2,000,000 fixed rate line
agreement maturing
August 24, 2024, interest
payable at 1% 1,811 1,875
Notes payable to South
Range State Bank's former
stockholders, maturing in
three equal annual
installments beginning
February 1, 1997,
interest payable at 5.2% - 788
---------- -----------
$ 37,145 $ 23,270
The Federal Home Loan Bank borrowings are
collateralized by a blanket collateral agreement on
the Registrant's residential mortgage loans.
Prepayment of the advances is subject to the
provisions and conditions of the credit policy of
the Federal Home Loan Bank of Indianapolis in effect
as of September 30, 1999. Borrowings other than
Federal Home Loan Bank advances are not subject to
prepayment penalties.
7.CURRENT EVENTS
A business trust subsidiary of the Registrant sold
12,450 of Trust Preferred Securities at $1,000 per
preferred security in a May 1999 offering. The
proceeds from the sale of the Trust Preferred
Securities were used by the Registrant's subsidiary
to purchase an equivalent amount of Subordinated
Debentures of the Registrant. The Trust Preferred
Securities carry a distribution floating rate of the
3-month LIBOR plus 2.5%, have a stated maturity of
May 14, 2029, and are guaranteed by the Registrant.
The securities are redeemable at par after May 14,
2009. Distributions on the Trust Preferred
Securities are payable quarterly on February 14, May
14, August 14 and November 14. The first
distribution was paid on August 14, 1999.
In May 1999, the Registrant acquired branches in
Kaleva and Mancelona, Michigan from Huntington
National Bank. The transaction is accounted for
under the purchase method of accounting. The
Registrant assumed approximately $17.5 million in
deposits, and acquired approximately $286,000 in
premises, equipment and sundry assets, and $1.7
million of intangible assets, as more fully
disclosed in the Condensed Consolidated Statements
of Cash Flows.
On July 23, 1999, the Registrant sold two of its
branch offices located in Rudyard and Cedarville in
Michigan's Upper Peninsula with total deposits of
approximately $11 million resulting in a net gain on
sale of approximately $430,000, as more fully
disclosed in the Condensed Consolidated Statements
of Cash Flows. These branch dispositions are
consistent with the Registrant's strategy of
improving operating efficiency by maintaining a
presence only in locations such as commercial
centers where it can operate profitably.
In addition to the branch acquisitions and branch
sales noted above, the Registrant closed the
Watersmeet and Lake Linden branch offices in August
of 1999. The deposits and loans for these offices
were transferred to existing branches in nearby
locations. The Registrant also opened a private
banking branch in the Bay Harbor area of Petoskey,
Michigan in September of 1999.
ITEM 2. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERTATIONS
The following discussion and analysis of financial
condition and results of operations provides additional
information to assess the condensed consolidated
financial statements of the Registrant and its wholly-
owned subsidiaries through the third quarter of 1999.
The discussion should be read in conjunction with those
statements and their accompanying notes.
The Registrant is not aware of any market or
institutional trends, events, or circumstances that
will have or are reasonably likely to have a material
effect on liquidity, capital resources, or results of
operations except as discussed herein. Also, the
Registrant is not aware of any current recommendations
by regulatory authorities which will have such effect
if implemented.
Forward-Looking Statements:
This report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Registrant
intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform
Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-
looking statements, which are based on certain
assumptions and describe future plans, strategies and
expectations of the Registrant, are generally
identifiable by use of the words "believe", "expect",
"intend", "anticipate", "estimate", "project" or
similar expressions. The Registrant's ability to
predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations
and future prospects of the Registrant and the
subsidiaries include, but are not limited to, changes
in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of
the U.S. Treasury and the Federal Reserve Board, the
quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the
Registrant's market area and accounting principles,
policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking
statements and undue reliance should not be placed on
such statements. Further information concerning the
Registrant and its business, including additional
factors that could materially affect the Registrant's
financial results, is included in the Registrant's
filings with the Securities and Exchange Commission.
Financial Highlights:
Year to date consolidated net income was $4,575,000
through September 30, 1999 compared to $3,615,000 for
the same period in 1998. Diluted earnings per share
increased from $.50 through September 30, 1998, to $.64
for the same period in 1999. The loan portfolio
continues a significant growth trend with gross loans
increasing $35,182,000 or 8.5% since December 31, 1998.
Loan growth remains focused in the commercial lending
and leasing areas. The loan growth in 1999 has been
funded primarily through an increase in the deposit
portfolio. Deposits have increased $48,483,000 or
12.0% since December 31, 1998. The primary area of
deposit growth for the Registrant has been in interest-
bearing demand accounts.
Financial Condition:
Cash and Cash Equivalents: Cash and cash equivalents
increased $18.0 million through the third quarter of
1999. The increase was largely funded by an increase
in deposits as discussed more fully below, and is
available for planned future growth in the Bank's loan
and investment portfolios, as well as to provide
additional liquidity in anticipation of the Year 2000.
Investment Securities: Available for sale securities
increased approximately $19.6 million through the third
quarter of 1999. The mix of the portfolio has changed
from December 31, 1998, as more fully disclosed in Note
4 of Notes to Condensed Consolidated Financial
Statements contained herein. The growth is a result of
asset and liability strategies to manage interest rate
risk through the diversification of the balance sheet
from the purchase of investment securities funded by
additional borrowings. Management has utilized its
available capacity to borrow additional funds at the
Federal Home Loan Bank in order to match the pricing
and maturity of investment security purchases.
Loans: Through the third quarter of 1999, loan
balances increased by $35.2 million. Management
believes loans provide the most attractive earning
asset yield available to the Registrant and that
trained personnel and controls are in place to
successfully manage a growing portfolio. Accordingly,
management intends to continue to maintain loans at a
high level while maintaining adequate liquidity. As
shown in the table below, the loan mix remains
relatively constant with a slight increase in
commercial loans as a percent of total loans for the
nine months ended September 30, 1999 compared to
December 31, 1998.
Management is aware of the risk associated with an
increase in average balances of loans but believes that
the current level in the allowance for loan losses is
adequate. At September 30, 1999 the allowance for loan
losses was equal to 1.40% of total loans outstanding
compared to 1.48% at December 31, 1998. The allocation
of the allowance for loan losses between portfolio
categories has not changed significantly since December
31, 1998.
Loans to general commercial businesses increased by
$34.1 million through the third quarter of 1999.
Management continues to focus on loan growth through an
increase in the commercial lending area. A significant
portion of the growth is due to the Bank's continued
ability to penetrate growth markets such as Marquette
and Sault Ste. Marie.
The other loan categories have remained fairly
consistent at September 30, 1999 when compared to
December 31, 1998.
(In thousands of dollars)
September 30, % of December 31, % of
1999 Total 1998 Total
Loans:
Commercial real estate $78,396 17.6% $82,207 20.0%
Commercial, financial,
and agricultural 170,914 38.2 136,820 33.2
Leases:
Commercial 22,699 5.1 20,097 4.9
Governmental 43,703 9.8 40,098 9.7
1-4 family residential
real estate 102,338 22.9 97,415 23.7
Consumer 18,074 4.0 23,160 5.6
Construction 10,778 2.4 11,923 2.9
-------- ------ --------- ------
$446,902 100.0% $411,720 100.0%
Credit Quality: Management analyzes the allowance for
loan losses in detail on a monthly basis to ensure that
the losses inherent in the portfolio are properly
reserved for in the allowance for loan losses. The
Registrant's success in maintaining excellent credit
quality is demonstrated in its historical charge-off
percentage. Net charge-offs to gross loans outstanding
was .11% for September 30, 1999 and 1998. Charge-offs
for the period ended September 30, 1999 increased only
$40,000 from the same period in 1998 despite strong
growth in the loan portfolio. This is mainly the
result of management's continued efforts to improve
credit quality in such portfolios. Accordingly, the
provision for loan losses was decreased from $1,125,000
in the nine-month period ended September 30, 1998 to
$639,000 for the same period in 1999.
The table presented below shows the balance of non-
performing loans, which include nonaccrual loans, loans
90 or more days past due and still accruing, and
renegotiated loans as of September 30, 1999 and
December 31, 1998.
(In thousands of dollars)
September 30, December 31,
1999 1998
Nonaccrual loans $ 498 $ 2,174
Loans 90 days or more past due and still accruing 1,467 1,238
While loans 90 days or more past due have increased by
$229,000 or 18.5% since December 31, 1998, nonaccrual
loans have decreased by $1,676,000 or 77.1%.
Management is actively managing the current loan
delinquencies and has taken various actions to reduce
the level of non-performing loans. Non-performing
loans to total gross loans were .44% and .83% at
September 30, 1999 and December 31, 1998, respectively.
Deposits: Total deposits through the third quarter
have increased $48.5 million. Interest bearing deposit
balances increased through September 30, 1999,
continuing a trend from 1998. The increase in total
deposits of $17.5 million was the result of the branch
acquisitions during the second quarter of 1999, as more
fully disclosed in the Notes to the Condensed
Consolidated Financial Statements, contained herein.
The remaining growth has come from the branch network,
as management has continued to offer attractive deposit
products to its customers, generally through premium-
based certificate of deposit programs and higher
yielding savings accounts.
Borrowings: The Registrants branching network is a
relatively high cost network in comparison to peers.
Accordingly, the Registrant uses alternative funding
sources to provide funds for lending activities. Other
borrowings increased by $13.9 million through the third
quarter of 1999 (refer to the table presented in Note 6
of the Notes to Condensed Consolidated Financial
Statements contained herein) as a result of asset and
liability strategies utilized to grow the Bank's
investment security portfolio as described above. At
September 30, 1999, $35.3 million of the total
borrowings were from the Federal Home Loan Bank of
Indianapolis. Alternative sources of funding can be
obtained at interest rates which are competitive with,
or lower than, retail deposit rates and with minimal
administrative costs.
Guaranteed Preferred Beneficial Interests in the
Corporation's Subordinated Debentures: Consistent with
the Registrant's strategic plan, the Registrant
completed a private offering in May 1999 of Capital, or
Trust Preferred, securities in the amount of
$12,450,000. Such amounts will be used to support the
Registrant's current capital position allowing for
future growth and increased common shareholder value.
Under regulatory guidelines, such securities are
eligible as regulatory capital, as defined, subject to
certain limitations.
Shareholder's Equity: Total shareholder's equity
increased approximately $.7 million from December 31,
1998 to September 30, 1999. The increase primarily
resulted from net income of $4.6 million offset by the
repurchase of common stock of $3.1 million and cash
dividends paid of $1.0 million. The Registrant will
continue to selectively repurchase common stock as
opportunities arise.
Results of Operations:
Net Interest Income: Net interest income for the
quarter ended September 30, 1999 increased by 7.6%
compared to the same period one year ago. The increase
in net interest income was largely the result of an
increase in the average volume of the loan portfolio
for the third quarter of 1999 compared to the third
quarter of 1998. The increase related to volume was
partially offset by a decrease in the net interest
margin. The net interest margin, on a fully taxable
equivalent basis for the quarter ended
September 30, 1999 was 4.72%, compared to 5.04% for the
same period of 1998. The decrease in the net interest
margin has been impacted by the low interest rate
environment and the competitive nature of the
Registrant's market. Interest income from loans
represented 94.5% of total interest income for the
third quarter of 1999 compared to 96.9% for the same
period of 1998. In all cases, the total amount of
interest income and the yield on total earning assets
is strongly influenced by lending activities.
Net interest income for the nine months ended September
30, 1999 increased by 2.8% compared to the same period
in 1998. The net interest margin, on a fully taxable
equivalent basis for the nine months ended September
30, 1999 decreased from 5.15% for the same period in
1998 to 4.74% for the same reasons mentioned in the
preceding paragraph. Interest income from loans
represented 96.2% of total interest income through the
third quarter of 1999 compared to 96.7 % for the same
period of 1998.
Provision for Loan Losses: The Registrant maintains
the allowance for loan losses at a level adequate to
cover losses inherent in the portfolio. The Registrant
records a provision for loan losses necessary to
maintain the allowance at that level after considering
factors such as loan charge-offs and recoveries,
changes in the mix of loans in the portfolio, loan
growth, and other economic factors. The provision for
loan losses decreased by $237,000 for the three months
ended September 30, 1999 and $486,000 for the nine
months ended September 30, 1999 compared to the same
periods in 1998 primarily as a result of the
Registrant's favorable net charge-off and non-
performing loan trends as previously discussed.
Management continues to fund the allowance at a rate
consistent with its analysis of problem credits, also
considering changes in the size and mix of its loan
portfolio. The allowance for loan losses to gross
loans was 1.40% and 1.48% at September 30, 1999 and
December 31, 1998, respectively.
Noninterest Income: Noninterest income increased by
$561,000 for the three months ended September 30, 1999
compared to the same period in 1998. The increase was
primarily due to an increase in other noninterest
income of $390,000, largely the result of the net gain
on the sale of the Rudyard and Cedarville branches as
discussed in Note 7, and an increase in service charges
on deposit accounts of $196,000.
Noninterest income increased by $567,000 for the nine
months ended September 30, 1999 compared to the same
period one year ago. The increase was the result of an
increase in service charges on deposits of $378,000 and
an increase in other noninterest income of $253,000.
As discussed above, the increase in other noninterest
income was mainly due to the net gain on the sale of
the Rudyard and Cedarville branches.
Noninterest Expenses: Noninterest expense increased
$560,000 for the three months ended September 30, 1999
compared to the same period of 1998. A primary
objective of management is to hold the rate of increase
in this category below future asset growth. Assets
increased 20% from September 30, 1998 to September 30,
1999. Salary expense increased by $171,000 during the
third quarter of 1999 compared to the second quarter of
1998. Occupancy expense increased by $10,000 for the
third quarter of 1999 compared to the same period in
1998. Other noninterest expense increased by $379,000
for the third quarter of 1999 compared to the same
period in 1998. This increase is mainly due to an
increase in professional fees related to data
processing.
Noninterest expense increased $509,000 or 4.5% for the
nine months ended September 30, 1999 compared to the
same period of 1998. Management believes this low
level of growth is attributable to significant
efficiencies obtained in operational areas of the Bank
based on a heightened level of management emphasis in
this area. The increase in noninterest expense was
primarily due to an increase in other noninterest
expense of $448,000 for reasons noted in the preceding
paragraph. Occupancy expense increased $96,000 and
salary expense decreased $35,000 for the nine months
ended September 30, 1999 compared to same period of
1998.
Federal Income Tax: The provision for income taxes was
22.5% of income before income tax for the quarter ended
September 30, 1999 compared to 28.3% for the quarter
ended September 30, 1998. For the nine months ended
September 30, 1999, the provision for income taxes was
21.7% of income compared to 25.6% for the same period
in 1998. The difference between the effective tax rate
and the federal corporate income tax rate of 34% is
primarily due to tax-exempt interest earned on loans,
leases, and investments. The effective tax rate has
decreased as tax-exempt income has become a larger
percentage of total interest income.
Interest Rate Risk:
Management actively manages the Registrant's interest
rate risk. In relatively low interest rate
environments which have been in place the last few
years, borrowers have generally tried to extend the
maturities and repricing periods on their loans and
place deposits in demand or very short term accounts.
Management has taken various actions to offset the
imbalance which those tendencies would otherwise
create. Commercial and real estate loans are written
at variable rates or, if necessary, fixed rates for
relatively short terms. Products have also been
offered to give customers an incentive to accept longer
term deposits. Management can also manage interest
rate risk with the maturity periods of securities
purchased, selling securities available for sale, and
borrowing funds with targeted maturity periods.
As of September 30, 1999, the Registrant had a
cumulative liability gap position of approximately $205
million within the one-year timeframe. This position
suggests that if the market interest rates decline in
the next 12 months, the Registrant has the potential to
earn more net interest income. Conversely, if market
interest rates increase in the next 12 months, the
Registrant has the potential to earn less net interest
income. Management believes that it is properly
positioned against significant changes in rates without
severely altering operating results.
Liquidity:
The Registrant's sources of liquidity include principal
payments on loans and investments, sales of securities
available for sale, deposits from customers, borrowings
from the Federal Home Loan Bank, other bank borrowings,
and the issuance of common stock. The Registrant has
ready access to significant sources of liquidity on an
almost immediate basis. Management anticipates no
difficulty in maintaining liquidity at the levels
necessary to conduct the Registrant's day-to-day
business activities.
Capital Resources:
It is the policy of the Registrant to maintain capital
at a level consistent with both safe and sound
operations and proper leverage to generate an
appropriate return on shareholders' equity. The
capital ratios of the Registrant exceed the regulatory
minimum guidelines. The table below shows a summary of
the Registrant's capital position in comparison to
regulatory requirements.
Tier 1 Total
Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
Regulatory minimum 4.0% 4.0% 8.0%
The Registrant
September 30, 1999 8.6 12.0 13.2
December 31, 1998 7.2 9.4 10.7
The capital levels as of September 30, 1999 include
adjustment for the Capital, or Trust Preferred,
Securities issued in May 1999, subject to certain
limitations. Federal Reserve guidelines limit the
amount of cumulative preferred securities which can be
included in Tier 1 capital to 25% of total Tier 1
capital. As of September 30, 1999, all of the
$12,450,000 of Capital Securities were available as
Tier 1 capital of the Registrant. As previously noted,
the Capital Securities will be used to support the
Registrant's current capital position allowing for
future growth.
Year 2000 Issue:
In January 1997, the Registrant and its subsidiary,
North Country Bank and Trust, began assessing the
impact of the century change associated with the
failure to renovate, validate, and implement mission
critical systems to ensure they were Year 2000 (Y2K)
ready. A Y2K Committee made up of a team of
professionals, representing all disciplines within the
organization, was actively involved in the assessment,
renovation, validation, and implementation of Y2K
issues.
All internal testing has been completed in accordance
with the regulatory requirements, and will continue to
be periodically validated and tested throughout the
fourth quarter of 1999. A Business Resumption
Contingency Plan was developed which involved
mitigating operational risks should core business
processes fail, regardless if mission-critical systems
were remediated for Y2K. All expenses made to date and
expected through the Y2K date change regarding
preparations necessary for Y2K are consistent with
amounts disclosed in prior Registrant filings.
In March 1999, the Registrant engaged Wipfli, Ulrich,
Bertelson to perform an independent third party review
of the Registrant's Y2K status. The objective of the
third party review is to provide management with an
independent review of the status and satisfaction of
regulatory requirements of Y2K, with completion
scheduled for the fourth quarter of 1999.
The regulators continue to monitor closely the Y2K
efforts of Financial Institutions. Regulators have
conducted their quarterly reviews, which look at the
overall progress that is made in the Registrant's Y2K
efforts, as well as its compliance with federally
mandated requirements. Examiners check to see that
financial institutions are performing any ongoing
system renovation and testing that may be needed,
establishing comprehensive contingency plans,
mitigating any identified Y2K related business risk,
and effectively informing their customers of their Y2K
preparedness. In August 1999, The Federal Financial
Institutions Examination Council issued a statement
that 99% of Insured Financial Institutions are prepared
for Y2K. In October 1999, the Registrant received its
latest regulatory rating from the Regulators, a
positive rating concluding "everything is in order."
Regulators will perform follow-up phone interviews
during the weekend of the Y2K change date to ensure
ending results are favorable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part ofthis report
Number Exhibit
3.1 Articles of Incorporation, as amended.
3.2 Bylaws, as amended.
10.1 Consulting Agreement dated September 15,
1999 between the Company and Ronald G. Ford.
10.2 Second Amendment to Employment Agreement dated
August 18, 1999, between the Company and Ronald G. Ford.
10.3 Management Continuity Agreement dated May 22, 1996
between the Company and Sherry Littlejohn.
10.4 First Amendment to Employment Contract dated
August 18, 1999 between the Company and Sherry Littlejohn.
10.5 Employment Agreement dated September 1, 1997
between the Company and Anthony Palumbo.
10.6 North Country Financial Corporation Supplemental
Executive Retirement Plan.
27 Financial Data Schedule.
(b) There were no reports filed on Form 8-K during the
quarter ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned,
thereunto duly authorized.
NORTH COUNTRY FINANCIAL CORPORATION
-----------------------------------
(Registrant)
11/5/99 /s/ Ronald G. Ford
- --------------- ---------------------------------
Date RONALD G. FORD, CEO
11/5/99 /s/ Sherry Littlejohn
- --------------- ---------------------------------
Date SHERRY LITTLEJOHN
CHIEF ACCOUNTING OFFICER,
PRESIDENT AND COO