UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 2001, there were outstanding 7,023,651 shares of the
registrant's common stock, no par value.
NORTH COUNTRY FINANCIAL CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheets -
March 31, 2001 (Unaudited) and December 31, 2000................... 1
Condensed Consolidated Statements of Income - Three
Months Ended March 31, 2001 (Unaudited) and
March 31, 2000 (Unaudited)......................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three Months Ended March 31, 2001
(Unaudited) and March 31, 2000 (Unaudited)......................... 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 (Unaudited) and
March 31, 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 6. Exhibits and Reports on Form 8-K.................................... 14
SIGNATURES..................................................................... 15
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
- --------------------------------------------------------------------------------
March 31, December 31,
2001 2000
-------- --------
(Unaudited)
ASSETS
Cash and due from banks $ 18,631 $ 20,829
Federal funds sold 9,952 0
-------- --------
Total cash and cash equivalents 28,583 20,829
Securities available for sale 71,313 72,066
Total loans 534,600 541,689
Allowance for loan losses (9,217) (9,454)
-------- --------
Net loans 525,383 532,235
Premises and equipment 18,709 18,850
Other assets 24,161 23,016
-------- --------
Total assets $668,149 $666,996
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 39,738 $ 50,479
Interest-bearing 472,624 481,404
-------- --------
Total deposits 512,362 531,883
Federal funds purchased 0 1,800
Borrowings 89,235 69,235
Accrued expenses and other liabilities 7,919 7,011
-------- --------
Total liabilities 609,516 609,929
-------- --------
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,
7,023,360 and 6,993,684 issued and outstanding at
March 31, 2001 and December 31, 2000 16,262 16,029
Retained earnings 28,770 27,887
Accumulated other comprehensive income 1,151 701
-------- --------
Total shareholders' equity 46,183 44,617
-------- --------
Total liabilities and shareholders' equity $668,149 $666,996
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
1.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months ended
March 31,
------------------
2001 2000
------- -------
Interest income
Interest and fees on loans $12,314 $11,235
Interest on securities
Taxable 1,299 777
Tax-exempt 120 169
Other interest income 171 91
------- -------
Total interest income 13,904 12,272
------- -------
Interest expense
Deposits 6,441 5,172
Borrowings 1,104 805
Subordinated debentures 266 273
------- -------
Total interest expense 7,811 6,250
------- -------
Net interest income 6,093 6,022
Provision for loan losses 800 350
------- -------
Net interest income after provision for loan losses 5,293 5,672
------- -------
Other income
Service fees 456 479
Gain on sales of securities 455 0
Net gain on sale of branches 0 292
Fee income generated by mortgage subsidiary 1,487 0
Other operating income 88 195
------- -------
Total other income 2,486 966
------- -------
Other expenses
Salaries, commissions, and related benefits 3,133 1,659
Occupancy and equipment 848 770
Other 1,992 1,785
------- -------
Total other expenses 5,973 4,214
------- -------
Income before provision for income taxes 1,806 2,424
Provision for income taxes 220 474
------- -------
Net income $ 1,586 $ 1,950
======= =======
Basic earnings per common share $ 0.23 $ 0.28
======= =======
Diluted earnings per common share $ 0.23 $ 0.28
======= =======
Dividends declared per common share $ 0.10 $ 0.05
======= =======
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
2.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months ended
March 31,
------------------
2001 2000
------- -------
Balance - beginning of period $44,617 $40,820
Net income for period 1,586 1,950
Net unrealized gain on securities
available for sale 450 159
------- -------
Total comprehensive income 2,036 2,109
Dividends declared (703) (326)
Issuance of common stock 236 102
Common stock retired (3) (294)
------- -------
Balance - end of period $46,183 $42,411
======= =======
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
3.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months ended
March 31,
------------------
2001 2000
-------- --------
Cash flows from operating activities
Net income $ 1,586 $ 1,950
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 614 593
Provision for loan losses 800 350
Gain on sales of securities (455) 0
Loss on sale of premises and equipment 29 0
Net gain on sale of branches 0 (292)
Change in other assets (596) (1,681)
Change in other liabilities 678 320
-------- --------
Net cash provided by operating activities 2,656 1,240
-------- --------
Cash flows from investing activities
Net increase in interest-bearing deposits in other
financial institutions 0 (6)
Purchase of securities available for sale (34,167) (14,163)
Proceeds from sales of securities available for sale 28,356 0
Proceeds from maturities, calls or paydowns of
securities available for sale 7,721 203
Net decrease (increase) in loans 5,291 (20,712)
Purchase of premises and equipment (312) (159)
Net cash paid for sale of branches 0 (4,540)
-------- --------
Net cash provided by (used in) investing activities 6,889 (39,377)
-------- --------
Cash flows from financing activities
Net increase (decrease) in deposits (19,521) 17,860
Net decrease in federal funds purchased (1,800) 0
Proceeds from borrowings 20,000 20,000
Proceeds from issuance of common stock 236 102
Retirement of common stock (3) (294)
Payment of cash dividends (703) (326)
-------- --------
Net cash provided by (used in) financing activities (1,791) 37,342
-------- --------
Net change in cash and cash equivalents 7,754 (795)
Cash and cash equivalents at beginning of period 20,829 26,160
-------- --------
Cash and cash equivalents at end of period $ 28,583 $ 25,365
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4.
NORTH COUNTRY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months ended
March 31,
------------------
2001 2000
-------- --------
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 7,054 $ 6,130
Income taxes 50 663
Transfers of foreclosures from loans to other real estate 761 215
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.
5.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
The unaudited condensed consolidated financial statements of North Country
Financial Corporation (the Registrant) have been prepared in accordance with
generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
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. 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 has not had a material impact on the
consolidated financial statements.
3. EARNINGS PER SHARE
------------------
The factors used in the earnings per share computation follow.
(In thousands, except per share data)
Three Months
Ended March 31,
2001 2000
------ ------
Basic earnings per common share:
Net income $1,586 $1,950
Weighted average common shares outstanding 7,012 6,996
------ ------
Basic earnings per common share $ 0.23 $ 0.28
====== ======
Diluted earnings per common share:
Net income $1,586 $1,950
Weighted average common shares outstanding
for basic earnings per common share 7,012 6,996
Add: Dilutive effect of assumed exercises
of stock options 2 31
Add: Dilutive effect of directors' deferred stock
Compensation 1 26
------ ------
Average shares and dilutive potential common shares 7,015 7,053
------ ------
Diluted earnings per common share $ 0.23 $ 0.28
====== ======
- --------------------------------------------------------------------------------
6.
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 March 31, 2001 and December 31, 2000 are as follows
(in thousands):
March 31, 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 $11,107 $11,196 $10,946 $10,882
Obligations of states and political
subdivisions 10,912 11,946 14,754 15,542
Corporate securities 5,045 5,370 4,553 4,740
Mortgage-related securities 42,508 42,801 40,752 40,902
------- ------- ------- -------
Total investment securities
available for sale $69,572 $71,313 $71,005 $72,066
======= ======= ======= =======
5. ALLOWANCE FOR LOAN LOSSES
-------------------------
Activity in the allowance for loan losses for the three months ended March
31, 2001 and 2000, are summarized as follows (in thousands):
March 31, March 31,
2001 2000
--------- ---------
Balance at beginning of period $ 9,454 $ 6,863
Charge-offs (1,108) (374)
Recoveries 71 22
Provision for loan losses 800 350
-------- --------
$ 9,217 $ 6,861
======== ========
Information regarding impaired loans follows (in thousands):
As of and As of and
for the three for the year
months ended ended
March 31, December 31,
2001 2000
------------- ------------
Average investment in impaired loans $18,644 $22,650
Balance of impaired loans 17,773 19,514
- --------------------------------------------------------------------------------
7.
NORTH COUNTRY FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
6. BORROWINGS
----------
Borrowings consist of the following at March 31, 2001 and December 31, 2000
(in thousands):
March 31, 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 $87,488 $67,488
Farmers Home Administration, $2,000,000 fixed rate note
payable maturing August 24, 2024, interest payable at 1% 1,747 1,747
------- -------
$89,235 $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
March 31, 2001. Borrowings other than Federal Home Loan Bank advances are not
subject to prepayment penalties.
7. CURRENT EVENTS
--------------
In April 2001, the Registrant opened a branch office in Boyne City in
Michigan's Lower Peninsula. The office provides a full range of financial
services.
- --------------------------------------------------------------------------------
8.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the condensed consolidated
financial statements of the Registrant and its wholly-owned subsidiaries through
the first quarter of 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 $1.6 million through March 31, 2001
compared to $2.0 million for the same period in 2000. Diluted earnings per
share were $0.23 for the three months ended March 31, 2001 compared to $0.28 for
the same period in 2000. The provision for loss losses increased on a year-to-
date basis from $350,000 for the three months ended March 31, 2000 to $800,000
for the three months ended March 31, 2001. The loan portfolio experienced a
nominal decline during the first quarter of 2001, decreasing $7.1 million from
December 31, 2000 to March 31, 2001. Deposits have decreased $19.5 million
since December 31, 2000 while borrowings have increased $20.0 million during
that same time period.
Financial Condition:
Cash and Cash Equivalents: Cash and cash equivalents increased $7.8 million or
37.2% through the first quarter of 2001. The increase was attributed to a
federal funds sold position of $10.0 million at March 31, 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 remained relatively stable
from December 31, 2000 to March 31, 2001 with the balance on March 31, 2001
totaling $71.3 million. Investment securities are maintained at a level in
which interest rate risk is managed through diversification of the balance
sheet.
Loans: Through the first quarter of 2001, loan balances decreased by $7.1
million or 1.3%. 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 several nonperforming loans; considering the overall economic
conditions and the seasonality issues experienced in the Registrant's market
area, the first quarter was identified as most appropriate time to slow the
growth. Management anticipates loan growth to resume in the second 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 overall loan mix remains relatively
constant with a slight decline in commercial real estate loans from December 31,
2000 to March 31, 2001.
9.
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 March 31, 2001 and December 31, 2000
(in thousands):
March 31, % of December 31, % of
2001 Total 2000 Total
--------- ----- ------------ -----
Loans:
Commercial real estate $ 78,616 14.7% $ 90,635 16.7%
Commercial, financial, and agricultural 234,118 43.8 217,786 40.2
Leases:
Commercial 37,873 7.1 41,962 7.7
Governmental 54,284 10.2 55,205 10.2
1-4 family residential real estate 110,944 20.8 113,834 21.0
Consumer 11,721 2.2 13,059 2.4
Construction 7,044 1.2 9,208 1.8
-------- ----- -------- -----
$534,600 100.0% $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 March 31, 2001 and December 31, 2000, the allowance for loan
losses was equal to 1.7% of total loans outstanding.
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 were 0.19% and 0.06% for the three
months ended March 31, 2001 and 2000, respectively. Net charge-offs for the
quarter ended March 31, 2001 increased $685,000 from the same period in 2000.
Included in charge-offs for the quarter ended March 31, 2001 were loans to five
borrowers totaling $813,000. These loans were included in nonperforming loans
as of December 31, 2000 and while the charge-offs occurred in 2001, it was in
anticipation of such potential charge-offs that the provision for loan losses
was increased during 2000. The provision for loan losses was increased $450,000
from $350,000 for the quarter ended March 31, 2000 to $800,000 for the same
period in 2001.
The table presented below shows the balance of non-performing loans - which
include nonaccrual loans and loans 90 or more days past due and still accruing -
as of March 31, 2001 and December 31, 2000 (in thousands):
March 31, December 31,
2001 2000
--------- ------------
Nonaccrual loans $1,704 $10,547
Loans 90 days or more past due and still accruing 1,965 3,117
Nonaccrual loans have decreased $8.8 million from December 31, 2000 to March 31,
2001 and loans 90 days or more past due and still accruing have decreased by
$1.2 million during that same time period. The substantial decrease in the
nonaccrual loans from December 31, 2000 to March 31, 2001 is directly related to
the full collection of one $6.9 million commercial loan in March 2001. At March
31, 2001, loans to four commercial borrowers represented $980,000 of the
nonaccrual loans with the remaining $724,000 representing loans to twelve
consumer mortgage borrowers. Management is working with the borrowers to bring
these loans current. Management continues to monitor the situation on the non-
performing loans and has taken various actions to reduce the level of non-
performing loans. Non-performing loans to total gross loans were 0.7% and 2.5%
at March 31, 2001 and December 31, 2000, respectively.
10.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Deposits: Total deposits through the first quarter have decreased $19.5 million
or 3.7%. The decrease consisted of both noninterest-bearing and interest-
bearing deposit balances generated through the Bank's branch network. The
decrease is attributable to seasonality issues experienced in the Bank's market
area as well as overall economic conditions.
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. At March 31, 2001, $87.5 million of
the total borrowings were from the Federal Home Loan Bank of Indianapolis.
Alternative sources of funding can be obtained at interest rates which are
competitive with, or lower than, retail deposit rates and with minimal
administrative costs.
Guaranteed Preferred Beneficial Interests in the Corporation's Subordinated
Debentures: Consistent with the Registrant's strategic plan, the Registrant
completed a private offering in May 1999 of Capital, or Trust Preferred,
securities in the amount of $12,450,000. The proceeds were used to support the
Registrant's capital position allowing for future growth and increased common
shareholder value. Under regulatory guidelines, such securities are eligible as
regulatory capital, as defined, subject to certain limitations.
Shareholder's Equity: Total shareholder's equity increased $1.6 million from
December 31, 2000 to March 31, 2001. The increase is comprised of net income of
$1.6 million, issuance of common stock of $236,000, and an increase in the net
unrealized gain on securities of $450,000, offset by dividends declared of
$703,000.
Results of Operations:
Net Interest Income: Net interest income for the quarter ended March 31, 2001
increased by $71,000 or 1.2% 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
March 31, 2001 was 4.23%, compared to 4.98% 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. Overall, as interest
rates decreased, the Registrant was not able to decrease its cost of funds rate
at the same rate as lending rates were decreasing; therefore, margins were
narrowed. Interest income from loans represented 88.6% of total interest income
for the first quarter of 2001 compared to 91.5% 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.
Provision for Loan Losses: The allowance for loan losses is maintained at a
level adequate to cover losses inherent in the portfolio. The Registrant
records a provision for loan losses necessary to maintain the allowance at that
level after considering factors such as loan charge-offs and recoveries, changes
in the mix of loans in the portfolio, loan growth, and other economic factors.
The provision for loan losses increased by $450,000 for the quarter ended March
31, 2001 compared to the same period in 2000. This is due primarily to
increased net charge-offs as previously discussed.
11.
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
March 31, 2001 compared to the same period in 2000. The increase was primarily
due to fee income generated by the Registrant's mortgage subsidiary totaling
$1.5 million for the quarter ended March 31, 2001. The mortgage subsidiary was
acquired by the Registrant during the third quarter of 2000. Other changes in
other income between the two quarters included a gain on the sale of investment
securities of $455,000 during the quarter ended March 31, 2001 versus a gain on
the sale of a branch office of $292,000 during the quarter ended March 31, 2000.
Other Expenses: Other expenses increased $1.8 million for the quarter ended
March 31, 2001 compared to the same period of 2000. Salaries, commissions, and
related benefits increased by $1.5 million during the first quarter of 2001
compared to the first quarter of 2000. This increase is due to commission
expense of $1.2 million paid by the mortgage subsidiary directly related to the
fee income described above. Occupancy expense increased by $78,000 or 10.1% for
the first quarter of 2001 compared to the same period in 2000. Other
noninterest expense increased by $207,000 or 11.6% for the first quarter of 2001
compared to the same period in 2000. The increases in occupancy expense and
other noninterest expense are partially attributable to the increase in the
branch network that occurred throughout 2000.
Federal Income Tax: The provision for income taxes was 12.2% of pretax income
for the quarter ended March 31, 2001 compared to a provision for income taxes of
20.0% for the quarter ended March 31, 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 March 31, 2001, the Registrant had a cumulative asset repricing gap
position of $39.9 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.
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.
During the past six months, the Registrant retained the services of an
investment banking firm to evaluate various strategic alternatives, including a
possible business combination involving the Registrant and another party. After
considerable deliberation and discussions, the Board of Directors has concluded
that remaining independent at this time is in the best interest of the
shareholders and customers. This decision was based on a careful review of the
Registrant's geographic markets, industry trends, market value, and business and
operational strategies. Accordingly, the work of the investment banking firm
has been concluded. The Registrant will pursue a strategy of well-managed
growth, primarily focused in the medium- to larger-size geographic markets, and
continue to increase shareholder value by growing the franchise and increasing
earnings per share.
Capital Resources:
It is the policy of the Registrant to maintain capital at a level consistent
with both safe and sound operations and proper leverage to generate an
appropriate return on shareholders' equity. The capital ratios of the
Registrant exceed the regulatory minimum guidelines. The table below shows a
summary of the Registrant's capital position in comparison to regulatory
requirements.
Tier I Tier I Total
Capital to Capital to Capital to
Average Risk Weighted Risk Weighted
Assets Assets Assets
---------- ------------- -------------
Regulatory minimum 4.0% 4.0% 8.0%
The Registrant
March 31, 2001 7.6% 10.1% 11.3%
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 March 31,
2001, all of the $12,450,000 of Capital Securities were available as Tier I
capital of the Registrant. As previously noted, the Capital Securities will be
used to support the Registrant's current capital position allowing for future
growth.
13.
NORTH COUNTRY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
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
March 31, 2001.
14.
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)
5/14/01 /s/ Ronald G. Ford
- ------- ------------------
Date RONALD G. FORD,
CHAIRMAN AND CEO
5/14/01 /s/ Sherry L. Littlejohn
- ------- -------------------------------------
Date SHERRY L. LITTLEJOHN,
CHIEF OPERATING OFFICER AND TREASURER
15.