1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
-------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from <> to <>
Commission file number: 0-20167
NORTH COUNTRY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3530 NORTH COUNTRY DRIVE, TRAVERSE CITY, MI 49684
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (231) 929-5600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------
As of July 31, 2001, there were outstanding 7,023,651 shares of the registrant's
common stock, no par value.
2
NORTH COUNTRY FINANCIAL CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2001 (Unaudited) and December 31, 2000.................................... 1
Condensed Consolidated Statements of Income - Three
and Six Months Ended June 30, 2001 (Unaudited) and
June 30, 2000 (Unaudited)........................................................ 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three and Six Months Ended June 30, 2001
(Unaudited) and June 30, 2000 (Unaudited)........................................ 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001 (Unaudited) and
June 30, 2000 (Unaudited)........................................................ 4-5
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................................................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 9-13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................ 14
Item 6. Exhibits and Reports on Form 8-K................................................... 14
SIGNATURES ................................................................................... 15
3
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 23,241 $ 20,829
Federal funds sold 19,510 0
----------- -----------
Total cash and cash equivalents 42,751 20,829
Interest bearing deposits in other financial institutions 662 0
Securities available for sale 59,967 72,066
Total loans 530,271 541,689
Allowance for loan losses (9,397) (9,454)
----------- -----------
Net loans 520,874 532,235
Premises and equipment 19,781 18,850
Other assets 23,857 23,016
----------- -----------
Total assets $ 667,892 $ 666,996
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 45,580 $ 50,479
Interest-bearing 469,252 481,404
----------- -----------
Total deposits 514,832 531,883
Federal funds purchased 0 1,800
Borrowings 88,937 69,235
Accrued expenses and other liabilities 5,761 7,011
----------- -----------
Total liabilities 609,530 609,929
----------- -----------
Guaranteed preferred beneficial interests in the Corporation's
subordinated debentures 12,450 12,450
----------- -----------
Shareholders' equity
Preferred stock, no par value, 500,000 shares authorized, no shares
outstanding Common stock, no par value, 18,000,000 shares authorized,
7,023,651 and 6,993,684 issued and outstanding at
June 30, 2001 and December 31, 2000 16,265 16,029
Retained earnings 29,696 27,887
Accumulated other comprehensive income (loss) (49) 701
----------- -----------
Total shareholders' equity 45,912 44,617
----------- -----------
Total liabilities and shareholders' equity $ 667,892 $ 666,996
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
1.
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NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended Six months ended
--------June 30,-------- --------June 30,-------
2001 2000 2001 2000
---- ---- ---- ----
Interest income
Interest and fees on loans $11,833 $12,589 $24,147 $23,824
Interest on securities
Taxable 1,205 797 2,504 1,574
Tax-exempt 68 175 188 344
Other interest income 126 100 297 191
------- ------- ------- -------
Total interest income 13,232 13,661 27,136 25,933
------- ------- ------- -------
Interest expense
Deposits 5,720 5,971 12,161 11,143
Borrowings 1,241 1,113 2,345 1,918
Subordinated debentures 215 281 481 554
------- ------- ------- -------
Total interest expense 7,176 7,365 14,987 13,615
------- ------- ------- -------
NET INTEREST INCOME 6,056 6,296 12,149 12,318
Provision for loan losses 275 1,525 1,075 1,875
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,781 4,771 11,074 10,443
------- ------- ------- -------
Other income
Service fees 477 504 933 983
Gain on sales of securities 58 49 513 49
Net gain on sale of branches 0 0 0 292
Fee income generated by mortgage subsidiary 2,128 0 3,615 0
Other operating income 253 854 318 1,049
------- ------- ------- -------
Total other income 2,916 1,407 5,379 2,373
------- ------- ------- -------
Other expenses
Salaries, commissions, and related benefits 3,900 1,818 7,028 3,477
Occupancy and equipment 847 734 1,697 1,504
Other 2,103 1,963 4,075 3,748
------- ------- ------- -------
Total other expenses 6,850 4,515 12,800 8,729
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,847 1,663 3,653 4,087
Provision for income taxes 219 201 439 675
------- ------- ------- -------
NET INCOME $ 1,628 $ 1,462 $ 3,214 $ 3,412
======= ======= ======= =======
Basic earnings per common share $ .23 $ .21 $ .46 $ .49
======= ======= ======= =======
Diluted earnings per common share $ .23 $ .21 $ .46 $ .49
======= ======= ======= =======
Dividends declared per common share $ .10 $ .05 $ .20 $ .09
======= ======= ======= =======
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
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NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended Six months ended
--------June 30,-------- --------June 30,-------
2001 2000 2001 2000
---- ---- ---- ----
Balance - beginning of period $46,183 $42,411 $44,617 $40,820
Net income for period 1,628 1,462 3,214 3,412
Net unrealized gain (loss) on securities
available for sale (1,200) 25 (750) 184
------- ------- ------- -------
Total comprehensive income 428 1,487 2,464 3,596
Dividends declared (702) (330) (1,405) (656)
Issuance of common stock 3 100 239 202
Common stock retired 0 (400) (3) (694)
------- ------- ------- -------
Balance - end of period $45,912 $43,268 $45,912 $43,268
======= ======= ======= =======
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
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NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Six Months ended
-----------June,-----------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,214 $ 3,412
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 1,182 1,169
Provision for loan losses 1,075 1,875
Gain on sales of securities (513) (49)
(Gain) loss on sale of premises and equipment 25 (271)
Net gain on sale of branches 0 (292)
Change in other assets (10) (2,513)
Change in other liabilities (863) (152)
-------- --------
Net cash provided by operating activities 4,110 3,179
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-bearing deposits in other financial institutions (662) (688)
Purchase of securities available for sale (35,057) (24,547)
Proceeds from sales of securities available for sale 33,629 9,946
Proceeds from maturities, calls or paydowns of securities available for sale 12,971 795
Net (decrease) increase in loans 9,031 (58,644)
Purchase of premises and equipment (1,959) (492)
Proceeds from sale of premises and equipment 177 774
Net cash paid for sale of branches 0 (4,540)
Net cash received for net liabilities assumed in acquisition of branches 0 14,390
-------- --------
Net cash provided by (used in) investing activities 18,130 (63,006)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (17,051) 29,355
Net decrease in federal funds purchased (1,800) 0
Proceeds from borrowings 20,000 65,000
Payment on borrowings (298) (30,285)
Proceeds from issuance of common stock 239 202
Retirement of common stock (3) (694)
Payment of cash dividends (1,405) (656)
-------- --------
Net cash provided by (used in) financing activities (318) 62,922
-------- --------
Net change in cash and cash equivalents 21,922 3,095
Cash and cash equivalents at beginning of period 20,829 26,160
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,751 $ 29,255
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
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NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Six Months ended
--------June 30,-------
2001 2000
---- ----
Supplemental disclosures of cash flow information
Cash paid for:
Interest $15,448 $12,502
Income taxes 805 1,993
Transfers of foreclosures from loans to other real estate 1,255 602
Assets and liabilities acquired in branch acquisitions:
Premises and equipment, net 0 139
Core deposit intangibles and goodwill 0 664
Deposits 0 15,149
Other liabilities 0 44
Assets and liabilities divested in branch sales:
Loans 0 8
Premises and equipment, net 0 31
Deposits 0 4,858
Other liabilities 0 13
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
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NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of North Country
Financial Corporation (the Registrant) have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June
30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001. The unaudited consolidated financial
statements and footnotes thereto should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in
the Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates.
2. FUTURE ACCOUNTING CHANGES
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 141 requires the use of
the purchase method of accounting for business combinations initiated after
June 30, 2001. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 addresses how intangible assets acquired outside of a
business combination should be accounted for upon acquisition and how
goodwill and other intangible assets should be accounted for after they
have been initially recognized. SFAS No. 142 eliminates the amortization
for goodwill and other intangible assets with indefinite lives. Other
intangible assets with a finite life will be amortized over their useful
life. Goodwill and other intangible assets with indefinite useful lives
shall be tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset may be impaired. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. The
Corporation's adoption of SFAS No. 142 on January 1, 2002 is not
anticipated to have a material impact on the consolidated financial
statements as of the date of adoption.
3. EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
(In thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Basic earnings per common share:
Net income $ 1,628 $ 1,462 $ 3,214 $ 3,412
Weighted average common shares outstanding 7,024 6,979 7,018 6,987
--------- -------- -------- ---------
Basic earnings per common share $ .23 $ .21 $ .46 $ .49
======== ======= ======== =========
Diluted earnings per common share:
Net income $ 1,628 $ 1,462 $ 3,214 $ 3,412
Weighted average common shares outstanding
for basic earnings per common share 7,024 6,979 7,018 6,987
Add: Dilutive effect of assumed exercises
of stock options 3 12 2 12
Add: Dilutive effect of directors' deferred stock
Compensation 1 37 1 37
--------- -------- -------- ---------
Average shares and dilutive potential common shares 7,028 7,028 7,021 7,036
--------- -------- -------- ---------
Diluted earnings per common share $ .23 $ .21 $ .46 $ .49
======== ======= ======== =========
- --------------------------------------------------------------------------------
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NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
available for sale as of June 30, 2001 and December 31, 2000 are as follows
(in thousands):
-----------June 30, 2001--------- --------December 31, 2000--------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations $ 9,175 $ 8,995 $ 10,946 $ 10,882
Obligations of states and political
subdivisions 10,423 10,586 14,754 15,542
Corporate securities 5,939 6,277 4,553 4,740
Mortgage-related securities 34,504 34,109 40,752 40,902
--------------- -------------- -------------- ---------------
Total investment securities
available for sale $ 60,041 $ 59,967 $ 71,005 $ 72,066
=============== ============== ============== ===============
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the six months ended June 30,
2001 and 2000, are summarized as follows (in thousands):
June 30, June 30,
2001 2000
---- ----
Balance at beginning of period $ 9,454 $ 6,863
Charge-offs (1,774) (1,098)
Recoveries 642 80
Provision for loan losses 1,075 1,875
----------- -----------
Balance at end of period $ 9,397 $ 7,720
=========== ===========
Information regarding impaired loans follows (in thousands):
As of and As of and
for the six for the year
months ended ended
June 30, December 31,
2001 2000
---- ----
Average investment in impaired loans $ 17,998 $ 22,650
Balance of impaired loans 16,482 19,514
- --------------------------------------------------------------------------------
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NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
6. BORROWINGS
Borrowings consist of the following at June 30, 2001 and December 31, 2000
(in thousands):
June 30, December 31,
2001 2000
---- ----
Federal Home Loan Bank advances at rates ranging from 4.35% to 7.59% with
maturities from less than one year to ten years $ 87,190 $ 67,488
Farmers Home Administration, $2,000,000 fixed rate note payable
maturing August 24, 2024, interest payable at 1% 1,747 1,747
----------- -----------
$ 88,937 $ 69,235
=========== ===========
The Federal Home Loan Bank borrowings are collateralized by a blanket
collateral agreement on the Registrant's residential mortgage loans, U.S.
Government and agency securities, and Federal Home Loan Bank stock.
Prepayment of the advances is subject to the provisions and conditions of
the credit policy of the Federal Home Loan Bank of Indianapolis in effect
as of June 30, 2001. Borrowings other than Federal Home Loan Bank advances
are not subject to prepayment penalties.
7. CURRENT EVENTS
On August 3, 2001, North Country Bank and Trust, the primary subsidiary of
the Registrant, entered into an agreement with Standard Federal Bank and
Michigan National Bank, subsidiaries of ABN AMRO North America, Inc. to
purchase six of their bank branches located in northern lower Michigan.
According to the agreement, five of the branches to be purchased are
currently operated by Standard Federal Bank in Charlevoix, Gaylord,
Houghton Lake, Petoskey, and Rogers City. The sixth operates as a Michigan
National Bank branch in Traverse City. The Bank will acquire approximately
$90 million in deposits as a result of the transaction. The transaction is
subject to regulatory approval and is expected to be completed by the end
of 2001.
On July 13, 2001, the Bank sold the deposits and certain assets of the St.
Ignace and Mackinac Island branches to Central Savings Bank. Deposits of
$11,677,000, other liabilities of $35,000, and assets of $757,000 were
divested in the transaction which resulted in a net gain on sale of
$501,000.
In July 2001, the Bank entered into an agreement to sell the deposits and
certain assets of the Curtis and Naubinway branches to State Savings Bank.
The transaction is subject to regulatory approval and is expected to be
completed by the end of 2001.
The Bank will be opening a new branch in Ishpeming in Michigan's Upper
Peninsula in September of this year.
- --------------------------------------------------------------------------------
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NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the condensed consolidated
financial statements of the Registrant and its subsidiaries through the second
quarter of 2001. The discussion should be read in conjunction with those
statements and their accompanying notes.
The Registrant is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or results of operations except as discussed
herein. Also, the Registrant is not aware of any current recommendations by
regulatory authorities which will have such effect if implemented.
FORWARD-LOOKING STATEMENTS:
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Registrant intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Registrant, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Registrant's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Registrant and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Registrant's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Registrant and its business, including additional
factors that could materially affect the Registrant's financial results, is
included in the Registrant's filings with the Securities and Exchange
Commission.
FINANCIAL HIGHLIGHTS:
Year-to-date consolidated net income was $3.21 million through June 30, 2001
compared to $3.41 million for the same period in 2000. Diluted earnings per
share were $0.46 for the six months ended June 30, 2001 compared to $0.49 for
the same period in 2000. The provision for loss losses decreased on a
year-to-date basis from $1.88 million for the six months ended June 30, 2000 to
$1.08 million for the six months ended June 30, 2001. The loan portfolio
experienced a nominal decline through the second quarter of 2001, decreasing
$11.4 million from December 31, 2000 to June 30, 2001. Deposits have decreased
$17.1 million since December 31, 2000 while borrowings have increased $19.7
million during that same time period.
FINANCIAL CONDITION:
Cash and Cash Equivalents: Cash and cash equivalents increased $21.9 million
through the second quarter of 2001. The increase was primarily attributed to a
federal funds sold position of $19.5 million at June 30, 2001 compared to $0 at
December 31, 2000. Excess monies are invested in federal funds until
opportunities in the Bank's loan and investment portfolios arise.
Investment Securities: Available for sale securities decreased $12.1 million or
16.8% from December 31, 2000 to June 30, 2001 with the balance on June 30, 2001
totaling $60.0 million. Investment securities are maintained at levels needed to
manage interest rate risk and liquidity through diversification of the balance
sheet.
Loans: Through the second quarter of 2001, loan balances decreased by $11.4
million or 2.1%. While a decrease in the loan level is not typical for the
Registrant, this was a planned strategy to allow management's attention to be
focused on nonperforming loan issues; considering the overall economic
conditions and the seasonality issues experienced in the Registrant's market
area, the first half of the year was identified as most appropriate time to slow
the growth. Management anticipates loan growth to resume in the third quarter of
2001. Management believes loans provide the most attractive earning asset yield
available to the Registrant and that trained personnel and controls are in place
to successfully manage the loan portfolio, accordingly, management intends to
continue to maintain loans at a high level while maintaining adequate liquidity.
As shown in the table below, the composition of the loan portfolio between
December 31, 2000 and June 30, 2001 remains relatively constant with a slight
increase in commercial, financial and agricultural loans offset by declines in
commercial real estate and residential real estate loans.
9.
12
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Following is a summary of the loan mix at June 30, 2001 and December 31, 2000
(in thousands):
June 30, % of December 31, % of
2001 Total 2000 Total
---- ----- ---- -----
Loans:
Commercial real estate $ 75,544 14.2% $ 90,635 16.7%
Commercial, financial, and agricultural 243,057 45.8 217,786 40.2
Leases:
Commercial 38,011 7.2 41,962 7.7
Governmental 54,657 10.3 55,205 10.2
1-4 family residential real estate 102,279 19.3 113,834 21.0
Consumer 11,285 2.1 13,059 2.4
Construction 5,438 1.1 9,208 1.8
------------ ------- ------------ -------
$ 530,271 100.0% $ 541,689 100.0%
============ ======= ============ =======
Credit Quality: The allowance for loan losses is maintained by management at a
level considered to be adequate to cover probable losses related to specifically
identified loans, as well as probable losses inherent in the balance of the loan
portfolio. At June 30, 2001 and December 31, 2000, the allowance for loan losses
remained relatively unchanged at 1.8% and 1.7% of total loans outstanding,
respectively.
Management analyzes the allowance for loan losses in detail on a monthly basis
to ensure that the losses inherent in the portfolio are properly reserved for.
Net charge-offs to gross loans outstanding remained stable and were 0.21% and
0.20% for the six months ended June 30, 2001 and 2000, respectively. Charge-offs
for the six month period ended June 30, 2001 increased $676,000 from the same
period in 2000 but were substantially offset by an increase in recovery actions
of $562,000 over the same period. The provision for loan losses was decreased
$800,000 or 42.7% from $1.88 million for the six months ended June 30, 2000 to
$1.08 million for the six months ended June 30, 2001. The provision for loan
losses was increased during 2000 in anticipation of potential charge-offs of
nonperforming loans.
The table presented below shows the balance of non-performing loans - which
include nonaccrual loans and loans 90 or more days past due and still accruing -
as of June 30, 2001 and December 31, 2000 (in thousands):
June 30, December 31,
2001 2000
---- ----
Nonaccrual loans $ 2,450 $ 10,547
Loans 90 days or more past due and still accruing 5,554 3,117
Nonaccrual loans decreased $8.1 million or 76.8% from December 31, 2000 to June
30, 2001 while loans 90 days or more past due and still accruing increased by
$2.4 million or 78.2% during that same time period. The substantial decrease in
the nonaccrual loans from December 31, 2000 to June 30, 2001 is largely
attributable to the full collection of one $6.9 million commercial loan in March
2001. Additionally, in accordance with its contractual terms, one $2.4 million
loan was reinstated to accrual status beginning January 2001. As of June 30,
2001, loans to four commercial borrowers represented $1.43 million of the
nonaccrual loans with the remaining $1.02 million representing loans to fifteen
consumer mortgage borrowers. One $3.8 million commercial loan represented 68% of
loans over 90 days past due as of June 30, 2001 and is being closely monitored
by management to reduce the likelihood of any potential loss. While the weakened
economy has had an impact on the repayment ability of borrowers, management
remains in regular contact with the credit customers of the Bank and works with
them to bring these loans current. Management continues to monitor the situation
on the non-performing loans and has taken various actions to reduce their level.
The ratio of non-performing loans to total gross loans has significantly
decreased from 2.5% at December 31, 2000 to 1.5% at June 30, 2001.
10.
13
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Deposits: Total deposits through the second quarter have decreased $17.1 million
or 3.2%. The decrease consisted of both noninterest-bearing and interest-bearing
deposit balances generated through the Bank's branch network. Fluctuations of
this type are not atypical and are experienced from time to time in the Bank's
normal course of business.
Borrowings: In addition to deposits, the Registrant uses alternative funding
sources to provide funds for lending activities and to grow the Bank's
investment portfolio as described above. Alternative sources can be obtained at
interest rates which are competitive with, or lower than, retail deposit rates
and with minimal administrative costs. Year-to-date borrowings have increased
$19.7 million or 28.5% from December 30, 2000. At June 30, 2001, $87.2 million
of the total borrowings were from the Federal Home Loan Bank of Indianapolis.
Guaranteed Preferred Beneficial Interests in the Corporation's Subordinated
Debentures: Consistent with the Registrant's strategic plan, the Registrant
completed a private offering in May 1999 of Capital, or Trust Preferred,
securities in the amount of $12,450,000. The proceeds were used to support the
Registrant's capital position allowing for future growth and increased common
shareholder value. Under regulatory guidelines, such securities are eligible as
regulatory capital, as defined, subject to certain limitations.
Shareholder's Equity: Total shareholder's equity increased $1.3 million from
December 31, 2000 to June 30, 2001. The increase is comprised of net income of
$3.2 million and issuance of common stock of $239,000 offset by a decrease in
the net unrealized gain on securities of $750,000 and dividends declared of $1.4
million.
RESULTS OF OPERATIONS:
Net Interest Income: Net interest income for the quarter ended June 30, 2001
decreased by $240,000 or 3.8% compared to the same period one year ago. While
loan and deposit volume has increased during the past twelve months, decreases
in interest rates have resulted in essentially stable net interest income. The
net interest margin, on a fully taxable equivalent basis, for the quarter ended
June 30, 2001 was 4.33%, compared to 4.78% for the same period of 2000. The net
interest margin has been impacted by the current economic conditions as well as
the competitive nature of the Registrant's market. The Bank, along with its
competitors, has experienced tighter interest margins as lending rates decrease
at a faster pace than deposit and borrowing rates. Thus, in the current
decreasing interest rate environment, the Bank's net interest margin has been
narrowing. However, the net interest margin for the second quarter of 2001
increased since the first quarter of the year when it was 4.23%; this is due to
the timing impact of lowered deposit rates. Interest income from loans
represented 89.4% of total interest income for the second quarter of 2001
compared to 92.2% for the same period of 2000. For both periods, the total
interest income and the yield on total earning assets are strongly influenced by
lending activities.
Net interest income for the six months ended June 30, 2001 remained stable and
at $12.1 million is comparable to the same period in 2000. The net interest
margin, on a fully taxable equivalent basis for the six months ended June 30,
2001 decreased from 4.85% for the same period in 2000 to 4.31% for the same
reasons mentioned in the preceding paragraph. Interest income from loans
represented 88.9% of total interest income through the second quarter of 2001
compared to 91.9% for the same period of 2000.
Provision for Loan Losses: The allowance for loan losses is maintained at a
level adequate to cover losses inherent in the portfolio. The Registrant records
a provision for loan losses necessary to maintain the allowance at that level
after considering factors such as loan charge-offs and recoveries, changes in
the mix of loans in the portfolio, loan growth, and other economic factors. The
provision for loan losses decreased by $1.3 million and $800,000 for the quarter
ended and six month period ended June 30, 2001, respectively. The provision for
loan losses was increased during the previous year in anticipation of potential
charge-offs of certain loans that were included in nonperforming assets as of
June 30, 2000.
11.
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NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other Income: Other income increased by $1.5 million for the quarter ended June
30, 2001 compared to the quarter ended June 30, 2000. The increase was primarily
due to fee income generated by the Registrant's mortgage subsidiary totaling
$2.1 million for the quarter ended June 30, 2001. The mortgage subsidiary was
acquired by the Registrant during the third quarter of 2000. The increase was
partially offset by a decrease of $601,000 in other operating income between the
two quarters. This decrease was due to two events that happened during the
second quarter of 2000 but did not recur in 2001. The Bank experienced a gain on
the sale of mortgaging servicing rights of $229,000 in May 2000 and one of its
subsidiaries, North Country Real Estate Company, realized a $225,000 gain on the
sale of assets in June 2000.
Other income increased by $3.0 million for the six months ended June 30, 2001
compared to the same period one year ago. The increase was primarily due to $3.6
million in fee income generated by the Registrant's mortgage subsidiary through
the six months ended June 30, 2001 in addition to increased gains on the sale of
securities of $464,000 for the six months ended June 30, 2001 compared to the
same period last year. These increases were partially offset by a decrease in
net gains on the sale of branches of $292,000 resulting from a branch sale
during the first quarter of 2000, and a decrease in other operating income of
$731,000 between the two six month periods ended June 30.
Other Expenses: Other expenses increased $2.3 million for the quarter ended June
30, 2001 compared to the same period of 2000. Salaries, commissions, and related
benefits increased by $2.1 million during the second quarter of 2001 compared to
the second quarter of 2000. This increase is mainly due to commission expense of
$1.9 million paid by the mortgage subsidiary directly related to the fee income
described above. Occupancy expense increased by $113,000 or 15.4% and other
noninterest expense increased by $140,000 or 7.1% for the second quarter of 2001
compared to the same period in 2000.
Other expenses increased $4.1 million or 46.6% for the six months ended June 30,
2001 compared to the same period of 2000. Salaries, commissions, and related
benefits increased by $3.6 million through the second quarter of 2001 compared
to the same period in 2000. This increase was primarily due to commission
expense of $3.2 million, as mentioned above. Occupancy expense increased by
$193,000 or 12.8% and other noninterest expense increased by $327,000 or 8.7%
through the second quarter of 2001 compared to the same period in 2000.
Federal Income Tax: The provision for income taxes was 12% of pretax income for
both the quarters ended June 30, 2001 and June 30, 2000. For the six months
ended June 30, 2001, the provision for income taxes was 12% of income compared
to 16.5% for the same period in 2000. The difference between the effective tax
rate and the federal corporate income tax rate of 34% is primarily due to
tax-exempt interest earned on loans, leases and investments. The effective tax
rate has decreased as tax-exempt income has become a larger percentage of total
interest income.
INTEREST RATE RISK:
Management actively manages the Registrant's interest rate risk. In relatively
low interest rate environments which have been experienced during the past
several years, borrowers have generally tried to extend the maturities and
repricing periods on their loans and place deposits in demand or very short term
accounts. Management has taken various actions to offset the imbalance which
those tendencies would otherwise create. Commercial and real estate loans are
written at variable rates or, if necessary, fixed rates for relatively short
terms. Management can also manage interest rate risk with the maturity periods
of securities purchased, selling securities available for sale, and borrowing
funds with targeted maturity periods.
As of June 30, 2001, the Registrant had a cumulative asset repricing gap
position of $61.3 million within the one-year timeframe. This position suggests
that if the market interest rates increase in the next twelve months, the
Registrant has the potential to earn more net interest income. Conversely, if
market interest rates decline in the next twelve months, the Registrant has the
potential to earn less net interest income. Management believes that it is
properly positioned against significant changes in rates without severely
altering operating results.
12.
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NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY:
The Registrant's sources of liquidity include principal payments on loans and
investments, sales of securities available for sale, deposits from customers,
borrowings from the Federal Home Loan Bank, other bank borrowings, and the
issuance of common stock. The Registrant has ready access to significant sources
of liquidity on an almost immediate basis. Management anticipates no difficulty
in maintaining liquidity at the levels necessary to conduct the Registrant's
day-to-day business activities.
CAPITAL RESOURCES:
It is the policy of the Registrant to maintain capital at a level consistent
with both safe and sound operations and proper leverage to generate an
appropriate return on shareholders' equity. The capital ratios of the Registrant
exceed the regulatory minimum guidelines. The table below shows a summary of the
Registrant's capital position in comparison to regulatory requirements.
Tier I Tier I Total
Capital to Capital to Capital to
Average Risk Weighted Risk Weighted
Assets Assets Assets
------ ------ ------
Regulatory minimum 4.0% 4.0% 8.0%
The Registrant
June 30, 2001 7.8% 10.3% 11.6%
December 31, 2000 7.6% 10.0% 11.2%
The capital levels include adjustment for the Capital, or Trust Preferred,
Securities issued in May 1999, subject to certain limitations. Federal Reserve
guidelines limit the amount of cumulative preferred securities which can be
included in Tier I capital to 25% of total Tier I capital. As of June 30, 2001,
all of the $12,450,000 of Capital Securities were available as Tier I capital of
the Registrant.
13.
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NORTH COUNTRY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Registrant's shareholders was held on April 17, 2001.
The purpose of the meeting was to elect directors, each for a three-year term.
The name of each director elected, along with the number of votes cast for or
authority withheld follows:
AUTHORITY
DIRECTORS ELECTED FOR WITHHELD
----------------- --- --------
Stanley Gerou, II 3,374,843 1,006,010
John Lindroth 3,316,465 1,064,388
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) There are no exhibits filed as part of this report.
(b) There were no reports filed on Form 8-K during the quarter ended June
30, 2001.
14.
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NORTH COUNTRY FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH COUNTRY FINANCIAL CORPORATION
-----------------------------------
(Registrant)
August 7, 2001 /s/ Ronald G. Ford
- -------------- ---------------------------------
Date RONALD G. FORD,
CHAIRMAN AND CEO
August 8, 2001 /s/ Sherry L. Littlejohn
- -------------- ---------------------------------
Date SHERRY L. LITTLEJOHN,
PRESIDENT AND CHIEF OPERATING OFFICER