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 March 31, 2000
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)
3530 NORTH COUNTRY DRIVE, TRAVERSE CITY, MI 49684
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (231) 929-5600
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, (or for such shorter periods that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of April 30, 2000, there were outstanding 6,982,577
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
Independent Accountant's Report 1
Condensed Consolidated Balance Sheets -
March 31, 2000 (Unaudited) and December 31, 1999 2
Condensed Consolidated Statements of Income - Three
Months Ended March 31, 2000 (Unaudited) and
March 31, 1999 (Unaudited) 3
Condensed Consolidated Statements of Changes in
Shareholders' Equity - Three Months Ended
March 31, 2000 (Unaudited) and
March 31, 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 (Unaudited) and
March 31, 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
Wipifli Ullrich
Bertelson LLP
-------------------------------
CPAs * CONSULTANTS * ADVISORS
-------------------------------
Independent Accountant's Report
Board of Directors and Shareholders
North Country Financial Corporation
Traverse City, Michigan
We have reviewed the accompanying unaudited
consolidated balance sheet of North Country Financial
Corporation and Subsidiaries as of March 31, 2000, and
the related unaudited consolidated statements of
income, changes in shareholders' equity, and cash flows
for the three-month period then ended. These financial
statements are the responsibility of the Corporation's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified
Public Accountants. A review of interim financial
information consists principally of applying analytical
procedures to financial data and making inquiries of
persons responsible for financial and accounting
matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted
auditing standards, the objective of which is the
expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
consolidated financial statements for them to be in
conformity with generally accepted accounting
principles.
/s/ Wipfli Ullrich Bertelson LLP
Wipfli Ullrich Bertelson LLP
May 10, 2000
Appleton, Wisconsin
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2000 1999
(Unaudited)
ASSETS
Cash and due from banks $ 19,778 $ 26,160
Federal funds sold 5,587 0
--------- ---------
Total cash and cash equivalents 25,365 26,160
Interest-bearing deposits in other
financial institutions 685 679
Securities available for sale 57,573 43,343
Total loans 486,973 466,621
Allowance for loan losses (6,861) (6,863)
--------- ---------
480,112 459,758
Premises and equipment 18,827 19,118
Other assets 20,780 19,384
--------- ---------
Total assets $ 603,342 $ 568,442
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 41,118 $ 43,606
Interest-bearing 434,882 419,392
--------- ---------
Total deposits 476,000 462,998
Borrowings 66,878 46,878
Accrued expenses and other liabilities 5,603 5,296
--------- ---------
Total liabilities 548,481 515,172
--------- ---------
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, 6,988,408 and 7,000,176 issued
and outstanding at March 31, 2000 and
December 31, 1999, respectively 16,226 16,418
Retained earnings 26,682 25,058
Accumulated other comprehensive deficit (497) (656)
--------- ---------
Total shareholders' equity 42,411 40,820
--------- ---------
Total liabilities and shareholders' equity $ 603,342 $ 568,442
See accompanying notes to condensed consolidated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
2000 1999
Interest income
Interest and fees on loans $11,235 $ 9,449
Interest on securities
Taxable 777 186
Tax-exempt 169 19
Other interest income 91 78
------- -------
Total interest income 12,272 9,732
------- -------
Interest expense
Deposits 5,172 4,230
Borrowings 805 392
Subordinated debentures 273 0
------- -------
Total interest expense 6,250 4,622
------- -------
Net interest income 6,022 5,110
Provision for loan losses 350 213
------- -------
Net interest income after provision for
loan losses 5,672 4,897
------- -------
Other income
Service fees 479 423
Gain on sales of loans 13 70
Net gain on sale of branches 292 0
Other operating income 182 122
------- -------
Total other income 966 615
------- -------
Other expenses
Salaries and employee benefits 1,659 1,472
Occupancy and equipment 770 630
Other 1,785 1,334
------- -------
Total other expenses 4,214 3,436
------- -------
Income before provision for income taxes 2,424 2,076
Provision for income taxes 474 535
------- -------
Net income $ 1,950 $ 1,541
======= =======
Basic earnings per common share $ 0.28 $ 0.22
======= =======
Diluted earnings per common share $ 0.28 $ 0.21
======= =======
Dividends paid per common share $ 0.05 $ 0.05
======= =======
See accompanying notes to condensed consolidated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
2000 1999
Balance - beginning of period $ 40,820 $ 39,469
Net income for period 1,950 1,541
Net unrealized gain (loss) on securities
available for sale 159 (41)
-------- --------
Total comprehensive income 2,109 1,500
Cash dividends (326) (321)
Issuance of common stock 102 93
Common stock retired (294) (2,527)
-------- --------
Balance - end of period $ 42,411 $ 38,214
======== ========
See accompanying notes to condensed consolidated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
2000 1999
Cash flows from operating activities
Net income $ 1,950 $ 1,541
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 593 522
Provision for loan losses 350 213
Net gain on sale of branches (292) 0
Change in other assets (1,681) (430)
Change in other liabilities 320 198
--------- ---------
Net cash provided by operating activities 1,240 2,044
--------- ---------
Cash flows from investing activities
Net increase in interest-bearing deposits in
other financial institutions (6) 0
Purchase of securities available for sale (14,163) (495)
Proceeds from maturities, calls or paydowns of
securities available for sale 203 683
Net increase in loans (20,712) (10,991)
Purchase of premises and equipment (159) (576)
Net cash paid for branch sales (4,540) 0
--------- ---------
Net cash used in investing activities (39,377) (11,379)
--------- ---------
Cash flows from financial activities
Net increase in deposits 17,860 12,895
Proceeds from borrowings 20,000 8,000
Payment on borrowings 0 (5,788)
Proceeds from issuance of common stock 102 93
Retirement of common stock (294) (2,527)
Payment of cash dividends (326) (321)
--------- ---------
Net cash provided by financing activities 37,342 12,352
--------- ---------
Net change in cash and cash equivalents (795) 3,017
Cash and cash equivalents at beginning of period 26,160 22,641
--------- ---------
Cash and cash equivalents at end of period $ 25,365 $ 25,658
========= =========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 6,130 $ 4,679
Income taxes 663 0
Assets and liabilities divested in branch sales:
Loans (8)
Premises and equipment, net (31)
Deposits 4,858
Other liabilities 13
See accompanying notes to condensed consolidated financial statements.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial
statements of North Country Financial Corporation
(the Registrant) have been prepared in accordance
with generally accepted accounting principles for
interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the
information and footnotes required by generally
accepted accounting principles for complete
financial statements. In the opinion of management,
all adjustments (consisting of normal recurring
accruals) considered necessary for a fair
presentation have been included. Operating results
for the three-month period ended March 31, 2000 are
not necessarily indicative of the results that may
be expected for the year ending December 31, 2000.
The unaudited consolidated financial statements and
footnotes thereto should be read in conjunction with
the audited consolidated financial statements and
footnotes thereto included in the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1999.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and
expenses during the period. Actual results could
differ from those estimates.
2. FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial
Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
This Statement requires that all derivative
financial instruments be recognized as either assets
or liabilities in the Balance Sheet. Derivative
financial instruments not designated as hedges will
be measured at fair value with changes in fair value
being recognized in earnings in the period of
change. If a derivative is designated as a hedge,
the accounting for changes in fair value will depend
on the specific exposure being hedged. The
Statement is effective for fiscal years beginning
after June 15, 2000. Management, at this time,
cannot determine the effect adoption of this
Statement may have on the consolidated financial
statements of the Registrant as the effect is
dependent on the amount and nature of derivatives
and hedges held at the time of adoption of the
Statement.
3. EARNINGS PER SHARE
The factors used in the earnings per share
computation follow (in thousands, except per share data):
Three months Three months
ended ended
March 31, March 31,
2000 1999
Basic earnings per common share:
Net income $ 1,950 $ 1,541
Weighted average common shares outstanding 6,996 7,073
-------- --------
Basic earnings per common share $ 0.28 $ 0.22
======== ========
Diluted earnings per common share:
Net income $ 1,950 $ 1,541
Weighted average common shares outstanding
for basic earnings per common share 6,996 7,073
Add: Dilutive effect of assumed exercises
of stock options 31 110
Add: Dilutive effect of directors' deferred
stock compensation 26 8
-------- --------
Average shares and dilutive potential common
shares 7,053 7,191
-------- --------
Diluted earnings per common share $ 0.28 $ 0.21
======== ========
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of
investment securities available for sale as of March 31, 2000
and December 31, 1999 are as follows (in thousands):
March 31, 2000 December 31, 1999
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations $ 10,883 $ 10,463 $ 9,863 $ 9,392
Obligations of states and
political subdivisions 19,103 19,167 16,356 16,210
Corporate securities 3,551 3,601 3,049 3,008
Mortgage-related securities 24,789 24,342 15,070 14,733
-------- -------- -------- --------
Total investment securities
available for sale $ 58,326 $ 57,573 $ 44,338 $ 43,343
======== ======== ======== ========
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the
three months ended March 31, 2000 and 1999, are
summarized as follows (in thousands):
March 31, March 31,
2000 1999
Balance at beginning of period $ 6,863 $ 6,112
Charge-offs (374) (147)
Recoveries 22 33
Provision for loan losses 350 213
------- -------
$ 6,861 $ 6,211
======= =======
Information regarding impaired loans follows (in thousands):
As of and As of and
for the three for the year
months ended ended
March 31, December 31,
2000 1999
Average investment in impaired loans $ 5,502 $ 6,128
Balance of impaired loans 5,400 5,604
6. BORROWINGS
Borrowings consist of the following at
March 31, 2000 and December 31, 1999 (in thousands):
March 31, December 31,
2000 1999
Federal Home Loan Bank advances at various
rates with various maturities (see annual
financial statements as referenced in Note 1) $65,067 $45,067
Farmers Home Administration, $2,000,000 fixed
rate note payable maturing August 24, 2024,
interest payable at 1% 1,811 1,811
------- -------
$66,878 $46,878
======= =======
The Federal Home Loan Bank borrowings are
collateralized by a blanket collateral agreement on
the Registrant'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 March 31, 2000.
Borrowings other than Federal Home Loan Bank
advances are not subject to prepayment penalties.
7. CURRENT EVENTS
On January 14, 2000, the Registrant sold a branch
office located in Garden in Michigan's Upper
Peninsula with total deposits of $4,858,000
resulting in a net gain on sale of $292,000. This
branch disposition is consistent with the
Registrant's strategy of improving operating
efficiency by maintaining a presence only in
locations such as commercial centers where it can
operate profitably.
In addition to the above branch divestiture, the
Registrant closed the Carney branch office in
February of 2000. The deposits and loans for this
office were transferred to an existing branch in a
nearby location.
In February 2000, the Registrant entered into an
agreement with Old Kent Bank to purchase banking
offices in Alanson and Glen Arbor in Michigan's
Lower Peninsula. In addition to acquiring these two
offices, the Registrant is in the process of
establishing new offices in Cadillac and Traverse
City. These four offices, all located in Michigan's
Lower Peninsula, are anticipated to open in the
second quarter of 2000.
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 first quarter of 2000.
The discussion should be read in conjunction with those
statements and their accompanying notes.
The Registrant is not aware of any market or
institutional trends, events, or circumstances that
will have or are reasonably likely to have a material
effect on liquidity, capital resources, or results of
operations except as discussed herein. Also, the
Registrant is not aware of any current recommendations
by regulatory authorities which will have such effect
if implemented.
Forward-Looking Statements:
This report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Registrant
intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform
Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-
looking statements, which are based on certain
assumptions and describe future plans, strategies and
expectations of the Registrant, are generally
identifiable by use of the words "believe", "expect",
"intend", "anticipate", "estimate", "project" or
similar expressions. The Registrant's ability to
predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations
and future prospects of the Registrant and the
subsidiaries include, but are not limited to, changes
in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of
the U.S. Treasury and the Federal Reserve Board, the
quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the
Registrant's market area and accounting principles,
policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking
statements and undue reliance should not be placed on
such statements. Further information concerning the
Registrant and its business, including additional
factors that could materially affect the Registrant's
financial results, is included in the Registrant's
filings with the Securities and Exchange Commission.
Financial Highlights:
Year to date consolidated net income was $1.95 million
through March 31, 2000 compared to $1.54 million for
the same period in 1999. Diluted earnings per share
was $0.28 through March 31, 2000 compared to $0.21 for
the same period in 1999. The investment portfolio
increased 32.8% from $43.3 million at December 31, 1999
to $57.5 million at March 31, 2000. The loan portfolio
continues a growth trend with gross loans increasing
$20.4 million or 4.4% since December 31, 1999. Loan
growth remains focused in the commercial and
governmental leasing areas. The loan growth in 2000
has been funded primarily through increases in the
deposit portfolio and borrowings. Deposits have
increased $13.0 million or 2.8% since December 31,
1999, with the primary area of growth being interest-
bearing demand accounts. Borrowings have increased
$20.0 million or 42.7% from December 31, 1999 to March
31, 2000.
Financial Condition:
Cash and Cash Equivalents: Cash and cash equivalents
decreased $795,000 from December 31, 1999 to March 31,
2000. The decrease is due in part to reducing cash
accumulated at December 31, 1999 in anticipation of
Year 2000 liquidity needs.
Investment Securities: Available for sale securities
increased $14.2 million through the first quarter of
2000. The growth is a result of strategies to manage
interest rate risk through diversification of the
balance sheet. Management has utilized its available
capacity to borrow additional funds at the Federal Home
Loan Bank in order to match the pricing and maturity of
investment security purchases.
Loans: Through the first quarter of 2000, loan
balances increased by $20.4 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 a
high level while maintaining adequate liquidity. As
shown in the table below, the loan mix remains
relatively constant with a slight increase in
commercial and governmental leases as a percent of
total loans for the three months ended March 31, 2000
compared to December 31, 1999.
Following is a summary of the loan mix at March 31,
2000 and December 31, 1999 (in thousands):
March 31, % of December 31, % of
2000 Total 1999 Total
Loans:
Commercial real estate $ 78,343 16.1% $ 79,000 16.9%
Commercial, financial, and
agricultural 177,687 36.5 179,592 38.5
Leases:
Commercial 34,372 7.1 22,541 4.8
Governmental 58,242 11.9 48,148 10.3
1-4 family residential real estate 111,969 23.0 107,751 23.1
Consumer 15,194 3.1 17,051 3.7
Construction 11,166 2.3 12,538 2.7
-------- ------ --------- ------
$486,973 100.0% $466,621 100.0%
======== ====== ========= ======
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 probable losses inherent
in the balance of the loan portfolio. At March 31,
2000 the allowance for loan losses was equal to 1.4% of
total loans outstanding compared to 1.5% at December
31, 1999. The allocation of the allowance for loan
losses between portfolio categories has not changed
significantly since December 31, 1999.
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 charge-off experience.
Net charge-offs to gross loans outstanding was 0.07%
and 0.03% for the three-month period ended March 31,
2000 and 1999, respectively. Charge-offs for the
period ended March 31, 2000 increased $227,000 from the
same period in 1999; while increasing, the charge-off
level is considered to be manageable. To compensate
for the increased charge-offs, the provision for loan
losses was increased $137,000 from $213,000 for the
three-month period ended March 31, 1999 to $350,000 for
the same period in 2000.
The table presented below shows the balance of non-
performing loans - which include nonaccrual loans and
loans 90 or more days past due and still accruing - as
of March 31, 2000 and December 31, 1999 (in thousands).
March 31, December 31,
2000 1999
Nonaccrual loans $ 349 $ 95
Loans 90 days or more past due and still accruing 2,760 2,452
Nonaccrual loans have increased $254,000 from December
31, 1999 to March 31, 2000 while loans 90 days or more
past due have increased by $308,000 or 12.6% during
that same time period. 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 0.64%
and 0.55% at March 31, 2000 and December 31, 1999,
respectively.
Deposits: Total deposits through the first quarter of
2000 have increased $13.0 million or 2.8%. While
noninterest-bearing deposit balances decreased,
interest-bearing deposit balances increased through
March 31, 2000. The interest-bearing deposit growth
has come from the branch network as well as from the
issuance of brokered certificates of deposit.
Borrowings: The Registrant's branching network is a
relatively high cost network in comparison to peers.
Accordingly, the Registrant uses alternative funding
sources to provide additional funds for lending
activities and to grow the Bank's investment portfolio
as described above. At March 31, 2000, $65.1 million
of the total borrowings
were from the Federal Home Loan Bank of Indianapolis.
Alternative sources of funding can be obtained at
interest rates which are competitive with, or lower
than, retail deposit rates and with minimal
administrative costs.
Guaranteed Preferred Beneficial Interests in the
Corporation's Subordinated Debentures: Consistent with
the Registrant's strategic plan, the Registrant
completed a private offering in May 1999 of Capital, or
Trust Preferred, securities in the amount of
$12,450,000. The proceeds were used to support the
Registrant's capital position allowing for future
growth and increased common shareholder value. Under
regulatory guidelines, such securities are eligible as
regulatory capital, as defined, subject to certain
limitations.
Shareholder's Equity: Total shareholder's equity
increased $1.6 million from December 31, 1999 to March
31, 2000. The increase primarily resulted from net
income of $1.95 million offset by cash dividends paid
of $326,000 and the repurchase of common stock of
$294,000. The Registrant will continue to selectively
repurchase common stock as opportunities arise.
Results of Operations:
Net Interest Income: Net interest income for the
quarter ended March 31, 2000 increased by $912,000 or
17.8% compared to the same period one year ago. The
increase in net interest income was largely the result
of an increase in the loan volume for the first quarter
of 2000 compared to the first quarter of 1999. The net
interest margin, on a fully taxable equivalent basis,
for the quarter ended March 31, 2000 was 4.98%,
compared to 5.14% for the same period of 1999. The net
interest margin has been impacted by the relatively low
interest rate environment, the competitive nature of
the Registrant's market, and the issuance of the
subordinated debentures as discussed above. Interest
income from loans represented 91.5% of total interest
income for the first quarter of 2000 compared to 97.1%
for the same period of 1999. For both periods, the
total interest income and the yield on total earning
assets are strongly influenced by lending activities.
Provision for Loan Losses: The allowance for loan
losses is maintained 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 increased by $137,000 for the three months
ended March 31, 2000 compared to the same period in
1999 primarily due to increased net charge-off and non-
performing loan levels as previously discussed.
Management continues to fund the allowance at a rate
consistent with its analysis of problem credits, also
considering changes in the size and mix of its loan
portfolio.
Noninterest Income: Noninterest income increased by
$351,000 or 57.1% for the three months ended March 31,
2000 compared to the same period in 1999. The increase
was primarily due to the $292,000 gain on the sale of
the Garden office as discussed in Note 7 and an
increase in service charges on deposit accounts of
$56,000.
Noninterest Expenses: Noninterest expense increased
$778,000 or 22.6% for the three months ended March 31,
2000 compared to the same period of 1999. Salary
expense increased by $187,000 or 12.7% during the first
quarter of 2000 compared to the first quarter of 1999.
Occupancy and equipment expense increased by $140,000
or 22.2% for the first quarter of 2000 compared to the
same period in 1999. Other noninterest expense
increased by $451,000 or 33.8% for the first quarter of
2000 compared to the same period in 1999. These
increases are primarily the result of additional
banking offices and new subsidiaries of the Registrant
which were added since the first quarter of 1999.
Federal Income Tax: The provision for income taxes was
19.6% of income before income tax for the quarter ended
March 31, 2000 compared to 25.8% for the quarter ended
March 31, 1999. The difference between the effective
tax rate and the federal corporate income tax rate of
34% is primarily due to tax-exempt interest earned on
loans, leases, and investments. The effective tax rate
has decreased as tax-exempt income has become a larger
percentage of total interest income.
Interest Rate Risk:
Management actively manages the Registrant's interest
rate risk. In relatively low interest rate
environments which have been in place the last few
years, borrowers have generally tried to extend the
maturities and repricing periods on their loans and
place deposits in demand or very short term accounts.
Management has taken various actions to offset the
imbalance which those tendencies would otherwise
create. Commercial and real estate loans are written
at variable rates or, if necessary, fixed rates for
relatively short terms. Products have also been
offered to give customers an incentive to accept longer
term deposits. Management can also manage interest
rate risk with the maturity periods of securities
purchased, selling securities available for sale, and
borrowing funds with targeted maturity periods.
As of March 31, 2000, the Registrant had a cumulative
liability gap position of $89.3 million within the one-
year timeframe. This position suggests that if the
market interest rates decline in the next 12 months,
the Registrant has the potential to earn more net
interest income. Conversely, if market interest rates
increase in the next 12 months, the Registrant has the
potential to earn less net interest income. Management
believes that it is properly positioned against
significant changes in rates without severely altering
operating results.
Liquidity:
The Registrant's sources of liquidity include principal
payments on loans and investments, sales of securities
available for sale, deposits from customers, borrowings
from the Federal Home Loan Bank, other bank borrowings,
and the issuance of common stock. The Registrant has
ready access to significant sources of liquidity on an
almost immediate basis. Management anticipates no
difficulty in maintaining liquidity at the levels
necessary to conduct the Registrant's day-to-day
business activities.
Capital Resources:
It is the policy of the Registrant to maintain capital
at a level consistent with both safe and sound
operations and proper leverage to generate an
appropriate return on shareholders' equity. The
capital ratios of the Registrant exceed the regulatory
minimum guidelines. The table below shows a summary of
the Registrant's capital position in comparison to
regulatory requirements.
Tier 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 Registrant
March 31, 2000 7.7% 11.1% 12.3%
December 31, 1999 8.4% 11.8% 13.0%
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 1 capital to
25% of total Tier 1 capital. As of March 31, 2000, all
of the $12,450,000 of Capital Securities were available
as Tier 1 capital of the Registrant. As previously
noted, the Capital Securities will be used to support
the Registrant's current capital position allowing for
future growth.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On March 15, 2000, the Registrant issued five shares of
stock each to two employees of the Company. The shares
were given to the employees in connection with an
employee recognition program. The issuance of stock to
the employees was exempt from registration under The
Securities Act because the transaction did not involve
an offer or sale of stock for value.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this
report
Number Exhibit
10.1 North Country Financial Corporation 2000
Stock Incentive Plan.
27 Financial Data Schedule.
(b) There were no reports filed on Form 8-K during the
quarter ended March 31, 2000.
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)
May 11, 2000 /s/ Ronald G. Ford
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Date RONALD G. FORD,
CHAIRMAN AND CEO
May 11, 2000 /s/ Kristine E. Hoefler
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Date KRISTINE E. HOEFLER,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER