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: 0-20167
September 30, 1998
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 September 30, 1998, there were outstanding 7,152,724 shares of the
registrant's common stock, no par value.
1.
<PAGE>
<TABLE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)
September 30, December 31,
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks $ 13,191 $ 9,338
Federal funds sold 8,406 1,805
--------- ---------
Total cash and cash equivalents 21,597 11,143
Securities available for sale 9,410 10,103
Loans 398,993 372,519
Allowance for loan losses (6,270) (5,600)
--------- ---------
392,723 366,919
Premises and equipment 18,365 17,477
Other assets 12,955 15,792
--------- ---------
Total assets $ 455,050 $421,434
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 38,718 $ 33,354
Interest-bearing 347,437 327,195
--------- ---------
Total deposits 386,155 360,549
Federal funds purchased and securities sold
under agreement to repurchase 2,215 1,895
Other borrowings 24,076 19,628
Accrued expenses and other liabilities 3,408 2,770
--------- ---------
Total liabilities 415,854 384,842
Shareholders' equity
Preferred stock, no par value, 500,000 shares authorized,
no shares outstanding Common stock, no par value,
18,000,000 shares authorized and 7,152,724 outstanding
at September 30, 1998 and 6,000,000 authorized and
2,379,490 outstanding at December 31, 1997 20,097 19,916
Retained earnings 19,102 16,679
Unrealized loss on securities available for sale, net (3) (3)
--------- ---------
Total shareholders' equity 39,196 36,592
--------- ---------
Total liabilities and shareholders' equity $ 455,050 $ 421,434
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
2.
<PAGE>
<TABLE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars)
(Unaudited)
Three months ended Nine months ended
------September 30,------ ------September 30,------
1998 1997 1998 1997
---- ---- ---- ----
Interest income
<S> <C> <C> <C> <C>
Loans, including fees $ 9,370 $ 8,988 $ 27,720 $ 25,571
Securities
Taxable 185 223 582 797
Exempt from federal taxation 14 9 18 26
Other 98 109 345 237
-------- -------- -------- --------
9,667 9,329 28,665 26,631
Interest expense
Deposits 4,165 3,782 12,238 10,712
Borrowed funds 382 298 975 931
-------- -------- -------- --------
4,547 4,080 13,213 11,643
-------- -------- -------- --------
Net interest income 5,120 5,249 15,452 14,988
Provision for loan losses 450 530 1,125 878
-------- -------- -------- --------
Net interest income after provision for loan losses 4,670 4,719 14,327 14,110
Noninterest income
Service charges on deposit accounts 333 334 1,043 856
Gains on sale of loans 28 20 83 41
Securities gain (losses) (17) 44 (17)
Other 301 91 750 263
-------- -------- -------- --------
662 428 1,920 1,143
Noninterest expense
Salaries and employee benefits 1,590 1,405 4,798 4,437
Occupancy 632 540 1,798 1,667
Other 1,509 1,793 4,789 4,923
-------- -------- -------- --------
3,731 3,738 11,385 11,027
-------- -------- -------- --------
Income before income tax 1,601 1,409 4,862 4,226
Income tax expense 453 194 1,247 921
-------- -------- -------- --------
Net income $ 1,148 $ 1,215 $ 3,615 $ 3,305
========= ========= ========= =========
Weighted average common shares outstanding 7,131,698 7,144,626 7,132,551 7,128,675
========= ========= ========= =========
Basic earnings per common share $ .16 $ .17 $ .51 $ .46
======== ======== ======== =========
Diluted earnings per common share $ .16 $ .17 $ .50 $ .46
======== ======== ======== =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3.
<PAGE>
<TABLE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
(Unaudited)
Three months ended Three months ended
September 30, 1998 September 30, 1997
Shares Equity Total Shares Equity Total
<S> <C> <C> <C> <C>
Balance - beginning of period 2,369,811 $37,760 2,376,578 $35,163
Net income for period 1,148 1,215
Net change in unrealized gain on
securities available for sale 9 71
-------- --------
Total comprehensive income 1,157 1,286
Cash dividends (315) (305)
Issuance of common stock related to
3 for 1 stock split 4,756,773
Issuance of common stock 26,140 594 7,529 160
Common stock retired (1,500) (65)
---------- -------- --------- --------
7,152,724 $ 39,196 2,382,607 $ 36,239
========== ======== ========= ========
</TABLE>
<TABLE>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
Shares Equity Total Shares Equity Total
<S> <C> <C> <C> <C>
Balance - beginning of period 2,379,490 $ 36,592 2,363,734 $ 32,386
Net income year-to-date 3,615 3,305
Net change in unrealized gain on
securities available for sale 1 141
--------- --------
Total comprehensive income 3,616 3,446
Cash dividends (934) (878)
Issuance of common stock 30,638 875 26,488 1,557
Issuance of common stock related to
3 for 1 stock split 4,756,773
Common stock retired (14,177) (953) (7,615) (272)
---------- --------- ---------- ---------
7,152,724 $ 39,196 2,382,607 $ 36,239
========== ========= ========== =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4.
<PAGE>
<TABLE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities $ 8,771 $ 6,303
Cash flows from investing activities
Net change in interest-bearing deposits with banks 438
Purchase of securities available for sale (4,000) (830)
Proceeds from sales of securities available for sale 752 9,847
Proceeds from maturities, calls or paydowns of securities available for sale 3,943 488
Net increase in loans (26,474) (24,664)
Purchase of premises and equity (1,900) (3,668)
Net cash provided in acquisitions 32
----------- ---------
Net cash from investing activities (27,679) (18,357)
Cash flows from financial activities
Net increase in deposits 25,606 31,471
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 320 (5,000)
Proceeds from other borrowings 10,500 14,950
Payment on other borrowings (6,052) (18,658)
Proceeds from issuance of common stock 875 1,286
Retirement of common stock (953)
Payment of dividends (934) (879)
----------- ---------
Net cash from financing activities 29,362 23,170
----------- ---------
Net change in cash and cash equivalents 10,454 11,116
Cash and cash equivalents at beginning of period 11,143 12,164
----------- ---------
Cash and cash equivalents at end of period $ 21,597 $ 23,280
=========== =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5.
<PAGE>
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
September 30, 1998, and the nine-month period ending September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
2. ACCOUNTING CHANGES
In June 1997, the FASB issued SFAS No. 131, ""oDisclosures about Segments
of an Enterprise and Related Information". This statement establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
but retains the requirement to report information about major customers. It
also amends SFAS No. 94, ""oConsolidation of All Majority-Owned
Subsidiaries", to remove the special disclosure requirements for previously
unconsolidated subsidiaries. The statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
presented. This statement need not be applied to interim financial
statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. The statement is not expected to have an effect on the
financial position or operating results of the Registrant, but may require
additional disclosures in the financial statements. The Registrant will
implement this statement with the December 31, 1998 annual report.
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 adoption of this statement may have
on the financial statements of the Company as the effect is dependent of
the amount and nature of derivatives and hedges held at the time of
adoption of the statement.
3. PER SHARE CALCULATIONS
A resolution for a 3 for 1 stock split, effected by means of a 2 for 1
stock distribution, for shareholders of record on August 25, 1998 was
approved by the Board of Directors on August 11, 1998. All share and per
share amounts in this filing have been retroactively adjusted to reflect
the 3 for 1 split.
(Consolidated)
6.
<PAGE>
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 nine months ended September
30, 1998 and 1997, are summarized as follows:
<TABLE>
(In thousands of dollars)
September 30, September 30,
1998 1997
<S> <C> <C>
Balance at beginning of period $ 5,600 $ 4,591
Charge-offs (533) (370)
Recoveries 78 97
Transferred from purchase of U.P. Financial 298
Provision for loan loss 1,125 878
--------- --------
$ 6,270 $ 5,494
========= ========
</TABLE>
Information regarding impaired loans follows:
<TABLE>
(In thousands of dollars)
September 30, December 31,
1998 1997
<S> <C> <C>
Average investment in impaired loans $ 5,220 $ 6,710
Balance of impaired loans 5,192 6,933
</TABLE>
5. OTHER BORROWINGS
Other borrowings consists of the following at September 30, 1998 and December
31, 1997:
<TABLE>
(In thousands of dollars)
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Other borrowings
Federal Home Loan bank advances (6) at various rates with
various maturities (see annual financial statements) $ 20,850 $ 16,115
Farmers Home Administration, $2,000,000 fixed rate line
agreement maturing August 24, 2024, interest payable at 1% 1,938 1,938
Note payable to NDB Bank, $500,000 fixed rate line
agreement maturing November 20, 1998, interest payable at
7.39% 500 0
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 1,575
-------- --------
$ 24,076 $ 19,628
======== ========
</TABLE>
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 December 31, 1997 and
September 30, 1998. Borrowings other than Federal Home Loan Bank are not subject
to prepayment penalties.
7.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the consolidated condensed
financial statements of the Registrant and its wholly-owned subsidiaries through
the third quarter of 1998. 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.
Highlights:
Year to date consolidated net income was $3,615,000 through September 30, 1998
compared to $3,305,000 for the same period in 1997. Earnings per share increased
from $.46 through September 30, 1997, to $.51 for the same period in 1998. The
loan portfolio continues a significant growth trend with gross loans increasing
$26,500,000 or 7.11% since December 31, 1997. Loan growth remains focused in the
commercial lending and leasing areas. The loan growth in 1998 has been funded
through an increase in the deposit portfolio. Deposits have increased
$25,600,000 or 7.10% since December 31, 1997. The primary area of deposit growth
for the Registrant has been in money market accounts.
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 Condition:
Loans: Through the third quarter of 1998, loan balances increased by $26.5
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 which is consistent
with maintaining adequate liquidity. As shown in the table below, the loan mix
remains relatively constant for the quarter ended September 30, 1998 compared to
December 31, 1997.
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 September 30, 1998 the allowance for loan losses was equal to 1.57%
of total loans outstanding compared to 1.50% at December 31, 1997.
8.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Commercial real estate loans have increased by $1.3 million and loans to general
commercial businesses increased by $14.0 million through the third quarter of
1998. Commercial leases increased $8.8 million at September 30, 1998 and
governmental leases increased $5.0 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 a continued ability to penetrate
growth markets such as Marquette and Sault Ste. Marie. The other loan categories
have remained fairly consistent since December 31, 1997 with residential, 1-4
family mortgages decreasing by $.09 million, consumer loans decreasing $2.6
million and construction loans increasing $.4 million at September 30, 1998.
<TABLE>
September 30, % of December 31, % of
1998 Total 1997 Total
---- ----- ---- -----
<S> <C> <C> <C> <C>
Loans
Commercial real estate $ 87,396 21.9% $ 86,052 23.1%
Commercial, financial, and agricultural 109,671 27.5 95,631 25.7
Leases:
Commercial 19,877 5.0 11,094 3.0
Governmental 51,440 12.9 46,464 12.5
1-4 family residential real estate 95,454 23.9 95,543 25.6
Consumer 24,177 6.1 26,795 7.2
Construction 10,978 2.7 10,940 2.9
------------ ------- ------------ -------
$ 398,993 100.0% $ 372,519 100.0%
============ ======= ============ =======
</TABLE>
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
recognized. 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% and .08% for September 30, 1998 and 1997,
respectively. Charge-offs for the period ended September 30, 1998 increased
$163,000 from the same period in 1997. This is mainly the result of an increase
in commercial and installment loan charge-offs for the period. Accordingly, the
provision for loan losses was increased from $878,000 in the nine month period
ended September 30, 1997 to $1,125,000 for the same period in 1998.
The table presented below shows the balances of nonaccrual loans, loans 90 or
more days past due, and renegotiated loans as of September 30, 1998, and
December 31, 1997.
<TABLE>
(In thousands of dollars)
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Nonaccrual loans $ 1,695 $ 1,956
Loans 90 days or more past due 1,630 698
Renegotiated loans 0 0
</TABLE>
While nonaccrual loans have decreased $261,000 or 13% since December 31, 1997,
loans 90 days or more past due have increased $932,000 or 134%. The cause of the
increase is due to two commercial loans that have become over 90 days delinquent
in the third quarter of 1998. 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 .83% and
.71% at September 30, 1998 and December 31, 1997, respectively.
Investments: Available for sale securities decreased $.69 million through the
third quarter of 1998 due to the call of $3.9 million, and sale of $.75 million
of securities. The mix of the portfolio remained relatively unchanged from
December 31, 1997. 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.
9.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Deposits: Total deposits through the third quarter have increased $25.6 million.
Interest bearing deposit balances increased through September 30, 1998,
continuing a trend from 1997. Management has continued to offer attractive
deposit products to its customer, 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
$4.4 million through the third quarter (refer to the table presented in Note 4
to the third quarter financial statements above for the composition of the
increase). At September 30, 1998, $20.85 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.
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.
Results of Operations
Net Interest Income: Net interest income through September 30, 1998 decreased by
2.5%, compared to the same period one year ago. The net interest margin, on a
fully tax equivalent basis at September 30, 1998 was 5.13%, compared to 5.64%
for all of 1997. The net yield on interest earning assets reflects the
competitive nature of the Registrant's market. Interest income from loans
represented 96.9% of total interest income through the third quarter of 1998
compared to 96.3% for the same period of 1997. 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 increased $247,000 through
September 30, 1998 compared to the same period in 1997 as a result of the
Registrant's desire to maintain an adequate allowance for loan losses.
Management continues to fund the allowance at a rate consistent with loan
growth. The allowance to gross loans was 1.57% and 1.53% at September 30, 1998
and 1997, respectively.
Noninterest Income: Service charges on deposit accounts increased $187,000
through the third quarter of 1998 vs. the third quarter of 1997 due mainly to an
increased focus on non-interest sources of income. Gains on sales of loans has
increased to $83,000 through the third quarter of 1998 vs. $41,000 through the
third quarter of 1997 due to an increase in loan sale activity. Securities gains
were $45,000 through the third quarter of 1998. Security losses of $17,000 were
reported for the same period in 1997. The proceeds from the security sales were
used to fund loans in the Registrant's growing loan portfolio. Other noninterest
income increased $514,000 through the third quarter of 1998 vs. the third
quarter of 1997 due mainly to an increase in insurance commissions and the sale
of property.
Noninterest Expenses: Noninterest expense increased 4% through September 30,
1998 compared to the same period of 1997. The increase is consistent with the
Registrant's asset growth. Salary expense increased by $467,000 from September
30, 1997 to the same period in 1998. Much of the increase in salaries was due to
the Registrant's staffing of branches that opened in the second quarter of 1998.
Occupancy expense increased by $125,000 from September 30, 1997 to September 30,
1998. Other noninterest expense decreased by $164,000 for this same period. A
primary objective of management is to hold the rate of increase in this category
below future asset growth. Management believes this decrease is attributable to
significant efficiencies obtained and an increasing level of management emphasis
in this area.
10.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Federal Income Tax: The provision for income taxes was 25.8% of income before
income tax through September 30, 1998 compared to 21.8% through September 30,
1997. 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 increased as tax-exempt
income has become a smaller portion 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. Since December 31, 1997, the
Registrant has decreased its sensitivity in the cumulative net asset (liability)
funding gap for 1 - 180 days from ($34,038,000) at December 31, 1997 to
($15,303,000) at September 30, 1998.
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'oequity. The capital ratios of
the Registrant exceed the regulatory guidelines for well capitalized
institutions. The table below shows the Registrant's capital, in thousands of
dollars, and capital ratios at September 30, 1998 and 1997.
<TABLE>
--------------------September 30, 1998----------------------
Required Required Actual Actual
<S> <C> <C> <C> <C>
Tier 1 risk adjusted capital ratio $ 13,995 4.0% $ 31,420 9.0%
Total risk adjusted capital ratio 27,990 8.0 35,582 10.2
Tier 1 leverage ratio 17,749 4.0 31,420 7.1
Tier 1 capital 33,022
Tier 2 capital 4,352
Total risk based capital 37,374
Total risk weighted assets 349,882
Average total assets 443,720
</TABLE>
<TABLE>
--------------------September 30, 1997----------------------
Required Required Actual Actual
<S> <C> <C> <C> <C>
Tier 1 risk adjusted capital ratio $ 12,701 4.00% $ 29,402 9.26%
Total risk adjusted capital ratio 25,402 8.00 33,390 10.52
Tier 1 leverage ratio 16,494 4.00 29,402 7.13
Tier 1 capital 29,402
Tier 2 capital 3,988
Total risk based capital 33,390
Total risk weighted assets 317,525
Average total assets 412,356
</TABLE>
Year 2000 Issue: The Registrant has identified the resolution of the Year 2000
issue as a priority item. During 1997 and the first nine months of 1998, the
Registrant has committed resources, mainly manpower, to the task of identifying
the scope of the Year 2000 issue and formulating a plan for ensuring that all
impacted systems are compliant by the end of 1998. A contingency plan is in
place for all major systems identified.
Because the Registrant has outsourced virtually all of its data processing, it
has begun the process of contacting all related vendors, requesting written
confirmation that their respective products are Year 2000 compliant. Vendor
assertions will be tested during 1998 so that the Registrant has ample time to
react to any problems.
11.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Registrant has already begun contacting significant commercial customers
regarding their status on the Year 2000 issue so as to avoid any negative impact
on the quality of the loan portfolio.
Because of the outsourcing utilized by the Registrant, the addressing of the
Year 2000 issue is not expected to materially impact the Registrant's results of
operations and capital resources. The Registrant has budgeted Year 2000 related
expenses of $225,000 for 1998 and 1999. As of September 30, 1998, the Registrant
has expensed approximately $13,500 in Year 2000 related expenses.
12.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation has not experienced any material changes to its market risk
position from that disclosed in the Corporation's 1997 Form 10-K Annual Report.
13.
<PAGE>
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
None.
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.
(a) A special meeting of the Registrant's shareholders was held on August 11,
1998.
(b) Not applicable.
(c) The sole purpose of the meeting was to consider and vote upon an increase
in the Registrant's common stock "no par value" from 6,000,000 shares to
18,000,000. The vote was as follows:
For: 1,556,677
Against: 13,354
Abstentions and broker non-votes: 22,404
(d) Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
Number Exhibit
27 Financial Data Schedule. Filed herewith.
The following documents are filed as part of Part I, Item 1 of this report:
Consolidated Balance Sheets - September 30, 1998 (Unaudited) and December
31, 1997 (Audited)
Consolidated Statements of Income - Three months ended September 30, 1998
and 1997 and the nine months ended September 30, 1998 and 1997 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity - Three months
ended September 30, 1998 and 1997 and nine months ended September 30, 1998
and 1997 (Unaudited)
Consolidated Statement of Cash Flows - Nine months ended September 30, 1998
and 1997 (Unaudited)
Notes to consolidated financial statements - September 30, 1998
<PAGE>
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)
11-16-98 /s/ Ronald G. Ford
Date RONALD G. FORD, CEO
11-16-98 /s/ Sherry Littlejohn
Date SHERRY LITTLEJOHN
PRESIDENT AND CFO
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