U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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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 462990, Escondido, California 92025
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (760) 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
--- ---
As of November 5, 1998 the Registrant had 4,637,290 shares of no par value
common stock issued and outstanding.
NORTH COUNTY BANCORP
Part I FINANCIAL INFORMATION Page
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Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 2
Consolidated Statement of Income -
Three Months Ended and Nine Months Ended
September 30, 1998 and 1997 3
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity -
Nine months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
1
NORTH COUNTY BANCORP
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In thousands)
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks $ 35,391 $ 24,262
Federal funds sold 16,000 4,000
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51,391 28,262
Investment securities:
Available for sale 19,291 17,544
Held to maturity 14,860 12,135
Loans, net 223,666 207,723
Other real estate owned 562 986
Premises and equipment, net 9,653 8,582
Accrued interest receivable and other assets 5,569 5,502
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$ 324,992 $ 280,734
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Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing $ 94,518 $ 89,852
Interest-bearing 197,866 161,703
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292,384 251,555
Accrued expenses and other liabilities 2,444 2,377
Fed funds purchased and U.S. Treasury demand note 1,121 1,194
Capital lease obligation 405 415
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Total liabilities 296,354 255,541
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Stockholders' equity:
Common stock, no par value,
Authorized, 10,000,000 shares;
Outstanding shares 4,637,290
in 1998 and 1997 16,058 16,058
Retained earnings 12,495 9,137
Other comprehensive income 85 (2)
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Total stockholders' equity 28,638 25,193
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$ 324,992 $ 280,734
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See accompanying notes to consolidated financial statements.
2
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF INCOME
(Unaudited, in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1998 1997 1998 1997
------ ------ ------- -------
Interest income:
Interest and fees on loans $5,831 $5,231 $17,016 $14,569
Investment securities 458 460 1,306 1,379
Federal funds sold 301 139 513 337
Deposits with other financial institutions 64 7 64 16
------ ------ ------- -------
Total interest income 6,654 5,837 18,899 16,301
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Interest expense:
Deposits 1,655 1,520 4,528 4,235
Fed funds purchased and U.S. Treasury demand note 15 11 35 59
Long term debt 14 49 43 193
------ ------ ------- -------
Total interest expense 1,684 1,580 4,606 4,487
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Net interest income 4,970 4,257 14,293 11,814
Provision for loan losses 594 104 1,634 722
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Net interest income after provision for loan losses 4,376 4,153 12,659 11,092
Other income 1,728 1,748 5,470 4,886
Other expense 3,905 4,264 12,324 11,958
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Income before income taxes 2,199 1,637 5,805 4,020
Provision for income taxes 980 695 2,447 1,615
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Net income $1,219 $ 942 $ 3,358 $ 2,405
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Basic earnings per share $ 0.26 $ 0.22 $ 0.72 $ 0.57
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------ ------ ------- -------
Diluted earnings per share $ 0.25 $ 0.20 $ 0.70 $ 0.52
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------ ------ ------- -------
See accompanying notes to consolidated financial statements.
3
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
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Cash flows from operating activities:
Net income $ 3,358 $ 2,405
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 832 977
Deferred loan fees and costs, net (606) (276)
Investment premiums and discounts, net 170 103
Other 26 135
Gain on sale of other real estate owned (383) (346)
Provision for loan and lease losses 1,634 722
(Increase) decrease in interest receivable (265) 53
Increase in taxes payable 46 330
(Decrease) increase in accrued expenses (133) 2,179
Increase in interest payable 201 376
Other, net 14 331
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Net cash provided by operating activities 4,894 6,989
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Cash flows from investing activities:
Proceeds from sales and maturities of investment securities 11,280 17,863
Purchase of investment securities (15,923) (16,531)
Net increase in loans (17,287) (26,492)
Purchase of premises and equipment (1,903) (529)
Proceeds from sale of other real estate owned 1,322 2,050
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Net cash used in investing activities (22,511) (23,639)
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Cash flows from financing activities:
Cash payments on notes payable and capital lease obligations (10) (10)
Net increase in deposits 40,829 24,676
Net (decrease) increase in short term borrowings (73) 88
Net decrease in long term borrowings -- (1,550)
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Net cash provided by financing activities 40,746 23,204
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Net increase in cash and cash equivalents 23,129 6,554
Cash and cash equivalents at beginning of year 28,262 28,136
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Cash and cash equivalents at end of period $ 51,391 $ 34,690
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Disclosures:
Total interest paid $ 4,405 $ 4,111
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Total taxes paid $ 2,370 $ 1,172
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Foreclosed real estate loans $ 316 $ 810
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Conversion of subordinated debentures into common stock,
net of deferred offering costs $ -- $ 250
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See accompanying notes to consolidated financial statements.
4
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, dollars in thousands)
Common Stock Other Total
---------------------- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
--------- ------- -------- ------------- -------------
Balance at December 31, 1996 2,003,193 $11,758 $ 8,500 $(86) $20,172
Two for one stock split 2,005,956 -- --
Exercise of stock options 788 -- --
Conversion of subordinated debentures 69,608 250 250
Decrease in unrealized loss on available
for sale securities, net of tax 110 110
Net income 2,405 2,405
--------- ------- ------- ---- -------
Balance at September 30, 1997 4,079,545 12,008 10,905 24 22,937
Five percent stock dividend including
cash for fractional shares 220,608 2,867 (2,872) (5)
Conversion of subordinated debentures 337,137 1,183 1,183
Increase in unrealized loss on available
for sale securities, net of tax (26) (26)
Net income 1,104 1,104
--------- ------- ------- ---- -------
Balance December 31, 1997 4,637,290 16,058 9,137 (2) 25,193
Decrease in unrealized loss on available
for sale securities, net of tax 87 87
Net income 3,358 3,358
--------- ------- ------- ---- -------
Balance September 30, 1998 4,637,290 $16,058 $12,495 $ 85 $28,638
--------- ------- ------- ---- -------
--------- ------- ------- ---- -------
See accompanying notes to consolidated financial statements.
5
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, 1997.
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 and nine month periods
ended September 30, 1998 and 1997, reflect all adjustments, consisting only
of normal recurring accruals and provisions, necessary for a fair
presentation thereof.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share (EPS) represents net income divided by the weighted
average common shares outstanding during the period adjusted retroactively
for stock dividends excluding any potential dilutive effects. The weighted
average number of shares outstanding for basic EPS was 4,637,290 for the
three and nine months ended September 30, 1998 and 4,224,543 and 4,216,664
for the three and nine months ended September 30, 1997, respectively.
Diluted EPS gives effect to all potential issuances of common stock that
would have caused basic EPS to be lower as if the issuance had already
occurred. The calculation of diluted EPS assumes the issuance of 179,609 and
532,136, shares of common stock at September 30, 1998 and 1997, respectively,
upon the exercise of eligible stock options and conversion of the Company's
convertible subordinated debentures. The weighted average number of shares
outstanding for diluted EPS was 4,814,527 and 4,816,899 for the three and
nine months ended September 30, 1998, respectively, and 4,755,977 and
4,748,800 for the three and nine months ended September 30, 1997,
respectively.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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-K
for the year ended December 31, 1997.
Statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations,
intentions, beliefs or strategies regarding the future. All forward-looking
statements included in this document are based on information available to
the Company on the date thereof, and the Company assumes no obligation to
update any such forward-looking statements. It is important to note that the
Company's actual results could differ materially from those in such
forward-looking statements. Factors that could cause actual results to differ
materially from those in such forward-looking statements are included in the
discussions below.
FINANCIAL CONDITION
Total assets of the Company increased $44.3 million or 15.7% to $325.0 million
at September 30, 1998, from $280.7 million at December 31, 1997.
Interest-bearing deposits due from banks , Federal funds sold and investments
securities increased $10.0 million, $12.0 million and $4.5 million,
respectively, reflecting excess liquidity due to deposit growth. Gross loans
increased $16.7 million or 7.9% to $227.7 million at period end from
$211.0 million at the end of 1997. Within the major loan categories
commercial loans increased $10.8 million to $122.5 million, real estate loans
increased $4.5 million to $50.3 million and construction loans increased
$8.3 million to $18.7 million. These increases were partially offset by a
decrease of $6.1 million in consumer loans to $34.9 million primarily due to
decreases of $2.5 million in Title I loans and $1.6 million in other equity
loans. The Company continues to experience poor demand for consumer financing
primarily due to increased competition from non-bank lenders as well as other
financial institutions in its market area. Included in the commercial loan
group, SBA loans increased $6.6 million to $61.7 million and other commercial
loans increased $4.2 million to $60.8 million. Commercial real estate loans
at $47.9 million accounted for $5.0 million of the increase in real estate
loans. The only notable changes in the loan portfolio mix at period end from
the end of the year were in consumer loans which declined to 15.3% of total
loans from 19.4% and construction loans which increased to 8.2% of total
loans from 4.9%. Other real estate owned decreased $424,000 in the first nine
months of 1998 to $562,000 due to the sale of seven properties with a
carrying value of $938,000 partially offset by foreclosures of four
additional properties that totaled $316,000.
Total deposits at September 30, 1998 increased $40.8 million or 16.2% from
December 31, 1997. The deposit growth was centered in time deposits which
grew 57.2% or $26.7 million to $73.4 million and was supplemented by growth
in NOW accounts of $5.6 million to $42.2 million, noninterest-bearing demand
deposits of $4.7 million to $94.5 million and savings accounts of $3.9 million
to $82.2 million at period end. Total time deposits at the end of September
were 25.1% of total deposits compared to 18.6% at the end of 1997. The
decline in the stock market during 1998 stimulated consumer investment in
fixed income instruments such as bank certificates of deposit. Total
stockholders' equity at September 30, 1998 was $28.6 million compared to
$25.2 million at December 31, 1997, an increase of $3.4 million or 13.7% due
to earnings. The Company's Tier I leverage capital ratios were 8.87% and
8.76%, at September 30, 1998 and December 31, 1997, respectively. The Bank's
Tier I leverage capital ratios were 8.83% and 8.73% at September 30, 1998 and
December 31, 1997, respectively. (See CAPITAL RESOURCES.)
RESULTS OF OPERATIONS
SUMMARY
Net income for the nine months ended September 30, 1998 increased $953,000 or
39.6% to $3.4 million from $2.4 million for the same period in 1997. The
increase is attributable to a number of factors, the largest of which was an
increase in net interest income of $2.5 million or 21.0% to $14.3 million
from $11.8 million. The provision for loan and lease losses increased $912,000
7
or 126.3% to $1.6 million from $722,000 primarily due to loan growth. Other
income increased $584,000 or 12.0% and other expense increased $366,000 or
3.1%. The provision for income taxes increased $832,000 to $2.4 million for
the first nine months of 1998 from $1.6 million for the same prior year
period due to an increase of $1.8 million or 44.4% in pre-tax earnings and a
slightly higher effective tax rate. Return on average assets and average
stockholders' equity for the first nine months of 1998 were 1.50% and 16.57%,
respectively, compared to 1.18% and 14.94%, respectively, for the same 1997
period. Basic and diluted earnings per share for the first nine months of
1998 increased to $0.72 and $0.70, respectively, from $0.57 and $0.52,
respectively, for the same 1997 period. The 1997 earnings per share
calculations have been restated to reflect a 5% stock dividend paid on
January 30, 1998. (See "RESULTS OF OPERATIONS -- PROVISION FOR LOAN AND LEASE
LOSSES", "RESULTS OF OPERATIONS -- NET INTEREST INCOME", and "RESULTS OF
OPERATIONS -- OTHER INCOME AND EXPENSE")
For the quarter ended September 30, 1998, the Company reported net income of
$1.2 million compared to $942,000, an increase of $277,000 or 29.4% over the
third quarter of 1997. The increase in third quarter earnings is primarily
due to increases in net interest income of $713,000 and a decrease in other
expense of $359,000 which were partially offset by an increase in the
provision for loans and lease losses of $490,000. The provision for income
taxes increased $285,000 to $980,000 for the third quarter of 1998. The
return on average assets and average stockholders' equity for the quarter
ended September 30, 1998 were 1.53% and 17.27%, respectively, compared to
1.33% and 16.80%, respectively, for the third quarter of 1997. Primary and
fully diluted earnings per share for the third quarter of 1998 were $0.26 and
$0.25, respectively, compared to $0.22 and $0.20, respectively last year.
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 1998 compared to
1997 increased $2.5 million or 21.0% primarily due to growth of 13.1% or
$30.5 million in average interest earning assets which increased to
$263.9 million from $233.4 million. The average tax equivalent yield on
earning assets increased to 9.60% from 9.37%. Interest income increased
$2.6 million or 15.9% to $18.9 million from $16.3 million primarily due to
loan income which increased $2.4 million or 16.8%. Average loans and their
tax equivalent yields increased to $219.2 million and 10.39%, respectively,
at period end from $191.4 million and 10.20% , respectively, for the same
prior year period. Interest on Federal funds sold increased $176,000 due to
increased volume. The average balance in Federal funds sold increased to
$12.7 million from $8.3 million with an average yield of 5.42% for both
periods. Interest on investments decreased $73,000 for the first nine months
of 1998 compared to 1997. This was primarily due to a decrease or $2.9 million
in average volume to $30.5 million in 1998 versus $33.4 million in 1997
partially offset by an increase in tax equivalent yield to 5.87% in 1998 from
5.65% in 1997. The net tax equivalent interest margin (net interest income as
a percentage of average interest-earning assets) was 7.27% and 6.80% for the
nine months ended September 30, 1998 and 1997, respectively.
Interest expense increased $119,000 or 2.7% for the first nine months of 1998
compared to the same period in 1997. The increase in interest consisted of
$293,000 in deposit interest partially offset by a decrease of $174,000 in
interest expense on other borrowings, primarily long term borrowings. Average
interest-bearing deposits increased $14.2 million to $177.1 million in 1998
compared to $162.9 for the same 1997 period. The average rate paid on
interest-bearing deposits decreased during this time period to 3.42% from
3.48%. Average money market and savings deposits increased $5.7 million to
$79.4 million and the average rate paid on these accounts was unchanged at
3.29%. During the same period average NOW accounts increased $4.4 million to
$40.9 million while the average rate paid decreased to 1.35% from 1.43%.
Average time deposits increased $4.1 million to $56.8 million at September 30,
1998. The average rate paid for these deposits decreased to 5.08% from 5.16%
largely due to a deposit promotion in the second quarter of 1997 in which the
Company offered a short term (seven month) certificate of deposit at 6.00%.
At September 30, 1997, the Company had $1.3 million outstanding in 9 1/4%
convertible subordinated debentures which were redeemed (at the Company's
option) for common stock in October of 1997. Two term notes for $1.6 million
were paid in full during the second quarter of 1997. Consequently, average
long term borrowings for the first nine months of 1998 decreased to $410,000
from $2.6 million for the same 1997 period. The average rates paid on total
interest-bearing liabilities were 3.45% and 3.59% for the first nine months
of 1998 and 1997, respectively.
8
OTHER INCOME AND OTHER EXPENSE
Other income increased $584,000 for the nine months ended September 30, 1998
compared to the same 1997 period. The increase in other income is largely due
to an increase in gains on loan sales of $547,000 or 68.6% to $1.3 million in
1998 from $798,000 in 1997. Gains on the sale of SBA loans and equity loans
increased $381,000 and $225,000, respectively, partially offset by a decrease
in gains on the sale of Title I loans of $58,000. The Company sold $3.0 million
in SBA loans in 1998 compared to none in the same 1997 period. Title I and
equity loans sold totaled $29.9 million and $27.3 million, respectively,
during the first nine months of 1998 and 1997. Other expense increased
$366,000 compared to last year. Other expense consists primarily of salaries
and employee benefits which increased $780,000 to $7.3 million, occupancy
expense which increased $67,000 to $2.5 million, advertising and public
relations which increased $22,000 to $514,000, telephone expense which
increased $70,000 to $363,000 and expenses related to retaining professional
services decreased $20,000 to $352,000. Expenses related to the acquisition,
maintenance and sale of other real estate owned partially offset the
increases in the other expense category by decreasing $206,000 to a net gain
of $302,000 as did expenses related to collection efforts which decreased
$172,000 to $64,000 in 1998 compared to the same prior year period.
IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS
The Company has recognized the challenges posed by the Year 2000 issues and
has completed preliminary work to inventory computer systems, software and
equipment containing embedded microchips, and has performed a risk
assessment. The Company has hired an outside consultant to further assist in
the identification, testing and evaluation of all systems, service providers
and vendors to assure Year 2000 compliance and the potential impact of this
problem on its customers. An internal task force has been established to work
with the consultant in reviewing all computer systems and equipment, project
planning, risk management and contingency planning. Systems found to be year
2000 deficient will be modified, upgraded or replaced. Project plans
anticipate all existing , critical information systems infrastructure to be
year 2000 compliant by March 31, 1999 and all other equipment and systems to
be year 2000 compliant by June 30, 1999. Contingency plans will be in place
in the first quarter of 1999 to address any failures resulting from
relationships with significant customers, suppliers or other third parties.
To the extent that the problem is not successfully addressed, consequences,
the extent of which are unknown, could follow. The Company does not believe
that the costs of addressing this problem through the planned modification of
existing systems and conversion to new systems will have a material effect on
the results of operations. The Company anticipates related expenditures of
approximately $250,000 in 1998 and 1999.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the nine months ended September 30,
1998 was $1.6 million compared to $722,000 for the comparable 1997 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 provision for
loan and lease losses reflects a provision of $640,000 during the first nine
months of 1998 compared to $650,000 in the same 1997 period to supplement the
Company's Title I HUD reserve due to potential losses in the Title I
portfolio. Net charge offs increased to $865,000 for the first nine months of
1998 from $324,000 for the same prior year period. The annualized ratio of
net charge offs to total loans was 0.51%, 0.47% and 0.21% at September 30,
1998, December 31, 1997, and September 30, 1997, respectively. The loan and
lease loss reserve was 1.77%, 1.55% and 1.71% of total gross loans at
September 30, 1998, December 31, 1997 and September 30, 1997, respectively.
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 and lease
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.
9
NONPERFORMING ASSETS
The following table provides information with respect to the components of
the Company's nonperforming assets at September 30, 1998 and December 31,
1997:
September 30, December 31,
1998 1997
------------- ------------
Nonaccrual loans:
Conventional real estate 129 --
Commercial 671 2,163
Installment and consumer 285 858
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Total 1,085 3,021
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Other real estate owned 562 986
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Total nonperforming assets $1,647 $4,007
------ ------
------ ------
Nonperforming assets to total
gross loans plus other real
estate owned 0.72% 1.89%
------ ------
------ ------
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 $719,000 and $556,000 for commercial loans
and real estate mortgage loans, respectively, at September 30, 1998. The
recorded investments are stated net of reserves for loan losses of $39,000
and $12,000, respectively. Impaired loans at December 31, 1997 were recorded
at $1.5 million and $468,000 for commercial loans and real estate mortgage
loans, respectively, net of reserves for loan losses of $130,000 and $21,000,
respectively.
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
26.3% and 20.6% of the Company's total assets at September 30, 1998 and
December 31, 1997, respectively. Liquidity management also includes the
management of unfunded commitments to make loans and undisbursed amounts
under lines of credit. At September 30, 1998, these commitments totaled
$48.1 million in commercial loans, $1.2 million in letters of credit,
$15.1 million in real estate construction loans, and $10.6 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
$13.0 million for the purchase of Federal funds with other financial
institutions and may borrow funds at a correspondent financial institution,
the Federal Home Loan Bank 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
10
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 September 30, 1998 approximately 62% 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.
CAPITAL RESOURCES
Stockholders' equity increased 13.7% to $28.6 million at September 30, 1998
from $25.2 million at December 31, 1997. Net income of $3.4 million and an
increase in net unrealized gains on available for sale securities of $87,000
contributed to the increase in equity.
The following table provides information with respect to the Company's and
the Bank's regulatory capital ratios and regulatory minimum requirements:
September 30, December 31, Regulatory Minimum
1998 1997 Ratios
------------- ------------ ------------------
NORTH COUNTY BANCORP
Risk-based capital
Tier 1 11.40% 10.88% 4.00%
Total 12.65% 12.14% 8.00%
Tier 1 leverage capital 8.87% 8.76% 4.00% - 5.00%
NORTH COUNTY BANK
Risk-based capital
Tier 1 11.34% 10.85% 4.00%
Total 12.59% 12.10% 8.00%
Tier 1 leverage capital 8.83% 8.73% 4.00% - 5.00%
Management anticipates capital expenditures of approximately $200,000
primarily for upgrades to computer and data communications equipment,
computer software and improvements to facilities during the remainder of
1998. The Company has received approval from the Federal Reserve System to
establish a full service branch office located at Palomar Airport Road and
Business Park Drive in the City of Vista, California. The office, which will
be a leased facility, is scheduled to open during the second quarter of 1999.
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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.
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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: November 6, 1998
- ---------------------------------------- ----------------
Michael J. Gilligan
Vice President & Chief Financial Officer
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