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EXHIBIT 13
NORTH
COUNTRY
FINANCIAL
CORPORATION
2000
ANNUAL
REPORT
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TABLE OF CONTENTS
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To Our Shareholders.............................................................................1
Comparative Highlights..........................................................................2
Five Year Comparisons...........................................................................3
Independent Auditor's Report....................................................................5
Consolidated Balance Sheets.....................................................................7
Consolidated Statements of Income...............................................................8
Consolidated Statements of Changes in Shareholders' Equity......................................9
Consolidated Statements of Cash Flows..........................................................10
Notes to Consolidated Financial Statements.....................................................12
Selected Financial Data........................................................................32
Summary Quarterly Financial Information........................................................33
Market Information.............................................................................34
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................35
Board of Directors.............................................................................46
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TO OUR SHAREHOLDERS
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[Corporation letterhead]
Dear Shareholder:
Your corporation continues to grow in terms of assets, loans, deposits and
equity. During 2000, the bank continued its expansion in lower northern Michigan
by opening an office in Cadillac and a second office in Traverse City; we also
purchased banking offices in Alanson and Glen Arbor. We plan to open a Boyne
City office by April 1, 2001. This will give us 30 offices in 27 towns, spread
across Michigan's Upper Peninsula and northern lower Michigan.
Beginning in April, your stock became listed on The NASDAQ National Market
System (symbol: NCUF) and we have been disappointed in the market price. The
poor performance in the market is due in part to the overall sharp swings in the
economy during 2000, including the downgrading of Internet stocks, election
uncertainty, speculation about Federal Reserve policy and our absence of an
aggressive investor relations program.
Our increase in lending activity (net loans are up 15.8% over last year) and our
identification of probable non-performing loans, prompted the board to increase
the provision for loan losses. Although this action resulted in lower net income
and earnings per share, we believe this was a necessary step to ensure your bank
is not slowed by possible loan losses and is positioned for future increases in
lending, income and earnings. For details, turn to the "Highlights" on page 35.
This coming year, although we will continue considering acquisitions that can
enhance growth, we will focus more on increasing profits from existing
operations. We believe this will be accomplished by attracting new commercial
loans, new mortgage loans and retail deposits.
Your bank will be launching a new marketing and public relations program in
2001, designed primarily to increase the level of awareness of your bank among
businesses and consumers in lower northern Michigan who do not know us as well
as our customer base in the Upper Peninsula. In addition, we will launch an
investor relations program, seeking more exposure in business and investor
publications that communicate the continual growth and value of your bank to
brokers and consumer investors.
On behalf of your Board of Directors, thank you for your continued confidence
and support of the regional community banking services we provide.
Respectfully,
- --------------------- -------------------------- ------------------------
Ronald G. Ford Michael C. Henricksen Thomas G. King
Chairman and C.E.O. Vice Chairman Vice Chairman
1.
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COMPARATIVE HIGHLIGHTS
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Dollars in thousands, except per share data
BALANCE SHEET STATISTICS 2000 1999 % CHANGE
Assets $666,996 $568,442 17.3%
Net loans 532,235 459,758 15.8
Deposits 531,883 462,998 14.9
Shareholders' equity 44,617 40,820 9.3
Shares of stock outstanding 6,993,684 7,000,176 (0.1)
Book value per share 6.38 5.83 9.4
OPERATING STATISTICS
Total income $61,536 $46,087 33.5%
Total expense 55,408 37,996 45.8
Income before income taxes 6,128 8,091 (24.3)
Net income 5,183 6,356 (18.5)
Basic earnings per share .74 .90 (17.8)
Diluted earnings per share .73 .89 (18.0)
DIVIDEND SUMMARY
(CASH DIVIDENDS DECLARED PER COMMON SHARE)
Quarter Ending
March 31 .05 .04
June 30 .05 .04
September 30 .14 .05
December 31 .10 .05
Total dividends .34 .18 88.9%
The above summary should be read in connection with the related consolidated
financial statements and notes included elsewhere in this report.
BUSINESS OF THE CORPORATION
North Country Financial Corporation is a registered bank holding company formed
under the Bank Holding Company Act of 1956, as amended. The principal assets of
the Corporation are its ownership of all of the outstanding capital stock of
North Country Bank and Trust, North Country Financial Group, North Country
Capital Trust, First Rural Relending Company, and First Manistique Agency. North
Country Bank and Trust, headquartered in Traverse City, Michigan, provides a
full range of commercial and retail banking services to customers in Michigan.
North Country Bank and Trust owns North Country Mortgage Company LLC, American
Financial Mortgage Corporation, North Country Employee Leasing Company LLC, and
NCB Real Estate Company. North Country Mortgage Company LLC and American
Financial Mortgage Corporation are engaged in the business of mortgage lending
and brokering. North Country Employee Leasing Company LLC provides employees to
North Country Bank and Trust. NCB Real Estate Company owns several properties
used by the Bank. North Country Financial Group provides tax-exempt
lease/purchase financing to municipalities. North Country Capital Trust was
formed solely for the issuance of trust preferred securities. First Rural
Relending Company is a rural lending corporation. First Manistique Agency is
engaged in the selling of insurance.
FORM 10-K
A copy of the Annual Report to the Securities and Exchange Commission on Form
10-K is available without charge by writing Kristine Hoefler, North Country
Financial Corporation, 3530 North Country Drive, Traverse City, Michigan 49684.
MARKET SUMMARY
The common stock of North Country Financial Corporation was been traded in
private sales from October 1976 until April 18, 2000 at which time the stock
started trading on the NASDAQ Bulletin Board system. The Corporation has 2,056
shareholders of record, as of January 31, 2001.
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FIVE YEAR COMPARISONS
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ASSETS
[ASSETS LINE CHART] Total assets on a consolidated basis increased by
17% during 2000 to $667 million. Total assets have
increased $300 million since the end of 1996, an
increase of 82% in four years.
SECURITIES
[SECURITIES LINE CHART] Our portfolio of securities increased during 2000
to $72 million. Management has utilized excess
deposit funds and the proceeds of several
borrowings to purchase high yield and high quality
investment securities.
NET LOANS
[NET LOANS LINE CHART] Total net loans increased 16% to $532 million in
2000. Loan demand is strong and our primary
lending objective continues to be one of selecting
the highest quality credits. Total loan losses
have remained at an acceptable level, and we
continue to maintain a loan loss allowance above
regulatory guidelines. The allowance for loan
losses totaled $9 million at the end of 2000. We
expect strong loan demand to continue, with the
majority being commercial and business loans,
which represent 75% of the loan portfolio.
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FIVE YEAR COMPARISONS
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DEPOSITS
[DEPOSITS LINE CHART] Total deposits increased by 14.9% to $532 million.
In 2000, we paid our depositors interest of $25
million which goes back into our regional economy.
SHAREHOLDERS' EQUITY
[SHAREHOLDERS' EQUITY During 2000, $4 million was added to shareholders'
LINE CHART] equity, increasing total equity by 9.3%. In
addition, cash dividends of $0.34 per share, or $2
million, were declared to our shareholders during
2000. Book value per share increased from $5.83 at
December 31, 1999 to $6.38 at December 31, 2000.
NET INCOME
[NET INCOME LINE CHART] Net income for 2000 was $5 million as compared to
$6 million for 1999. Basic earnings per share for
2000 totaled $0.74 as compared to $0.90 for 1999
and $0.65 for 1998.
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INDEPENDENT AUDITOR'S REPORT
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INDEPENDENT AUDITOR'S REPORT
TO THE SHAREHOLDERS OF
NORTH COUNTRY FINANCIAL CORPORATION
TRAVERSE CITY, MICHIGAN
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5.
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INDEPENDENT AUDITOR'S REPORT
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INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
North Country Financial Corporation
Traverse City, Michigan
We have audited the accompanying consolidated balance sheets of North Country
Financial Corporation and Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Country
Financial Corporation and Subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with generally accepted
accounting principles.
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Wipfli Ullrich Bertelson LLP
January 26, 2001
Appleton, Wisconsin
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CONSOLIDATED BALANCE SHEETS
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2000 and 1999
(Dollars in Thousands)
- -------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
------
Cash and cash equivalents $ 20,829 $ 26,160
Interest-bearing deposits in other financial institutions -0- 679
Securities available for sale 72,066 43,343
Total loans 541,689 466,621
Allowance for loan losses (9,454) (6,863)
---------------- ----------------
Net loans 532,235 459,758
Premises and equipment 18,850 19,118
Other assets 23,016 19,384
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TOTAL ASSETS $ 666,996 $ 568,442
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Liabilities:
Non-interest-bearing deposits $ 50,479 $ 43,606
Interest-bearing deposits 481,404 419,392
--------------- ---------------
Total deposits 531,883 462,998
Federal funds purchased 1,800 -0-
Borrowings 69,235 46,878
Other liabilities 7,011 5,296
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Total liabilities 609,929 515,172
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Guaranteed preferred beneficial interests in the Corporation's
subordinated debentures 12,450 12,450
--------------- ---------------
Shareholders' equity:
Preferred stock - No par value:
Authorized 500,000 shares, no shares outstanding
Common stock - No par value:
Authorized - 18,000,000 shares
Issued and outstanding - 6,993,684 and 7,000,176 shares
at December 31, 2000 and 1999, respectively 16,029 16,418
Retained earnings 27,887 25,058
Accumulated other comprehensive income (deficit) 701 (656)
--------------- ----------------
Total shareholders' equity 44,617 40,820
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 666,996 $ 568,442
=============== ===============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands, Except Per Share Data)
- -------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Interest income:
Interest and fees on loans $ 50,063 $ 40,457 $ 37,284
Interest on securities:
Taxable 3,462 1,438 436
Tax-exempt 643 232 31
Other interest income 515 422 747
---------------- --------------- ---------------
Total interest income 54,683 42,549 38,498
---------------- --------------- ---------------
Interest expense:
Deposits 24,555 18,282 16,530
Borrowings 3,726 1,651 1,285
Subordinated debentures 1,140 669 -0-
---------------- --------------- ---------------
Total interest expense 29,421 20,602 17,815
---------------- --------------- ---------------
Net interest income 25,262 21,947 20,683
Provision for loan losses 5,875 1,457 1,200
---------------- --------------- ---------------
Net interest income after provision for loan losses 19,387 20,490 19,483
---------------- --------------- ---------------
Other income:
Service fees 1,982 1,965 1,478
Net security gains 110 -0- 45
Fee income generated by mortgage subsidiary 2,809 -0- -0-
Other operating income 1,952 1,573 1,128
---------------- --------------- ---------------
Total other income 6,853 3,538 2,651
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Other expenses:
Salaries, commissions and related benefits 9,433 6,362 6,568
Occupancy expense 2,902 2,613 2,426
Printing and supplies 357 393 391
Amortization of acquisition intangibles 810 699 790
Accounting, legal and consulting fees 958 874 930
Data processing 1,597 1,370 1,566
Telephone 897 690 656
Other 3,158 2,936 3,276
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Total other expenses 20,112 15,937 16,603
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Income before provision for income taxes 6,128 8,091 5,531
Provision for income taxes 945 1,735 970
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Net income $ 5,183 $ 6,356 $ 4,561
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Earnings per share:
Basic $ 0.74 $ 0.90 $ 0.65
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Diluted $ 0.73 $ 0.89 $ 0.64
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands, Except Per Share Data)
- -------------------------------------------------------------------------------
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Income (Deficit) Total
----- ----- -------- ---------------- -----
Balance, January 1, 1998 7,138,470 $ 19,916 $ 16,679 $ (3) $ 36,592
Net income 4,561 4,561
Other comprehensive
income:
Net unrealized gain on
securities available for
sale 47 47
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Total comprehensive income 4,608
Dividends declared ($.17
per share) (1,251) (1,251)
Issuance of common stock 87,667 1,317 1,317
Retirement of common
stock (95,377) (1,797) (1,797)
---------------- ---------------- -------------- -------------- --------------
Balance, December 31,
1998 7,130,760 19,436 19,989 44 39,469
Net income 6,356 6,356
Other comprehensive
deficit:
Net unrealized loss on
securities available for
sale (700) (700)
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Total comprehensive income 5,656
Dividends declared ($.18
per share) (1,287) (1,287)
Issuance of common stock 22,407 480 480
Retirement of common
stock (152,991) (3,498) (3,498)
--------------- --------------- -------------- -------------- --------------
Balance, December 31,
1999 7,000,176 16,418 25,058 (656) 40,820
Net income 5,183 5,183
Other comprehensive
income:
Net unrealized gain on
securities available for
sale 1,357 1,357
--------------
Total comprehensive income 6,540
Dividends declared ($.34
per share) (2,354) (2,354)
Issuance of common stock 51,489 498 498
Retirement of common
stock (57,981) (887) (887)
---------------- ---------------- -------------- -------------- --------------
Balance, December 31,
2000 6,993,684 $ 16,029 $ 27,887 $ 701 $ 44,617
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
- -------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 5,183 $ 6,356 $ 4,561
---------------- ----------------- ---------------
Adjustments to reconcile net income to net
cash provided by operating
activities:
Provision for loan losses 5,875 1,457 1,200
Provision for depreciation and net
amortization 2,281 2,247 2,073
Proceeds from loan sales 6,129 15,173 21,525
Loans originated for sale (6,068) (15,146) (21,415)
Gains on sales of:
Loans held for sale (61) (27) (110)
Securities (110) -0- (45)
Premises, equipment and other real estate (35) (382) (103)
Branches (292) (430) -0-
Change in other assets (3,846) (503) 1,514
Change in other liabilities 622 1,610 186
---------------- ----------------- ---------------
Total adjustments 4,495 3,999 4,825
---------------- ----------------- ---------------
Net cash provided by operating activities 9,678 10,355 9,386
---------------- ----------------- ---------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits in other financial institutions 679 (679) -0-
Payment for purchases of securities available for sale (53,542) (38,875) (7,530)
Proceeds from sale of securities available for sale 23,576 -0- 3,820
Proceeds from maturities of securities available for sale 3,543 3,131 2,330
Net increase in loans (79,854) (57,168) (40,350)
Proceeds from sale of premises, equipment,
and other real estate 2,096 1,231 1,364
Capital expenditures (1,659) (2,603) (2,526)
Net cash paid for branch sales (4,540) (10,001) -0-
Net cash provided from acquisitions 13,985 15,504 -0-
---------------- ----------------- ----------------
Net cash used in investing activities (95,716) (89,460) (42,892)
----------------- ------------------ ----------------
10.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
- ----------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from financing activities:
Net increase in deposits $ 58,594 $ 51,440 $ 44,412
Net increase (decrease) in federal funds
purchased 1,800 -0- (1,195)
Proceeds from borrowings 80,000 36,000 10,500
Principal payments on borrowings (57,643) (12,392) (6,858)
Net proceeds from issuance of guaranteed
preferred beneficial interests in the
Corporation's subordinated debentures -0- 11,882 -0-
Proceeds from issuance of common stock 498 480 1,192
Retirement of common stock (887) (3,498) (1,797)
Dividends paid (1,655) (1,287) (1,251)
----------------- ------------------ ----------------
Net cash provided by financing activities 80,707 82,625 45,003
---------------- ----------------- ---------------
Net increase (decrease) in cash and cash
equivalents (5,331) 3,520 11,497
Cash and cash equivalents at beginning 26,160 22,640 11,143
---------------- ----------------- ---------------
Cash and cash equivalents at end $ 20,829 $ 26,160 $ 22,640
================ ================= ===============
Supplemental cash flow information:
- -----------------------------------
Cash paid during the year for:
Interest $ 27,929 $ 20,359 $ 18,077
Income taxes 2,530 540 1,241
Noncash investing and financing activities:
- ------------------------------------------
Transfer of foreclosures from loans to
other real estate 1,481 1,561 461
Assets and liabilities acquired in acquisitions:
Premises and equipment 204 286 -0-
Acquisition intangibles 918 1,680 -0-
Other assets 449 -0- -0-
Deposits 15,149 17,463 -0-
Other liabilities 407 7 -0-
Assets and liabilities divested in branch sales:
Loans 8 -0- -0-
Premises and equipment 31 65 -0-
Acquisition intangibles -0- 370 -0-
Deposits 4,858 10,866 -0-
Other liabilities 13 -0- -0-
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of North Country Financial Corporation (the
"Corporation") and Subsidiaries conform to generally accepted accounting
principles and prevailing practices within the banking industry. Significant
accounting policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and its wholly owned subsidiaries, North Country Bank and Trust (the "Bank"),
North Country Financial Group, North Country Capital Trust, and other minor
subsidiaries, after elimination of intercompany transactions and accounts.
Nature of Operations
The Corporation's and the Bank's revenues and assets are derived primarily from
the banking industry. The Bank's primary market area is Michigan. The Bank
provides to its customers commercial, real estate, agricultural, and consumer
loans, as well as a variety of traditional deposit products. A significant
portion of the Bank's commercial loan portfolio consists of leases to commercial
and governmental entities which are secured by various types of equipment. These
leases are dispersed geographically throughout the country.
While the Corporation's chief decision makers monitor the revenue streams of the
various Corporation products and services, operations are managed and financial
performance is evaluated on a Corporation-wide basis. Accordingly, all of the
Corporation's banking operations are considered by management to be aggregated
in one reportable operating segment.
Use of Estimates in the Preparation of Financial Statements
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.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, non-interest-bearing deposits in correspondent banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
Securities
The Corporation's securities are classified and accounted for as securities
available for sale. These securities are stated at fair value. Premiums and
discounts are recognized in interest income using the interest method over the
period to maturity. Unrealized holding gains and losses, net of tax, on
securities available for sale are reported as accumulated other comprehensive
income within shareholders' equity until realized.
Gains and losses on the sale of securities are determined using the
specific-identification method.
Loans Held for Sale
Loans held for sale represent originations of fixed-rate, first mortgage loans
recorded at cost. The loans are sold at fair value shortly after origination
based on an agreement with an outside mortgage company.
12.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest Income and Fees on Loans
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all unpaid
accrued interest is reversed. Loan-origination fees are credited to income when
received.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to commercial
loans which have been judged to be impaired. A loan is impaired when, based on
current information, it is probable that the Corporation will not collect all
amounts due in accordance with the contractual terms of the loan agreement.
These specific allowances are based on discounted cash flows of expected future
payments using the loan's initial effective interest rate or the fair value of
the collateral if the loan is collateral dependent.
The Corporation continues to maintain a general allowance for loan losses for
loans not considered impaired. The allowance for loan losses is maintained at a
level which management believes is adequate to provide for possible loan losses.
Management periodically evaluates the adequacy of the allowance using the
Corporation's past loan loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
factors. The allowance does not include the affects of expected losses related
to future events or future changes in economic conditions. This evaluation is
inherently subjective since it requires material estimates that may be
susceptible to significant change. Loans are charged against the allowance for
loan losses when management believes the collectibility of the principal is
unlikely. In addition, various regulatory agencies periodically review the
allowance for loan losses. These agencies may require additions to the allowance
for loan losses based on their judgments of collectibility.
In management's opinion, the allowance for loan losses is adequate to cover
probable losses relating to specifically identified loans, as well as probable
losses inherent in the balance of the loan portfolio as of the balance sheet
date.
Other Real Estate
Other real estate is carried at the lower of cost or fair value, less estimated
sales costs.
Premises and Equipment
Premises and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of premises and
equipment are reflected in income. Depreciation is computed on the straight-line
method and is based on the estimated useful lives of the assets.
Acquisition Intangibles
The Corporation's acquisition intangibles include the value of ongoing customer
relationships (core deposits) and the excess of cost over the fair value of net
assets acquired (goodwill) arising from the purchase of certain assets and the
assumption of certain liabilities from unrelated entities. Core deposit
intangibles are amortized over a 10-year period and goodwill is amortized over
periods ranging from 15 to 25 years. Acquisition intangibles are periodically
reviewed for impairment. Any impairment in the intangibles would be recorded
against income in the period of impairment.
13.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred.
Earnings Per Common Share
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential common shares
issuable under stock options and deferred stock compensation agreements.
Earnings and dividends per share are restated for all stock splits through the
date of issue of the financial statements.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(deficit). Other comprehensive income (deficit) includes unrealized gains and
losses on securities available for sale, net of tax, which are recognized as a
separate component of equity, accumulated other comprehensive income (deficit).
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences are expected to
reverse. Deferred tax expense (credit) is the result of changes in the deferred
tax asset and liability.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded
in the consolidated financial statements when they become payable.
Future Accounting Change
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. As amended by SFAS
No. 137, the statement is effective for fiscal years beginning after June 15,
2000. The Corporation's adoption of SFAS No. 133 on January 1, 2001 did not have
a material impact on the consolidated financial statements as of the date of
adoption.
Reclassifications
Certain amounts in the 1999 and 1998 consolidated financial statements have been
reclassified to conform to the 2000 presentation.
14.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 2 - ACQUISITIONS AND DIVESTURES
In June 2000, the Corporation acquired branches in Glen Arbor and Alanson from
Old Kent Bank. The Corporation assumed deposits of $15,149,000 and other
liabilities of $44,000. Property and equipment of $139,000 was also acquired.
The transaction resulted in core deposit intangibles and goodwill of $664,000.
In August 2000, the Corporation acquired American Financial Mortgage
Corporation, a Michigan based mortgage company, through a stock purchase. Total
assets acquired and liabilities assumed were $514,000 and $363,000,
respectively. The transaction resulted in goodwill of $254,000.
In May 1999, the Corporation acquired branches in Kaleva and Mancelona from
Huntington National Bank. The Corporation assumed deposits of $17,463,000 and
other liabilities of $7,000. Premises and equipment of $286,000 was also
acquired. The transaction resulted in core deposit intangibles and goodwill of
$1,680,000.
The above acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the assets, liabilities, and results of operations are
included in the Corporation's consolidated financial statements as of and
subsequent to the respective acquisition dates. Note 7 provides information
regarding acquisition intangibles.
In January 2000, the Corporation sold a branch in Garden. Deposits of
$4,858,000, other liabilities of $13,000, and assets of $39,000 were divested in
the transaction which resulted in a net gain on sale of $292,000.
In July 1999, the Corporation sold branches in Rudyard and Cedarville. Deposits
of $10,866,000 and premises and equipment of $65,000 were divested in the
transaction at a premium of $800,000. After consideration for unamortized
intangible assets related to such branches, the transaction resulted in a net
gain on sale of $430,000.
Information regarding assets and liabilities acquired or divested in these
transactions is presented on the consolidated statements of cash flows.
NOTE 3 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $8,657,000 and $6,722,000 were
restricted at December 31, 2000 and 1999, respectively, to meet the reserve
requirements of the Federal Reserve System.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale as
of December 31 are as follows (dollars in thousands):
2000
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------- ----------- ----------- ---------------
U.S. Treasury securities and
obligations of U.S. government
agencies $ 10,946 $ 33 $ 97 $ 10,882
Obligations of states and
political subdivisions 14,754 858 70 15,542
Corporate securities 4,553 237 50 4,740
Mortgage-related securities 40,752 231 81 40,902
---------------- ----------- -------------- -------------
Total securities available
for sale $ 71,005 $ 1,359 $ 298 $ 72,066
================ =========== ============== ==============
15.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 4 - SECURITIES AVAILABLE FOR SALE (Continued)
1999
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------- ----------- ----------- ---------------
U.S. Treasury securities and
obligations of U.S. government
agencies $ 9,863 $ -0- $ 471 $ 9,392
Obligations of states and
political subdivisions 16,356 408 554 16,210
Corporate securities 3,049 -0- 41 3,008
Mortgage-related securities 15,070 -0- 337 14,733
---------------- ----------- ----------- ---------------
Total securities available
for sale $ 44,338 $ 408 $ 1,403 $ 43,343
================ =========== =========== ===============
Following is a summary of the proceeds from sales of securities available for
sale, as well as gross gains and losses for the years ended December 31 (dollars
in thousands):
2000 1999 1998
---- ---- ----
Proceeds from sale of securities $ 23,576 $ -0- $ 3,820
Gross gains on sales 110 -0- 65
Gross losses on sales -0- -0- 20
The amortized cost and estimated fair value of securities available for sale at
December 31, 2000, by contractual maturity, are shown below (dollars in
thousands). Contractual maturities may differ from expected maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized Estimated
Cost Fair Value
---- ----------
Due in one year or less $ 161 $ 283
Due after one year through five years 2,216 2,223
Due after five years through ten years 10,062 10,640
Due after ten years 17,814 18,018
--------------- ---------------
30,253 31,164
Mortgage-related securities 40,752 40,902
--------------- ---------------
Total $ 71,005 $ 72,066
=============== ===============
The amortized cost and estimated fair value of securities pledged to secure
treasury deposits was $800,000 and $796,000, respectively, as of December 31,
2000. See note 9 for information on securities pledged to secure borrowings from
the Federal Home Loan Bank.
16.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 5 - LOANS
The composition of loans at December 31 follows (dollars in thousands):
2000 1999
---- ----
Commercial, financial, and agricultural $ 308,421 $ 258,592
Commercial and governmental leases 97,167 70,689
1-4 family residential real estate 113,834 107,751
Consumer 13,059 17,050
Construction 9,208 12,539
---------------- ----------------
Total loans $ 541,689 $ 466,621
================ ================
An analysis of the allowance for loan losses for the years ended December 31
follows (dollars in thousands):
2000 1999 1998
---- ---- ----
Balance, January 1 $ 6,863 $ 6,112 $ 5,600
Provision for loan losses 5,875 1,457 1,200
Recoveries on loans 144 102 117
Loans charged off (3,428) (808) (805)
--------------- ---------------- ---------------
Balance, December 31 $ 9,454 $ 6,863 $ 6,112
============== =============== ==============
Information regarding impaired loans follows (dollars in thousands):
As of December 31:
2000 1999 1998
---- ---- ----
Investment in impaired loans $ 19,514 $ 5,604 $ 6,073
Impaired loans on non-accrual 10,507 -0- 1,401
Amount of the allowance allocated 3,451 704 873
For the years ended December 31:
2000 1999 1998
---- ---- ----
Average investment in impaired loans $ 22,650 $ 6,128 $ 6,155
Interest income recognized during impairment 1,125 298 316
Interest income that would have been recognized
on an accrual basis 1,478 369 668
Cash-basis interest income recognized 832 299 302
The Bank, in the ordinary course of banking business, grants loans to the
Corporation's executive officers and directors including their families and
firms in which they are principal owners. Activity in such loans during 2000 is
summarized below (dollars in thousands).
Substantially all loans to executive officers and directors were made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.
Loans outstanding, January 1, 2000 $ 15,729
New loans 1,142
Repayment (1,385)
Net activity related to new or retired directors for 2000 (2,697)
----------------
Loans outstanding, December 31, 2000 $ 12,789
===============
17.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 follow (dollars in thousands):
2000 1999
---- ----
Land $ 2,781 $ 2,896
Buildings and improvements 15,374 15,054
Furniture, fixtures, and equipment 10,812 10,327
--------------- ---------------
Totals 28,967 28,277
Less - Accumulated depreciation and amortization 10,117 9,159
--------------- ---------------
Net book value $ 18,850 $ 19,118
=============== ===============
Depreciation and amortization of premises and equipment charged to operating
expenses amounted to $1,582,000 in 2000, and $1,523,000 in 1999 and $1,381,000
in 1998.
NOTE 7 - ACQUISITION INTANGIBLES
Included in other assets are intangible assets acquired through acquisitions.
Acquisition intangibles consist of the following as of December 31, net of
amortization (dollars in thousands):
2000 1999
---- ----
Goodwill $ 4,073 $ 3,668
Core deposit intangible 2,637 2,934
--------------- ---------------
Total acquisition intangibles $ 6,710 $ 6,602
=============== ===============
NOTE 8 - DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in
thousands):
2000 1999
---- ----
Non-interest-bearing demand deposits $ 50,479 $ 43,606
Savings, money market, and interest-bearing demand deposits 241,787 267,027
Time deposits 239,617 152,365
--------------- ---------------
Total deposits $ 531,883 $ 462,998
=============== ===============
Retail time deposits of $100,000 or more were $66,163,000 and $35,310,000 at
December 31, 2000 and 1999, respectively. Interest expense on retail time
deposits of $100,000 or more was $3,522,000, $1,357,000 and $1,544,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. Brokered time
deposits were $14,964,000 and $0 at December 31, 2000 and 1999, respectively.
Interest expense on brokered deposits was $863,000, $0 and $0 for the years
ended December 31, 2000, 1999 and 1998, respectively.
18.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 8 - DEPOSITS (CONTINUED)
Maturities of time deposits outstanding at December 31, 2000, are as follows
(dollars in thousands):
2001 $ 155,459
2002 60,399
2003 9,150
2004 13,210
2005 692
Thereafter 707
----------------
$ 239,617
================
NOTE 9 - BORROWINGS
Borrowings consist of the following at December 31 (dollars in thousands):
2000 1999
---- ----
Federal Home Loan Bank:
Fixed-rate advance at 6.01%, maturing June 19, 2000 $ -0- $ 10,000
Fixed-rate advance at 6.07%, maturing August 9, 2000 -0- 7,000
Fixed-rate advance at 7.37%, maturing April 15, 2004 115 136
Fixed-rate advance at 7.59%, maturing May 17, 2004 203 240
Fixed-rate advance at 6.35%, maturing July 7, 2004 1,000 1,000
Fixed-rate advance at 6.50%, maturing October 17, 2005 1,974 2,268
Fixed-rate advance at 7.06%, maturing May 15, 2006 4,196 4,423
Adjustable-rate advance, callable June 24, 2002,
maturing June 23, 2008, 5.49% at December 31, 2000 and 1999 10,000 10,000
Adjustable-rate advance, callable October 22, 2001
maturing October 21, 2009, 5.66% at December 31, 2000 and 1999 10,000 10,000
Adjustable-rate advance, callable February 22, 2001,
maturing February 22, 2010, 6.22% at December 31, 2000 10,000 -0-
Adjustable-rate advance, callable June 22, 2001,
maturing June 22, 2010, 6.50% at December 31, 2000 10,000 -0-
Adjustable-rate advance, callable March 23, 2001,
maturing June 23, 2010, 5.99% at December 31, 2000 5,000 -0-
Adjustable-rate advance, callable December 20, 2001,
maturing December 20, 2010, 4.98% at December 31, 2000 5,000 -0-
Adjustable-rate advance, callable December 29, 2003,
maturing December 28, 2010, 5.16% at December 31, 2000 10,000 -0-
---------------- ------------------
67,488 45,067
Farmers Home Administration:
Fixed-rate note payable to Farmers Home Administration,
maturing August 24, 2024, interest payable at 1% 1,747 1,811
---------------- -----------------
Total borrowings
$ 69,235 $ 46,878
================ =================
19.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 9 - BORROWINGS (CONTINUED)
Maturities of borrowings outstanding at December 31, 2000, are as follows
(dollars in thousands):
2001 $ 686
2002 734
2003 788
2004 1,987
2005 881
Thereafter 64,159
----------------
$ 69,235
================
The Federal Home Loan Bank borrowings are collateralized by the following: a
blanket collateral agreement on the Bank's residential mortgage loans; U.S.
Government and agency securities with an amortized cost and estimated fair value
of $29,761,000 and $29,725,000, respectively, at December 31, 2000; and by
Federal Home Loan Bank stock owned by the Bank totaling $3,989,000, included in
other assets, at December 31, 2000. Prepayment of the advances is subject to the
provisions and conditions of the credit policy of the Federal Home Loan Bank of
Indianapolis in effect as of December 31, 2000.
The Farmers Home Administration borrowing is collateralized by loans totaling
$1,700,000, originated and held by the Corporation's wholly owned subsidiary,
First Rural Relending, and guaranteed by the Corporation.
NOTE 10 - INCOME TAXES
The components of the federal income tax provision for the years ended December
31 follow (dollars in thousands):
2000 1999 1998
---- ---- ----
Current tax expense $ 2,062 $ 1,853 $ 1,240
Deferred tax credit (1,117) (118) (270)
--------------- ---------------- ---------------
Total provision for income taxes $ 945 $ 1,735 $ 970
============== =============== ==============
Deferred income taxes are provided for the temporary differences between the
financial reporting and tax bases of the Corporation's assets and liabilities.
The major components of net deferred tax assets at December 31 are as follows
(dollars in thousands):
2000 1999
---- ----
Deferred tax assets:
Allowance for loan losses $ 3,050 $ 2,071
Deferred compensation 495 413
Unrealized loss on securities available for sale -0- 339
------------------- ---------------
Total deferred tax assets 3,545 2,823
------------------ ---------------
Deferred tax liabilities:
Depreciation (1,058) (1,045)
Intangibles (92) (196)
Unrealized gain on securities available for sale (360) -0-
Other (57) (22)
------------------- ----------------
Total deferred tax liabilities (1,567) (1,263)
------------------- ----------------
Net deferred tax asset $ 1,978 $ 1,560
================== ===============
20.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (CONTINUED)
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows (dollars in thousands):
2000 1999 1998
---- ---- ----
Tax expense at statutory rate $ 2,084 $ 2,751 $ 1,881
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,263) (1,122) (1,128)
Other 124 106 217
-------------- --------------- --------------
Provision for income taxes $ 945 $ 1,735 $ 970
============== =============== ==============
Included in the total provision for income taxes are expenses of $37,000, $0 and
$15,000 for the years ended December 31, 2000, 1999 and 1998, respectively,
related to security transactions.
NOTE 11 - RETIREMENT PLAN
The Corporation has established a 401(k) profit-sharing plan. Employees who have
completed three months of service and attained the age of 18 are eligible to
participate in the plan. Eligible employees can elect to have a portion, not to
exceed 15%, of their annual compensation paid into the plan. In addition, the
Corporation may make discretionary contributions into the plan. Retirement plan
contributions charged to operations totaled $153,000, $159,000 and $200,000 for
2000, 1999 and 1998, respectively.
NOTE 12 - DEFERRED COMPENSATION PLANS
As an incentive to retain key members of management and directors, the
Corporation has two deferred compensation plans.
Benefits under one of the plans is based on the number of years the individuals
have served the Corporation. A liability is recorded on a present value basis
and discounted using current market rates. The liability may change depending
upon changes in long-term interest rates. The liability at December 31, 2000 and
1999, for vested benefits under this plan, was $1,206,000 and $1,136,000
respectively. The Corporation maintains life insurance policies on the plan
participants. Death benefits received from the life insurance policies will be
used to offset the obligations under the plan. The cash surrender value of these
policies was $1,047,000 and $940,000 at December 31, 2000 and 1999,
respectively.
The Corporation sponsors a deferred stock compensation plan for directors.
Directors are allowed to defer their director's fees under the plan. The
deferred compensation is computed as stock equivalents as the compensation is
earned. Directors receive the deferred compensation in the form of common stock
upon retirement. The liability relating to this plan was $485,000 and $325,000
at December 31, 2000 and 1999, respectively.
Deferred compensation expense for the plans was $339,000, $248,000 and $316,000
for 2000, 1999 and 1998, respectively.
NOTE 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
SUBORDINATED DEBENTURES
In May 1999, the Corporation formed a Delaware business trust, North Country
Capital Trust (the "Trust"). All of the common securities of this special
purpose trust are owned by the Corporation. The Trust exists solely to issue
capital securities. For financial reporting purposes, the Trust is reported as a
subsidiary and is consolidated into the financial statements of the Corporation.
The capital securities are presented as a separate line item on the consolidated
balance sheet as guaranteed preferred beneficial interests in the Corporation's
subordinated debentures (trust preferred securities).
21.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
SUBORDINATED DEBENTURES (CONTINUED)
The Trust has issued trust preferred securities and invested the net proceeds in
subordinated debentures issued to the Trust by the Corporation. The subordinated
debentures are the sole asset of the Trust. The Corportion, through guarantees
and agreements, has fully and unconditionally guaranteed all of the Trust's
obligations under the trust preferred securities.
The Federal Reserve Bank has accorded the trust preferred securities Tier I
capital status. The ability to apply Tier I capital treatment, as well as to
deduct the expense of the subordinated debentures for income tax purposes,
provided the Corporation with a cost-effective way to raise regulatory capital.
The trust preferred securities are not included as a component of total
shareholders' equity on the consolidated balance sheet.
The trust preferred securities carry a floating rate of the three month LIBOR
plus 2.5% and have a stated maturity date of May 14, 2029. 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.
NOTE 14 - SHAREHOLDERS' EQUITY
Earnings per share are based upon the weighted average number of shares
outstanding. The following shows the computation of basic and diluted earnings
per share for the years ended December 31 (dollars in thousands, except per
share data):
Weighted
Average
Number of Earnings Per
Net Income Shares Share
---------- ------ -----
2000
- ----
Earnings per share - Basic $ 5,183 6,980,979 $ 0.74
==========
Effect of stock options - Net 6,409
Effect of deferred stock compensation 77,538
-------------- --------------
Earnings per share - Diluted $ 5,183 7,064,926 $ 0.73
============== ============== ==========
1999
- ----
Earnings per share - Basic $ 6,356 7,031,203 $ 0.90
==========
Effect of stock options - Net 67,972
Effect of deferred stock compensation 21,886
-------------- --------------
Earnings per share - Diluted $ 6,356 7,121,061 $ 0.89
============== ============== ==========
1998
- ----
Earnings per share - Basic $ 4,561 7,038,909 $ 0.65
==========
Effect of stock options - Net 64,693
Effect of deferred stock compensation 16,614
-------------- --------------
Earnings per share - Diluted $ 4,561 7,120,216 $ 0.64
============== ============== ==========
Effective August 25, 1998, the Board of Directors of the Corporation approved a
three-for-one stock split. All references to the number of shares of common
stock in the consolidated financial statements and footnotes thereto have been
restated for the stock split.
22.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (CONTINUED)
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Management believes, as of December 31, 2000, the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
subsidiary bank's category.
The Corporation's actual and required capital amounts and ratios as of December
31 are as follows (dollars in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2000
- ----
Total capital (to risk-
weighted assets):
Consolidated $ 55,285 11.2% =>$ 39,497 => 8.0% N/A
North Country Bank & Trust $ 55,428 11.3% =>$ 39,241 => 8.0% =>$ 49,051 => 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $ 49,097 10.0% =>$ 19,638 => 4.0% N/A
North Country Bank & Trust $ 49,271 10.1% =>$ 19,513 => 4.0% =>$ 29,269 => 6.0%
Tier I capital (to average assets):
Consolidated $ 49,097 7.6% =>$ 25,840 => 4.0% N/A
North Country Bank & Trust $ 49,271 7.6% =>$ 25,932 => 4.0% =>$ 32,415 => 5.0%
23.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 14 - SHAREHOLDERS' EQUITY (CONTINUED)
1999
- ----
Total capital (to risk-
weighted assets):
Consolidated $ 51,666 13.0% =>$ 31,732 => 8.0% N/A
North Country Bank & Trust $ 50,053 12.7% =>$ 31,609 => 8.0% =>$ 39,511 => 10.0%
Tier I capital (to risk-
weighted assets):
Consolidated $ 46,684 11.8% =>$ 15,866 => 4.0% N/A
North Country Bank & Trust $ 45,090 11.4% =>$ 15,804 => 4.0% =>$ 23,707 => 6.0%
Tier I capital (to average assets):
Consolidated $ 46,684 8.4% =>$ 22,120 => 4.0% N/A
North Country Bank & Trust $ 45,090 8.2% =>$ 22,066 => 4.0% =>$ 27,583 => 5.0%
The Bank is restricted by banking regulations from making dividend distributions
above prescribed amounts. At December 31, 2000, the Bank could have paid
$19,000,000 of additional dividends to the Corporation without prior regulatory
approval.
In June 2000, the Board of Directors adopted a Shareholder Rights Plan 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 Rights Plan was not
adopted in response to any specific effort to acquire control of the
Corporation.
NOTE 15 - STOCK OPTION PLANS
The Corporation sponsors three stock option plans. One plan was approved during
2000 and applies to officers, employees and nonemployee directors. A total of
500,000 shares were made available for grant under this plan. The other two
plans, one for officers and employees and the other for nonemployee directors,
were approved in 1997. A total of 600,000 shares were made available for grant
under these plans. Options under all of the plans are granted at the discretion
of a committee of the Corporation's Board of Directors. Options to purchase
shares of the Corporation's stock are granted at a price equal to the market
price of the stock at the date of grant. The committee, within guidelines of no
less than six months and no greater than ten years, as established under the
plans, determines the vesting of the options when they are granted.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes methodology. The following assumptions were made in estimating
fair value for options granted for the years ended December 31:
2000 1999 1998
---- ---- ----
Dividend yield 2.88% 0.90% 1.00%
Risk-free interest rate 7.00% 5.50% 4.72%
Weighted average expected life (years) 7.0 7.0 7.0
Expected volatility 31.45% 16.46% 10.04%
The weighted average fair value of options granted as of their grant date, using
the assumptions shown above, was computed at $1.68 per share for options granted
in 2000, $0.94 per share for options granted in 1999 and $0.39 per share for
options granted in 1998.
24.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
No compensation cost has been recognized for the plans. Had compensation cost
been determined on the basis of fair value, net income and earnings per share
would have been reduced for the years ended December 31, as follows (dollars in
thousands except per share data):
2000 1999 1998
---- ---- ----
Net income:
----------
As reported $ 5,183 $ 6,356 $ 4,561
================ =============== ===============
Pro forma $ 5,043 $ 6,288 $ 4,550
================ =============== ===============
Earnings per share - Basic:
---------------------------
As reported $ 0.74 $ 0.90 $ 0.65
================ =============== ===============
Pro forma $ 0.72 $ 0.89 $ 0.64
================ =============== ===============
Earnings per share - Diluted:
-----------------------------
As reported $ 0.73 $ 0.89 $ 0.64
================ =============== ===============
Pro forma $ 0.71 $ 0.88 $ 0.64
================ =============== ===============
Following is a summary of stock option transactions for the years ended
December 31:
Number of Shares
---------------------------------------------------
2000 1999 1998
---- ---- ----
Outstanding at beginning of year 573,145 331,895 198,759
Granted during the year 201,700 244,400 163,200
Expired during the year (84,698) -0- -0-
Exercised during the year (at prices
ranging from $3.67 to $15.00 per share) (12,150) (3,150) (30,064)
----------------- ---------------- ---------------
Outstanding at end of year 677,997 573,145 331,895
================ =============== ==============
Weighted average exercise price per share
at end of year $ 16.65 $ 18.34 $ 16.97
================ =============== ==============
Available for grant at end of year 337,373 39,073 283,473
================ =============== ==============
Options granted during 2000 were granted at prices of $9.25, $12.00 and $15.00.
Options granted in 1999 were granted at a price of $20.00. Options granted in
1998 were granted at prices of $19.00 and $20.33. Under these plans, options
expire ten years after the date of grant.
25.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 15 - STOCK OPTION PLANS (CONTINUED)
Following is a summary of the options outstanding at December 31, 2000:
Outstanding Options Exercisable Options
------------------------------------------------ ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life-Years Price Number Price
----------- ------ ---------- ----- ------ -----
$4.25 to $15.00 325,197 7.89 $ 12.89 80,065 $ 14.28
$19.00 to $20.33 352,800 8.08 20.11 208,800 20.19
----------- ----------- ---------- ----------- ----------
677,997 7.99 $ 16.65 288,865 $ 18.55
=========== =========== ========== =========== ==========
NOTE 16 - OTHER COMPREHENSIVE INCOME (DEFICIT)
Other comprehensive income (deficit) components and related taxes were as
follows (dollars in thousands):
2000 1999 1998
---- ---- ----
Unrealized holding gains (losses) on
available for sale securities $ 2,166 $ (1,061) $ 117
Less reclassification adjustments for gains
later recognized in income 110 -0- 45
-------------- ---------------- --------------
Net unrealized gains (losses) 2,056 (1,061) 72
Tax effect 699 (361) 25
-------------- ---------------- --------------
Other comprehensive income (deficit) $ 1,357 $ (700) $ 47
============== ================ ==============
NOTE 17 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheets.
The Corporation's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. These
commitments at December 31 are as follows (dollars in thousands):
2000 1999
---- ----
Commitments to extend credit $ 119,763 $ 130,446
Standby letters of credit 14,601 14,425
Credit card commitments 5,612 5,334
--------------- ---------------
$ 139,976 $ 150,205
=============== ===============
26.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The commitments are
structured to allow for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the
Corporation's subsidiary and serviced by other companies. These commitments are
unsecured.
Contingencies
In the normal course of business, the Corporation is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Concentration of Credit Risk
The Corporation's subsidiary bank grants residential, commercial, agricultural,
and consumer loans throughout Michigan. Due to the diversity of locations, the
ability of debtors to honor their contracts is not tied to any particular
economic sector.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments:
Cash and cash equivalents - The carrying values approximate the fair values for
these assets.
Securities - Fair values are based on quoted market prices where available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans - Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, residential
mortgage, and other consumer. The fair value of loans is calculated by
discounting scheduled cash flows using discount rates reflecting the credit and
interest rate risk inherent in the loan.
The methodology in determining fair value of nonaccrual loans is to average them
into the blended interest rate at 0% interest. This has the effect of decreasing
the carrying amount below the risk-free rate amount and therefore discounts the
estimated fair value.
Impaired loans are measured at the estimated fair value of the expected future
cash flows at the loan's effective interest rate or the fair value of the
collateral for loans which are collateral dependent. Therefore, the carrying
values of impaired loans approximate the estimated fair values for these assets.
Deposit liabilities - The fair value of deposits with no stated maturity, such
as non-interest-bearing demand deposits and savings, is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows applying
interest rates currently being offered on similar certificates.
27.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Federal funds purchased and borrowings - Rates currently available for debt with
similar terms and remaining maturities are used to estimate the fair value of
existing debt. The fair value of borrowed funds due on demand is the amount
payable at the reporting date.
Guaranteed preferred beneficial interests in the Corporation's subordinated
debentures - The carrying value is considered to estimate fair value as this
financial instrument reprices frequently and fully.
Off-balance-sheet instruments - The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements, the current interest rates, and the
present creditworthiness of the counterparties. Since this amount is immaterial,
no amounts for fair value are presented.
The following table presents information for financial instruments at December
31 (dollars in thousands):
2000 1999
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Cash and cash equivalents $ 20,829 $ 20,829 $ 26,160 $ 26,160
Interest-bearing deposits -0- -0- 679 679
Securities available for sale 72,066 72,066 43,343 43,343
Net loans 532,235 535,318 459,758 461,511
--------------- ---------------- --------------- ---------------
Total financial assets $ 625,130 $ 628,213 $ 529,940 $ 531,693
=============== ================ =============== ===============
Financial liabilities:
Deposits $ 531,883 $ 531,567 $ 462,998 $ 462,634
Federal funds purchased and
borrowings 71,035 72,281 46,878 45,729
Guaranteed preferred beneficial
interests in the Corporation's
subordinated debentures 12,450 12,450 12,450 12,450
--------------- ---------------- --------------- ---------------
Total financial liabilities $ 615,368 $ 616,298 $ 522,326 $ 520,813
=============== ================ =============== ===============
Limitations - Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. Fair value estimates
are based on existing on- and off-balance-sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include premises and equipment, other assets, and other liabilities.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
28.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2000 and 1999
(Dollars in Thousands)
ASSETS
------
2000 1999
---- ----
Cash and cash equivalents $ 132 $ 889
Investment in subsidiaries 57,323 51,649
Other assets 1,421 1,651
--------------- ---------------
TOTAL ASSETS $ 58,876 $ 54,189
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Dividends payable $ 699 $ -0-
Other liabilities 724 533
--------------- ---------------
Total liabilities 1,423 533
Subordinated debentures 12,836 12,836
Total shareholders' equity 44,617 40,820
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,876 $ 54,189
=============== ===============
29.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
2000 1999 1998
---- ---- ----
Income:
Dividends received from subsidiaries $ 1,900 $ 3,150 $ 3,250
Other 48 24 32
-------------- --------------- --------------
Total income 1,948 3,174 3,282
-------------- --------------- --------------
Expenses:
Salaries and benefits 64 82 142
Interest 1,175 760 95
Other 323 364 596
-------------- --------------- --------------
Total expenses 1,562 1,206 833
-------------- --------------- --------------
Income before credit for income
taxes and equity in undistributed net
income of subsidiaries 386 1,968 2,449
Credit for income taxes (400) (402) (147)
--------------- ---------------- ---------------
Income before equity in undistributed
net income of subsidiaries 786 2,370 2,596
Equity in undistributed net income of
subsidiaries 4,397 3,986 1,965
-------------- --------------- --------------
Net income $ 5,183 $ 6,356 $ 4,561
============== =============== ==============
30.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands)
2000 1999 1998
---- ---- ----
Increase (decrease) in cash and cash equivalents:
Cash flows from operating
activities:
Net income $ 5,183 $ 6,356 $ 4,561
-------------- --------------- --------------
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) loss on sale of premise and equipment -0- 4 (32)
Provision for depreciation and amortization 29 9 5
Equity in undistributed net income of subsidiaries (4,397) (3,986) (1,965)
Change in other assets 323 (606) (112)
Change in other liabilities 149 (70) 38
-------------- ---------------- --------------
Total adjustments (3,896) (4,649) (2,066)
--------------- ---------------- ---------------
Net cash provided by operating activities 1,287 1,707 2,495
-------------- --------------- --------------
Cash flows from investing activities:
Investment in subsidiaries -0- (9,561) -0-
Payment for purchase of securities available for sale -0- -0- (111)
Proceeds from sales of securities available for sale -0- -0- 10
Proceeds from sale of premise and equipment -0- -0- 100
Capital expenditures -0- -0- (3)
--------------- ---------------- ---------------
Net cash used in investing activities -0- (9,561) (4)
--------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from borrowings -0- 15,836 -0-
Principal payments on borrowings -0- (3,788) (788)
Proceeds from issuance of common stock 498 480 1,192
Retirement of common stock (887) (3,498) (1,797)
Dividends paid (1,655) (1,287) (1,251)
--------------- ---------------- ---------------
Net cash provided by (used in) financing activities (2,044) 7,743 (2,644)
--------------- --------------- ---------------
Net decrease in cash and cash equivalents (757) (111) (153)
Cash and cash equivalents at beginning 889 1,000 1,153
-------------- --------------- --------------
Cash and cash equivalents at end $ 132 $ 889 $ 1,000
============== =============== ==============
31.
34
SELECTED FINANCIAL DATA
==============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Years ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Selected Financial Condition Data:
Total assets $ 666,996 $ 568,442 $ 471,381 $ 421,434 $ 367,160
Loans 541,689 466,621 411,720 372,519 314,886
Securities 72,066 43,343 8,676 10,103 15,191
Deposits 531,883 462,998 404,961 360,549 305,939
Borrowings 69,235 46,878 23,270 19,628 20,441
Total equity 44,617 40,820 39,469 36,592 32,386
Selected Operations Data:
Interest income $ 54,683 $ 42,549 $ 38,498 $ 35,964 $ 28,724
Interest expense (29,421) (20,602) (17,815) (15,898) (12,674)
------------ ------------ ----------- ------------ ------------
Net interest income 25,262 21,947 20,683 20,066 16,050
Provision for loan losses (5,875) (1,457) (1,200) (1,398) (2,424)
Net security gains (losses) 110 -0- 45 (60) (8)
Other income 6,743 3,538 2,606 1,698 1,368
Other expenses (20,112) (15,937) (16,603) (14,797) (11,609)
------------ ------------ ----------- ------------ ------------
Income before income taxes 6,128 8,091 5,531 5,509 3,377
Provision for income taxes (945) (1,735) (970) (1,403) (543)
------------ ------------ ----------- ------------ ------------
Net income $ 5,183 $ 6,356 $ 4,561 $ 4,106 $ 2,834
=========== =========== ========== =========== ===========
Per Share Data: *
Net income - Basic $ 0.74 $ 0.90 $ 0.65 $ 0.58 $ 0.43
Net income - Diluted 0.73 0.89 0.64 0.57 0.43
Cash dividends declared 0.34 0.18 0.17 0.16 0.14
Book value 6.38 5.83 5.54 5.13 4.57
Financial Ratios:
Return on average equity 12.13% 15.83% 11.18% 11.29% 9.15%
Return on average assets 0.84% 1.22% 0.98% 1.00% 0.82%
Dividend payout ratio 45.42% 20.25% 27.43% 28.79% 32.11%
Average equity to average assets 6.92% 7.70% 8.75% 8.85% 8.99%
* Adjusted for 3 for 1 stock splits on April 29, 1996 and August 25, 1998
32.
35
SELECTED FINANCIAL DATA
==============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three months ended,
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000
- ----
Selected Operations Data:
Interest income $ 12,272 $ 13,661 $ 14,261 $ 14,489
Interest expense (6,250) (7,365) (7,785) (8,021)
---------- ---------- ----------- -----------
Net interest income 6,022 6,296 6,476 6,468
Provision for loan losses (350) (1,525) (2,500) (1,500)
Net security gains -0- 49 61 -0-
Other income 966 1,407 1,847 2,633
Other expenses (4,214) (4,515) (5,588) (5,795)
---------- ---------- ----------- -----------
Income before income taxes 2,424 1,663 235 1,806
Provision for income taxes (474) (201) 94 (364)
---------- ---------- ---------- -----------
Net income $ 1,950 $ 1,462 $ 329 $ 1,442
========= ========= ========== ==========
Per Share Data:
Net income - Basic $ 0.28 $ 0.21 $ 0.05 $ 0.20
Net income - Diluted 0.28 0.21 0.05 0.19
1999
- ----
Selected Operations Data:
Interest income $ 9,732 $ 10,187 $ 10,791 $ 11,839
Interest expense (4,622) (4,917) (5,283) (5,780)
---------- ---------- ----------- -----------
Net interest income 5,110 5,270 5,508 6,059
Provision for loan losses (213) (213) (213) (818)
Other income 615 649 1,223 1,051
Other expenses (3,436) (4,167) (4,291) (4,043)
---------- ---------- ----------- -----------
Income before income taxes 2,076 1,539 2,227 2,249
Provision for income taxes (535) (232) (500) (468)
---------- ---------- ----------- -----------
Net income $ 1,541 $ 1,307 $ 1,727 $ 1,781
========= ========= ========== ==========
Per Share Data:
Net income - Basic $ 0.22 $ 0.19 $ 0.25 $ 0.24
Net income - Diluted 0.22 0.19 0.25 0.23
33.
36
SELECTED FINANCIAL DATA
==============================================================================
NORTH COUNTRY FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
MARKET INFORMATION
(Unaudited)
Prior to April 18, 2000, there had been no active market for the Corporation's
common stock and no published information with respect to its market price.
There had been occasional direct sales by shareholders of which the
Corporation's common stock sold at a premium to book value. The price was
reported to management in most of these transactions, but management has no way
of confirming the prices which were reported. Effective April 18, 2000, the
Corporation's common stock is traded on the NASDAQ Bulletin Board under the
symbol "NCUF."
The following table sets forth the range of high and low sales prices of the
Corporation's common stock from January 1, 1999 through April 17, 2000, as
reported to management, and the range of the high and low bid prices from April
18, 2000 through the end of the year, as reported by NASDAQ. Quotations for the
NASDAQ Bulletin Board reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not reflect actual transactions.
Three months ended,
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000
- ----
High $ 20.00 $ 14.00 $ 11.50 $ 7.75
Low 14.00 11.13 6.50 5.13
1999
- ----
High $ 25.00 $ 25.00 $ 20.00 $ 20.00
Low 23.00 19.50 19.00 17.00
34.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
==============================================================================
NORTH COUNTRY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS
For North Country Financial Corporation ("the Corporation"), 2000 was a year of
record growth. The Corporation grew total assets by 17.3%. Growth remains an
important element of the Corporation's strategy, and management believes that
the continued success and profitability of the Corporation depends on continuing
to attract credit-worthy, and profitable assets both internally and through
market expansion. To enhance its ability to grow, the Corporation formed a real
estate mortgage company, North Country Mortgage Company LLC, in May 2000 and
acquired another real estate mortgage company, American Financial Mortgage
Corporation, in August 2000. In addition, the Corporation continued its market
expansion into lower Michigan through the opening of two new branches in
Cadillac and Traverse City and the purchase of two branches in Alanson and Glen
Arbor.
At December 31, 2000, the Corporation had total assets of $667.0 million, an
increase of $98.6 million from December 31, 1999. During 2000, net loans
increased 15.8% or $72.4 million to $532.2 million. Of the total increase in
loans, $49.8 million came from an increase in the commercial loan portfolio. In
addition, the Corporation's security portfolio increased $29.8 million from 1999
to 2000 to $72.1 at December 31, 2000. The increase coincides with the
Corporation's strategy to invest funds from increased deposits and borrowings
into securities with similar contractual maturities.
The growth in 2000 continues the trend which has developed over the past several
years. From 1996 through 2000, assets grew by a total of $299.8 million or
81.7%. During the same five-year period, net loans grew $222.2 million, or
71.7%, and securities increased $56.3 million, or 358.6%.
Growth will continue to be an important element of the Corporation's strategy,
and selective bank and branch acquisitions may continue to occur as
opportunities arise. The Corporation's banking offices are located in Michigan,
a state which covers a large geographic area and has a low population density.
Because of the nature of this market area, the cost of operating the
Corporation's banking network is higher than the average for banking companies
the same size as the Corporation.
Although earnings have decreased from 1999 to 2000, overall earnings have been
strong over the past several years. Net income was $5.2 million, $6.4 million,
and $4.6 million for 2000, 1999 and 1998, respectively. Return on average
shareholders' equity was 12.1%, 15.8% and 11.2%, for 2000, 1999 and 1998,
respectively. Basic earnings per share were $0.74 in 2000, $0.90 in 1999 and
$0.65 in 1998, representing a decrease of 17.8% from 1999 to 2000 and an
increase of 38.5% from 1998 to 1999. The primary cause of the earnings decrease
for 2000 is the increased provision for loan losses. The provision for loan
losses for 2000 totaled $5.9 million as compared to $1.5 million in 1999 and
$1.2 million in 1998.
35.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
==============================================================================
FINANCIAL CONDITION
LOANS
Loans represented 81.2% of total assets at the end of 2000, compared to 82.1% at
the end of 1999. The loan to deposit ratio remained relatively stable over the
past two years, increasing slightly from 100.8% at December 31, 1999 to 101.8%
at December 31, 2000. Loans provide the most attractive earning asset yield
available to the Corporation and management believes the personnel and controls
are in place to successfully manage a growing loan portfolio. Accordingly,
management intends to continue to maintain loans at the highest possible level
within the constraints of adequate liquidity.
Following is a summary of the Corporation's loan balances at December 31 (in
thousands):
Percent
2000 1999 Change
---- ---- ------
Commercial real estate $ 90,635 $ 79,000 14.7%
Commercial, financial, and agricultural 217,786 179,592 21.3
Leases:
Commercial 41,962 22,541 86.2
Governmental 55,205 48,148 14.7
1 - 4 family residential real estate 113,834 107,751 5.6
Consumer 13,059 17,050 (23.4)
Construction 9,208 12,539 (26.6)
------------ ------------ ---------
Total $ 541,689 $ 466,621 16.1%
============ ============ ========
The Corporation has four major categories of lending activities. Three
categories, commercial, residential real estate, and consumer, are generally
with customers in Michigan. The fourth major lending line, commercial and
governmental leasing, takes place on a nationwide basis. As shown in the table
above, the majority of the current year loan growth occurred in the commercial
loans and the leasing categories. Management believes these categories will
continue to grow in the future, with the level of consumer lending continuing to
decrease.
During 2000, commercial loans increased by $49.8 million or by 19.3%. The
commercial loan growth is largely due to the efforts of the relationship bankers
and their ability to penetrate growth markets primarily in lower Michigan but
also in areas such as Marquette and Sault Ste. Marie. The most prominent type of
financing, at $76.6 million or 24.8% of the commercial loan portfolio, continues
to focus on hospitality and tourism related industries. The remainder of the
commercial loan portfolio is diversified in such categories as gaming,
petroleum, forestry, and farming.
In addition to traditional commercial lending, the Corporation finances
commercial and governmental leases throughout the country. As illustrated in the
table above, a significant portion of the leasing activity is to governmental
units, including Native American organizations. The Corporation has developed
expertise and contacts in the leasing business which provide it with
opportunities to purchase credit-worthy leases at attractive yields. Management
closely reviews the credit quality of each proposed lease before entering into a
financing agreement. The lease agreements are strictly financing; while the
Corporation has access to the underlying equipment as collateral, there is no
interest in the residual value of the equipment. Management continues to pursue
leases both through unrelated entities and the Corporation's subsidiary, North
Country Financial Group, in Denver, Colorado. This corporation is engaged in the
business of public finance and focuses on providing tax-exempt financing to
municipalities located throughout the United States.
36.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
Real estate lending on 1-4 family residences comprises the second largest
portion of the loan portfolio. This past year, residential real estate loans
grew by 5.6% or by $6.0 million to $113.8 million. Approximately 84% of
residential real estate loans are adjustable rate products that have an annual
interest adjustment. These loans typically have a maximum adjustment of two
percentage points annually and five percentage points over the life of the loan.
The Corporation continues to sell longer-term, fixed rate products; however,
with the rising interest rate environment, activity in this area declined in
2000. Loans originated and sold to the secondary market by the subsidiary bank
totaled $6.1 million in 2000 compared to $15.1 million in 1999.
Consumer lending represents a small percentage of the Corporation's loan
portfolio. At December 31, 2000, consumer loans totaled $13.1 million, or 2.4%
of the total portfolio. Consumer loans continue to decrease both in dollars and
in percentage in relation to the overall loan portfolio. This decrease is
intentional as consumer lending is a highly competitive, and traditionally a
higher cost, area of lending. The Corporation will continue to originate
consumer loans; however, this is not seen as a high priority lending area at the
current time.
At the end of 2000, the allowance for loan losses totaled $9.5 million which
represents 1.7% of total loans. The allowance is maintained by management at a
level considered adequate to cover losses that are currently anticipated based
on past loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. In
management's opinion, the allowance for loan losses is adequate to cover
probable losses related to specifically identified loans, as well as probable
losses inherent in the balance of the loan portfolio.
The Corporation's credit quality history is demonstrated in the following table
(dollars in thousands):
2000 1999 1998
---- ---- ----
Allowance to total loans at end of year 1.7% 1.5% 1.5%
Net charge-offs during the year $ 3,284 $ 706 $ 687
Net charge-offs to average outstanding loans 0.7% 0.2% 0.2%
Net charge-offs to beginning allowance balance 47.9% 11.6% 12.3%
Nonaccrual loans at end of year 10,547 95 2,174
Loans 90 days or more delinquent at end of year
(excluding nonaccrual loans) $ 3,117 $ 2,452 $ 1,238
Management analyzes the allowance for loan losses in detail on a monthly basis
to ensure the losses inherent in the portfolio are properly considered. The
Corporation's success in maintaining strong credit quality is demonstrated in
its historical charge-off experience. Net charge-offs to average loans
outstanding was 0.7%, 0.2% and 0.2% for the years ended December 31, 2000, 1999
and 1998, respectively. Net charge-offs for the year ended December 31, 2000
increased $2.6 million from the previous year. The increase was primarily due to
three lending relationships charged-off in 2000 totaling $2.3 million; after
considering these specific charge-offs, the charge-off level is deemed to be
manageable. To compensate for the increased charge-offs and increased levels of
non-performing loans as described above, the provision for loan losses was
increased $4.4 million from $1.5 million for the year ended December 31, 1999 to
$5.9 million for the year ended December 31, 2000.
Nonaccrual loans have increased $10.5 million from December 31, 1999 to December
31, 2000 while loans 90 days or more past due and still accruing have increased
by $0.7 million during that same time period. At December 31, 2000, loans to
three commercial borrowers represented $9.5 million of the $10.5 million of
nonaccrual loans. Management is working with the borrowers and does not
currently anticipate charge-offs on these loans; however, as a precautionary
measure, $2.7 million of the allowance for loan losses is allocated to these
loans. The remaining increase in nonaccrual loans of $1.0 million relates to
loans to six borrowers with individual balances less than $200,000. Included in
the December 31, 2000 totals for loans 90 days or more delinquent and still
accruing are loans to twelve commercial borrowers totaling $2.1 million; the
remaining balance of loans 90 days or more delinquent consists of twenty
residential real estate and consumer loans. Management continues to monitor the
situation on the non-performing loans and has taken actions to reduce the level
of non-performing loans.
37.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
SECURITIES
During 2000, the security portfolio became a more important component of the
Corporation's strategy to diversify its asset base. Securities increased $29.8
million in 2000, from $43.3 million at December 31, 1999 to $72.1 million at
December 31, 2000. Funds made available from increased deposits and additional
borrowings have been invested into securities with similar contractual
maturities. The security portfolio is diversified among U.S. Treasury and agency
securities, obligations of states and political subdivisions, corporate
securities and mortgage-related securities. The carrying value of the
Corporation's securities is as follows at December 31 (dollars in thousands):
2000 1999
---- ----
U.S. Treasury securities and obligations of
U.S. government agencies $ 10,882 $ 9,392
Obligations of states and political subdivisions 15,542 16,210
Corporate securities 4,740 3,008
Mortgage-related securities 40,902 14,733
--------------- ---------------
Total securities $ 72,066 $ 43,343
=============== ===============
The Corporation's policy is to purchase securities of high credit quality,
consistent with its asset/liability management strategies. The mortgage-related
securities have maturities ranging up to 30 years, while the remaining
securities have maturities ranging primarily from one to 15 years. The
Corporation classifies all securities as available for sale, in order to
maintain adequate liquidity and to maximize its ability to react to changing
market conditions.
DEPOSITS
Deposit growth has been, and continues to be, a key element of the Corporation's
expansion strategy. Total deposits at December 31, 2000, were $531.9 million
compared to $463.0 million at the end of 1999. The growth of $68.9 million
during 2000 included a net increase of $10.3 million related to branch
acquisition and divesture activity. Another $15.0 million of the increase is due
to brokered certificates of deposit issued by the subsidiary bank to holders
throughout the country. The remainder of the growth, $43.6 million, was
internally generated by the Corporation throughout its branch network.
The most significant impact on the growth of deposits has been in the time
deposit category. As of December 31, 2000, time deposits represented $239.6
million, or 45.0% of the Corporation's total deposit base. Retail deposits over
$100,000, totaling $66.2 million and $35.3 million at December 31, 2000 and
1999, respectively, are from governmental entities, other financial
institutions, and individual customers. Brokered deposits, which the Corporation
began issuing in 2000, account for $15.0 of total deposits at December 31, 2000.
The Corporation continues to offer its premium-based certificate of deposit
program. Customers can elect to receive one of several products in place of cash
interest payments on term certificates. The Corporation offers firearms, golf
clubs, diamond jewelry, and grandfather clocks under these programs. The most
successful and long-standing of the programs is the firearm program, which is
offered to sports enthusiasts nationally. Under the premium-based certificate of
deposit program, the Corporation records the cost of the product given as a
discount from the face amount of the certificate of deposit and recognizes
interest expense on the effective interest method over the life of the
certificate. Total certificates of deposits outstanding under this program were
$1.5 million at December 31, 2000 and 1999.
38.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
BORROWINGS
As previously mentioned, the Corporation's branch network is a relatively high
cost network in comparison to peer banking companies. Accordingly, the
Corporation continues to utilize alternative funding sources to provide funds
for investing and lending activities. Borrowings increased during 2000 from
$46.9 million to $69.2 million. At December 31, 2000, the majority of the
borrowings were from the Federal Home Loan Bank of Indianapolis with both fixed
and variable interest rates and stated maturities ranging through 2010. The
increase in borrowings during the year is in accordance with the Corporation's
asset/liability management strategies to match borrowings with assets of similar
terms. From time-to-time, alternative sources of funding can be obtained at
interest rates which are competitive with, or lower than, retail deposit rates
and with inconsequential administrative costs. Management anticipates borrowings
will continue to be a significant part of the overall funding mix of the
Corporation.
SHAREHOLDERS' EQUITY
See the discussion under "CAPITAL" below.
RESULTS OF OPERATIONS
SUMMARY
Earnings continued strong in 2000 through a combination of increased net
interest income and noninterest income and improved efficiency in operations.
Net income was $5.2 million, $6.4 million, and $4.6 million for 2000, 1999 and
1998, respectively. The decrease in net income of $0.8 million from 1999 to 2000
is the result of an increase in the provision for loan losses of $4.4 million
during the year, offset by an increase of $3.6 million in net interest income on
a tax equivalent basis. Basic earnings per share were $0.74 in 2000, $0.90 in
1999 and $0.65 in 1998, a decrease of 17.8% from 1999 to 2000 and an increase of
38.5% from 1998 to 1999.
Net interest income is the primary source of earnings. On a tax equivalent
basis, net interest income increased to $27.5 million in 2000, from $23.9
million and $22.6 million in 1999 and 1998, respectively. Net interest income
increased 15.1% from 1999 to 2000 and 5.8% from 1998 to 1999; the increase is
attributable primarily to the increase in volume in the lending and securities
areas.
Noninterest income continues to provide a strong secondary source of revenue for
the Corporation, increasing to $6.9 million in 2000, from $3.5 million in 1999
and $2.7 million in 1998. Of the $3.4 million increase in noninterest income
from 1999 to 2000, $2.8 million is related to fee income generated by the
Corporation's mortgage subsidiary. Income from noninterest sources will be an
important component of the Corporation's future earnings as the expectation is
net interest margins will continue to tighten due to competitive pressures.
Noninterest expense increased in 2000 to $20.1 million from $15.9 million in
1999, as compared to $16.6 million in 1998. Directly related to the mortgage
subsidiary fee income above are commissions of $2.3 million included in
noninterest expense for 2000. Management continues to manage noninterest expense
in an effort to maintain strong earnings for the Corporation.
NET INTEREST INCOME
Net interest income is a function of the difference, or margin, between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing obligations. The net interest margin is affected by economic
and competitive factors that influence rates, loan demand, and deposit flows.
The Corporation's net interest margin, on a tax equivalent basis, has declined
during 2000, from 4.8% to 4.3%.
39.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
Net interest income increased $3.6 million on a tax equivalent basis for 2000 as
compared to 1999, and $1.3 million on a tax equivalent basis for 1999 as
compared to 1998. The volume increases in both loans and securities had the
largest impact on interest income during 2000. The loan volume increases were
largely a result of growth in the higher yielding commercial loan and lease
areas. This, coupled with an increase in interest rates during 2000, had a
favorable impact on interest income during the year. Management expects the
higher yielding loan and lease assets will continue to grow.
Total interest expense was $29.4 million in 2000, compared to $20.6 million and
$17.8 million in 1999 and 1998, respectively. The increase in interest expense
during 2000 was the result of overall increases in the rates and volume of
interest-bearing obligations. For 2000, interest expense on deposits represented
83.5% of total interest expense. The remaining 16.5% relates to the
Corporation's alternative sources of funding, namely borrowings and the trust
preferred securities. Management monitors the rates paid on deposit products and
evaluates alternative funding sources on a regular basis in an effort to control
interest expense.
The following table presents the amount of interest income from average
interest-earning assets and the yields earned on those assets, as well as the
interest expense on average interest-bearing obligations and the rates paid on
those obligations. All average balances are daily average balances.
----------------------------------------Years ended December 31,--------------------------------------
------------------2000------------ -------------1999------------- ----------------1998------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1,2,3) $ 515,685 $ 52,005 10.08% $ 434,723 $ 42,288 9.73% $ 403,563 $ 39,206 9.71%
Taxable securities 40,532 3,462 8.54 16,040 1,438 8.97 7,578 686 9.05
Nontaxable securities(2) 11,456 974 8.50 4,201 352 8.38 1,000 47 4.70
Other interest-earning assets 12,699 515 4.06 11,310 422 3.73 12,810 497 3.88
---------- -------- ----- ---------- -------- ----- ---------- -------- ------
Total interest-
earning assets 580,372 56,956 9.81 466,274 44,500 9.54 424,951 40,436 9.52
---------- -------- ----- ---------- -------- ----- ---------- -------- ------
Interest-bearing obligations:
Savings deposits 254,286 11,895 4.68 265,868 11,045 4.15 209,864 7,271 3.46
Time deposits 205,900 12,660 6.15 131,545 7,237 5.50 150,685 9,259 6.14
Borrowings 62,087 3,726 6.00 29,748 1,651 5.55 22,247 1,285 5.78
Subordinated debentures 12,450 1,140 9.16 7,781 669 8.60 0 0 0.00
---------- -------- ----- ---------- -------- ----- ---------- -------- ------
Total interest-bearing
obligations 534,723 29,421 5.50 434,942 20,602 4.74 382,796 17,815 4.65
---------- -------- ----- ---------- -------- ----- ---------- -------- ------
Net interest income $ 27,535 $ 23,898 $ 22,621
======== ======== ========
Net interest rate spread 4.31% 4.80% 4.87%
===== ======= =====
Net earning assets $ 45,649 $ 31,332 $ 42,155
========== ========== ==========
Net yield on average interest-
earning assets 4.74% 5.13% 5.32%
===== ======= =====
Average interest-earning assets
to average interest-bearing
obligations 1.09X 1.07X 1.11X
========== ========== ==========
- ----------
(1) For purposes of these computations, non-accruing loans are included in
the daily average loan amounts outstanding.
(2) The amount of interest income on nontaxable securities and loans has
been adjusted to a tax equivalent basis.
(3) Interest income on loans includes loan fees.
40.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing obligations. It distinguishes between changes related to higher
or lower outstanding balances and changes due to the levels and fluctuations in
interest rates. For each category of interest-earning assets and
interest-bearing obligations, information is provided for changes attributable
to (i) changes in volume (i.e. changes in volume multiplied by old rate) and
(ii) changes in rate (i.e. changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
--------------------------------Years ended December 31,-------------------------
--------2000-------vs.------1999------ -------1999------vs.-------1998-------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
------ ------
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- -------- ------ ---- ---------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 8,117 1,600 9,717 $ 3,031 $ 51 $ 3,082
Taxable securities 2,095 (71) 2,024 759 (7) 752
Nontaxable securities 617 5 622 245 60 305
Other interest-earning assets 54 39 93 (57) (18) (75)
---------- ---------- --------- ----------- ----------- -----------
Total interest-earning assets $ 10,883 $ 1,573 12,456 $ 3,978 $ 86 4,064
========== ========== --------- ========== ========== ----------
Interest-bearing obligations:
Savings deposits $ (497) 1,347 850 $ 2,162 $ 1,612 3,774
Time deposits 4,489 934 5,423 (1,109) (913) (2,022)
Borrowings 1,931 144 2,075 418 (52) 366
Subordinated debentures 425 46 471 669 0 669
---------- ---------- --------- ---------- ---------- ----------
Total interest-bearing
obligations $ 6,348 $ 2,471 8,819 $ 2,140 $ 647 2,787
========== ========== --------- ========== ========== ----------
Net interest income $ 3,637 $ 1,277
========= ==========
PROVISION FOR LOAN LOSSES
The Corporation maintains the allowance for loan losses at a level considered
adequate to cover losses inherent in the loan portfolio. The Corporation records
a provision for loan losses necessary to maintain the allowance at an adequate
level after considering factors such as loan charge-offs and recoveries, changes
in the loan portfolio composition, loan growth, and other economic factors as
more fully described in Note 1 to the accompanying financial statements. The
increase in the provision for loan losses to $5.9 million in 2000, as compared
to $1.5 million for 1999, is a direct result of the increase in nonperforming
loans throughout 2000 and also loan growth during 2000. The allowance for loan
losses as a percentage of total loans increased to 1.7% at December 31, 2000
compared to 1.5% at both December 31, 1999 and 1998.
NONINTEREST INCOME
Noninterest income was $6.9 million, $3.5 million, and $2.7 million in 2000,
1999 and 1998, respectively. The principal sources of noninterest income are
service charges on deposit accounts and fee income generated by the mortgage
subsidiary. Service charges on deposits remained stable at $2.0 million for 2000
and 1999. As discussed in Note 2 to the Consolidated Financial Statements, the
Corporation acquired a mortgage company during 2000. The mortgage company has
arrangements with unrelated investor banks which table fund the loans at the
time of closing. The fee income recorded by the mortgage company, which totals
$2.9 million for 2000, includes origination fees, discount fees, yield spread
premiums, and miscellaneous fees on the loans brokered.
41.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
NONINTEREST EXPENSE
Noninterest expense was $20.1 million, $15.9 million, and $16.6 million in 2000,
1999, and 1998, respectively. The increase in noninterest expense for 2000 is
due in part to the commission expense of $2.3 million included in salaries,
commissions and related benefits; the commission expense started in 2000 in
conjunction with the acquisition of the mortgage company as discussed above. In
addition to the commissions, overall noninterest expense increased during the
year in connection with the mortgage company acquisition and branches acquired
or opened during the year.
FEDERAL INCOME TAXES
The provision for income taxes is 15.4% of income before income tax in 2000,
compared to 21.5% in 1999 and 17.5% in 1998. The difference between these rates
and the federal corporate income tax rate of 34% is primarily due to tax-exempt
interest earned on securities and loans. The decrease in the overall tax rate in
2000 is due to tax-exempt interest income increasing while pre-tax income
decreased. Tax exempt interest represented 61% of pre-tax income in 2000
compared to 41% in 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Corporation's primary market risk exposure is interest rate risk which
management actively manages. The Corporation has no market risk sensitive
instruments held for trading purposes. In the relatively low interest rate
environment which has been in place the last 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. In general, management tries to write commercial and real estate loans
at variable rates or, when forced to offer fixed rates due to competitive
pressures, write fixed rate loans for relatively short terms. Conversely,
management has attempted to offer deposit products designed to steer depositors
to longer periods.
Beyond general efforts to shorten loan pricing periods and extend deposit
maturities, management can manage interest rate risk by the maturity periods of
securities purchased, selling securities available for sale, and borrowing funds
with targeted maturity periods, among other strategies. Also, the rate of
interest rate changes can impact the actions taken since the speed of change
affects borrowers and depositors differently.
42.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
==============================================================================
Exposure to interest rate risk is reviewed on a regular basis by the
Corporation's Executive Committee. Interest rate risk is the potential of
economic losses due to future interest rate changes. These economic losses can
be reflected as a loss of future net interest income and/or a loss of current
fair market values. The objective is to measure the effect of interest rate
changes on net interest income and to structure the composition of the balance
sheet to minimize interest rate risk and at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to identify
and minimize the risks. Tools used by management include maturity and repricing
GAP analyses and interest rate sensitivity analyses. Following is the
Corporation's repricing GAP table at December 31, 2000 (dollars in thousands):
1 - 90 91 - 365 2 - 5 Over 5
Days Days Years Years Total
----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Loans receivable $ 275,982 $ 114,287 $ 99,497 $ 51,923 $ 541,689
Securities 9,692 -0- 2,223 60,151 72,066
Other 4,180 -0- -0- -0- 4,180
----------- ------------ ------------ ------------ -----------
Total interest-earning assets 289,854 114,287 101,720 112,074 617,935
----------- ----------- ----------- ----------- -----------
Interest-bearing obligations:
Savings deposits 241,787 -0- -0- -0- 241,787
Time deposits 51,078 104,381 83,451 707 239,617
Federal funds purchased 1,800 -0- -0- -0- 1,800
Borrowings -0- 40,686 24,390 4,159 69,235
Subordinated debentures 12,450 -0- -0- -0- 12,450
----------- ----------- ----------- ----------- -----------
Total interest-bearing obligations 307,115 145,067 107,841 4,866 564,889
----------- ----------- ----------- ----------- -----------
GAP $ (17,261) $ (30,780) $ (6,121) $ 107,208 $ 53,046
============ =========== =========== =========== ===========
Cumulative GAP $ (17,261) $ (48,041) $ (54,162) $ 53,046 $ 53,046
============ ============ ============ =========== ===========
The above analysis indicates that at December 31, 2000, the Corporation had a
cumulative liability GAP position of $48.0 million within the one-year
timeframe. This suggests that if market interest rates decline in the next
twelve months, the Corporation has the potential to earn more net interest
income. Conversely, if market interest rates increase in the next twelve months,
the above GAP position suggests the Corporation's net interest income would
decline due to interest-bearing obligations maturing or repricing prior to
interest-earning assets.
A limitation of the traditional GAP analysis is that it does not consider the
timing or magnitude of noncontractual repricing or expected prepayments. In
addition, the GAP analysis treats savings, NOW and money market accounts as
repricing within 90 days, while experience suggests that these categories of
deposits are actually comparatively resistant to rate sensitivity. Considering
the limitations of the GAP analysis, and based on the results of other interest
rate risk management tools used by the Corporation, management believes the
Corporation is properly positioned against significant changes in interest rates
without significantly altering operating results.
43.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
==============================================================================
FOREIGN EXCHANGE RISK
In addition to managing interest rate risk, management also actively manages
risk associated with foreign exchange. The Corporation provides foreign exchange
services, makes loans to, and accepts deposits from, Canadian customers
primarily at its banking offices in Sault Ste. Marie. To protect against foreign
exchange risk, the Corporation monitors the volume of Canadian deposits it takes
in and then invests these Canadian funds in Canadian commercial loans and
securities. As of December 31, 2000, the Corporation had excess Canadian assets
of $5.7 million (or $3.9 million in U.S. dollars). Management feels the exposure
to short-term foreign exchange risk is minimal and at an acceptable level for
the Corporation.
OFF-BALANCE-SHEET RISK
Derivative financial instruments include futures, forwards, interest rate swaps,
option contracts and other financial instruments with similar characteristics.
The Corporation currently does not enter into futures, forwards, swaps or
options. However, the Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit and involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates and may
require collateral from the borrower if deemed necessary by the Corporation.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party up to a stipulated
amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as
an asset or liability by the Corporation until the instrument is exercised.
LIQUIDITY
The Corporation's primary sources of funds include principal payments on
securities and loans, sales of securities available for sale, sales of loans
held for sale, deposits from customers, borrowings from the Federal Home Loan
Bank and other sources, and the issuance of common stock. While scheduled
repayments of securities and loans are predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In an attempt to minimize the effects of
such fluctuation in funding sources, management has increased its borrowings
from the Federal Home Loan Bank. In addition, the Corporation has ready access
to significant sources of liquidity on an almost immediate basis through
arrangements with the Federal Home Loan Bank and other financial institutions.
Management anticipates no difficulty in maintaining liquidity at the levels
necessary to conduct the Corporation's day-to-day business activities.
CAPITAL
It is the policy of the Corporation to maintain capital at a level consistent
with both safe and sound operations and proper leverage to generate an
appropriate return on shareholders' equity. Capital formation has been key to
the Corporation's growth. During 2000, 1999 and 1998, the Corporation raised
$0.5 million, $0.5 million and $1.3 million, respectively, in capital through
the issuance of common stock related to the exercise of stock options and the
dividend reinvestment program. Net income exceeded dividends declared by $2.8
million in 2000, $5.1 million in 1999 and $3.3 million in 1998. These increases
in capital were offset by the retirement of common stock of $0.9 million in
2000, $3.5 million in 1999 and $1.8 million in 1998. The Corporation will
continue to repurchase common stock from time-to-time when management believes
such repurchases will enhance the return to its common shareholders. Overall,
shareholders' equity increased by $3.8 million in 2000 and by $1.3 million in
1999.
During 1999, the Corporation formed a Delaware business trust, North Country
Capital Trust, solely to issue capital, or trust preferred securities. Through
this entity, $12.5 million of trust preferred securities were issued in 1999;
the net proceeds were invested in subordinated debentures issued to the trust by
the Corporation. The Federal Reserve Bank has accorded the trust preferred
securities Tier I capital treatment for regulatory purposes. The ability to
apply Tier I capital treatment has positioned the Corporation for future growth
without diluting the common shareholder base.
Should additional capital be required to take advantage of expansion
opportunities, management believes the demand for the Corporation's common stock
could provide for additional capital to the extent that such capital cannot be
internally generated.
44.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
As a banking company, the Corporation is required to maintain certain levels of
capital under government regulation. There are several measurements of
regulatory capital and the Corporation is required to meet minimum requirements
under each measurement. The Federal banking regulators have also established
capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective
action in the event an institution becomes financially troubled.
Regulatory capital is not the same as shareholders' equity reported in the
accompanying financial statements. Certain assets cannot be considered assets
for regulatory purposes. The Corporation's acquisition intangibles are examples
of such assets.
Presented below is a summary of the Corporation's consolidated 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 for capital adequacy purposes 4.0% 4.0% 8.0%
The Corporation:
December 31, 2000 7.6% 10.0% 11.2%
December 31, 1999 8.4% 11.8% 13.0%
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note 1 to the accompanying financial statements for a discussion of
accounting pronouncements issued by the Financial Accounting Standards Board
which the Corporation is not required to implement until periods subsequent to
December 31, 2000.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and results of operations in historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Corporation's operations. Nearly all the assets and liabilities of the
Corporation are financial, unlike industrial or commercial companies. As a
result, the Corporation's performance is directly impacted by changes in
interest rates, which are indirectly influenced by inflationary expectations.
The Corporation's ability to match the interest sensitivity of its financial
assets to the interest sensitivity of its financial liabilities tends to
minimize the effect of changes in interest rates on the Corporation's
performance. Changes in interest rates do not necessarily move to the same
extent as changes in the price of goods and services.
45.
48
BOARD OF DIRECTORS
================================================================================
NORTH COUNTRY FINANCIAL CORPORATION
PAUL W. ARSENAULT.....................................................................President, Concepts Consulting, Inc.
BERNARD A. BOUSCHOR.......................................................Tribal Chairman, Sault Tribe of Chippewa Indians
RONALD G. FORD...................................Chairman and Chief Executive Officer, North Country Financial Corporation
STANLEY J. GEROU II.............................................Owner, Days Inn & Comfort Inn (Munising), Gerou Excavating
MICHAEL C. HENRICKSEN............................................................................Owner, Satellite Services
WESLEY W. HOFFMAN........................................................President, Wesley W. Hoffman and Associates, P.C.
THOMAS G. KING...................................................................President, Top of Lake Investment Company
JOHN D. LINDROTH....................................................................President, Superior State Agency, Inc.
SHERRY L. LITTLEJOHN...................................President and Chief Operating Officer, North Country Bank and Trust
JOHN P. MILLER............................................................................Retired, Peoples Store Co., Inc.
NORTH COUNTRY BANK AND TRUST
PAUL W. ARSENAULT.....................................................................President, Concepts Consulting, Inc.
DENNIS BITTNER..................................................................................Owner, Bittner Engineering
BERNARD A. BOUSCHOR.......................................................Tribal Chairman, Sault Tribe of Chippewa Indians
ROBERT C. DELLANGELO, M.D........................................................................................Physician
RONALD G. FORD...................................Chairman and Chief Executive Officer, North Country Financial Corporation
STANLEY J. GEROU II.............................................Owner, Days Inn & Comfort Inn (Munising), Gerou Excavating
MICHAEL C. HENRICKSEN............................................................................Owner, Satellite Services
WESLEY W. HOFFMAN........................................................President, Wesley W. Hoffman and Associates, P.C.
G. DAVID JUKURI...................................................................................Owner, Century 21 Agency
THOMAS G. KING...................................................................President, Top of Lake Investment Company
JOHN D. LINDROTH....................................................................President, Superior State Agency, Inc.
SHERRY L. LITTLEJOHN...................................President and Chief Operating Officer, North Country Bank and Trust
STEVE MADIGAN..................................................................Owner, Madigan-Pingatore Insurance Services
JOHN P. MILLER............................................................................Retired, Peoples Store Co., Inc.
SPENCER SHUNK.......................................................................................Owner, Shunk Furniture
GLEN TOLKSDORF.....................................................................................Owner, Tolksdorf Realty
46.
49
COMMUNITY DIRECTORS
===============================================================================
ESCANABA/MARQUETTE/IRON MOUNTAIN
Lyle Berro Steve Pelto Larry Seratti
Michele Butler Kevin Romitti Kerry Sorensen
Lloyd Houle Rich Rossway Brian Steinhoff
Dave Johnson Matt Surrell
TRAVERSE CITY
Gar Atchinson Michael Niedzielski Kent Rozycki
Keith Baker Phil Potvin Fred Salisbury Sr.
Doug Knorr Tom Taylor
47.
50
CONTACTS
==============================================================================
NORTH COUNTRY FINANCIAL CORPORATION
EXECUTIVE OFFICES
3530 North Country Drive
Traverse City, Michigan 49684
906-341-8401 or 1-888-343-8147
SHAREHOLDER INFORMATION
For information or assistance with questions, please
contact North Country Financial Corporation Investor Relations at
906-341-8401 or 1-888-343-8147
DIVIDEND REINVESTMENT PLAN
Shareholders may acquire additional shares of
North Country Financial Corporation stock through the
Dividend Reinvestment Plan. For information, please contact
Registrar & Transfer Company Investor Relations at
1-800-368-5948
STOCK TRANSFER AGENT
For questions regarding transfer of stock, please contact
Registrar & Transfer Company Investor Relations at
1-800-368-5948
48.