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: June 30, 1999 Commission file number: 0-20167
NORTH COUNTRY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 S. CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 341-8401
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
As of July 31, 1999, there were outstanding 7,020,520 shares of the registrant's
common stock, no par value.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1999 (Unaudited) and December 31, 1998................ 1
Condensed Consolidated Statements of Income - Three and
Six Months Ended June 30, 1999 (Unaudited) and
June 30, 1998 (Unaudited)...................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three and Six Months Ended June 30, 1999
(Unaudited) and June 30, 1998 (Unaudited)...................... 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 (Unaudited) and
June 30, 1998 (Unaudited)...................................... 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)......................................... 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 15
Item 2. Changes in Securities and Use of Proceeds....................... 15
Item 3. Defaults upon Senior Securities................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............. 15
Item 5. Other Information............................................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURES ............................................................ 16
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,787 $ 16,593
Federal funds sold 23,432 6,048
----------- -----------
Total cash and cash equivalents 53,219 22,641
Securities available for sale 12,286 8,565
Federal Home Loan Bank stock 3,034 3,034
Total loans 427,089 411,720
Allowance for loan losses (6,160) (6,112)
----------- -----------
420,929 405,608
Premises and equipment 18,879 17,938
Other assets 14,564 13,595
----------- -----------
Total assets $ 522,911 $ 471,381
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 41,701 $ 42,077
Interest-bearing 406,321 362,885
----------- -----------
Total deposits 448,022 404,962
Other borrowings 19,209 23,270
Accrued expenses and other liabilities 4,195 3,680
----------- -----------
Total liabilities 471,476 431,912
Guaranteed preferred beneficial interests in the Corporation's
subordinated debentures 12,450 0
----------- -----------
Shareholders' equity
Preferred stock, no par value, 500,000 shares authorized, no shares
outstanding Common stock, no par value, 18,000,000 shares authorized,
7,025,437 and 7,130,760 issued and outstanding at
June 30, 1999 and December 31, 1998 16,913 19,436
Retained earnings 22,197 19,989
Accumulated other comprehensive income, net (75) 44
----------- -----------
Total shareholders' equity 39,035 39,469
----------- -----------
Total liabilities and shareholders' equity $ 522,911 $ 471,381
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
(Unaudited)
<TABLE>
Three months ended Six months ended
--------June 30,---------- ---------June 30,---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 9,896 $ 9,489 $ 19,345 $ 18,350
Securities
Taxable 167 178 353 397
Exempt from federal taxation 10 3 29 4
Other 114 145 192 247
-------- -------- --------- ---------
10,187 9,815 19,919 18,998
Interest expense
Deposits 4,445 4,096 8,675 8,073
Other borrowings 472 317 864 593
-------- -------- --------- ---------
4,917 4,413 9,539 8,666
-------- -------- --------- ---------
Net interest income 5,270 5,402 10,380 10,332
Provision for loan losses 213 425 426 675
-------- -------- --------- ---------
Net interest income after provision for loan losses 5,057 4,977 9,954 9,657
Noninterest income
Service charges on deposit accounts 469 401 892 710
Gain (loss) on sales of loans (10) 32 60 55
Gain on sales of securities 44
Other 190 283 312 449
-------- -------- --------- ---------
649 716 1,264 1,258
Noninterest expense
Salaries and employee benefits 1,530 1,568 3,002 3,208
Occupancy and equipment 622 598 1,252 1,166
Other 2,015 1,830 3,349 3,280
-------- -------- --------- ---------
4,167 3,996 7,603 7,654
-------- -------- --------- ---------
Income before income tax expense 1,539 1,697 3,615 3,261
Income tax expense 232 380 767 794
-------- -------- --------- ---------
Net income $ 1,307 $ 1,317 $ 2,848 $ 2,467
======== ======== ========= =========
Basic earnings per common share $ .19 $ .18 $ .40 $ .35
======== ======== ========= =========
Diluted earnings per common share $ .18 $ .18 $ .40 $ .35
======== ======== ========= =========
Dividends paid per common share $ .05 $ .04 $ .09 $ .09
======== ======== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars)
(Unaudited)
<TABLE>
Three months ended Six months ended
---------June 30,---------- ---------June 30,-------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance - beginning of period $ 38,214 $ 37,471 $ 39,469 $ 36,589
Net income for period 1,307 1,317 2,848 2,467
Net change in net unrealized gain on securities
available for sale (78) (5) (119) (5)
--------- --------- --------- ---------
Total comprehensive income 1,229 1,312 2,729 2,462
Cash dividends (319) (312) (640) (620)
Issuance of common stock 111 129 204 281
Common stock retired (200) (840) (2,727) (952)
--------- --------- --------- ---------
Balance - end of period $ 39,035 $ 37,760 $ 39,035 $ 37,760
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
Six months ended
------June 30,------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,848 $ 2,467
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 1,018 1,023
Provision for loan losses 426 675
Gain on sales of securities (44)
Change in other assets 963 2,140
Change in other liabilities 569 177
--------- ---------
Net cash from operating activities 5,824 6,438
Cash flows from investing activities
Purchase of securities available for sale (6,302) (4,000)
Proceeds from sales of securities available for sale 752
Proceeds from maturities, calls or paydowns of securities available for sale 2,389 1,000
Net increase in loans (15,747) (11,458)
Purchase of premises and equipment (1,345) (1,626)
Net cash received for net liabilities assumed in acquisition of branches 15,504
--------- ---------
Net cash from investing activities (5,501) (15,332)
Cash flows from financial activities
Net increase in deposits 25,597 14,338
Proceeds from other borrowings 8,000 8,235
Payment on other borrowings (12,061) (787)
Proceeds from issuance of common stock 204 281
Retirement of common stock (2,727) (952)
Net proceeds from the issuance of guaranteed preferred beneficial
interests in the Corporation's subordinated debentures 11,882
Payment of cash dividends (640) (620)
--------- ---------
Net cash from financing activities 30,255 20,495
--------- ---------
Net change in cash and cash equivalents 30,578 11,601
Cash and cash equivalents at beginning of period 22,641 11,143
--------- ---------
Cash and cash equivalents at end of period 53,219 $ 22,744
========= =========
Supplemental disclosures of cash flow information Increases related to branch
acquisitions:
Premises and equipment, net $ (286)
Core deposit intangibles and goodwill (1,680)
Deposits 17,463
Other liabilities 7
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4.
<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 six-month period ended June
30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. The unaudited consolidated financial
statements and footnotes thereto should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in
the Registrant's Annual Report on Form 10- 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 Balance Sheet. Derivative financial instruments not
designated as hedges will be measured at fair value with changes in fair
value being recognized in earnings in the period of change. If a derivative
is designated as a hedge, the accounting for changes in fair value will
depend on the specific exposure being hedged. The Statement is effective
for fiscal years beginning after June 15, 1999. Management, at this time,
cannot determine the effect adoption of this Statement may have on the
consolidated financial statements of the Registrant as the effect is
dependent on the amount and nature of derivatives and hedges held at the
time of adoption of the Statement.
3. EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
<TABLE>
(In thousands, except per share data)
Three months Six months
ended ended
June 30, 1999 June 30, 1999
<S> <C> <C>
Basic earnings per common share:
Net income $ 1,307 $ 2,848
Weighted average common shares outstanding 7,031 7,052
---------- ----------
Basic earnings per common share $ .19 $ .40
========== ==========
Diluted earnings per common share:
Net income $ 1,307 $ 2,848
Weighted average common shares outstanding
for basic earnings per common share 7,031 7,052
Add: Dilutive effect of assumed exercises
of stock options 91 101
Add: Dilutive effect of directors' deferred stock
compensation 7 7
---------- ----------
Average shares and dilutive potential common shares 7,129 7,160
---------- ----------
Diluted earnings per common share $ .18 $ .40
========== ==========
</TABLE>
(Continued)
5.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. EARNINGS PER SHARE (Continued)
For the quarter and six months ended June 30, 1998, the weighted average
common shares outstanding used in the computations of basic and diluted
earnings per share were approximately 7,127,000 and 7,134,000,
respectively. The assumed exercise of stock options and deferred stock
compensation for the quarter and six months ended June 30, 1998 did not
have a dilutive effect on these calculations.
All share and per share amounts in this filing have been retroactively
adjusted to reflect the August of 1998 3-for-1 split.
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the six months ended June 30,
1999 and 1998, are summarized as follows:
<TABLE>
(In thousands of dollars)
June 30, June 30,
1999 1998
<S> <C> <C>
Balance at beginning of period $ 6,112 $ 5,600
Charge-offs (430) (441)
Recoveries 52 50
Provision for loan losses 426 675
--------- ---------
$ 6,160 $ 5,884
========= =========
</TABLE>
Information regarding impaired loans follows:
<TABLE>
(In thousands of dollars)
As of and As of and
for the six for the year
months ended ended
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Average investment in impaired loans $ 5,421 $ 6,155
Balance of impaired loans 5,493 6,073
</TABLE>
(Continued)
6.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. OTHER BORROWINGS
Other borrowings consist of the following at June 30, 1999 and December 31,
1998:
<TABLE>
June 30, December 31,
1999 1998
(In thousands of dollars)
<S> <C> <C>
Federal Home Loan Bank advances at various rates with various
maturities (see annual financial statements as referenced in
Note 1) $ 17,334 $ 20,607
Farmers Home Administration, $2,000,000 fixed rate line
agreement maturing August 24, 2024, interest payable at 1% 1,875 1,875
Notes payable to South Range State Bank's former stockholders,
maturing in three equal annual installments beginning
February 1, 1997, interest payable at 5.2% 788
-------- --------
$ 19,209 $ 23,270
======== ========
</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 June 30, 1999. Borrowings other than Federal Home Loan Bank advances
are not subject to prepayment penalties.
6. CURRENT EVENTS
In May of 1999, the Registrant acquired branches in Kaleva and Mancelona,
Michigan from Huntington National Bank. The transaction is accounted for
under the purchase method of accounting. The Registrant assumed
approximately $17.5 million in deposits, and acquired approximately
$286,000 in premises, equipment and sundry assets, and $1.7 million of
intangible assets, as more fully disclosed in the Statement of Cash Flows.
A business trust subsidiary of the Registrant sold 12,450 of Trust
Preferred Securities at $1,000 per preferred security in a May of 1999
offering. The proceeds from the sale of the Trust Preferred Securities were
used by the Registrant's subsidiary to purchase an equivalent amount of
Subordinated Debentures of the Registrant. The Trust Preferred Securities
carry a distribution floating rate of the 3-month LIBOR plus 2.5%, have a
stated maturity of May 14, 2029, and are guaranteed by the Registrant The
securities are redeemable at par after May 14, 2009. Distributions on the
Trust Preferred Securities are payable quarterly on February 14, May 14,
August 14 and November 14. The first distribution will be paid on August
14, 1999.
7.
<PAGE>
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 second quarter of 1999. The discussion should be read in conjunction with
those statements and their accompanying notes.
The Registrant is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or results of operations except as discussed
herein. Also, the Registrant is not aware of any current recommendations by
regulatory authorities which will have such effect if implemented.
Forward-Looking Statements:
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Registrant intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Registrant, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Registrant's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Registrant and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Registrant's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Registrant and its business, including additional
factors that could materially affect the Registrant's financial results, is
included in the Registrant's filings with the Securities and Exchange
Commission.
Financial Highlights:
Year to date consolidated net income was $2,848,000 through June 30, 1999
compared to $2,467,000 for the same period in 1998. Diluted earnings per share
increased from $.35 through June 30, 1998, to $.40 for the same period in 1999.
The loan portfolio continues a significant growth trend with gross loans
increasing $15,369,000 or 3.7% 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 i the deposit portfolio. Deposits have
increased $43,060,000 or 10.6% 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 second quarter of 1999, loan balances increased by $15.4
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 as a percent of total loans
for the six months ended June 30, 1999 compared to December 31, 1998.
8.
<PAGE>
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 believes that the current level in the allowance for loan losses is
adequate. At June 30, 1999 the allowance for loan losses was equal to 1.44% 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 $17.6 million through the
second quarter of 1999. Management continues to focus on loan growth through an
increase in the commercial lending area. A significant portion of the growth is
due to the Bank's continued ability to penetrate growth markets such as
Marquette and Sault Ste. Marie.
Governmental leases also have increased in the first six months of 1999, up $8.4
million from December 31, 1998. In the second quarter of 1999, the Registrant
formed North Country Financial Group, Inc., which opened 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 other loan categories have remained fairly consistent at June 30, 1999 when
compared to December 31, 1998.
<TABLE>
June 30, % of December 31, % of
1999 Total 1998 Total
---- ----- ---- -----
<S> <C> <C> <C> <C>
Loans
Commercial real estate $ 82,891 19.4% $ 82,207 20.0%
Commercial, financial, and agricultural 154,442 36.2 136,820 33.2
Leases:
Commercial 13,382 3.1 20,097 4.9
Governmental 48,451 11.3 40,098 9.7
1-4 family residential real estate 100,093 23.5 97,415 23.7
Consumer 18,812 4.4 23,160 5.6
Construction 9,018 2.1 11,923 2.9
---------- ----- ---------- -----
$ 427,089 100.0% $ 411,720 100.0%
========== ===== ========== =====
</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
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 .09% and
.10% for June 30, 1999 and 1998, respectively. Charge-offs for the period ended
June 30, 1999 decreased $11,000 from the same period in 1998 despite strong
growth in the loan portfolio. This is mainly the result of management's
continued efforts to improve credit quality in such portfolios. Accordingly, the
provision for loan losses was decreased from $675,000 in the six month period
ended June 30, 1998 to $426,000 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 June 30, 1999 and December 31, 1998.
<TABLE>
(In thousands of dollars)
June 30, December 31,
1999 1998
<S> <C> <C>
Nonaccrual loans $ 441 $ 2,174
Loans 90 days or more past due and still accruing 1,364 1,238
</TABLE>
9.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
While loans 90 days or more past due have increased by $126,000 or 10.2% since
December 31, 1998, nonaccrual loans have decreased by $1,733,000 or 79.7%.
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 .42% and .83% at June 30, 1999 and December 31,
1998, respectively.
Investments: Available for sale securities increased approximately $3,721,000
through the second quarter of 1999 mainly due to the purchase of 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 second quarter have increased $43.1
million. Interest bearing deposit balances increased through June 30, 1999,
continuing a trend from 1998. $17.5 million of the increase in total deposits
was the result of the branch acquisitions during the second quarter of 1999, as
more fully disclosed in the Notes to the Condensed Consolidated Financial
Statements, contained herein. The remaining growth has come from the branch
network, as management has continued to offer attractive deposit products to its
customers, generally through premium-based certificate of deposit programs and
higher yielding savings accounts.
Borrowings: The Registrants branching network is a relatively high cost network
in comparison to peers. Accordingly, the Registrant uses alternative funding
sources to provide funds for lending activities. Other borrowings decreased by
$4.1 million through the second quarter of 1999 (refer to the table presented in
Note 5 to the second quarter financial statements above for the composition of
the decrease). At June 30, 1999, $17.3 million of the total borrowings were from
the Federal Home Loan Bank of Indianapolis. Alternative sources of funding can
be obtained at interest rates which are competitive with, or lower than, retail
deposit rates and with minimal administrative costs.
Guaranteed Preferred Beneficial Interests in the Corporation's Subordinated
Debentures: Consistent with the Registrant's Strategic Plan, the Registrant
completed a private offering in May of 1999 of Capital, or Trust Preferred,
securities in the amount of $12,450,000. Such amounts will be used to support
the Registrant's current capital position allowing for future growth and
increased common shareholder value. Under regulatory guidelines, such securities
are eligible as regulatory capital, as defined, subject to certain limitations.
Shareholder's Equity: Total shareholder's equity decreased approximately $.4
million from December 31, 1998 to June 30, 1999. The decrease primarily resulted
from the repurchase of common stock of $2.7 million and cash dividends paid of
$.6 million, offset by net income of $2.8 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 for the quarter ended June 30, 1999
decreased by 2.4% compared to the same period one year ago. The net interest
margin, on a fully taxable equivalent basis for the quarter ended June 30, 1999
was 4.76%, compared to 5.42% 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 for the second quarter of 1999
compared to 96.7% for the same period of 1998. In all cases, the total amount of
interest income and the yield on total earning assets is strongly influenced by
lending activities.
Net interest income for the six months ended June 30, 1999 increased by .5%
compared to the same period in 1998. The net interest margin, on a fully taxable
equivalent basis for the six months ended June 30, 1999 decreased from 5.21% for
the same period in 1998 to 4.75% for the same reasons mentioned in the preceding
paragraph. Interest income from loans represented 97.1% of total interest income
through the second quarter of 1999 compared to 96.6% for the same period of
1998.
10.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Loan Losses: The Registrant maintains the allowance for loan
losses at a level adequate to cover losses inherent in the portfolio. The
Registrant records a provision for loan losses necessary to maintain the
allowance at that level after considering factors such as loan charge-offs and
recoveries, changes in the mix of loans in the portfolio, loan growth, and other
economic factors. The provision for loan losses decreased by $212,000 for the
three months ended June 30, 1999 and $249,000 for the six months ended June 30,
1999 compared to the same periods 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 1.44% and 1.48% at June 30, 1999 and December 31,
1998, respectively.
Noninterest Income: Noninterest income decreased by $67,000 for the three months
ended June 30, 1999 compared to the same period in 1998. The decrease was
primarily due to a decrease in other noninterest income of $93,000, largely the
result of reduced insurance commissions, and a decrease in gains on sales of
loans of $42,000. These reductions were offset by an increase in service charges
on deposit accounts of $68,000.
Noninterest income remained relatively unchanged for the six months ended June
30, 1999 compared to the same period one year ago. An increase in service
charges on deposit accounts of $182,000 was offset by decreases in other
noninterest income of $137,000 and gain on sales of securities of $44,000. As in
the second quarter of 1999, the decrease in other noninterest income was mainly
due to a reduction in insurance premiums. There were no securities gains or
losses through the second quarter of 1999.
Noninterest Expenses: Noninterest expense increased $171,000 for the three
months ended June 30, 1999 compared to the same period of 1998. A primary
objective of management is to hold the rate of increase in this category below
future asset growth. Salary expense decreased by $38,000 during the second
quarter of 1999 compared to the second quarter of 1998 largely due to a
reduction in staffing. Occupancy expense increased by $24,000 for the second
quarter of 1999 compared to the same period in 1998. Other noninterest expense
increased by $185,000 for the second quarter of 1999 compared to the same period
in 1998. This increase is mainly due to an increase in professional fees related
to data processing.
Noninterest expense decreased $51,000 for the six months ended June 30, 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. Salary
expense decreased by $206,000 through the second quarter of 1999 compared to the
same period of 1998 for the same reasons noted in the preceding paragraph. This
decrease was offset by increases in occupancy expense of $86,000 and other
noninterest expense of $69,000 for the six months ended June 30, 1999 compared
to same period of 1998.
Federal Income Tax: The provision for income taxes was 15.1% of income before
income tax for the quarter ended June 30, 1999 compared to 22.4% for the quarter
ended June 30, 1998. For the six months ended June 30, 1999, the provision for
income taxes was 21.2% of income compared to 24.3% for the same period in 1998.
The difference between the effective tax rate and the federal corporate income
tax rate of 34% is primarily due to tax-exempt interest earned on loans, leases,
and investments. The effective tax rate has decreased as tax-exempt income has
become a larger percentage of total interest income.
Interest Rate Risk:
Management actively manages the Registrant's interest rate risk. In relatively
low interest rate environments which have been in place the last few years,
borrowers have generally tried to extend the maturities and repricing periods on
their loans and place deposits in demand or very short term accounts. Management
has taken various actions to offset the imbalance which those tendencies would
otherwise create. Commercial and real estate loans are written at variable rates
or, if necessary, fixed rates for relatively short terms. Products have also
been offered to give customers an incentive to accept longer term deposits.
Management can also manage interest rate risk with the maturity periods of
securities purchased, selling securities available for sale, and borrowing funds
with targeted maturity periods.
11.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of June 30, 1999, the Registrant had a cumulative liability gap position of
$64,695,000 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 withou 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.
<TABLE>
Tier 1 Total
Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Regulatory minimum 4.0% 4.0% 8.0%
The Registrant
June 30, 1999 8.9 12.0 13.7
December 31, 1998 7.2 9.4 10.7
</TABLE>
The capital levels as of June 30, 1999 include adjustment for the Capital, or
Trust Preferred, Securities issued in May of 1999, subject to certain
limitations. Federal Reserve guidelines limit the amount of cumulative preferred
securities which can be included in Tier 1 capital to 25% of total Tier 1
capital. As of June 30, 1999, approximately $11,000,000 of the $12,450,000 of
Capital Securities were included as Tier 1 capital of the Registrant with the
remaining $1,450,000 included as Tier 2 capital, component of total risk-based
capital. As previously noted, the Capital Securities will be used to support the
Registrant's current capital position allowing for future growth and increased
common shareholder value.
Recent Developments:
On July 23, 1999, the Registrant sold two of its branch offices located in
Rudyard and Cedarville in Michigan's Upper Peninsula with total deposits of
approximately $20 million. These branch dispositions are consistent with the
Registrant's strategy of improving operating efficiency by maintaining a
presence only in locations such as commercial centers where it can operate
profitably.
12.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000 Issue:
The regulators continue to monitor closely the Year 2000 efforts of financial
institutions. Regulators have conducted their quarterly reviews, which look at
the overall progress that a financial institution has made in its Year 2000
efforts as well as to review their compliance with federally mandated
requirements. Examiners check to see that financial institutions are performing
ongoing system renovation and testing that may be needed, establishing
comprehensive contingency plans, mitigating any identified Year 2000 related
business risk, and effectively informing their customers of their Year 2000
preparations. In August 1999, The Federal Financial Institutions Examination
Council issued a statement that 99% of insured financial institutions are
prepared for the Year 2000.
In January 1997, the Registrant began assessing the impact of the century change
associated with the failure to renovate, validate, and implement mission
critical systems to ensure Year 2000 (Y2K) readiness. A Y2K Committee made up of
a team of professionals, representing all disciplines within the organization,
was actively involved in the assessment, renovation, validation, and
implementation of Year 2000 issues.
A Business Resumption Contingency Plan was developed to mitigate operational
risks should core business processes fail, regardless if mission-critical
systems were remediated for Y2K. All internal testing has been completed in
accordance with the regulatory requirements and will be periodically validated
throughout the third and fourth quarter of 1999.
In March 1999, the Registrant engaged Wipfli, Ulrich, Bertelson, to perform an
independent third party review of Year 2000. The objective of the third party
review was to provide management with an independent review of the status of the
Registrant's Y2K readiness and to ensure compliance with regulatory requirements
related to Year 2000 issues. Recommendations from the review have been
addressed.
There has been no significant change in the amounts expended by the Registrant
to ensure Y2K readiness from amounts previously reported.
13.
<PAGE>
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.
14.
<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.
(b) On May 14, 1999, the Registrant issued debentures to North Country Capital
Trust ("NCCT"), a business trust subsidiary of the Registrant. NCCT
purchased the debentures with the proceeds from the sale of trust preferred
securities issued by NCCT in a private placement. The Registrant guaranteed
the preferred securities. The documents governing these securities,
including the Indenture under which the debentures were issued, restrict
the Registrant's right to pay a dividend on its commo stock under certain
circumstances and give the holders of the preferred securities preference
on liquidation over the holders of Registrant's common stock. Specifically,
the Registrant may not declare or pay a cash dividend on its common stock
if (a) an event of default has occurred as defined in the Indenture, (b)
the Registrant is in default under its Guarantee, or (c) the Registrant has
exercised its right under the debentures and the preferred securities to
extend the interest payment period In addition, if any of these conditions
have occurred and until they are cured, the Registrant is restricted from
redeeming or purchasing any shares of its common stock except under very
limited circumstances. The Registrant's obligation under the debentures,
the preferred securities and the Guarantee is $12,450,000 and the interest
rate is payable quarterly at a floating rate equal to 3-month LIBOR plus
2.5%. See Note 6 of the Notes to Condensed Consolidated Financial
Statements included in this Report.
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.
The annual meeting of the Registrant's shareholders was held on April 20, 1999.
The purpose of the meeting was to elect directors, each for a three year term.
The name of each director elected (along with the number of votes cast for or
authority withheld) follows:
Authority
Directors Elected For Withheld
- ----------------- --- --------
Michael C. Henricksen 4,590,176 6,892
John P. Miller 4,589,972 7,096
Ronald G. Ford 4,589,788 7,280
Item 5. Other Information.
There are no matters required to be reported under this item.
(Continued)
15.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
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:
Condensed Consolidated Balance Sheets - June 30, 1999 (Unaudited) and
December 31, 1999
Condensed Consolidated Statements of Income - Three and Six Months
ended June 30, 1999 and 1998 (Unaudited).
Condensed Consolidated Statements of Changes in Shareholders' Equity -
Three and Six Months ended June 30, 1999 and 1998 (Unaudited) Condensed
Consolidated Statements of Cash Flows - Six Months ended June 30, 1999
and 1998 (Unaudited) Notes to Unaudited Consolidated Financial
Statements - June 30, 1999
(b) The following reports on Form 8-K were filed during the quarter ended
June 30, 1999.
During the quarter the Registrant filed a Report on Form 8-K, dated
May 14, 1999, reporting the Registrant's completion of a private
placement of $12,450,000 principal amount of trust preferred
securities.
16.
<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)
8/13/99 /s/ Ronald G. Ford
Date RONALD G. FORD, CEO
8/13/99 /s/ Sherry Littlejohn
Date SHERRY LITTLEJOHN
PRESIDENT AND COO
17.
330813
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 29,787
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,432
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,286
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 427,089
<ALLOWANCE> 6,160
<TOTAL-ASSETS> 522,911
<DEPOSITS> 448,022
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,195
<LONG-TERM> 19,209
0
0
<COMMON> 16,913
<OTHER-SE> 22,122
<TOTAL-LIABILITIES-AND-EQUITY> 522,911
<INTEREST-LOAN> 19,345
<INTEREST-INVEST> 382
<INTEREST-OTHER> 192
<INTEREST-TOTAL> 19,919
<INTEREST-DEPOSIT> 8,675
<INTEREST-EXPENSE> 9,539
<INTEREST-INCOME-NET> 10,380
<LOAN-LOSSES> 426
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,603
<INCOME-PRETAX> 3,615
<INCOME-PRE-EXTRAORDINARY> 3,615
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,848
<EPS-BASIC> .40
<EPS-DILUTED> .40
<YIELD-ACTUAL> 4.75
<LOANS-NON> 441
<LOANS-PAST> 1,364
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,688
<ALLOWANCE-OPEN> 6,112
<CHARGE-OFFS> 430
<RECOVERIES> 52
<ALLOWANCE-CLOSE> 6,160
<ALLOWANCE-DOMESTIC> 6,160
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,001
</TABLE>
