UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission file number:
March 31, 1999 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 April 30, 1999, there were outstanding 7,035,455 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 -
March 31, 1999 (Unaudited) and December 31, 1998............ 1
Condensed Consolidated Statements of Income - Three
Months Ended March 31, 1999 (Unaudited) and
March 31, 1998 (Unaudited).................................. 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three Months Ended March 31, 1999 (Unaudited)
and March 31, 1998 (Unaudited).............................. 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 (Unaudited) and
March 31, 1998 (Unaudited).................................. 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)...................................... 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 2. Changes in Securities and Use of Proceeds..................... 14
Item 3. Defaults upon Senior Securities............................... 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 5. Other Information............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
SIGNATURES ............................................................ 15
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 22,115 $ 16,593
Federal funds sold 3,543 6,048
--------- ---------
Total cash and cash equivalents 25,658 22,641
Securities available for sale 8,303 8,565
Federal Home Loan Bank stock 3,034 3,034
Total loans 422,597 411,720
Allowance for loan losses (6,211) (6,112)
--------- ---------
416,386 405,608
Premises and equipment 18,160 17,938
Other assets 13,869 13,595
--------- ---------
Total assets $ 485,410 $ 471,381
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 35,624 $ 42,077
Interest-bearing 382,233 362,885
--------- ---------
Total deposits 417,857 404,962
Other borrowings 25,482 23,270
Accrued expenses and other liabilities 3,857 3,680
--------- ---------
Total liabilities 447,196 431,912
Shareholders' equity
Preferred stock, no par value, 500,000
shares authorized, no shares outstanding
Common stock, no par value, 18,000,000
shares authorized, 7,027,510 and 7,130,760
issued and outstanding at March 31, 1999
and December 31, 1998 17,002 19,436
Retained earnings 21,209 19,989
Accumulated other comprehensive income, net 3 44
--------- ---------
Total shareholders' equity 38,214 39,469
--------- ---------
Total liabilities and shareholders'
equity $ 485,410 $ 471,381
========= =========
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
1.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
--------March 31,-------
1999 1998
---- ----
Interest income
Loans, including fees $9,449 $8,861
Securities
Taxable 186 219
Exempt from federal taxation 19 1
Other 78 102
------- -------
9,732 9,183
Interest expense
Deposits 4,230 3,977
Other borrowings 392 276
------- -------
4,622 4,253
------- -------
Net interest income 5,110 4,930
Provision for loan losses 213 250
------- -------
Net interest income after provision for loan losses 4,897 4,680
Noninterest income
Service charges on deposit accounts 423 309
Gain on sales of loans 70 23
Gain on sales of securities 44
Other 122 166
------ -------
615 542
Noninterest expense
Salaries and employee benefits 1,472 1,640
Occupancy and equipment 630 568
Other 1,334 1,450
------- -------
3,436 3,658
------- -------
Income before income tax expense 2,076 1,564
Income tax expense 535 414
------- -------
Net income $ 1,541 $ 1,150
======= =======
Basic earnings per common share $ .22 $ .16
======= =======
Diluted earnings per common share $ .21 $ .16
======= =======
Dividends paid per common share $ .05 $ .04
======= =======
See accompanying notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
2.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
-------March 31,-------
1999 1998
---- ----
Balance - beginning of period $ 39,469 $ 36,592
Net income for period 1,541 1,150
Net change in net unrealized gain on
securities available for sale (41) (3)
-------- --------
Total comprehensive income 1,500 1,147
Cash dividends (321) (310)
Issuance of common stock 93 152
Common stock retired (2,527) (110)
-------- --------
Balance - end of period $ 38,214 $ 37,471
======== ========
See accompanying notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
3.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
-------March 31,------
1999 1998
---- ----
Cash flows from operating activities
Net income $ 1,541 $ 1,150
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 522 557
Provision for loan losses 213 250
Gain on sales of securities (44)
Change in other assets (430) 3,377
Change in other liabilities 198 (449)
------- -------
Net cash from operating activities 2,044 4,841
Cash flows from investing activities
Purchase of securities available for sale (495)
Proceeds from sales of securities available for sale 752
Proceeds from maturities, calls or paydowns of securities
available for sale 683
Net increase in loans (10,991) (10,685)
Purchase of premises and equipment (576) (914)
------- -------
Net cash from investing activities (11,379) (10,847)
Cash flows from financial activities
Net increase in deposits 12,895 12,968
Proceeds from other borrowings 8,000
Payment on other borrowings (5,788) (787)
Proceeds from issuance of common stock 93 152
Retirement of common stock (2,527) (110)
Payment of cash dividends (321) (310)
------- -------
Net cash from financing activities 12,352 11,913
------- -------
Net change in cash and cash equivalents 3,017 5,907
Cash and cash equivalents at beginning of period 22,641 11,143
------- -------
Cash and cash equivalents at end of period $25,658 $17,050
======= =======
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4.
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 three-month period ending
March 31, 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.
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 statement of financial position. 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, 1999. Management, at
this time, cannot determine the effect of adoption 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 of dollars, except per share data)
Three months
ended March 31,
1999
----
Basic earnings per common share:
Net income $ 1,541
Weighted average common shares outstanding 7,073
--------
Basic earnings per common share $ .22
========
Diluted earnings per common share:
Net income $ 1,541
Weighted average common shares outstanding
for basic earnings per common share 7,073
Add: Dilutive effect of assumed exercises
of stock options 110
Add: Dilutive effect of directors' deferred stock
compensation 8
--------
Average shares and dilutive potential common shares 7,191
--------
Diluted earnings per common share $ .21
========
For the quarter ended March 31, 1998, the weighted average common shares
outstanding used in the computation of basic and diluted earnings per share
was approximately 7,139,000. The assumed exercise of stock options and
deferred stock compensation for the quarter ended March 31, 1998 did not
have a dilutive effect on this calculation.
All share and per share amounts in this filing have been retroactively
adjusted to reflect the August of 1998 3-for-1 split.
- --------------------------------------------------------------------------------
(Continued)
5.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the three months ended March
31, 1999 and 1998, are summarized as follows:
(In thousands of dollars)
March 31, March 31,
1999 1998
---- ----
Balance at beginning of period $ 6,112 $ 5,600
Charge-offs (147) (284)
Recoveries 33 6
Provision for loan loss 213 250
------- -------
$ 6,211 $ 5,572
======= =======
Information regarding impaired loans follows:
(In thousands of dollars)
As of and As of and
for the three for the year
months ended ended
March 31, December 31,
1999 1998
---- ----
Average investment in impaired loans $ 4,923 $ 6,155
Balance of impaired loans 4,696 6,073
5. OTHER BORROWINGS
Other borrowings consist of the following at March 31, 1999 and December
31, 1998:
March 31, 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) $ 20,607 $ 20,607
Farmers Home Administration, $2,000,000 fixed rate line
agreement maturing August 24, 2024, interest payable at 1% 1,875 1,875
Revolving line of credit to NBD Bank, maturing on May 20, 1999,
interest payable at an adjustable rate, 6.23% at April 26, 1999 3,000
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
--------- --------
$ 25,482 $ 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 March 31, 1999. Borrowings other than Federal Home Loan Bank advances
are not subject to prepayment penalties.
- --------------------------------------------------------------------------------
6.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 quarter ending March 31, 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 $1,541,000 through March 31, 1999
compared to $1,150,000 for the same period in 1998. Diluted earnings per share
increased from $.16 through March 31, 1998, to $.21 for the same period in 1999.
The loan portfolio continues a significant growth trend with gross loans
increasing $10,877,000 or 2.6% 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 $12,895,000 or 3.2% since December 31, 1998. The primary area of
deposit growth for the Registrant has been in interest-bearing demand accounts.
Financial Condition:
Loans: Through the first quarter of 1999, loan balances increased by $10.9
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 the highest level while maintaining
adequate liquidity. As shown in the table below, the loan mix remains relatively
constant with a slight increase in commercial loans and commercial leases as a
percent of total loans for the quarter ended March 31, 1999 compared to December
31, 1998.
7.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management is aware of the risk associated with an increase in average balances
of loans but feels that the current level in the allowance for loan losses is
adequate. At March 31, 1999 the allowance for loan losses was equal to 1.47% 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 $7.3 million through the
first quarter of 1999. Commercial leases increased $5.3 million at March 31,
1999 and governmental leases increased $1.9 million. Management continues to
focus on loan growth through an increase in the commercial lending and leasing
areas. 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 March 31, 1999 when
compared to December 31, 1998.
March 31, % of December 31, % of
1999 Total 1998 Total
---- ----- ---- -----
Loans
Commercial real estate $ 82,589 19.6% $ 82,207 20.0%
Commercial, financial, and agricultural 144,107 34.1 136,820 33.2
Leases:
Commercial 25,373 6.0 20,097 4.9
Governmental 42,040 9.9 40,098 9.7
1-4 family residential real estate 97,691 23.1 97,415 23.7
Consumer 21,124 5.0 23,160 5.6
Construction 9,673 2.3 11,923 2.9
---------- ------ ---------- ------
$ 422,597 100.0% $ 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 .03% and
.07% for March 31, 1999 and 1998, respectively. Charge-offs for the period ended
March 31, 1999 decreased $137,000 from the same period in 1998. This is mainly
the result of a decrease in commercial and installment loan charge-offs for the
period based on management's continued efforts to improve credit quality in such
portfolios. Accordingly, the provision for loan losses was decreased from
$250,000 in the three month period ended March 31, 1998 to $213,000 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 March 31, 1999 and December 31, 1998.
(In thousands of dollars)
March 31, December 31,
1999 1998
---- ----
Nonaccrual loans $ 2,174 $ 2,174
Loans 90 days or more past due and still accruing 1,045 1,238
Renegotiated loans 0 0
While nonaccrual loans have remained unchanged since December 31, 1998, loans 90
days or more past due have decreased $193,000 or 15.6%. 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 .76% and .83% at March 31, 1999 and December 31, 1998, respectively.
8.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investments: Available for sale securities decreased approximately $300,000
through the first quarter of 1999 mainly due to principal paydowns on
mortgage-backed securities. The mix of the portfolio remained relatively
unchanged from December 31, 1998. The primary use of the portfolio is to provide
a source of liquidity and pledging for certain repurchase agreements and
regulatory requirements. Most of the portfolio is invested in U.S. Treasury and
agency securities which have little credit risk and are highly liquid. There are
no securities classified as held to maturity.
Deposits: Total deposits through the first quarter have increased $12.9 million.
Interest bearing deposit balances increased through March 31, 1999, continuing a
trend from 1998. 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
$2.2 million through the first quarter of 1999 (refer to the table presented in
Note 5 to the first quarter financial statements above for the composition of
the increase). At March 31, 1999, $20.6 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.
Shareholder's Equity: Total shareholder's equity decreased approximately $1.3
million from December 31, 1998 to March 31, 1999. The decrease primarily
resulted from the repurchase of common stock of $2.5 million and cash dividends
paid of $321,000, offset by net income of $1.5 million. The Registrant will
continue to selectively repurchase common stock as opportunities arise, to
maximize return to its common shareholders.
Results of Operations:
Net Interest Income: Net interest income through March 31, 1999 increased by
3.65%, compared to the same period one year ago. The net interest margin, on a
fully taxable equivalent basis at March 31, 1999 was 5.14%, compared to 5.46%
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 97.1% of total
interest income through the first quarter of 1999 compared to 96.5% 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.
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 has decreased $37,000 through
March 31, 1999 compared to the same period in 1998 as a result of the
Registrant's favorable net charge-off and non-performing loan trends. Management
continues to fund the allowance at a rate consistent with loan growth. The
allowance for loan losses to gross loans was 1.47% and 1.48% at March 31, 1999
and December 31, 1998, respectively.
Noninterest Income: Service charges on deposit accounts increased $114,000
through the first quarter of 1999 compared to the first quarter of 1998 due
mainly to an increased focus on non-interest sources of income. Gains on sales
of loans has increased to $70,000 through the first quarter of 1999 compared to
$23,000 through the first quarter of 1998 due to an increase in loan sale
activity as a result of an increase in refinancing activity. There were no
securities gains or losses through the first quarter of 1999. Security gains of
$44,000 were reported for the same period in 1998. Other noninterest income
decreased $44,000 through the first quarter of 1999 compared to the first
quarter of 1998 due mainly to a decrease in insurance commissions.
9.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest Expenses: Noninterest expense decreased 6.1% through March 31, 1999
compared to the same period of 1998. Management believes this decrease is
attributable to significant efficiencies obtained in operational areas of the
Bank based on a heightened level of management emphasis in this area. A primary
objective of management is to hold the rate of increase in this category below
future asset growth. Salary expense decreased by $168,000 during the first
quarter of 1999 compared to the first quarter of 1998 largely due to a reduction
in staffing. Other noninterest expense decreased by $116,000 for the first
quarter of 1999 compared to the same period in 1998. Much of these decreases are
a direct result of management's emphasis on efficient operations. Occupancy
expense increased by $62,000 for the first quarter of 1999 compared to the same
period in 1998.
Federal Income Tax: The provision for income taxes was 25.8% of income before
income tax through March 31, 1999 compared to 26.5% through March 31, 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 March 31, 1999, the Registrant had a
cumulative liability gap position of $72,032,000 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 Registrants 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 Registrants
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
March 31, 1999 7.0 9.2 10.5
December 31, 1998 7.2 9.4 10.7
10.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Recent and Future Developments:
On May 14, 1999, the Registrant completed a private offering 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.
The Registrant has signed an agreement with The Huntington National Bank to
purchase certain assets of and assume certain deposit liabilities related to the
Huntington branch offices of Kaleva and Mancelona in the northern portion of
Michigan's Lower Peninsula. The Registrant expects to acquire approximately $20
million of deposits and approximately $238,000 of net fixed assets. Consummation
of this transaction is subject to approval by the FDIC and the Michigan
Financial Institutions Bureau. If such approvals are received, it is expected
that the transaction will close during the third quarter of 1999.
The Registrant has entered into definitive agreements, subject to regulatory
approvals and customary closing conditions, to sell three branches located in
three small communities in Michigan's Upper Peninsula with total deposits of
approximately $20 million. These branch dispositions, which are expected to
close by June 30, 1999, 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.
The Registrant also recently formed North Country Financial Group, Inc., which
is opening an office in Denver, Colorado, to further enhance its ability to
attract lease assets. This new corporation will be initially engaged in the
business of public finance, and intends to focus primarily on providing
tax-exempt lease/purchase financing to municipalities located throughout the
United States. Subject to its receipt of appropriate licensing, North Country
Financial Group intends to engage in publicly offered certificates of
participation, energy management transactions and municipal infrastructure
financing (such as 911 emergency systems, water, sewer and solid waste
projects).
The Registrant continually evaluates and considers new opportunities for growth.
The Registrant recently determined not to pursue two previously disclosed
potential opportunities to attract additional deposits and assets. The
Registrant terminated its plans to establish a bank subsidiary in Arizona due
principally to the lack of a suitable Bank executive to manage the proposed
operation after one of the Bank's long-term senior officers who had agreed to
manage the Arizona operations decided to pursue other opportunities. The
Registrant has also terminated its plans to invest in a de novo bank being
organized in Grand Rapids, Michigan after concluding that the investment would
not be its most effective use of capital.
Year 2000 Issue:
At the end of the current year, many companies, including financial institutions
such as the Registrant, will face potentially serious issues associated with the
inability of certain existing data processing hardware and software to
appropriately recognize calendar dates beginning in the year 2000. Many computer
programs that can only distinguish the final two digits of the year entered may
read entries for the year 2000 as the year 1900 and compute payment, interest or
delinquency based on the wrong date or are expected to be unable to compute
payment, interest or delinquency. Additionally, the failure of a bank customer
to prepare for year 2000 compatibility could have a significant adverse effect
on such customer's operations and profitability, in turn inhibiting its ability
to repay loans in accordance with their terms. Until sufficient information is
accumulated from customers to enable the Registrant to assess the degree to
which customers' operations are susceptible to potential problems relating to
the year 2000 issue, the Registrant will be unable to fully quantify the
potential for losses from loans to its commercial customers.
11.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Registrant, as a part of its Year 2000 compliance program, has expended
approximately $500,000 through March 31, 1999, to upgrade certain of its
equipment and software and may incur up to an additional $500,000 in 1999 for
these purposes. In addition, the Registrant has surveyed all of its commercial
and municipal customers and all of its third party vendors with respect to their
Year 2000 compliance. In connection with that review, the Registrant believes
that a relatively small percentage of its total loans outstanding may be at risk
because of the status of the customer's Year 2000 compliance. The Registrant
established a watch list with respect to approximately 20 of its customers and
added $120,000 to its loan and lease loss reserve as of March 31, 1999. The
Registrant is continuing to survey customers on the watch list. In addition,
every new loan made by the Registrant is made only after completion of a Year
2000 compliance checklist. The Registrant has also established a customer
awareness program to update customers on the Registrant's Year 2000
preparedness, as well as to provide information with respect to its expectations
as to customers' Year 2000 compliance and preparedness. Year 2000 updates are
also provided on the Registrant's web page.
The Registrant is ahead of all milestones which it established for itself with
respect to evaluating and remedying its Year 2000 compliance. The Registrant's
principal third party software service provider recently satisfactorily
completed all testing with respect to its Year 2000 compliance. The Registrant
recently satisfactorily completed its internal testing with respect to Year 2000
compliance which had been scheduled for completion in June of this year. The
next milestone in the Registrant's Year 2000 compliance program is for
completion of all third party vendor testing by the end of September of 1999,
when the Registrant presently anticipates that it will complete all of its Year
2000 assessment and remediation. However, there can be no assurance that the
Registrant will be successful in implementing its Year 2000 remediation plans
according to the anticipated schedule. In addition, the Registrant may be
adversely affected by the inability of other companies whose systems interact
with the Registrant to become Year 2000 compliant.
Although the Registrant expects its internal systems to be Year 2000 compliant
as described above, the Registrant has prepared a contingency plan that
specifies what it plans to do if important internal or external systems are not
Year 2000 compliant in a timely manner.
Management does not anticipate that the Registrant will incur material operating
expenses or be required to invest heavily in additional computer system
improvements to be Year 2000 compliant. Nevertheless, the inability of the
Registrant to successfully address Year 2000 issues could result in
interruptions in the Registrants' business and have a material adverse effect on
the Registrant's results of operations.
12.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant has not experienced any material changes to its market risk
position from that disclosed in the Registrant's 1998 Form 10-K Annual Report.
13.
NORTH COUNTRY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
At the date hereof, there were no material pending legal proceedings, other than
routine litigation incidental to the business of banking, to which the
Registrant or any of its subsidiaries is a party of or which any of its
properties is the subject.
Item 2. Changes in Securities and Use of Proceeds
There are no matters required to be reported under this item.
Item 3. Defaults Upon Senior Securities.
There have been no defaults upon senior securities relevant to the requirements
of this section.
Item 4. Submission of Matters to a Vote of Security Holders.
There are no matters required to be reported under this item.
Item 5. Other Information.
There are no matters required to be reported under this item.
Item 6. Exhibits and Reports on Form 8-K.
Number Exhibit
27 Financial Data Schedule. Filed herewith.
The following documents are filed as part of Part I, Item 1 of this report:
Condensed Consolidated Balance Sheets - March 31, 1999 (Unaudited) and
December 31, 1998
Condensed Consolidated Statements of Income - Three months ended March 31,
1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Changes in Shareholders' Equity -
Three months ended March 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows - Three months ended March
31, 1999 and 1998 (Unaudited)
Notes to Unaudited Consolidated Financial statements - March 31, 1999
14.
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)
/s/ Ronald G. Ford
Date May 14, 1999 RONALD G. FORD, CEO
/s/ Sherry Littlejohn
Date May 14, 1999 SHERRY LITTLEJOHN
PRESIDENT AND COO
15.