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 September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from <> to <>
Commission file number: 0-20167
NORTH COUNTRY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3530 NORTH COUNTRY DRIVE, TRAVERSE CITY, MI 49684
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (231) 929-5600
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, (or for such shorter periods that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of October 31, 2000, there were outstanding
6,981,310 shares of the registrant's common stock, no
par value.
<PAGE>
NORTH COUNTRY FINANCIAL CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 (Unaudited) and December 31, 1999 1
Condensed Consolidated Statements of Income - Three and
Nine Months Ended September 30, 2000 (Unaudited) and
September 30, 1999 (Unaudited) 2
Condensed Consolidated Statements of Changes in
Shareholders' Equity - Three and Nine Months Ended
September 30, 2000 (Unaudited) and
September 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 (Unaudited)
and September 30, 1999 (Unaudited) 4-5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
Cash and due from banks $ 25,125 $ 26,160
Federal funds sold 3,427 0
--------- ---------
Total cash and cash equivalents 28,552 26,160
Interest-bearing deposits in other financial
institutions 0 679
Securities available for sale 45,474 43,343
Total loans 537,709 466,621
Allowance for loan losses (8,511) (6,863)
--------- ---------
529,198 459,758
Premises and equipment 18,693 19,118
Other assets 22,299 19,384
--------- ---------
Total assets $644,216 $568,442
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 48,370 $ 43,606
Interest-bearing 478,942 419,392
--------- ---------
Total deposits 527,312 462,998
Borrowings 54,593 46,878
Accrued expenses and other liabilities 7,020 5,296
--------- ---------
Total liabilities 588,925 515,172
--------- ---------
Guaranteed preferred beneficial interests
in the Corporation's subordinated debentures 12,450 12,450
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized, no shares outstanding Common
stock, no par value, 18,000,000 shares
authorized, 6,965,669 and 7,000,176 issued
and outstanding at September 30, 2000 and
December 31, 1999 15,899 16,418
Retained earnings 27,144 25,058
Accumulated other comprehensive deficit (202) (656)
--------- ---------
Total shareholders' equity 42,841 40,820
--------- ---------
Total liabilities and shareholders' equity $644,216 $568,442
========= =========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
Interest income
Interest and fees on loans $13,024 $10,201 $36,848 $29,546
Interest on securities
Taxable 934 414 2,508 767
Tax-exempt 162 65 506 94
Other interest income 141 111 332 303
------- ------- ------- -------
Total interest income 14,261 10,791 40,194 30,710
------- ------- ------- -------
Interest expense
Deposits 6,503 4,711 17,646 13,386
Borrowings 990 416 2,908 1,033
Subordinated debentures 292 156 846 403
------- ------- ------- -------
Total interest expense 7,785 5,283 21,400 14,822
------- ------- ------- -------
Net interest income 6,476 5,508 18,794 15,888
Provision for loan losses 2,500 213 4,375 639
------- ------- ------- -------
Net interest income after provision
for loan losses 3,976 5,295 14,419 15,249
------- ------- ------- -------
Other income
Service fees 491 529 1,474 1,421
Gain on sales of securities 61 0 110 0
Net gain on sale of branches 0 430 292 430
Fee income generated by mortgage
subsidiary 1,121 0 1,121 0
Other operating income 174 264 1,223 636
------- ------- ------- -------
Total other income 1,847 1,223 4,220 2,487
------- ------- ------- -------
Other expenses
Salaries and employee benefits 2,858 1,761 6,335 4,763
Occupancy and equipment 708 642 2,212 1,894
Other 2,022 1,888 5,770 5,237
------- ------- ------- -------
Total other expenses 5,588 4,291 14,317 11,894
------- ------- ------- -------
Income before provision (credit)
for income taxes 235 2,227 4,322 5,842
Provision (credit) for income taxes (94) 500 581 1,267
------- ------- ------- -------
Net income $ 329 $ 1,727 $ 3,741 $ 4,575
======= ======= ======= =======
Basic earnings per common share $ 0.05 $ 0.25 $ 0.54 $ 0.65
======= ======= ======= =======
Diluted earnings per common share $ 0.05 $ 0.24 $ 0.53 $ 0.64
======= ======= ======= =======
Dividends declared per common share $ 0.14 $ 0.05 $ 0.24 $ 0.14
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
Balance - beginning of period $ 43,268 $ 39,035 $ 40,820 $ 39,469
Net income for period 329 1,727 3,741 4,575
Net unrealized gain (loss) on
securities available for sale 270 (2) 454 (121)
--------- -------- -------- --------
Total comprehensive income 599 1,725 4,195 4,4554
Dividends declared (999) (323) (1,655) (963)
Issuance of common stock 87 105 289 309
Common stock retired (114) (399) (808) (3,126)
--------- -------- -------- --------
Balance - end of period $ 42,841 $ 40,143 $ 42,841 $ 40,143
========= ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
2000 1999
Cash flows from operating activities
Net income $ 3,741 $ 4,575
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 1,761 1,706
Provision for loan losses 4,375 639
Gain on sales of securities (110) 0
Gain on sale of premises and equipment (271) (348)
Net gain on sale of branches (292) (430)
Change in other assets (2,593) (822)
Change in other liabilities 682 804
-------- --------
Net cash provided by operating activities 7,293 6,124
-------- --------
Cash flows from investing activities
Net decrease in interest-bearing deposits
in other financial institutions 679 0
Purchase of securities available for sale (26,027) (23,634)
Proceeds from sales of securities available for sale 23,576 0
Proceeds from maturities, calls or paydowns of
securities available for sale 1,221 3,663
Net increase in loans (73,823) (35,680)
Purchase of premises and equipment (1,203) (2,206)
Proceeds from sales of premises and equipment 815 407
Net cash paid for sale of branches (4,540) (10,001)
Net cash received for net liabilities assumed in
acquisitions 14,169 15,504
-------- --------
Net cash used in investing activities (65,133) (51,947)
-------- --------
Cash flows from financing activities
Net increase in deposits 54,023 41,886
Proceeds from borrowings 65,000 26,000
Payment on borrowings (57,285) (12,125)
Proceeds from issuance of common stock 289 309
Retirement of common stock (808) (3,126)
Net proceeds from the issuance of guaranteed
preferred beneficial interests in the
Corporation's subordinated debentures 0 11,882
Payment of cash dividends (987) (963)
-------- --------
Net cash provided by financing activities 60,232 63,863
-------- --------
Net change in cash and cash equivalents 2,392 18,040
Cash and cash equivalents at beginning of period 26,160 22,641
-------- --------
Cash and cash equivalents at end of period $28,552 $40,681
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
CONTINUED
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
2000 1999
Supplemental disclosures of cash flow information
Cash paid for:
Interest $19,819 $14,813
Income taxes 2,025 491
Assets and liabilities acquired in acquisitions:
Premises and equipment, net 194 286
Core deposit intangibles and goodwill 954 1,680
Other assets 219 0
Deposits 15,149 17,463
Other liabilities 387 7
Assets and liabilities divested in branch sales:
Loans 8 0
Premises and equipment, net 31 65
Acquisition intangibles 0 370
Deposits 4,858 10,866
Other liabilities 13 0
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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 nine month period ended September 30, 2000
are not necessarily indicative of the results that
may be expected for the year ending December 31,
2000. The unaudited consolidated financial
statements and footnotes thereto should be read in
conjunction with the audited consolidated financial
statements and footnotes thereto included in the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and
expenses during the period. Actual results could
differ from those estimates.
2.FUTURE ACCOUNTING CHANGES
In June 1999, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial
Accounting Standards ("FAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
This Statement requires that all derivative
financial instruments be recognized as either assets
or liabilities in the Balance Sheet. Derivative
financial instruments not designated as hedges will
be measured at fair value with changes in fair value
being recognized in earnings in the period of
change. If a derivative is designated as a hedge,
the accounting for changes in fair value will depend
on the specific exposure being hedged. The
Statement is effective for fiscal years beginning
after June 15, 2000. Management, at this time,
cannot determine the effect adoption of this
Statement may have on the consolidated financial
statements of the Registrant as the effect is
dependent on the amount and nature of derivatives
and hedges held at the time of adoption of the
Statement.
3.EARNINGS PER SHARE
The factors used in the earnings per share computation
follow.
(In thousands, except per share data)
Three months Nine months
ended ended
September 30, September 30,
2000 1999 2000 1999
Basic earnings per common share:
Net income $ 329 $1,727 $3,741 $4,575
Weighted average common shares
outstanding 6,965 7,015 6,980 7,040
------ ------ ------ ------
Basic earnings per common share $ 0.05 $ 0.25 $ 0.54 $ 0.65
====== ====== ====== ======
Diluted earnings per common share:
Net income $ 329 $1,727 $3,741 $4,575
Weighted average common shares
outstanding for basic earnings per
common share 6,965 7,015 6,980 7,040
Add: Dilutive effect of assumed
exercises of stock options 10 58 17 84
Add: Dilutive effect of directors'
deferred stock compensation 57 5 57 7
Average shares and dilutive potential ------ ------ ------ ------
common shares 7,032 7,078 7,054 7,131
------ ------ ------ ------
Diluted earnings per common share $ 0.05 $ 0.24 $ 0.53 $ 0.64
====== ====== ====== ======
<PAGE>
4.INVESTMENT SECURITIES
The amortized cost and estimated fair value
of investment securities available for sale
as of September 30, 2000 and December 31,
1999 are as follows (in thousands):
September 30, 2000 December 31, 1999
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations $10,924 $10,507 $ 9,863 $ 9,392
Obligations of states and
political subdivisions 16,538 16,668 16,356 16,210
Corporate securities 4,052 4,195 3,049 3,008
Mortgage-related securities 14,267 14,104 15,070 14,733
-------- ------- ------- -------
Total investment securities
available for sale $45,781 $45,474 $44,338 $43,343
5.ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for
the nine months ended September 30, 2000 and
1999, are summarized as follows (in thousands):
September 30, September 30,
2000 1999
Balance at beginning of period $ 6,863 $ 6,112
Charge-offs (2,827) (573)
Recoveries 100 75
Provision for loan losses 4,375 639
------- -------
$ 8,511 $ 6,253
======= =======
Information regarding impaired loans follows (in thousands):
As of and As of and
for the nine for the year
months ended ended
September 30, December 31,
2000 1999
Average investment in impaired loans $ 9,420 $ 6,128
Balance of impaired loans 17,633 5,604
<PAGE>
6.BORROWINGS
Borrowings consist of the following at September 30,
2000 and December 31, 1999 (in thousands):
September 30, December 31,
2000 1999
Federal Home Loan Bank advances at various
rates with various maturities (see annual
financial statements as referenced in Note 1) $ 52,782 $ 45,067
Farmers Home Administration, $2,000,000
fixed rate note payable maturing
August 24, 2024, interest payable at 1% 1,811 1,811
-------- --------
$ 54,593 $ 46,878
======== ========
The Federal Home Loan Bank borrowings are
collateralized by a blanket collateral agreement on
the Registrant's residential mortgage loans, U.S.
Government and agency securities, and Federal Home Loan
Bank stock. Prepayment of the advances is subject to
the provisions and conditions of the credit policy of
the Federal Home Loan Bank of Indianapolis in effect as
of September 30, 2000. Borrowings other than Federal
Home Loan Bank advances are not subject to prepayment
penalties.
7.CURRENT EVENTS
On August 1, 2000, the Registrant acquired American
Financial Mortgage Corp., a Michigan based mortgage
company, through a stock purchase. Total assets
acquired and liabilities assumed were $303,000 and
$343,000, respectively. The transaction resulted in
goodwill of $290,000. The acquisition of American
Financial Mortgage Corp. allows the Registrant to offer
a wider range of mortgage loan products through
secondary market relationships established by the
mortgage company. This acquisition is also viewed as a
source of noninterest income to the Registrant.
In August 2000, the Registrant opened a branch office
in Cadillac in Michigan's Lower Peninsula. The office
provides a full range of financial services. The
Registrant anticipates opening a branch office in Boyne
City, also in Michigan's Lower Peninsula, in 2001.
<PAGE>
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 third quarter of 2000.
The discussion should be read in conjunction with those
statements and their accompanying notes.
The Registrant is not aware of any market or
institutional trends, events, or circumstances that
will have or are reasonably likely to have a material
effect on liquidity, capital resources, or results of
operations except as discussed herein. Also, the
Registrant is not aware of any current recommendations
by regulatory authorities which will have such effect
if implemented.
Forward-Looking Statements:
This report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Registrant
intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform
Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-
looking statements, which are based on certain
assumptions and describe future plans, strategies and
expectations of the Registrant, are generally
identifiable by use of the words "believe", "expect",
"intend", "anticipate", "estimate", "project" or
similar expressions. The Registrant's ability to
predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations
and future prospects of the Registrant and the
subsidiaries include, but are not limited to, changes
in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of
the U.S. Treasury and the Federal Reserve Board, the
quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the
Registrant's market area and accounting principles,
policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking
statements and undue reliance should not be placed on
such statements. Further information concerning the
Registrant and its business, including additional
factors that could materially affect the Registrant's
financial results, is included in the Registrant's
filings with the Securities and Exchange Commission.
Financial Highlights:
Year-to-date consolidated net income was $3.7 million
through September 30, 2000 compared to $4.6 million for
the same period in 1999. Diluted earnings per share
were $0.53 for the nine months ended September 30, 2000
compared to $0.64 for the same period in 1999. The
provision for loss losses increased substantially on a
year-to-date basis from $639,000 for the nine months
ended September 30, 1999 to $4.4 million for the nine
months ended September 30, 2000. The loan portfolio
continues a significant growth trend with gross loans
increasing $71.1 million or 15.2% since December 31,
1999. Loan growth remains focused in the commercial
lending and leasing areas. The loan growth in 2000 has
been funded primarily through increases in the deposit
portfolio and borrowings. Deposits have increased
$64.3 million or 13.9% since December 31, 1999, with
the primary area of growth being interest-bearing
demand accounts. Borrowings have increased $7.7
million or 16.5% from December 31, 1999 to September
30, 2000.
Financial Condition:
Cash and Cash Equivalents: Cash and cash equivalents
increased $2.4 million or 9.1% through the third
quarter of 2000. The increase was largely funded by
increases in deposits and borrowings as discussed more
fully below, and is available for growth in the Bank's
loan and investment portfolios.
Investment Securities: Available for sale securities
remained fairly stable from December 31, 1999 to
September 30, 2000 with an increase of $2.1 million or
4.9%. Investment securities are maintained at a level
in which interest rate risk is managed through
diversification of the balance sheet. Management has
utilized its available capacity to borrow additional
funds at the Federal Home Loan Bank in order to match
the pricing and maturity of investment security
purchases.
Loans: Through the third quarter of 2000, loan
balances increased by $71.1 million or 15.2%.
Management believes loans provide the most attractive
earning asset yield available to the Registrant and
that trained personnel and controls are in place to
successfully manage a growing portfolio. Accordingly,
management intends to continue to maintain loans at a
high level while maintaining adequate liquidity. As
shown in the table below, the overall loan mix remains
relatively constant with an increase in commercial and
governmental leases as a percent of total loans for the
nine months ended September 30, 2000 compared to
December 31, 1999.
<PAGE>
Following is a summary of the loan mix at September 30,
2000 and December 31, 1999 (in thousands):
September 30, % of December 31, % of
2000 Total 1999 Total
Loans:
Commercial real estate $ 91,841 17.1% $ 79,000 16.9%
Commercial, financial, and
agricultural 209,335 38.9 179,592 38.5
Leases:
Commercial 41,222 7.7 22,541 4.8
Governmental 53,085 9.9 48,148 10.3
1-4 family residential real
estate 116,635 21.7 107,751 23.1
Consumer 13,553 2.5 17,051 3.7
Construction 12,038 2.2 12,538 2.7
-------- ------ -------- ------
$537,709 100.0% $466,621 100.0%
======== ====== ======== ======
The allowance for loan losses is maintained by
management at a level considered to be adequate to
cover probable losses related to specifically
identified loans, as well as probable losses inherent
in the balance of the loan portfolio. At September 30,
2000 and December 31, 1999, the allowance for loan
losses was equal to 1.6% and 1.5%, respectively, of
total loans outstanding.
Credit Quality: Management analyzes the allowance for
loan losses in detail on a monthly basis to ensure that
the losses inherent in the portfolio are properly
reserved for in the allowance for loan losses. The
Registrant's success in maintaining strong credit
quality is demonstrated in its historical charge-off
experience. Net charge-offs to gross loans outstanding
was 0.5% and 0.1% for the nine months ended September
30, 2000 and 1999, respectively. Charge-offs for the
nine month period ended September 30, 2000 increased
$2.3 million from the same period in 1999. The
increase was primarily due to one loan charge-off
totaling $1.5 million; other than this specific loan,
the charge-off level is considered to be manageable.
To compensate for the increased charge-offs and
increased levels of non-performing loans as described
below, the provision for loan losses was increased $3.7
million from $639,000 for the nine month period ended
September 30, 1999 to $4.4 million for the same period
in 2000.
The table presented below shows the balance of non-
performing loans - which include nonaccrual loans and
loans 90 or more days past due and still accruing - as
of September 30, 2000 and December 31, 1999 (in
thousands):
September 30, December 31,
2000 1999
Nonaccrual loans $10,542 $ 95
Loans 90 days or more past due and still accruing 6,933 2,452
Nonaccrual loans have increased $10.4 million from
December 31, 1999 to September 30, 2000 while loans 90
days or more past due and still accruing have increased
by $4.5 million during that same time period. At
September 30, 2000, loans to two commercial borrowers
represented $9.3 million of the $10.5 million of
nonaccrual loans. Management is working with the
borrowers and does not anticipate charge-offs on these
specific loans at this time; however, as a
precautionary measure the provision for loan losses has
been increased during the quarter ended September 30,
2000. The remaining increase in nonaccrual loans of
$1.1 million relates to loans to twelve borrowers with
individual balances less than $200,000. Included in
the September 30, 2000 totals for loans 90 days or more
past due and still accruing are loans to two commercial
borrowers totaling $5.4 million. One of these loans
has an 80% guarantee from the USDA for both principal
and interest; management is working with both borrowers
on bringing the 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 3.2% and 0.5% at September 30, 2000 and
December 31, 1999, respectively.
<PAGE>
Deposits: Total deposits through the third quarter
have increased $64.3 million or 13.9%. While both
noninterest-bearing and interest-bearing deposit
balances increased, the majority of the growth, $59.6
million, relates to interest-bearing deposit balances.
Of the total increase, $10.3 million represents the net
increase due to branch acquisitions and divestitures as
disclosed in the Condensed Consolidated Statements of
Cash Flows. The remaining growth is attributed to the
branch network as well as from the issuance of brokered
deposits.
Borrowings: The Registrant's branching network is a
relatively high cost network in comparison to peers.
Accordingly, the Registrant uses alternative funding
sources to provide funds for lending activities and to
grow the Bank's investment portfolio as described
above. At September 30, 2000, $52.8 million of the
total borrowings were from the Federal Home Loan Bank
of Indianapolis. Alternative sources of funding can be
obtained at interest rates which are competitive with,
or lower than, retail deposit rates and with minimal
administrative costs.
Guaranteed Preferred Beneficial Interests in the
Corporation's Subordinated Debentures: Consistent with
the Registrant's strategic plan, the Registrant
completed a private offering in May 1999 of Capital, or
Trust Preferred, securities in the amount of
$12,450,000. The proceeds were used to support the
Registrant's capital position allowing for future
growth and increased common shareholder value. Under
regulatory guidelines, such securities are eligible as
regulatory capital, as defined, subject to certain
limitations.
Shareholder's Equity: Total shareholder's equity
increased $2.0 million from December 31, 1999 to
September 30, 2000. The increase primarily resulted
from net income of $3.7 million offset by the
repurchase of common stock of $808,000 and dividends
declared of $1.7 million. The Registrant will continue
to selectively repurchase common stock as opportunities
arise.
Results of Operations:
Net Interest Income: Net interest income for the
quarter ended September 30, 2000 increased by $1.0
million or 18.3% compared to the same period one year
ago. The increase in net interest income was largely
the result of an increase in the loan volume for the
third quarter of 2000 compared to the third quarter of
1999. The net interest margin, on a fully taxable
equivalent basis, for the quarter ended September 30,
2000 was 4.71%, compared to 5.11% for the same period
of 1999. 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 increased, the Registrant
was not able to increase its lending rates at the same
rate as the increases experienced in the cost of funds;
therefore, margins were squeezed. Interest income from
loans represented 91.3% of total interest income for
the third quarter of 2000 compared to 94.5% for the
same period of 1999. For both periods, the total
interest income and the yield on total earning assets
are strongly influenced by lending activities.
Net interest income for the nine months ended September
30, 2000 increased by $2.9 million or 18.3% compared to
the same period in 1999. The net interest margin, on a
fully taxable equivalent basis for the nine months
ended September 30, 2000 decreased from 5.14% for the
same period in 1999 to 4.80% for the same reasons
mentioned in the preceding paragraph. Interest income
from loans represented 91.7% of total interest income
through the third quarter of 2000 compared to 96.2% for
the same period of 1999.
Provision for Loan Losses: The allowance for loan
losses is maintained at a level adequate to cover
losses inherent in the portfolio. The Registrant
records a provision for loan losses necessary to
maintain the allowance at that level after considering
factors such as loan charge-offs and recoveries,
changes in the mix of loans in the portfolio, loan
growth, and other economic factors. The provision for
loan losses increased by $2.3 million and $3.7 million
for the quarter ended and nine month period ended
September 30, 2000, respectively, compared to the same
periods in 1999. This is due primarily to increased
net charge-off and non-performing loan levels as
previously discussed. Management continues to fund the
allowance at a rate consistent with its analysis of
problem credits, also considering changes in the size
and mix of its loan portfolio.
<PAGE>
Other Income: Other income increased by $624,000 for
the quarter ended September 30, 2000 compared to the
same period in 1999. The increase was primarily due to
fee income generated by the Registrant's mortgage
subsidiary totaling $1.1 million for the quarter ended
September 30, 2000 offset by a $430,000 net gain on the
sale of branches for the quarter ended September 30,
1999. As discussed in the Notes to the Condensed
Consolidated Financial Statements, the mortgage
subsidiary was acquired by the Registrant during the
third quarter of 2000.
Other income increased by $1.7 million for the nine
months ended September 30, 2000 compared to the same
period one year ago. The increase was primarily due to
the fee income generated by the mortgage subsidiary as
discussed above.
Other Expenses: Other expenses increased $1.3 million
or 30.2% for the quarter ended September 30, 2000
compared to the same period of 1999. Salary expense
increased by $1.1 million or 62.3% during the third
quarter of 2000 compared to the third quarter of 1999.
This increase is due to commission expense of $1.0
million paid by the mortgage subsidiary directly
related to the fee income described above. Occupancy
expense increased by $66,000 or 10.3% for the third
quarter of 2000 compared to the same period in 1999.
Other noninterest expense increased by $134,000 or 7.1%
for the third quarter of 2000 compared to the same
period in 1999.
Other expenses increased $2.4 million or 20.4% for the
nine months ended September 30, 2000 compared to the
same period of 1999. Salary expense increased by $1.6
million or 33.0% through the third quarter of 2000
compared to the same period in 1999 for the reason
noted above. Occupancy expense increased by $318,000
or 16.8% through the third quarter of 2000 compared to
the same period in 1999. Other noninterest expense
increased by $533,000 or 10.2% through the third
quarter of 2000 compared to the same period in 1999.
The increases in occupancy expense and other
noninterest expense are not attributable to specific
occurrences but rather resulted from multiple factors.
Federal Income Tax: The credit for income taxes was
40% of pretax income for the quarter ended September
30, 2000 compared to a provision for income taxes of
22.5% for the quarter ended September 30, 1999. For
the nine months ended September 30, 2000, the provision
for income taxes was 13.4% of pretax income compared to
21.7% for the same period in 1999. The difference
between the effective tax rate and the federal
corporate income tax rate of 34% is primarily due to
tax-exempt interest earned on loans, leases, and
investments. The effective tax rate has decreased as
tax-exempt income has become a larger percentage of
total interest income.
Interest Rate Risk:
Management actively manages the Registrant's interest
rate risk. In relatively low interest rate
environments which have been experienced during the
past several years, borrowers have generally tried to
extend the maturities and repricing periods on their
loans and place deposits in demand or very short term
accounts. Management has taken various actions to
offset the imbalance which those tendencies would
otherwise create. Commercial and real estate loans are
written at variable rates or, if necessary, fixed rates
for relatively short terms. Products have also been
offered to give customers an incentive to accept longer
term deposits. Management can also manage interest
rate risk with the maturity periods of securities
purchased, selling securities available for sale, and
borrowing funds with targeted maturity periods.
As of September 30, 2000, the Registrant had a
cumulative asset gap position of approximately $42
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.
<PAGE>
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
September 30, 2000 7.5% 9.8% 11.1%
December 31, 1999 8.4% 11.8% 13.0%
The capital levels include adjustment for the Capital,
or Trust Preferred, Securities issued in May 1999,
subject to certain limitations. Federal Reserve
guidelines limit the amount of cumulative preferred
securities which can be included in Tier I capital to
25% of total Tier I capital. As of September 30, 2000,
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.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this
report
Number Exhibit
10 Employment Agreement dated September 30,
2000 between North Country Financial
Corporation and Sherry L. Littlejohn
27 Financial Data Schedule.
(b) There were no reports filed on Form 8-K during the
quarter ended September 30, 2000.
<PAGE>
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)
11/9/00 /s/ Ronald G. Ford
-------- ----------------------
Date RONALD G. FORD,
CHAIRMAN AND CEO
11/9/00 /s/ Kristine E. Hoefler
-------- -------------------------
Date KRISTINE E. HOEFLER,
EXECUTIVE VICE PRESIDENT AND CFO
