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 June 30, 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 July 31, 2000, there were outstanding 6,960,100
shares of the registrant's common stock, no par value.
NORTH COUNTRY FINANCIAL CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000 (Unaudited) and December 31, 1999 1
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 2000
(Unaudited) and June 30, 1999 (Unaudited) 2
Condensed Consolidated Statements of Changes
in Shareholders' Equity - Three and Six
Months Ended June 30, 2000 (Unaudited) and
June 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of Cash
Flows - Six Months Ended June 30, 2000
(Unaudited) and June 30, 1999 (Unaudited) 4-5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of
Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2000 1999
(Unaudited)
ASSETS
Cash and due from banks $ 22,250 $ 26,160
Federal funds sold 7,005 0
-------- --------
Total cash and cash equivalents 29,255 26,160
Interest-bearing deposits in other financial
institutions 1,367 679
Securities available for sale 57,543 43,343
Total loans 524,239 466,621
Allowance for loan losses (7,720) (6,863)
-------- -------
516,519 459,758
Premises and equipment 18,383 19,118
Other assets 22,063 19,384
-------- --------
Total assets $645,130 $568,442
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 42,422 $ 43,606
Interest-bearing 460,222 419,392
Total deposits 502,644 462,998
Borrowings 81,593 46,878
Accrued expenses and other liabilities 5,175 5,296
-------- --------
Total liabilities 589,412 515,172
-------- --------
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, 6,968,012 and 7,000,176
issued and outstanding at June 30, 2000
and December 31, 1999 15,926 16,418
Retained earnings 27,814 25,058
Accumulated other comprehensive deficit (472) (656)
-------- --------
Total shareholders' equity 43,268 40,820
-------- --------
Total liabilities and shareholders' equity $645,130 $568,442
======== ========
See accompanying notes to consolidated finacial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
------June 30,----- ----- June 30,-----
2000 1999 2000 1999
Interest income
Interest and fees on loans $12,589 $ 9,896 $23,824 $19,345
Interest on securities
Taxable 797 167 1,574 353
Tax-exempt 175 10 344 29
Other interest income 100 114 191 192
------- ------- ------- -------
Total interest income 13,661 10,187 25,933 19,919
------- ------- ------- -------
Interest expense
Deposits 5,971 4,445 11,143 8,675
Borrowings 1,113 316 1,918 708
Subordinated debentures 281 156 554 156
------- ------- ------- -------
Total interest expense 7,365 4,917 13,615 9,539
------- ------- ------- -------
Net interest income 6,296 5,270 12,318 10,380
Provision for loan losses 1,525 213 1,875 426
------- ------- ------- -------
Net interest income after
provision for loan losses 4,771 5,057 10,443 9,954
------- ------- ------- -------
Other income
Service fees 504 469 983 892
Gain on sales of loans 12 30 25 59
Gain on sales of securities 49 0 49 0
Net gain on sale of branches 0 0 292 0
Other operating income 842 150 1,024 313
------- ------- ------- ------
Total other income 1,407 649 2,373 1,264
------- ------- ------- ------
Other expenses
Salaries and employee benefits 1,818 1,530 3,477 3,002
Occupancy and equipment 734 622 1,504 1,252
Other 1,963 2,015 3,748 3,349
------- ------- ------- -------
Total other expenses 4,515 4,167 8,729 7,603
------- ------- ------- -------
Income before provision for
income taxes 1,663 1,539 4,087 3,615
Provision for income taxes 201 232 675 767
------- ------- ------- -------
Net income $ 1,462 $ 1,307 $ 3,412 $ 2,848
======= ======= ======= =======
Basic earnings per common share $ .21 $ .19 $ .49 $ .40
======= ======= ======= =======
Diluted earnings per common
share $ .21 $ .18 $ .49 $ .40
======= ======= ======= =======
Dividends paid per common share $ .05 $ .05 $ .09 $ .09
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Three months ended Six months ended
------June 30,------ -----June 30,------
2000 1999 2000 1999
Balance - beginning of period $42,411 $38,214 $40,820 $39,469
Net income for period 1,462 1,307 3,412 2,848
Net unrealized gain (loss) on
securities available for sale 25 (78) 184 (119)
------- ------- ------- -------
Total comprehensive income 1,487 1,229 3,596 2,729
Cash dividends (330) (319) (656) (640)
Issuance of common stock 100 111 202 204
Common stock retired (400) (200) (694) (2,727)
------- ------- ------- -------
Balance - end of period $43,268 $39,035 $43,268 $39,035
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited),
Six months ended
June 30,
2000 1999
Cash flows from operating activities
Net income $ 3,412 $ 2,848
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 1,169 1,018
Provision for loan losses 1,875 426
Gain on sales of securities (49) 0
Gain on sale of premises and equipment (271) (138)
Net gain on sale of branches (292) 0
Change in other assets (2,513) 963
Change in other liabilities (152) 569
-------- --------
Net cash provided by operating activities 3,179 5,686
-------- --------
Cash flows from investing activities
Net increase in interest-bearing deposits
in other financial institutions (688) 0
Purchase of securities available for sale (24,547) (6,302)
Proceeds from sales of securities available for sale 9,946 0
Proceeds from maturities, calls or paydowns of
securities available for sale 795 2,389
Net increase in loans (58,644) (15,747)
Purchase of premises and equipment (492) (1,418)
Proceeds from sales of premises and equipment 774 211
Net cash paid for sale of branches (4,540) 0
Net cash received for net liabilities assumed in
acquisition of branches 14,390 15,504
-------- --------
Net cash used in investing activities (63,006) (5,363)
-------- --------
Cash flows from financing activities
Net increase in deposits 29,355 25,597
Proceeds from borrowings 65,000 8,000
Payment on borrowings (30,285) (12,061)
Proceeds from issuance of common stock 202 204
Retirement of common stock (694) (2,727)
Net proceeds from the issuance of guaranteed
preferred beneficial interests in the
Corporation's subordinated debentures 0 11,882
Payment of cash dividends (656) (640)
-------- ---------
Net cash provided by financing activities 62,922 30,255
-------- --------
Net change in cash and cash equivalents 3,095 30,578
Cash and cash equivalents at beginning of period 26,160 22,641
-------- --------
Cash and cash equivalents at end of period $ 29,255 $ 53,219
======== ========
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
CONTINUED
(Dollars in thousands)
(Unaudited)
Six months ended
June 30,
2000 1999
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 12,502 $ 9,525
Income taxes 1,993 341
Assets and liabilities acquired in branch
acquisitions:
Premises and equipment, net (139) (286)
Core deposit intangibles and goodwill (664) (1,680)
Deposits 15,149 17,463
Other liabilities 44 7
Assets and liabilities divested in branch sales:
Loans (8) 0
Premises and equipment, net (31) 0
Deposits 4,858 0
Other liabilities 13 0
See accompanying notes to condensed consolidated financial statements.
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, 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 1999, 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 Six months
ended ended
June 30, June 30,
2000 1999 2000 1999
Basic earnings per common share:
Net income $1,462 $1,307 $3,412 $2,848
Weighted average common shares
outstanding 6,979 7,031 6,987 7,052
------ ------ ------ ------
Basic earnings per common share $ .21 $ .19 $ .49 $ .40
====== ====== ====== ======
Diluted earnings per common share:
Net income $1,462 $1,307 $3,412 $2,848
Weighted average common shares
outstanding for basic earnings
per common share 6,979 7,031 6,987 7,052
Add: Dilutive effect of assumed
exercises of stock options 12 91 12 101
Add: Dilutive effect of directors'
deferred stock compensation 37 7 37 7
Average shares and dilutive ------ ------ ------ ------
potential common shares 7,028 7,129 7,036 7,160
------ ------ ------ ------
Diluted earnings per common share $ .21 $ .18 $ .49 $ .40
====== ====== ====== ======
4.INVESTMENT SECURITIES
The amortized cost and estimated fair value of
investment securities available for sale as of June
30, 2000 and December 31, 1999 are as follows (in
thousands):
June 30, 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 $ 10,904 $ 10,392 $ 9,863 $ 9,392
Obligations of states and
political subdivisions 18,852 18,852 16,356 16,210
Corporate securities 4,049 4,134 3,049 3,008
Mortgage-related securities 24,453 24,165 15,070 14,733
-------- -------- -------- --------
Total investment securities
available for sale $ 58,258 $ 57,543 $ 44,338 $ 43,343
5.ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the
six months ended June 30, 2000 and 1999, are
summarized as follows (in thousands):
June 30, June 30,
2000 1999
Balance at beginning of period $ 6,863 $ 6,112
Charge-offs (1,098) (430)
Recoveries 80 52
Provision for loan losses 1,875 426
------- -------
$ 7,720 $ 6,160
======= =======
Information regarding impaired loans follows
(in thousands):
As of and As of and
for the six for the year
months ended ended
June 30, December 31,
2000 1999
Average investment in impaired loans $ 6,682 $ 6,128
Balance of impaired loans 9,041 5,604
6.BORROWINGS
Borrowings consist of the following at June 30, 2000
and December 31, 1999 (in thousands):
June 30, December 31,
2000 1999
Federal Home Loan Bank advances at
various rates with various maturities
(see annual financial statements as
referenced in Note 1) $79,782 $45,067
Farmers Home Administration,
$2,000,000 fixed rate note payable
maturing August 24, 2024, interest
payable at 1% 1,811 1,811
------- -------
$81,593 $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 June 30, 2000.
Borrowings other than Federal Home Loan Bank
advances are not subject to prepayment penalties.
7.CURRENT EVENTS
On June 16, 2000, the Registrant purchased branch
offices located in Glen Arbor and Alanson from Old
Kent Bank. In connection with these acquisitions,
the Registrant assumed deposits of $15,149,000 and
other liabilities of $44,000. Property and
equipment of $139,000 was also acquired. The
related core deposit intangibles and goodwill
totaled $664,000. These branch acquisitions are
consistent with the Registrant's strategy of
expanding in Michigan's Lower Peninsula.
In April, 2000, the Registrant closed the Newberry
Hill branch office. The deposits and loans for this
office were transferred to an existing branch office
in a nearby location.
The Registrant is in the process of establishing new
offices in Cadillac and Boyne City in Michigan's
Lower Peninsula. The Cadillac office is anticipated
to open in the third quarter of 2000 while the Boyne
City office is expected to open in 2001.
On June 21, 2000, the Board of Directors adopted a
Shareholder Rights Plan. The Rights Plan was not
adopted in response to any specific effort to
acquire control of the Registrant. Rather, it was
adopted to protect shareholders against attempts to
acquire control of the Registrant by means of
"creeping" acquisitions in the open market, a
hostile tender offer made at less than a full and
fair price, and other takeover tactics that can be
used to deprive shareholders of the ability to get a
full and fair price for all of their shares in the
context of a change in control. The Board believes
that rights plans have also proven effective in
providing a board of directors of a target company
with more time to pursue alternatives to an
inadequate hostile bid and negotiating leverage with
a bidder should the Board decide to engage in such
activities.
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 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 $3.41 million
through June 30, 2000 compared to $2.85 million for the
same period in 1999. Diluted earnings per share
increased from $0.40 through June 30, 1999, to $0.49
for the same period in 2000. The loan portfolio
continues a significant growth trend with gross loans
increasing $57.6 million or 12.4% since December 31,
1999. Loan growth remains focused in the commercial
lending and leasing areas. The loan growth in 2000 has
been funded primarily through increases in the deposit
portfolio and borrowings. Deposits have increased
$39.6 million or 8.6% since December 31, 1999, with the
primary area of growth being interest-bearing demand
accounts. Borrowings have increased $34.7 million or
74.1% from December 31, 1999 to June 30, 2000.
Financial Condition:
Cash and Cash Equivalents: Cash and cash equivalents
increased $3.1 million or 11.8% through the second
quarter of 2000. The increase was largely funded by
increases in deposits and borrowings as discussed more
fully below, and is available for growth in the Bank's
loan and investment portfolios.
Investment Securities: Available for sale securities
increased $14.2 million or 32.8% through the second
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 second quarter of 2000, loan
balances increased by $57.6 million or 12.4%.
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 six months ended June 30, 2000
compared to December 31, 1999.
Following is a summary of the loan mix at June 30, 2000
and December 31, 1999 (in thousands):
June 30, % of December 31, % of
2000 Total 1999 Total
Loans:
Commercial real estate $ 86,226 16.4% $ 79,000 16.9%
Commercial, financial, and
agricultural 197,204 37.6 179,592 38.5
Leases:
Commercial 41,760 8.0 22,541 4.8
Governmental 56,440 10.8 48,148 10.3
1-4 family residential
real estate 115,007 21.9 107,751 23.1
Consumer 14,596 2.8 17,051 3.7
Construction 13,006 2.5 12,538 2.7
-------- ------ -------- ------
$524,239 100.0% $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 June 30, 2000
and December 31, 1999, the allowance for loan losses
was equal to 1.5% of total loans outstanding.
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 strong credit
quality is demonstrated in its historical charge-off
experience. Net charge-offs to gross loans outstanding
was 0.20% and 0.08% for the six months ended June 30,
2000 and 1999, respectively. Charge-offs for the six
month period ended June 30, 2000 increased $668,000
from the same period in 1999; while increasing, the
charge-off level is considered to be manageable. To
compensate for the increased charge-offs and increased
levels of non-performing loans as described below, the
provision for loan losses was increased $1.4 million
from $426,000 for the six-month period ended June 30,
1999 to $1.88 million 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 June 30, 2000 and December 31, 1999 (in thousands):
June 30, December 31,
2000 1999
Nonaccrual loans $ 5,256 $ 95
Loans 90 days or more past due and
still accruing 1,820 2,452
Nonaccrual loans have increased $5.2 million from
December 31, 1999 to June 30, 2000 while loans 90 days
or more past due and still accruing have decreased by
$632,000 during that same time period. At June 30,
2000, loans to two commercial borrowers represented
$3.8 million of the $5.3 million of nonaccrual loans.
Management anticipates charge-offs on these specific
loans of approximately $1.5 million; therefore, as
discussed above, the provision for loan losses has been
increased accordingly during the quarter ended June 30,
2000. The remaining increase in nonaccrual loans of
$1.4 million relates to loans to thirteen borrowers
with individual balances less than $200,000.
Management continues to monitor the situation on these
and other non-performing loans and has taken various
actions to reduce the level of non-performing loans.
Non-performing loans to total gross loans were 1.00%
and 0.55% at June 30, 2000 and December 31, 1999,
respectively.
Deposits: Total deposits through the second quarter
have increased $39.6 million or 8.6%. While
noninterest-bearing deposit balances decreased,
interest-bearing deposit balances increased through
June 30, 2000. Of the total increase, $10.3 million
represents the net increase due to branch acquisitions
and divestitures as disclosed in the Condensed
Consolidated Statements of Cash Flows. The remaining
growth is attributed to the branch network as well as
from the issuance of brokered deposits.
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 funds for lending activities and to
grow the Bank's investment portfolio as described
above. At June 30, 2000, $79.8 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 $2.5 million from December 31, 1999 to June
30, 2000. The increase primarily resulted from net
income of $3.4 million offset by the repurchase of
common stock of $694,000 and cash dividends paid of
$656,000. 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 June 30, 2000 increased by $1.0 million
or 19.5% 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 second
quarter of 2000 compared to the second quarter of 1999.
The net interest margin, on a fully taxable equivalent
basis, for the quarter ended June 30, 2000 was 5.03%,
compared to 5.16% for the same period of 1999. The net
interest margin has been impacted by the current
economic conditions, the competitive nature of the
Registrant's market, and the issuance of the
subordinated debentures as discussed above. Overall,
as interest rates continue to increase, the Registrant
is not able to increase its lending rates at the same
rate as the increases experienced in the cost of funds;
therefore, margins are squeezed. Interest income from
loans represented 92.2% of total interest income for
the second 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.
Net interest income for the six months ended June 30,
2000 increased by 18.7% compared to the same period in
1999. The net interest margin, on a fully taxable
equivalent basis for the six months ended June 30, 2000
decreased from 5.15% for the same period in 1999 to
5.01% for the same reasons mentioned in the preceding
paragraph. Interest income from loans represented
91.9% of total interest income through the second
quarter of 2000 compared to 97.1% for the same period
of 1999.
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 $1.3 million and $1.4 million
for the quarter ended and six month period ended June
30, 2000, respectively, compared to the same periods in
1999. This is due primarily 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. The Registrant anticipates
that, for the balance of 2000, its quarterly provision
for loan losses will continue to be higher than the
comparable periods in 1999.
Other Income: Other income increased by $758,000 for
the quarter ended June 30, 2000 compared to the same
period in 1999. The increase was primarily due to an
increase in other operating income of $692,000, largely
the result of gains recognized on the sale of premises
and equipment and other assets.
Noninterest income increased by $1.1 million for the
six months ended June 30, 2000 compared to the same
period one year ago. The increase was primarily due to
the net gain on the sale of the Garden office during
the first quarter of 2000 and the net increase in other
operating income, as discussed above, during the second
quarter of 2000.
Noninterest Expenses: Noninterest expense increased
$348,000 or 8.4% for the quarter ended June 30, 2000
compared to the same period of 1999. Salary expense
increased by $288,000 or 18.8% during the second
quarter of 2000 compared to the second quarter of 1999.
Occupancy expense increased by $112,000 or 18.0% for
the second quarter of 2000 compared to the same period
in 1999. Other noninterest expense decreased by
$52,000 or 2.6% for the second quarter of 2000 compared
to the same period in 1999.
Noninterest expense increased $1.1 million or 14.8% for
the six months ended June 30, 2000 compared to the same
period of 1999. Salary expense increased by $475,000
or 15.8% through the second quarter of 2000 compared to
the same period in 1999. Occupancy expense increased
by $252,000 or 20.1% through the second quarter of 2000
compared to the same period in 1999. Other noninterest
expense increased by $399,000 or 11.9% through the
second quarter of 2000 compared to the same period in
1999.
Federal Income Tax: The provision for income taxes was
12.1% of income before income tax for the quarter ended
June 30, 2000 compared to 15.1% for the quarter ended
June 30, 1999. For the six months ended June 30, 2000,
the provision for income taxes was 16.5% of income
compared to 21.2% for the same period in 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 experienced during the
past several years, borrowers have generally tried to
extend the maturities and repricing periods on their
loans and place deposits in demand or very short term
accounts. Management has taken various actions to
offset the imbalance which those tendencies would
otherwise create. Commercial and real estate loans are
written at variable rates or, if necessary, fixed rates
for relatively short terms. 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 June 30, 2000, the Registrant had a cumulative
liability gap position of approximately $90 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
June 30, 2000 7.8% 10.2% 11.5%
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 June 30, 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 April 3, 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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Registrant's shareholders was
held on April 18, 2000. The purpose of the meeting was
to elect directors, each for a three year term, and to
approve the North Country Financial Corporation 2000
Stock Incentive Plan.
The name of each director elected, along with the
number of votes cast for or authority withheld)
follows:
Authority
Directors Elected For Withheld
Paul W. Arsenault 4,525,902 99,612
Bernard A. Bouschor 4,510,655 114,859
C. Ronald Dufina 4,529,183 96,331
Wesley W. Hoffman 4,527,309 98,205
The North Country Financial Corporation 2000 Stock
Incentive Plan received the following votes:
For 3,837,942
Against 601,814
Abstained 160,999
Authority withheld 24,759
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this
report
Number Exhibit
3 Articles of Incorporation, as amended
10 Employment Agreement dated July 3, 2000
between North Country Financial
Corporation and Ronald G. Ford
27 Financial Data Schedule.
(b) There were no reports filed on Form 8-K during the
quarter ended June 30, 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)
August 11, 2000 /s/ Ronald G. Ford
- ---------------- ------------------
Date RONALD G. FORD,
CHAIRMAN AND CEO
August 11, 2000 /s/ Kristine E. Hoefler
- ---------------- -----------------------
Date KRISTINE E. HOEFLER,
EXECUTIVE VICE PRESIDENT AND CFO