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, 2002
------------------
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)
1011 NOTEWARE DRIVE, TRAVERSE CITY, MI 49686
(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
--------- ---------
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------- ---------
As of October 31, 2002, there were outstanding 7,019,152 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, 2002 (Unaudited) and December 31, 2001............................... 1
Condensed Consolidated Statements of Income (Loss) - Three
and Nine Months Ended September 30, 2002 (Unaudited) and
September 30, 2001 (Unaudited)................................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three and Nine Months Ended September 30, 2002
(Unaudited) and September 30, 2001 (Unaudited)................................... 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 (Unaudited) and
September 30, 2001 (Unaudited)................................................... 4-5
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................................................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 15
Item 4. Controls and Procedures............................................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................... 17
SIGNATURE ................................................................................... 18
CERTIFICATION .................................................................................. 19
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 22,352 $ 25,163
Federal funds sold 3,509 11,584
----------- -----------
Cash and cash equivalents 25,861 36,747
Interest-bearing deposits in other financial institutions 0 634
Securities available for sale 85,331 61,885
Federal Home Loan Bank stock 4,375 4,375
Total loans 463,899 504,412
Allowance for loan losses (15,672) (10,444)
----------- -----------
Net loans 448,227 493,968
Premises and equipment 17,755 18,637
Other assets 27,279 20,383
----------- -----------
Total assets $ 608,828 $ 636,629
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 47,631 $ 46,342
Interest-bearing 415,686 436,182
----------- -----------
Total deposits 463,317 482,524
Borrowings 88,236 88,549
Other liabilities 4,942 5,217
----------- -----------
Total liabilities 556,495 576,290
----------- -----------
Guaranteed preferred beneficial interests in the Corporation's
subordinated debentures 12,450 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,
7,019,152 shares issued and outstanding 16,175 16,175
Retained earnings 22,738 31,554
Accumulated other comprehensive income 970 160
----------- -----------
Total shareholders' equity 39,883 47,889
----------- -----------
Total liabilities and shareholders' equity $ 608,828 $ 636,629
=========== ===========
See accompanying notes to condensed consolidated financial statements.
1.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans:
Taxable $ 7,130 $10,402 $ 23,199 $32,556
Tax-exempt 561 862 1,735 2,759
Interest on securities:
Taxable 852 1,310 2,781 3,814
Tax-exempt 68 60 200 248
Other interest income 66 163 144 460
-------- ------- -------- -------
Total interest income 8,677 12,797 28,059 39,837
-------- ------- -------- -------
Interest expense:
Deposits 3,105 5,132 9,526 17,293
Borrowings 1,283 1,235 3,831 3,580
Subordinated debentures 138 199 414 680
-------- ------- -------- -------
Total interest expense 4,526 6,566 13,771 21,553
-------- ------- -------- -------
Net interest income 4,151 6,231 14,288 18,284
Provision for loan losses 10,691 825 14,741 1,900
-------- ------- -------- -------
Net interest income (loss) after provision for loan losses (6,540) 5,406 (453) 16,384
-------- ------- -------- -------
Other income:
Service fees 526 456 1,395 1,389
Gain on sale of securities 247 0 669 513
Net gain on sale of branches 0 501 0 501
Other loan and lease income 238 1,283 878 5,313
Other 137 361 964 497
-------- ------- -------- -------
Total other income 1,148 2,601 3,906 8,213
-------- ------- -------- -------
Other expenses:
Salaries, commissions, and related benefits 1,796 2,588 5,678 9,616
Occupancy and equipment 770 804 2,311 2,501
Other 3,047 2,467 7,388 6,679
-------- ------- -------- -------
Total other expenses 5,613 5,859 15,377 18,796
-------- ------- -------- -------
Income (loss) before provision (credit) for
income taxes (11,005) 2,148 (11,924) 5,801
Provision (credit) for income taxes (4,048) 261 (4,863) 700
-------- ------- -------- -------
Net income (loss) $ (6,957) $ 1,887 $ (7,061) $ 5,101
======== ======= ======== =======
Earnings (loss) per common share:
Basic $ (0.99) $ 0.27 $ (1.01) $ 0.73
======== ======= ======== =======
Diluted $ (0.99) $ 0.27 $ (1.01) $ 0.73
======== ======= ======== =======
Dividends declared per common share $ 0.00 $ 0.10 $ 0.25 $ 0.30
======== ======= ======== =======
See accompanying notes to condensed consolidated financial statements.
2.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Balance, beginning of period $ 46,433 $ 45,912 $ 47,889 $ 44,617
Net income (loss) for period (6,957) 1,887 (7,061) 5,101
Net unrealized gain (loss) on securities
available for sale 407 699 810 (51)
-------- -------- -------- --------
Total comprehensive income (loss) (6,550) 2,586 (6,251) 5,050
Dividends declared 0 (702) (1,755) (2,107)
Issuance of common stock 0 0 0 239
Common stock retired 0 (90) 0 (93)
-------- -------- -------- --------
Balance, end of period $ 39,883 $ 47,706 $ 39,883 $ 47,706
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
--------- --------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss) $ (7,061) $ 5,101
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for loan losses 14,741 1,900
Depreciation and amortization 1,510 2,230
Gain on sales of securities (669) (513)
Loss on sale of premises, equipment, and other real estate 520 62
Net gain on sale of branches 0 (501)
Change in other assets (4,532) (1,544)
Change in other liabilities (275) (479)
--------- --------
Net cash provided by operating activities 4,234 6,256
--------- --------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in other financial institutions 634 (2,662)
Purchase of securities available for sale (110,582) (66,069)
Proceeds from sales of securities available for sale 81,280 37,651
Proceeds from maturities of securities available for sale 7,635 18,821
Net decrease in loans 25,818 21,527
Capital expenditures (933) (2,227)
Proceeds from sale of premises, equipment, and other real estate 2,303 177
Net cash paid for sale of branches 0 (10,728)
--------- --------
Net cash provided by (used in) investing activities 6,155 (3,510)
--------- --------
Cash flows from financing activities:
Net decrease in deposits (19,207) (11,726)
Net decrease in federal funds purchased 0 (1,800)
Proceeds from borrowings 0 20,000
Principal payments on borrowings (313) (362)
Proceeds from issuance of common stock 0 239
Retirement of common stock 0 (93)
Dividends paid (1,755) (2,107)
--------- --------
Net cash provided by (used in) financing activities (21,275) 4,151
--------- --------
Net increase (decrease) in cash and cash equivalents (10,886) 6,897
Cash and cash equivalents at beginning of period 36,747 20,829
--------- --------
Cash and cash equivalents at end of period $ 25,861 $ 27,726
========= ========
4.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
Supplemental cash flow information:
Cash paid for:
Interest $13,872 $19,819
Income taxes 550 1,195
Noncash investing and financing activities:
Transfers of foreclosures from loans to other real estate 5,181 1,899
Assets and liabilities divested in branch sales:
Loans 0 8
Premises and equipment, net 0 466
Deposits 0 11,683
Other liabilities 0 34
See accompanying notes to condensed consolidated financial statements.
5.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The financial statements in this Form 10-Q have not been reviewed by an
independent public accountant. The Corporation's independent public accountant
resigned on November 11, 2002. The Corporation's Audit Committee is in the
process of finding a new independent public accountant. Upon engagement of a new
independent public accountant, the financial statements in this Form 10-Q will
be reviewed and an amended Form 10-Q/A will be filed.
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of North Country
Financial Corporation (the "Corporation") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended
September 30, 2002, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002. The unaudited
consolidated financial statements and footnotes thereto should be read in
conjunction with the audited consolidated financial statements and
footnotes thereto included in the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2001.
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. CHANGE IN ACCOUNTING
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 141 requires the use of
the purchase method of accounting for business combinations initiated after
June 30, 2001. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 addresses how intangible assets acquired outside of a
business combination should be accounted for upon acquisition and how
goodwill and other intangible assets should be accounted for after they
have been initially recognized. SFAS No. 142 eliminates the amortization
for goodwill and other intangible assets with indefinite lives. Other
intangible assets with a finite life will be amortized over their useful
life. Goodwill and other intangible assets with indefinite useful lives
shall be tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset may be impaired. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. The
Corporation's adoption of SFAS No. 142 on January 1, 2002, did not have a
material impact on the consolidated financial statements as of the date of
adoption. The elimination of goodwill amortization will result in a
reduction of amortization expense of approximately $290,000 for the year
ended December 31, 2002, compared to 2001.
6.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. EARNINGS (LOSS) PER SHARE
The factors used in the earnings (loss) per common share computation
follow.
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data)
Basic earnings (loss) per common share:
Net income (loss) $ (6,957) $ 1,887 $ (7,061) $ 5,101
========= ======== ======== =========
Weighted average common shares outstanding 7,019 7,021 7,019 7,019
========= ======== ======== =========
Basic earnings (loss) per common share $ (0.99) $ 0.27 $ (1.01) $ 0.73
========= ======== ======== =========
Diluted earnings (loss) per common share:
Net income (loss) $ (6,957) $ 1,887 $ (7,061) $ 5,101
========= ======== ======== =========
Weighted average common shares outstanding
for basic earnings (loss) per common share 7,019 7,021 7,019 7,019
Add: Dilutive effect of assumed exercise
of stock options 2 3 3 3
Add: Dilutive effect of directors' deferred stock
compensation 0 1 0 1
--------- -------- -------- ---------
Average shares and dilutive potential common shares 7,021 7,025 7,022 7,023
========= ======== ======== =========
Diluted earnings (loss) per common share $ (0.99) $ 0.27 $ (1.01) $ 0.73
========= ======== ======== =========
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
available for sale as of September 30, 2002 and December 31, 2001, are as
follows (in thousands):
September 30, 2002 December 31, 2001
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 0 $ 0 $ 3,350 $ 3,128
Obligations of states and political
subdivisions 5,172 5,752 5,288 5,418
Corporate securities 10,591 11,225 8,063 8,571
Mortgage-related securities 68,096 68,354 44,941 44,768
--------- ---------- --------- -----------
Total investment securities
available for sale $ 83,859 $ 85,331 $ 61,642 $ 61,885
========= ========== ========= ===========
A significant portion of the investment securities are pledged to secure
borrowings from the Federal Home Loan Bank.
7.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the nine months ended
September 30, 2002 and 2001, is summarized as follows (in thousands):
September 30, September 30,
2002 2001
---- ----
Balance at beginning of period $ 10,444 $ 9,454
Charge-offs (9,746) (2,445)
Recoveries 233 739
Provision for loan losses 14,741 1,900
----------- -----------
Balance at end of period $ 15,672 $ 9,648
=========== ===========
Information regarding impaired loans follows (in thousands):
As of and As of and
for the Nine for the Year
Months Ended Ended
September 30, December 31,
2002 2001
---- ----
Average investment in impaired loans $ 28,132 $ 23,154
Balance of impaired loans 30,060 25,524
6. BORROWINGS
Borrowings consist of the following at September 30, 2002 and December 31,
2001 (in thousands):
September 30, December 31,
2002 2001
---- ----
Federal Home Loan Bank advances at rates
ranging from 4.35% to 7.59% with maturities
from less than one year to ten years $ 86,554 $ 86,867
Farmers Home Administration, fixed rate
note payable, maturing August 24, 2024,
interest payable at 1% 1,682 1,682
------------- -----------
$ 88,236 $ 88,549
============= ===========
The Federal Home Loan Bank borrowings are collateralized by a blanket
collateral agreement on the Corporation's residential mortgage loans, U.S.
government and agency securities, and Federal Home Loan Bank stock.
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, 2002. Borrowings other than Federal Home Loan Bank
advances are not subject to prepayment penalties.
8.
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 Corporation and its subsidiaries through the third
quarter of 2002. The discussion should be read in conjunction with those
statements and their accompanying notes.
The Corporation's subsidiary, North Country Bank & Trust ("Bank"), is currently
undergoing a regularly scheduled examination by its regulators. Following this
examination, it is anticipated that the Corporation will be subject to an
increased level of regulatory supervision and restrictions which could affect
the results of operations, liquidity, future growth, and capital resources.
Special attention should be paid to the discussion herein on credit quality,
liquidity, and regulatory matters.
The Corporation has determined that a possible affiliation with a larger banking
organization would benefit the long-term future of the Corporation. Management
is evaluating the options of such an affiliation; however, no affiliation
agreement presently exists with any specific organization.
FORWARD-LOOKING STATEMENTS:
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies or expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause actual results to differ from the
results in forward-looking statements include, but are not limited to:
- General economic conditions, either nationally or in the state in
which the Corporation does business;
- Legislation or regulatory changes which affect the business in which
the Corporation is engaged;
- Changes in the interest rate environment which increase or decrease
interest rate margins;
- Changes in securities markets with respect to the market value of
financial assets and the level of volatility in certain markets such
as foreign exchange;
- Significant increases in competition in the banking and financial
services industry resulting from industry consolidation, regulatory
changes and other factors, as well as action taken by particular
competitors;
- The ability of borrowers to repay loans;
- The effects on liquidity of unusual decreases in deposits;
- Changes in consumer spending, borrowing, and saving habits;
- Technological changes;
- Acquisitions and unanticipated occurrences which delay or reduce the
expected benefits of acquisitions;
- Hiring and retaining qualified management personnel;
- The Corporation's ability to increase market share and control
expenses;
- The effect of compliance with legislation or regulatory changes;
- The effect of changes in accounting policies and practices;
- The costs and effects of unanticipated litigation and of unexpected
or adverse outcomes in such litigation; and
- The factors discussed in Item 1 in this Report and in the
Management's Discussion and Analysis in Item 2, as well as those
discussed elsewhere in this Report.
These risks and uncertainties should be considered in evaluating forward-looking
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
FINANCIAL HIGHLIGHTS:
Year-to-date consolidated net loss was $7.1 million through September 30, 2002,
compared to net income of $5.1 million for the same period in 2001. Diluted loss
per share was $1.01 for the nine months ended September 30, 2002, compared to
earnings of $0.73 for the same period in 2001. The provision for loan losses
increased on a year-to-date basis from $1.9 million for the nine months ended
September 30, 2001 to $14.7 million for the nine months ended September 30,
2002. Total assets declined $27.8 million from December 31, 2001 to September
30, 2002. The loan portfolio continued to experience declines through the third
quarter of 2002, decreasing $40.5 million from December 31, 2001 to September
30, 2002. Deposits have decreased $19.2 million since December 31, 2001.
9.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION:
Cash and Cash Equivalents: Cash and cash equivalents decreased $10.9 million
through the third quarter of 2002. This was due to a reduced need for liquidity
and management's decision to invest available cash in securities.
Investment Securities: Available-for-sale securities increased $23.4 million, or
37.9%, from December 31, 2001 to September 30, 2002, with the balance on
September 30, 2002 totaling $85.3 million. Investment securities are utilized in
an effort to manage interest rate risk and liquidity. As of September 30, 2002,
a significant portion of the investment portfolio was pledged to secure
borrowings. The increase in investment securities is attributable to funds
available from the reductions in the loan portfolio and cash and cash
equivalents, offset by the reduction in the deposits.
Loans: Through the third quarter of 2002, loan balances decreased by $40.5
million or 8.0%. As planned, the Bank continues to decrease certain segments of
its loan portfolio through tightened underwriting and credit practices and
controls. Enhancements to the loan approval process and exception reporting
further provide for a more effective management of risk in the loan portfolio.
Management continues to actively manage the loan portfolio seeking to identify
and resolve problem assets at an early stage. Management believes a properly
positioned loan portfolio provides the most attractive earning asset yield
available to the Corporation and, with changes to the loan approval process and
exception reporting, controls are in place to more effectively manage the risk
in the loan portfolio. As shown in the table below, the decrease in the loan
portfolio between December 31, 2001 and September 30, 2002, resulted mainly from
declines in commercial, commercial real estate, and residential real estate
loans.
Following is a summary of the loan mix at September 30, 2002 and December 31,
2001 (in thousands):
September 30, % of December 31, % of
2002 Total 2001 Total
---- ----- ---- -----
Commercial real estate $ 67,439 14.5 $ 77,892 15.4
Commercial, financial, and agricultural 218,738 47.2 236,961 46.9
Leases:
Commercial 54,088 11.7 45,195 9.0
Governmental 33,021 7.1 37,247 7.4
1-4 family residential real estate 81,233 17.5 93,574 18.6
Consumer 6,777 1.5 9,516 1.9
Construction 2,603 0.5 4,027 0.8
------------ ------- ------------ -------
Total loans $ 463,899 100.0 $ 504,412 100.0
============ ======= ============ =======
Credit Quality: The allowance for loan losses is maintained by management at a
level considered to be adequate to cover probable losses related to specifically
identified loans, as well as losses inherent in the balance of the loan
portfolio. At September 30, 2002, the allowance for loan losses increased to
3.38% of total loans outstanding from 2.07% at December 31, 2001.
Management analyzes the allowance for loan losses in detail on a quarterly basis
to ensure that the losses inherent in the portfolio are properly reserved for.
Net charge-offs to gross loans outstanding increased to 2.05% from 0.33% for the
nine months ended September 30, 2002 and 2001, respectively. Net charge-offs for
the nine-month period ended September 30, 2002, were $9,513,000 compared to
$1,706,000 for the same period in 2001. The provision for loan losses was
increased $12.8 million from $1.9 million for the nine months ended September
30, 2001 to $14.7 million for the nine months ended September 30, 2002.
The table presented below shows the balance of nonperforming loans - which
include nonaccrual loans and loans 90 or more days past due and still accruing -
at September 30, 2002 and December 31, 2001 (in thousands):
September 30, December 31,
2002 2001
---- ----
Nonaccrual loans $ 20,450 $ 4,015
Loans 90 days or more past due and still accruing 1,250 6,101
Ratio - Nonperforming loans to gross loans 4.7% 2.0%
10.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Total nonperforming loans have increased $11.6 million since December 31, 2001,
after the net charge-offs of $9.5 million which have been recognized through
September 30, 2002. The weakness in the overall economy has persisted longer
than originally anticipated. As a result, consumer confidence, and spending, has
continued to drop. This, coupled with the events of September 11, 2001, has
continued to have a negative effect on the hotel and tourism industry. In
response to this trend, management increased the percentage applied to
classified loans in this industry and has also been aggressive in charging off
potential shortfalls in related collateral value.
During the current quarter, the Corporation began to recognize deterioration in
other segments of its commercial loan portfolio, as well as the real estate
portfolio. To some extent, these downgrades can be attributed to the impact of
the drop in tourism on the local economy. However, a general slowdown in the
commercial and construction segments has also contributed to the increase in
charge-offs and the required allowance for loan losses as of September 30, 2002.
During the current quarter the ongoing review of loan documentation, collateral,
and the risk ratings assigned to loans was performed internally and by the
Bank's regulators. This resulted in a significant portion of the loans
charged-off and the related increase in the allowance. Additional monitoring
reports were implemented in an effort to detect problems earlier.
As a result of the increased level of internally classified assets, the
Corporation has tightened its underwriting standards for all types of loans,
strengthened collection and workout procedures, and enhanced the monitoring of
collateral value. Additional staffing was added to the collection and loan
underwriting departments. The Corporation hired an attorney to handle
nonperforming assets. Executive Administrator positions have now been
established for the Upper and Lower Peninsula branches. Their primary function
will be to work with the lenders in the branches to assist lenders and customers
with effective handling and proper structuring of the credits. All lenders
report to these executives and will be responsible for adherence to the
Corporation's loan policy and underwriting standards.
As a result of these changes, in addition to controlling the growth of the
Corporation, management believes that credit problems will be identified earlier
when there may be more opportunities for a favorable resolution.
Deposits: Total deposits through the third quarter have decreased $19.2 million,
or 4.0%. The decrease occurred in interest-bearing deposit balances throughout
the Bank's branch network. This decrease was particularly due to management's
decision to reduce the level of the loan portfolio. Also, the Bank underwent a
Bank-wide consumer demand deposit account merger and implemented the Generation
Gold product.
Borrowings: In addition to deposits, the Corporation uses alternative funding
sources to provide funds for lending activities and to support the Bank's
investment portfolio. Alternative sources can be obtained at interest rates
which are competitive with retail deposit rates and with minimal administrative
costs. Borrowings have remained relatively stable from December 31, 2001 to
September 30, 2002. At September 30, 2002, $86.5 million of the total borrowings
were from the Federal Home Loan Bank of Indianapolis. These borrowings are
secured by a blanket collateral agreement on the Bank's residential mortgage
loans and investment securities pledged.
Guaranteed Preferred Beneficial Interests in the Corporation's Subordinated
Debentures: In 1999, the Corporation completed a private offering of Capital, or
Trust Preferred, securities in the amount of $12,450,000. Under regulatory
guidelines, guaranteed preferred beneficial interests in the Corporation's
subordinated debentures are eligible as regulatory capital, as defined, subject
to certain limitations. Due to the present financial condition in the current
quarter, the Board of Directors adopted a resolution to apply for the deferment
of interest payments on the Trust Preferred securities.
Shareholders' Equity: Total shareholders' equity decreased $8.0 million from
December 31, 2001 to September 30, 2002. The decrease is comprised of a net loss
of $7.1 million, combined with dividends declared of $1.8 million, offset by an
increase in the net unrealized gain on securities of $810,000.
11.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS:
Net Interest Income: Net interest income before provision for loan losses for
the quarter ended September 30, 2002, decreased by $2.1 million, or 33.4%,
compared to the same period one year ago. The decrease in loan and deposit
volume during the past twelve months, combined with decreases in interest rates,
have resulted in the decline in net interest income. Net interest income before
provision for loan losses for the nine months ended September 30, 2002,
decreased by $4.0 million, or 21.9%, compared to the same period in 2001. For
both periods, the total interest income and the yield on total earning assets
were strongly influenced by lending activities.
Provision for Loan Losses: The Corporation records a provision for loan losses
at a level it believes is necessary to maintain the allowance at an adequate
level after considering factors such as loan charge-offs and recoveries, changes
in the mix of loans in the portfolio, loan growth, and other economic factors.
The provision for loan losses increased by $9.9 million and $12.8 million for
the quarter ended and nine-month period ended September 30, 2002, respectively,
when compared to the same period in 2001. The provision for loan losses was
increased during the current year due to increased charge-offs and factors
discussed above relative to the increase in the allowance for loan losses.
Other Income: Other income decreased by $1.4 million for the quarter ended
September 30, 2002, compared to the quarter ended September 30, 2001. The
decrease was primarily due to a reduction of $1.0 million in fee income
generated by the Corporation's mortgage subsidiary for the quarter ended
September 30, 2002, and a $500,000 gain on sale of branches recorded in 2001.
The mortgage subsidiary ceased operations during the third quarter of 2001.
Other income decreased by $4.3 million for the nine months ended September 30,
2002, compared to the same period one year ago. The decrease was primarily due
to a reduction of $4.4 million in fee income generated by the Corporation's
mortgage subsidiary.
Other Expenses: Other expenses decreased $246,000 for the quarter ended
September 30, 2002, compared to the same period of 2001. Salaries, commissions,
and related benefits decreased by $792,000 during the third quarter of 2002
compared to the third quarter of 2001. The decrease in salaries, commissions,
and related benefits was primarily due to $579,000 in commissions paid by the
mortgage subsidiary in 2001, with none in 2002 due to the ceasing of operations
of the subsidiary during the third quarter of 2001. This decrease was offset by
an increase in other expenses of $546,000 during the third quarter of 2002.
Other expenses decreased $3.4 million for the nine months ended September 30,
2002, compared to the same period of 2001. Salaries, commissions, and related
benefits decreased by $3.9 million through the third quarter of 2002 compared to
the same period in 2001. This decrease was due to commission expense of $3.4
million paid by the Corporation's mortgage subsidiary in 2001, which was not
incurred in 2002 as described above.
Federal Income Tax: The current net loss for the quarter and nine month periods
ending September 30, 2002, created a credit for income taxes. The losses
generated for tax purposes will be carried back and offset against prior taxable
income. 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. In addition, prior to 2000, the corporation provided
for additional taxes on open issues. These issues were resolved in 2001 with no
negative tax impact. Therefore, the additional provisions for these issues were
reversed in 2001 resulting in 2001 provision for income taxes below historical
and current rates.
12.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY:
During the first week in November 2002, and in conjunction with the announcement
of the third quarter results and negative publicity, the Corporation experienced
an unexpected decrease in deposits particularly from local government entities.
It is anticipated that further deposit decreases may occur. The Corporation, as
of November 7, 2002, still had approximately $32 million of municipal deposits.
The Corporation's capital remains well above the regulatory minimum levels (as
shown below).
To address possible liquidity issues, the Corporation is revising its liquidity
plan to provide both short-term and long-term strategies. The Corporation's
ability to increase its borrowings from the Federal Home Loan Bank and its
correspondent banks, is minimal. Therefore, short-term liquidity sources include
the sale of unencumbered investment securities available-for-sale, sale of
assets, and generating new deposits via the Internet CD network.
From a long-term perspective, the liquidity plan will include strategies to
increase core deposits in the Corporation's local markets, the sale of segments
of the commercial loan and lease portfolio to strategic buyers, and possible
sale and closure of the smaller operating locations.
The liquidity plan is intended to be designed to address potential short-term
liquidity demands. Some of the short-term aspects of the liquidity plan could
result in negative impacts on the Corporation's earnings.
REGULATORY MATTERS:
It is the policy of the Corporation 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
Corporation exceed the regulatory minimum guidelines. The table below shows a
summary of the Corporation's capital position in comparison to regulatory
requirements.
Tier I Tier I Total
Capital to Capital to Capital to
Average Risk-Weighted Risk-Weighted
Assets Assets Assets
Regulatory minimum 4.0% 4.0% 8.0%
The Corporation
September 30, 2002 7.1% 9.4% 11.0%
December 31, 2001 8.4% 11.1% 12.4%
The capital levels include adjustment for the Capital, or Trust Preferred,
Securities issued in May 1999, subject to certain limitations. Federal Reserve
guidelines limit the amount of cumulative preferred securities which can be
included in Tier I capital to 25% of total Tier I capital. As of September 30,
2002, $10,994,000 of the $12,450,000 of Capital Securities were available as
Tier I capital of the Corporation.
In addition to the generally applicable regulatory capital requirements set
forth above, since January, 2002, the Bank has been required by Federal and
State regulatory authorities to maintain its Tier 1 capital at a level equal to
or exceeding 6.5% of the Bank's total assets, and if such level is less than
6.5% at June 30 or December 31 of any year while the requirement is in effect,
to submit to such regulatory authorities within 30 days thereafter a plan for
augmentation of the Bank's capital accounts to restore such ratio to 6.5%. At
June 30 and September 30, 2002, the Bank was in compliance with this
requirement. At the same time, the Federal and State regulatory authorities
required the Bank to take various other steps, among other things, to improve
asset quality, to reduce certain loan concentrations, and to improve loan
documentation, credit underwriting, and loan and lease loss provision
procedures.
13.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Corporation was recently examined by the Federal Reserve Bank of Chicago
("FRB") and the Bank is undergoing a regularly-scheduled examination by the
Federal Deposit Insurance Corporation ("FDIC") and the Michigan Office of
Financial and Insurance Services ("OFIS").
Since October 2001, the FDIC has required the Bank to provide 30 days' prior
written notice of the addition or replacement of any member of its board of
directors, and of the employment or change in responsibilities of any senior
executive officer. In addition, since the same time, the Bank has been required
to obtain the prior approval of the FDIC to enter into certain forms of
compensation, severance, or indemnification agreements with any director,
officer, employee or controlling shareholder of the Bank or the Corporation, or
certain other persons participating in the affairs of the Bank or the
Corporation, or to make any payment under such an agreement to any such person.
In connection with the current examination of the Bank by the FDIC and the OFIS,
certain recommendations have been made to the Bank by OFIS. These
recommendations have been verbally communicated to the Bank. The OFIS'
recommendations are:
- The Bank should limit interest rates offered by it to no more
than 75 basis points over market rates for new deposits.
- Prior approval should be obtained from OFIS for any asset
sales in excess of $10 million.
- Prior approval should be obtained from OFIS for any addition
or replacement of any senior executive officer or director.
- The Bank should declare and pay dividends only with prior
approval of OFIS.
- The Bank should furnish certain expanded financial information
to OFIS on a more frequent basis.
In addition to the OFIS recommendations, the FRB in a letter dated November 8,
2002, requested that the Corporation take the following actions only with the
prior approval of the FRB:
- Declare or pay dividends on the Corporation's stock.
- Redeem shares of the Corporation's stock.
- Increase borrowings or incur debt.
In addition, the FRB (i) recommended that the Corporation review its debt
service requirements on its outstanding trust preferred securities and preserve
its funds to increase its financial flexibility, and (ii) requested cash flow
projections from the Corporation through December, 2003.
The Board of Directors of the Corporation or the Bank have adopted resolutions
providing for prior regulatory approval of the declaration or payment of any
dividend by the Bank or the Corporation, and suspension of payments by the
Corporation in connection with its trust preferred securities.
The trust preferred subordinated debenture agreement allows for the suspension
of payments for up to 20 quarters. Therefore, the suspension of the interest
payments does not violate the agreement. However, while interest payments are
suspended, no dividends can be paid on the Corporation's common stock.
In addition, the Corporation's Board of Directors has suspended the payment of
fees to the directors.
Management is working to comply with the above recommendations of the Federal
and State regulatory authorities.
14.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK:
The Corporation has market risk exposure relative to interest rate risk, which
management actively manages. The Corporation has no market risk sensitive
instruments held for trading purposes. In relatively low interest rate
environments which have been experienced during the past several 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. 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, 2002, the Corporation had a cumulative asset repricing gap
position of $23.5 million within the one-year time frame. This position suggests
that if the market interest rates increase in the next twelve months, the
Corporation has the potential to earn more net interest income. Conversely, if
market interest rates decline in the next twelve months, the Corporation has the
potential to earn less net interest income. Management believes that it is
reasonably positioned against significant changes in rates without severely
altering operating results.
As of December 31, 2001, the Corporation had a cumulative liability sensitivity
GAP position of $8.6 million within the one-year timeframe. The Corporation's
cumulative liability sensitive GAP at December 31, 2001, suggested that if
market interest rates were to increase in the 12 months following December 31,
2001, the Corporation had the potential to earn less net interest income.
Conversely, if market interest rates were to continue to decrease in the 12
months following December 31, 2001, the December 31, 2001 GAP position suggested
the Corporation's net interest income would increase.
A limitation of the traditional GAP analysis is that it does not consider the
timing or magnitude of noncontractual repricing or expected prepayments. In
addition, the GAP analysis treats savings, NOW, and money market accounts as
repricing within 90 days, while experience suggests that these categories of
deposits are actually comparatively resistant to rate sensitivity. Considering
the limitations of the GAP analysis, and based on the results of other interest
rate risk management tools used by the Corporation, management believes the
Corporation is properly positioned against significant changes in interest rates
without significantly altering operating results.
15.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
As of November 8, 2002, an evaluation was performed under the supervision of and
with the participation of the Corporation's management, including the President
and Chief Executive 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 as of November 8, 2002. There have been no significant changes in
the Corporation's internal controls or in other factors that could significantly
affect internal controls subsequent to November 8, 2002.
16.
NORTH COUNTRY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Corporation is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 3.1 - Articles of Incorporation, as amended, incorporated herein
by reference to exhibit 3.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
Exhibit 3.2 - Amended and Restated Bylaws, incorporated herein by reference
to exhibit 3.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.
The President and Chief Executive Officer of the Corporation, who also
serves as the chief financial officer, is not filing with this Form 10-Q
the certification required by 18 U.S.C. Section 1350 because she is not in
a position to certify that the report fully complies with the requirements
of section 13(a) of the Securities Exchange Act of 1934 as the financial
statements contained in the report have not been reviewed by an independent
public accountant as required by applicable rules. The financial statements
in this report have not yet been reviewed by an independent public
accountant because the Corporation's independent public accountant resigned
on November 11, 2002, and while the Corporation is in the process of
finding a new independent public accountant, one has not yet been retained.
(b) There was only one Form 8-K filed during the quarter ended September
30, 2002. Form 8-K dated August 28, 2002 announced the change in the
Registrant's certifying accountant from Wipfli Ullrich Bertelson LLP to
Rehmann Robson.
17.
NORTH COUNTRY FINANCIAL CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH COUNTRY FINANCIAL CORPORATION
-----------------------------------
(Registrant)
11/13/02 By: /s/ Sherry L. Littlejohn
- --------- -------------------------------------
Date SHERRY L. LITTLEJOHN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(principal executive and financial officer)
18.
NORTH COUNTRY FINANCIAL CORPORATION
CERTIFICATION
I, Sherry L. Littlejohn, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10Q of North Country
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
11/13/02 /s/ Sherry L. Littlejohn
- --------- -----------------------------------------------------
Date SHERRY L. LITTLEJOHN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(chief executive officer and chief financial officer)
19.