U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
__X__ QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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______ TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10627
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NORTH COUNTY BANCORP
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(Exact name of small business issuer as specified in its charter)
California 95-3669135
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 S. Escondido Blvd., P.O.Box 1476, Escondido, California 92025
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 743-2200
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period 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
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As of May 7, 1996 the Registrant had 1,880,721 shares of no par value common
stock issued and outstanding.
NORTH COUNTY BANCORP
PAGE
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Part I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statement of Financial Condition -
March 31, 1996 and December 31, 1995 2
Consolidated Statement of Income -
Three Months Ended March 31, 1996 and 1995 3
Consolidated Statement of Cash Flows -
Three months Ended March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 11
1
NORTH COUNTY BANCORP
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 20,831,000 $ 24,233,000
Federal funds sold 9,000,000 10,500,000
------------ ------------
29,831,000 34,733,000
Investment securities:
Available for sale 20,238,000 18,250,000
Held to maturity 9,840,000 7,922,000
Loans, net 162,215,000 159,034,000
Other real estate owned 3,351,000 2,402,000
Premises and equipment, net 9,309,000 9,526,000
Accrued interest receivable and other assets 5,459,000 5,167,000
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$240,243,000 $237,034,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 70,042,000 $ 70,728,000
Interest bearing 146,272,000 143,108,000
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216,314,000 213,836,000
Accrued expenses and other liabilities 2,162,000 1,788,000
U.S. Treasury demand note 499,000 543,000
Notes payable 1,476,000 1,500,000
Capital lease obligation 454,000 462,000
Convertible subordinated debentures 1,678,000 1,678,000
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Total liabilities 222,583,000 219,807,000
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Stockholders' equity:
Common stock, no par value,
Authorized, 5,000,000 shares;
Outstanding shares 1,880,721 in 1996
and 1,878,984 in 1995 9,924,000 9,156,000
Retained earnings 7,934,000 8,164,000
Unrealized loss on available for sale
securities, net of tax (198,000) (93,000)
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Total stockholders' equity 17,660,000 17,227,000
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$240,243,000 $237,034,000
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See accompanying notes to consolidated financial statements.
2
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three Months Ended March 31,
------------------------------
1996 1995
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Interest income:
Interest and fees on loans $4,272,000 $4,411,000
Investment securities 357,000 341,000
Federal funds sold 118,000 10,000
Deposits with other financial institutions -- 1,000
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Total interest income 4,747,000 4,763,000
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Interest expense:
Deposits 1,138,000 1,105,000
Federal funds purchased and
U.S. Treasury demand note 5,000 33,000
Notes payable, capital lease obligation and
convertible subordinated debentures 86,000 86,000
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Total interest expense 1,229,000 1,224,000
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Net interest income 3,518,000 3,539,000
Provision for loan and lease losses 300,000 497,000
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Net interest income after provision
for loan and lease losses 3,218,000 3,042,000
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Other income 1,518,000 1,492,000
Other expense 3,762,000 3,882,000
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Income before income taxes 974,000 652,000
Provision for income taxes 441,000 156,000
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Net income $ 533,000 $ 496,000
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Primary earnings per share $ 0.28 $ 0.30
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Fully diluted earnings per share $ 0.26 $ 0.28
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See accompanying notes to consolidated financial statements.
3
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
--------------------------------
1996 1995
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Cash flows from operating activities:
Net income $ 533,000 $ 496,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 335,000 386,000
Deferred loan fees and costs, net (115,000) 16,000
Investment premiums and discounts, net 8,000 (6,000)
Loan servicing rights 52,000 80,000
Other 12,000 29,000
Provision for loan and lease losses 300,000 497,000
(Increase) decrease in interest receivable (108,000) 253,000
Increase in taxes payable 293,000 107,000
Increase in accrued expenses 58,000 114,000
Increase in interest payable 60,000 89,000
Decrease in SBA loan sales receivable -- 1,282,000
Other, net (684,000) (318,000)
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Net cash provided by operating activities 744,000 3,025,000
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Cash flows from investing activities:
Proceeds from sales and maturities of investment securities 4,599,000 3,816,000
Purchase of investment securities (8,513,000) (446,000)
Net (increase) decrease in loans (4,447,000) 766,000
Purchase of premises and equipment (118,000) (280,000)
Proceeds from sale of other real estate owned 424,000 590,000
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Net cash (used in) provided by investing activities (8,055,000) 4,446,000
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Cash flows from financing activities:
Cash payments on notes payable and capital lease obligations (8,000) (4,000)
Net increase (decrease) in deposits 2,478,000 (18,013,000)
Net (decrease) increase in short term borrowings (43,000) 453,000
Net decrease in long term borrowings (24,000) --
Cash proceeds from sale of common stock 6,000 --
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Net cash provided by (used in) financing activities 2,409,000 (17,564,000)
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Net (decrease) in cash and cash equivalents (4,902,000) (10,093,000)
Cash and cash equivalents at beginning of year 34,733,000 33,053,000
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Cash and cash equivalents at end of period $ 29,831,000 $ 22,960,000
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Disclosures:
Total interest paid $ 1,169,000 $ 1,135,000
Total taxes paid $ 185,000 $ --
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Foreclosed real estate loans $ 1,081,000 $ 1,388,000
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See accompanying notes to consolidated financial statements.
4
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with
the Securities and Exchange Commission rules and regulations for quarterly
reporting and therefore does not necessarily include all information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. This information
should be read in conjunction with the Company's Annual Report for the year
ended December 31, 1995.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management,
the unaudited financial information for the three months ended March 31, 1996
and 1995, reflect all adjustments, consisting only of normal recurring
accruals and provisions, necessary for a fair presentation thereof.
NOTE 2 - EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common stock
and common stock equivalent shares outstanding adjusted retroactively for
stock dividends. The weighted average number of shares outstanding for
primary earnings per share was 1,898,734 and 1,626,910 for the three months
ended March 31, 1996 and 1995, respectively. The calculation of fully
diluted earnings per share assumes the issuance of 214,031 shares of common
stock upon conversion of the Company's convertible subordinated debentures.
The weighted average number of shares outstanding for fully diluted earnings
per share was 2,119,653 and 1,840,941 for the three months ended March 31,
1996 and 1995, respectively.
NOTE 3 - STOCK DIVIDEND
On February 21, 1996, the Company declared a 5% stock dividend which was paid
on March 29, 1996 to stockholders of record on March 1, 1996. This resulted
in the issuance of 89,288 shares of common stock.
5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
North County Bancorp (the "Company") has one wholly owned subsidiary, North
County Bank (the "Bank"). North County Bank's operations are the only
significant operations of the Company. The accompanying financial
information should be read in conjunction with the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
FINANCIAL CONDITION
Total assets of the Company increased $3.2 million or 1.4% to $240.2 million
at March 31, 1996, from $237.0 million at December 31, 1995. Cash and cash
equivalents showed an overall decrease of 14.1% or $4.9 million. Within this
category cash and due from banks decreased 14.0% or $3.4 million to $20.8
million at period end from $24.2 million at the end of 1995 and Federal funds
sold decreased $1.5 million to $9.0 million at March 31, 1996 from $10.5
million at the end of 1995. Investment securities increased 14.9% or $3.9
million to $30.1 million at quarter end compared to $26.2 million at December
31, 1995. This increase consisted of $8.5 million in investment purchases
partially offset by $4.6 million in maturities and bond calls and is
indicative of the Company's efforts to utilize excess liquidity. Net loans
increased 2.0% or $3.2 million to $162.2 million at period end from $159.0
million at the end of 1995. The increase was primarily due to commercial
loans which increased $6.4 million or 8.6% offset by construction loans which
decreased $2.2 million or 24.4%, mortgage loans which decreased $651,000 or
2.4% and municipal leases which decreased $244,000 or 6.8%. Commercial loans
increased to 49.1% as a percentage of gross loans as compared to 46.2% at
year end. Real estate loans (construction and mortgage) decreased to 20.1%
of the loan mix as compared to 22.3% at December 31, 1995. Lending rates
declined during the first quarter in response to a 25 basis point cut in the
discount rate by the Federal Reserve Bank. Despite declining interest rates
making borrowing more attractive, the Company continues to experience poor
demand for consumer financing due to the sluggish economy and low level of
consumer confidence in its market area. Other real estate owned increased
$949,000 million to $3.4 million from $2.4 million during the first three
months of 1996. In spite of the slow real estate market the Company was able
to sell one property from its other real estate owned portfolio for $424,000
and had seven properties that totaled $1.3 million in escrow at March 31,
1996. Foreclosures during the first quarter of 1996 totaled $1.1 million.
Total deposits at March 31, 1996 increased $2.5 million or 1.2% from December
31, 1995. The increase was in interest bearing accounts which increased $3.2
million to 2.2% partially offset by demand deposits which decreased $686,000
or 1.0%. In the interest bearing category, NOW accounts increased $2.0
million, savings and money market accounts increased $1.2 million and time
deposits showed no change. Total stockholders' equity at March 31, 1996 was
$17.6 million as compared to $17.2 million at December 31, 1995, an increase
of $433,000 or 2.5%. The growth in equity consisted of $533,000 in earnings,
$105,000 from an increase in net unrealized losses on available for sale
securities, and $6,000 from the exercise of stock options. The Company's
Tier I risk based capital, total risk based capital and Tier I leverage
capital ratios were 9.15%, 11.28% and 7.35%, respectively at March 31, 1996,
as compared to 9.06%, 11.21% and 7.17%, respectively at December 31, 1995.
The Bank's Tier I risk based capital, total risk based capital and Tier I
leverage capital ratios were 10.55, 11.80% and 8.45%, respectively at March
31, 1996, as compared to 10.40%, 11.65% and 8.20%, respectively at December
31, 1995.
RESULTS OF OPERATIONS
SUMMARY
Net income for the three months ended March 31, 1996 increased $37,000 or
7.5% to $533,000 from $496,000 for the same period in 1995. The increase is
attributable to a number of factors. The provision for loan and lease losses
decreased $197,000 or 39.6% to $300,000 from $497,000 due to a decrease in
net charge offs of $433,000 or 79.6% to $111,000 at March 31, 1996 compared
to $544,000 at March 31, 1995. Other expense dropped $120,000 or 3.1% to
$3.8 million for the first quarter of 1996. This was partially offset by the
provision for income taxes which increased $285,000 to $441,000 for the first
three months of 1996 from $156,000 for the same prior year period. Return on
average assets and average stockholders' equity for the first three months of
1996 were .90% and 12.22%, respectively, compared to .85% and 14.18%,
respectively for the same 1995 period. Primary and fully diluted earnings per
share for the first three months of 1996 decreased to $.28 and $.26,
respectively, from $.30 and $.28, respectively for the same 1995 period due
to the sale of
6
common stock in the third quarter of 1995. (See RESULTS OF OPERATIONS --
Provision for loan and lease losses, RESULTS OF OPERATION --NONPERFORMING
ASSETS, and RESULTS OF OPERATIONS -- OTHER INCOME AND EXPENSE.)
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1996 and 1995
virtually remained at the same level decreasing only $21,000 or 0.6%.
Interest income increased $16,000 or 0.3% which consisted primarily of a
decrease of $139,000 in interest and fees on loans , an increase in Federal
funds sold interest of $108,000 and an increase in investment securities
interest of $16,000. Generally lower short term interest rates over the past
year decreased the taxable equivalent yield on earning assets to 9.65% at
March 31, 1996 from 10.06% for the same 1995 period. During this time period
the tax equivalent yield on loans decreased to 10.55% from 10.72% and the
average loan balances outstanding decreased to $165.0 million from $167.8
million for the quarters ended March 31, 1996 and 1995, respectively.
Although the yield on Federal funds sold decreased to 5.24% from 5.48% the
related average balance increased to $9.2 million from $757,000 for the
quarters ended March 31, 1996 and 1995, respectively, accounting for the
increase in interest on Federal funds sold. During this same period the yield
on the investment portfolio decreased to 5.56% from 5.71% while the average
volume increased to $26.5 million from $24.5 million. The net tax equivalent
interest margin (net interest income as a percentage of average
interest-earning assets) was 7.17% and 7.49% for the three months ended March
31, 1996 and 1995 respectively.
Interest expense increased only $5,000 or 0.4% for the first three months of
1996 compared to the same period in 1995. This increase consisted of an
increase of $33,000 in interest paid on deposits, offset by a decrease of
$28,000 in interest paid on Federal funds purchased and U.S. Treasury demand
note. The average rate paid on deposits increased slightly during this time
period to 3.17% at March 31, 1996 compared to 3.12% for the same 1995 period.
The average rate paid on NOW and money market and savings accounts dropped to
1.45% and 3.29%, respectively from 1.76% and 3.49%, respectively. During the
same period the average rate paid on time deposits increased to 4.81% from
3.67%. In addition to the rate increase average balances on time deposits
grew 37.7% or $9.1 million during the first quarter of 1996 to $33.3 million
compared to $24.2 million for the same 1995 period. Federal funds purchased
and the U.S. Treasury demand note account averaged $457,000 for the first
three months of 1996 compared to $2.3 million for the same period last year.
OTHER INCOME AND OTHER EXPENSE
Other income increased $26,000 and other expense decreased $120,000 for the
three months ended March 31, 1996 as compared to the same 1995 period. The
increase in other income is primarily attributable to an increase of $190,000
or 25.4% in service charges on deposit accounts largely due to increased
overdraft fees, an increase of $77,000 or 33.1% in other fees due to
increased loan servicing income, offset by a decrease of $231,000 or 49.2% in
gains from the sale of loans. The decrease in gain on loan sales for 1996 as
compared to 1995 is due to management's decision to portfolio SBA and Title I
loans due to slow loan demand in the Company's market area and to enhance
loan yield. Other expense consists primarily of salaries and employee
benefits which increased $46,000 to $2.0 million, occupancy expense which
decreased $86,000 to $775,000, advertising and other public relations which
decreased $35,000 to $120,000, and regulatory assessments which decreased
$76,000 to $91,000. The overall reduction in other expenses in 1996 is due
in part to the continued emphasis by management on vigorous cost containment
and reduction measures implemented during 1995 to reduce overhead costs.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the three months ended March 31,
1996 was $300,000 compared to $497,000 for the comparable 1995 period. The
amount of the provision reflects management's judgement as to the adequacy of
the reserve for loan and lease losses and is generally determined by the
periodic review of the loan portfolio, the Bank's loan loss experience, and
current and expected economic conditions. The decrease in the provision for
loan and lease losses reflects a decrease in net charge offs to $111,000 for
the first three months of 1996 as compared to $544,000 for the same prior
year period. The annualized ratio of net charge offs to total loans was
0.27%, 1.93% and 1.31% at March 31, 1996, December 31, 1995, and March 31,
1995, respectively. The loan and lease loss reserve was 1.88%, 1.80% and
1.62% of total gross loans at March 31, 1996, December 31, 1995 and March 31,
1995, respectively.
7
Loans are charged against the reserve, when in management's opinion, they are
deemed uncollectible, although the Bank continues to aggressively pursue
collection. Although management believes that the reserve for loan losses is
adequate to absorb losses as they arise, there can be no assurance that the
Company will not sustain losses in any given period which could be
substantial in relation to the size of the reserve for loan and lease losses.
NONPERFORMING ASSETS
The following table provides information with respect to the components of
the Company's nonperforming assets at March 31, 1996 and December 31, 1995:
March 31, December 31,
1996 1995
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Loans 90 days or more past due
and still accruing $ -- $ --
Nonaccrual loans:
Conventional real estate 316 1,095
Real estate construction 1,506 1,506
Commercial 1,842 1,560
Installment and consumer 1,429 1,129
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Total 5,093 5,290
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Total nonperforming loans 5,093 5,290
Other real estate owned 3,351 2,402
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Total nonperforming assets $8,444 $7,692
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Nonperforming assets to total
gross loans plus other real
estate owned 5.01% 4.68%
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The Company considers a loan to be nonperforming when any one of the
following events occurs: (a) any installment of principal or interest is 90
days past due; (b) the full timely collection of interest or principal
becomes uncertain; (c) the loan is classified as "doubtful" by bank
examiners; or (d) a portion of its principal balance has been charged-off.
The Company's policy is to classify loans which are 90 days past due as
nonaccrual loans unless Management determines that the loan is adequately
collateralized and in the process of collection or other circumstances exist
which would justify the treatment of the loan as fully collectible.
Impaired loans were recorded at $1,278,000 and $2,150,000 for commercial
loans and real estate mortgage loans, respectively, at March 31, 1996. The
recorded investments are stated net of reserves for loan losses of $368,000
and $129,000, respectively. Impaired loans at December 31, 1995 were
recorded at $1,270,000 and $2,467,000 for commercial loans and real estate
mortgage loans, respectively, net of reserves for loan losses of $289,000 and
$134,000, respectively.
8
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The liquidity of a banking institution reflects its ability to provide funds
to meet customer credit needs, to accommodate possible outflows in deposits,
to provide funds for day-to-day operations, and to take advantage of interest
rate market opportunities. Asset liquidity is provided by cash, certificates
of deposit with other financial institutions, Federal funds sold, investment
maturities and sales and loan maturities, repayments and sales. Liquid
assets (consisting of cash, Federal funds sold and investment securities)
comprised 24.9% and 25.7% of the Company's total assets at March 31, 1996 and
December 31, 1995, respectively. Liquidity management also includes the
management of unfunded commitments to make loans and undisbursed amounts
under lines of credit. At March 31, 1996, these commitments totaled $28.4
million in commercial loans, $2.5 million in letters of credit, $3.8 million
in real estate construction loans, and $8.2 million in consumer and
installment loans.
In addition to loan and investment sales and deposit growth, the Bank has
several secondary sources of liquidity. Many of the Bank's real estate
construction loans are originated pursuant to underwriting standards which
make them readily marketable to other financial institutions or investors in
the secondary market. In addition, in order to meet liquidity needs on a
temporary basis, the Bank has unsecured lines of credit in the amount of $3.0
million for the purchase of Federal funds with other financial institutions
and may borrow funds at a correspondent financial institution and the Federal
Reserve discount window, subject to the Bank's ability to supply collateral.
Asset/Liability Management involves minimizing the impact of interest rate
changes on the Company's earnings through the management of the amount,
composition and repricing periods of rate sensitive assets and rate sensitive
liabilities. Emphasis is placed on maintaining a rate sensitivity position
within the Company's policy guidelines to avoid wide swings in spreads and to
minimize risk due to changes in interest rates. At March 31, 1996
approximately 60% of the Company's interest earning assets have interest
rates which are tied to the Bank's base lending rate or mature in one year or
less. In order to match the rate sensitivity of its assets, the Company's
policy is to offer a large number of variable rate deposit products and limit
the level of large dollar time deposits with maturities of one year or
longer. In addition to managing its asset/liability position, the Company has
taken steps to mitigate the impact of changing interest rates by generating
non-interest income through service charges, offering products which are not
interest rate sensitive, such as escrow services and insurance products, and
through the servicing of mortgage loans.
9
CAPITAL RESOURCES
Stockholders' equity increased 2.5% to $17.7 million at March 31, 1996 from
$17.2 million at December 31, 1995. Net income of $533,000 partially offset
by an increase in net unrealized losses on available for sale securities of
$105,000 contributed to the increase in equity. The exercise of stock
options raised an additional $6,000.
The following table provides information with respect to the Company's and
the Bank's regulatory capital ratios and regulatory minimum requirements:
March 31, December 31, Regulatory Minimum
1996 1995 Ratios
--------- ------------ ------------------
NORTH COUNTY BANCORP
Risk-based capital
Tier 1 9.15% 9.06% 4.00%
Total 11.28% 11.21% 8.00%
Tier 1 leverage capital 7.35% 7.17% 4.00% - 5.00%
NORTH COUNTY BANK
Risk-based capital
Tier 1 10.55% 10.40% 4.00%
Total 11.80% 11.65% 8.00%
Tier 1 leverage capital 8.45% 8.20% 4.00% - 5.00%
At March 31, 1996, the Company had $1.7 million in 9 1/4% Convertible
Subordinated Debentures ("Debentures") due May 15, 2002 outstanding. The
debentures are convertible at the option of the holder into common stock of
the Company at a conversion price $7.84 per share, subject to adjustments for
stock splits, stock dividends or other certain events. The debentures are
redeemable, in whole or in part, at the option of the Company at declining
redemption prices that range from 104.25% at March 31, 1996 to par on or
after May 15, 1999. Under the risk-based capital regulations the debentures
qualify as Tier 2 capital. The Company used a portion of the proceeds of the
debentures to purchase $1.5 million of noncumulative perpetual preferred
stock from the Bank, increasing the Bank's capital ratios. Additionally, the
Company had $1.5 million outstanding under two term notes with directors of
the Company as of March 31, 1996 that mature on January 1, 1999 and July 1,
1998, respectively. The notes are unsecured and have a fixed interest rate of
8.00%. The notes have varying interest and principal payment schedules. The
Company also used the proceeds of these notes to purchase $1.5 million of
noncumulative perpetual preferred stock from the Bank.
Management anticipates no significant capital expenditures during 1996.
10
PART II - OTHER INFORMATION
All items of Part II other than Item 6 below are either inapplicable or would be
responded to in the negative.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) No reports on Form 8-K have been filed during the period, and no
events have occurred which would require one to be filed.
11
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 COUNTY BANCORP
(Registrant)
/s/ MICHAEL J. GILLIGAN Date: May 10, 1996
- ---------------------------------------- -------------
Michael J. Gilligan
Vice President & Chief Financial Officer
12