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 March 31, 1999
-------------------------------------------
--- TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number ______________ 0-10627 ______________
NORTH COUNTY BANCORP
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(Exact name of small business issuer as specified in its charter)
California 95-3669135
- -------------------------------------- -------------------------------------
(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 May 7, 1999 the Registrant had 4,882,705 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 Balance Sheet -
March 31, 1999 and December 31, 1998 2
Consolidated Statement of Income -
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statement of Cash Flows -
Three months Ended March 31, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity -
Three months Ended March 31, 1999 and 1998 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 16
1
NORTH COUNTY BANCORP
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 27,250 $ 26,885
Federal funds sold 27,000 17,000
----------- ------------
54,250 43,885
Investment securities:
Available for sale 17,763 17,193
Held to maturity 21,900 26,628
Loans 243,193 237,702
Less: Allowance for loan and lease losses 3,620 3,592
----------- ------------
239,573 234,110
Other real estate owned 94 374
Premises and equipment, net 9,880 10,013
Accrued interest receivable and other assets 5,260 5,210
----------- ------------
$348,720 $337,413
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $100,864 $100,465
Interest-bearing 211,439 202,594
----------- ------------
312,303 303,059
Accrued expenses and other liabilities 2,550 2,416
Federal funds purchased and U.S. Treasury demand note 2,436 1,551
Capital lease obligation 378 387
----------- ------------
Total liabilities 317,667 307,413
----------- ------------
Stockholders' equity:
Common stock, no par value, authorized
10,000,000 shares; outstanding shares
4,882,705 in 1999 and 4,868,906 in 1998 19,168 19,127
Retained earnings 11,867 10,834
Accumulated other comprehensive income 18 39
----------- ------------
Total stockholders' equity 31,053 30,000
----------- ------------
$348,720 $337,413
----------- ------------
----------- ------------
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 March 31,
----------------------------
1999 1998
------------- -------------
Interest income:
Interest and fees on loans $5,734 $5,358
Investment securities 570 440
Federal funds sold 282 105
Deposits with other financial institutions 2 --
------------- -------------
Total interest income 6,588 5,903
------------- -------------
Interest expense:
Deposits 1,612 1,403
Federal funds purchased and U.S. Treasury demand note 14 8
Other borrowings 14 15
------------- -------------
Total interest expense 1,640 1,426
------------- -------------
Net interest income 4,948 4,477
Provision for loan and lease losses 100 590
------------- -------------
Net interest income after provision
for loan and lease losses 4,848 3,887
------------- -------------
Noninterest income 1,354 1,987
Noninterest expense 4,457 4,212
------------- -------------
Income before income taxes 1,745 1,662
Provision for income taxes 712 662
------------- -------------
Net income $1,033 $1,000
------------- -------------
------------- -------------
Earnings per share:
Basic $ 0.21 $ 0.21
------------- -------------
------------- -------------
Diluted $ 0.20 $ 0.20
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
3
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended March 31,
----------------------------
1998 1998
------------- -------------
Cash flows from operating activities:
Net income $ 1,033 $ 1,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 357 264
Deferred loan fees and costs, net (213) (202)
Investment premiums and discounts, net (15) 45
Other 8 9
(Gain) on sale of other real estate owned (24) (77)
Provision for loan and lease losses 100 590
Decrease (increase) in interest receivable 2 (130)
Increase in taxes payable 598 569
Decrease in accrued expenses (634) (346)
Increase in interest payable 107 96
Other, net 21 202
------------- -------------
Net cash provided by operating activities 1,340 2,020
------------- -------------
Cash flows from investing activities:
Proceeds from sales and maturities of investment securities 19,775 3,331
Purchase of investment securities (15,601) (3,317)
Net increase in loans (5,377) (11,705)
Purchase of premises and equipment (223) (489)
Proceeds from sale of other real estate owned 330 77
------------- -------------
Net cash used in investing activities (1,096) (12,103)
------------- -------------
Cash flows from financing activities:
Cash payments on notes payable and capital lease obligations (8) (3)
Net increase in deposits 9,244 12,232
Net increase (decrease) in short term borrowings 885 (194)
------------- -------------
Net cash provided by financing activities 10,121 12,035
------------- -------------
Net increase in cash and cash equivalents 10,365 1,952
Cash and cash equivalents at beginning of year 43,885 28,262
------------- -------------
Cash and cash equivalents at end of period $ 54,250 $ 30,214
------------- -------------
------------- -------------
Disclosures:
Total interest paid $ 1,532 $ 1,330
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------------- -------------
Total taxes paid $ 24 $ --
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Foreclosed real estate loans $ 26 $ 140
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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 Accumulated Other Total
---------------------- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
---------- ---------- ---------- ----------------- -------------
Balance December 31, 1997 4,637,290 $16,058 $ 9,137 $ (2) $25,193
Comprehensive income:
Unrealized holding gain on available
for sale securities, net of tax of $20 26 26
Net income 1,000 1,000
-------------
Total comprehensive income 1,026
---------- ---------- ---------- ----------------- -------------
Balance March 31, 1998 4,637,290 16,058 10,137 24 26,219
Five percent stock dividend including
cash for fractional shares 231,616 3,069 (3,072) (3)
Comprehensive income:
Unrealized holding gain on available
for sale securities, net of tax of $13 15 15
Net income 3,769 3,769
-------------
Total comprehensive income 3,784
---------- ---------- ---------- ----------------- -------------
Balance December 31, 1998 4,868,906 19,127 10,834 39 30,000
Exercise of stock options 13,799 41 41
Comprehensive income:
Unrealized holding gain on available
for sale securities, net of tax of $18 (21) (21)
Net income 1,033 1,033
-------------
Total comprehensive income 1,012
---------- ---------- ---------- ----------------- -------------
Balance March 31, 1999 4,882,705 $19,168 $11,867 $18 $31,053
---------- ---------- ---------- ----------------- -------------
---------- ---------- ---------- ----------------- -------------
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 on Form 10K
for the year ended December 31, 1998.
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,
1999 and 1998, 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 is based upon the weighted average number of common
stock and common stock equivalent shares outstanding adjusted retroactively
for stock dividends. Basic earnings per share (EPS) represents net income
divided by the weighted average common shares outstanding during the
period. The weighted average number of shares outstanding for basic EPS was
4,874,579 and 4,868,906 for the three months ended March 31, 1999 and 1998,
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 for the three months ended
March 31, 1999 and 1998, assumes the issuance of 227,132 and 183,820 shares
of common stock, respectively, upon the conversion of stock options. The
weighted average number of shares outstanding for diluted EPS was 5,101,711
and 5,052,726 for the three months ended March 31, 1999 and 1998,
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, 1998.
Statements contained in this Report on Form 10Q 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
include general economic conditions, particularly in the Company's market
areas, changes in prevailing interest rates, competitive products and
pricing, inflation, credit and other risks of lending and investment
activities, fiscal and monetary policies of the U.S. and other governments,
regulations affecting financial institutions, and other risks and
uncertainties affecting the Company's operations and personnel.
RESULTS OF OPERATIONS
SUMMARY
A comparison of the first quarter results for the three months ended March
31, 1999 and 1998 reflects net income growth of 3% in 1999, amounting to
$1,033,000 compared to $1,000,000 in 1998. The increase in earnings is
attributable to a number of factors, primarily a decrease of $490,000 or
83% in the provision for loan and lease losses and an increase in net
interest income of $471,000 or 11% to $5.0 million for the first quarter of
1999 from $4.5 million for the first quarter of last year. These additions
to earnings were partially offset by a decrease in noninterest income of
$633,000 or 6% and an increase in noninterest expense of $245,000 or 6%.
The 1999 results produced return on average assets and average
stockholders' equity of 1.21% and 13.49%, respectively, compared to 1.41%
and 15.46%, respectively, for the same 1998 period. Basic and diluted
earnings per share measured $0.21 and $0.20, respectively, for the first
three months of both 1999 and 1998. The 1998 earnings per share
calculations have been restated to reflect a 5% stock dividend paid on
March 10, 1999.
NET INTEREST INCOME
Net interest income, the principal source of income for the Company, is
interest and fees earned on loans and investments less the interest paid on
deposits and borrowings. Primary factors affecting the level of net
interest income include increases or decreases in the average balances
(volume) of interest-earning assets and interest-bearing liabilities,
increases or decreases in the average rates earned and paid on these assets
and liabilities, the Company's ability to manage its earning asset
portfolio and the availability of particular sources of funds. The changes
in net interest income between the quarters ended March 31, 1999 and 1998
are analyzed in Table One. An analysis of the Company's taxable-equivalent
net interest income and average balance sheet levels for the two quarters
is presented in Table Two. Interest income and yields in the following
discussion are on a tax-equivalent basis.
Net interest income for the three months ended March 31, 1999 compared to
1998 increased $468,000 or 10% to $5.0 million from $4.5 million. The
increase was the result of growth in earning assets and deposit pricing
management efforts. Average earning assets grew $51.2 million or 20% to
$301.3 million at an average yield of 8.89% from $250.1 million at a yield
of 9.60% last year. The growth in earning assets was led by loans which
increased $23.2 million or 11% to $235.6 million for the first quarter of
1999 from $212.4 million for the same 1998 period. Interest income on
earning assets increased $682,000 or 12% to $6.6 million compared to
$5.9 million. Interest and fees on loans increased $371,000 or 7% to
$5.7 million in 1999 from $5.4 million for the same prior year period. The
effect on interest income of the increase in
7
loan volume was partially countered by a decrease in the average yield on
loans to 9.87% from 10.24% primarily due to the decline in the prime
lending rate during the last half of 1998. Deposit growth continued to
outpace loan growth in 1999 constraining the net yield on earning assets as
excess funds were invested in lower yielding short-term investments and Fed
funds. Average investment securities and Fed funds sold increased over the
first quarter of 1998 by $11.6 million and $16.3 million, respectively, and
contributed $132,000 and $177,000, respectively, to the increase in
interest income. The net interest margin (net interest income as a
percentage of average interest-earning assets) was 6.68% and 7.29% for the
three months ended March 31, 1999 and 1998, respectively.
Interest expense increased approximately 15% or $214,000 for the first
three months of 1999 compared to the same period in 1998 primarily due to
an increase of $209,000 in interest paid on deposits. Average
interest-bearing deposits for the first quarter of 1999 increased
$40.0 million or 24% to $207.6 million at an average rate paid of 3.15%
compared to $167.6 million at an average rate of 3.40% for the same prior
year period. Time deposits averaged $79.3 million at an average rate paid
of 4.74% in 1999 compared to $49.7 million at an average rate paid of 5.03%
for the first quarter of 1998. The decrease in rates paid on deposits is
attributable to government easing of short term interest rates and the
Company generally lowering interest rates to limit time deposit growth as
well as lower the related interest expense. Time deposit interest expense
increased $312,000 to $927,000 in 1999 from $615,000 last year. During this
same period the average rate paid on savings accounts (including money
market accounts) decreased to 2.68% on average balances of $84.2 million in
1999 from an average rate of 3.38% on balances of $79.1 million last year.
Interest expense related to savings deposits decreased $102,000 to $557,000
in 1999 compared to $659,000 for the same period last year. The average
rates paid on total interest-bearing liabilities were 3.18% and 3.43% for
the first three months of 1999 and 1998, respectively.
TABLE ONE - CHANGES IN TAXABLE-EQUIVALENT NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
This table sets forth information regarding changes in net interest income
on a fully taxable-equivalent basis for the first quarter ended March 31,
1999 and 1998. The changes for each major category of interest income and
interest expense are divided between the portion of change attributable to
the variance in average balances (volume) or average rates for that
category. The amount of change that cannot be separated is allocated to
each variance proportionately. Nonaccrual loans are included in average
balances for these computations.
1999 vs. 1998
-----------------------------------
Increase (Decrease)
Due to Changes in
-----------------------------------
Volume Rate Total
--------- ---------- ------------
Earning assets -- Interest income:
Loans $570 $(199) $ 371
Investment securities:
Taxable 157 (33) 124
Non-taxable 8 -- 8
Federal funds sold 192 (15) 177
Interest-bearing deposits 2 -- 2
--------- ---------- ------------
Total 929 (247) 682
--------- ---------- ------------
Deposits and borrowed funds -- Interest expense:
Interest-bearing demand deposits 16 (17) (1)
Savings deposits 40 (142) (102)
Time deposits 348 (36) 312
Other short term borrowings 6 -- 6
Capital lease (1) -- (1)
--------- ---------- ------------
Total 409 (195) 214
--------- ---------- ------------
Change in net interest income $520 $ (52) $ 468
--------- ---------- ------------
--------- ---------- ------------
8
TABLE TWO - ANALYSIS OF TAXABLE-EQUIVALENT NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
This table presents an analysis of net interest income and average balance sheet
levels for the first three months of 1999 and 1998. Tax-exempt income is
presented on a tax-equivalent basis assuming a 34% federal tax rate.
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/
BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD
--------- ---------- -------- ---------- --------- ---------
ASSETS
- ------
Interest-earning assets:
Loans (1) ........................... $ 235,630 $ 5,735 9.87% $ 212,411 $ 5,364 10.24%
Taxable investment securities (2) ... 38,111 534 5.68 27,071 410 6.14
Tax-exempt investment securities (2) 3,418 50 5.96 2,845 42 5.99
Interest-bearing deposits ........... 166 2 5.11 -- -- --
Federal funds sold .................. 23,993 282 4.77 7,741 105 5.49
--------- --------- -------- --------- --------- --------
Total earning assets ................ 301,318 6,603 8.89 250,068 5,921 9.60
--------- --------- -------- --------- --------- --------
Noninterest-earning assets:
Cash and due from banks ............. 26,267 21,741
Premises and equipment, net ......... 9,965 8,689
Other assets (3) .................... 6,266 7,024
--------- ---------
Total noninterest-earning assets .... 42,498 37,454
--------- ---------
Less allowance for loan
and lease losses .................... 3,630 3,242
--------- ---------
Total assets ........................ $ 340,186 $ 284,280
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand ........... $ 44,121 128 1.18 $ 38,882 129 1.34
Savings ........................... 84,189 557 2.68 79,075 659 3.38
Time .............................. 79,304 927 4.74 49,677 615 5.03
Other short term borrowings ......... 1,361 14 4.11 823 8 3.98
Capital lease ....................... 381 14 14.63 413 15 14.52
--------- -------- --------- --------- -------- ------
Total interest-bearing liabilities... 209,356 1,640 3.18 168,870 1,426 3.43
-------- --------- -------- ------
Noninterest-bearing liabilities:
Demand deposits ..................... 97,900 86,917
Other liabilities ................... 2,305 2,605
--------- ---------
Total liabilities ................... 309,561 258,392
Stockholders' equity ................... 30,625 25,888
--------- ---------
Total liabilities and
stockholders' equity .............. $ 340,186 $ 284,280
--------- ---------
--------- ---------
Net interest income
(tax equivalent basis) ........... 4,963 4,495
Reversal of tax equivalent adjustment (15) (18)
--------- ---------
Net interest income ................. $ 4,948 $ 4,477
--------- ---------
--------- ---------
Net interest spread (4) ............. 5.71% 6.18%
------- ------
------- ------
Net interest margin (5) ............. 6.68% 7.29%
------- ------
------- ------
- -----------------------
(1) Nonaccrual loans are included in the daily average loan amounts
outstanding.
(2) The average balance sheet amounts and yields on available for sale debt
securities are based on the average of historical amortized cost balances.
(3) Includes average balances of real estate owned other than Company and Bank
premises during 1999 and 1998 of $365,000 and $1.1 million, respectively.
(4) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
9
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the three months ended March 31,
1999 was $100,000 compared to $590,000 for the comparable 1998 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 Company's loan loss experience, and
current and expected economic conditions. Improvement in the credit quality of
the Company's loan portfolio at the end of the first quarter of 1999 compared to
the same quarter of last year is evidenced by a reduction in the amounts
provided for losses, particularly as related to the Title I loan portfolio. The
provision for loan and lease losses during the first quarter of 1998 reflected a
provision of $340,000 compared to $0 in 1999 to supplement the Company's Title I
HUD reserve due to potential losses in the Title I portfolio at that time. As
presented in Table Three, net charge offs decreased to $72,000 in 1999 from
$530,000 for the first three months of 1998. The annualized ratio of net charge
offs to average loans was 0.12% at March 31, 1999 compared to 1.00% at March 31,
1998. The allowance for loan and lease losses represented 1.49% and 1.50% of
total gross loans at March 31, 1999 and March 31, 1998, 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.
TABLE THREE - ALLOWANCE AND PROVISION FOR LOAN AND LEASE LOSSES
(DOLLARS IN THOUSANDS)
This table summarizes loan balances at the end of each period and daily averages
during the period, changes in the allowance for loan and lease losses arising
from loan charge-offs and recoveries, additions to the allowance which have been
charged to operating expense, and certain ratios relating to the allowance for
loan losses.
Three Months Ended March 31,
---------------------------
1999 1998
--------- ---------
BALANCES:
Average loans during the period ................ $235,630 $212,411
Loans at the end of period ..................... 243,193 222,228
ALLOWANCE FOR LOAN AND LEASE LOSSES:
Balance at beginning of period ................. 3,592 3,268
Actual charge-offs:
Commercial loans ............................ 47 109
Installment and consumer loans .............. 73 450
-------- --------
Total ..................................... 120 559
Recoveries on loans previously charged off:
Commercial loans ............................ 11 4
Installment and consumer loans .............. 37 25
-------- --------
Total ..................................... 48 29
Net loan charge-offs to average loans .......... 72 530
Provision for loan and lease losses ............ 100 590
-------- --------
Balance at end of period ....................... $ 3,620 $ 3,328
======== ========
RATIOS:
Annualized net loan charge-offs to average loans 0.12% 1.00%
Allowance for loan and lease losses to
loans at end of period ...................... 1.49% 1.50%
10
NONINTEREST INCOME
Noninterest income for the first three months of 1999 decreased approximately
32% or $633,000 due mainly to a decrease of $600,000 in gains on the sale of
loans. Title I and equity loans sold totaled $1.6 million for gains of $62,000
in 1999 compared to $10.8 million sold in the first quarter of 1998 for total
gains of $358,000. The secondary market demand for these loans decelerated in
the last half of 1998 and the first quarter of 1999, and consequently the
Company's sales volume has declined. SBA loan sales totaled $212,000 for gains
of $8,000 during 1999 compared to $1.9 million in loan sales for gains of
$250,000 in the first quarter of 1998. Management's decision on whether or not
to sell these loans depends upon, among other factors, loan demand, premium
levels and prepayment risk. While Managements does not anticipate the sale of a
significant amount of these loans in 1999, some sales are likely.
NONINTEREST EXPENSE
Noninterest expense increased $245,000 or 6% for the first three months of 1999
compared to 1998. This category consists of salaries and employee benefits which
increased $94,000 to $2.6 million, occupancy expense which increased $185,000 to
$976,000, telephone expense which increased $59,000 to $173,000, and advertising
and other public relations which increased $5,000 to $171,000. Decreases in
noninterest expense stemmed from branch operational losses which decreased
$77,000 to $4,000 and professional services which decreased $28,000 to $60,000.
The Company currently plans the opening of a new full service branch in Vista,
California and the construction of a new facility for its Murrieta branch in the
second half of 1999, and expects to open one or more additional SBA loan
production offices in 1999.
IMPACT OF YEAR 2000
Noninterest expense includes the cost of projects to ensure accurate date
recognition and data processing with respect to the century date change
(commonly referred to as "Y2K"). The Y2K issue confronting the Company, its
suppliers, customers, customer's suppliers and competitors centers on the
potential inability of computer systems to recognize the year 2000. Some
computer systems in use today were designed and developed when computer memory
was limited and expensive on early mainframes. As a consequence many programs
used only two digits for the year in the date field to conserve memory. As a
result, these computer applications could fail completely or create erroneous
results by the year 2000 unless corrective measures are taken. To the extent
that the problem is not successfully addressed, consequences, the extent of
which are unknown, could impact the Company's business, operations, customers
and vendors.
According to its Year 2000 Project Plan, the Company will complete all required
testing before June 30, 1999. As of March 31, 1999, the Company had identified
critical systems and processes and had completed the testing, validation and
remediation of substantially all its critical systems. The Company is also
assessing the potential impact of this problem on its suppliers. Vendors upon
whom there is significant reliance have been identified and inquiries made
regarding their year 2000 readiness plans and status. Appropriate measures to
minimize risk will be undertaken with those that appear to pose a significant
risk. Replacements may be effected where necessary. However, where no viable
alternative for some suppliers, such as power distribution and local telephone
companies exist contingency plans are being formulated. As with all financial
institutions, a high degree of reliance is placed on the systems of other
institutions, including government agencies, to settle transactions. Principal
settlement methods associated with major payment systems will be tested as part
of their integration with the Company's processing system.
The Company is also assessing the potential impact of this problem on its
customers. Borrowers, funding sources and large depositors with a significant
financial relationship with the Company are being reviewed to assess their Y2K
readiness preparation and the risk potential to the Company. Borrowing
relationships with credit commitments of $750,000 or more are assigned one of
three risk levels based on their level of preparation: low, medium or high.
Borrowers in the high risk category will be reassessed quarterly, while
borrowers in the medium risk category will be reassessed semiannually. The risk
mitigation plan has been
11
incorporated into the normal credit review process. To mitigate the potential
loss of large deposits, the Company has reviewed and increased its secondary
sources of liquidity.
The Company is developing business resumption contingency plans specific to the
year 2000 that address the actions that would be taken if critical business
functions cannot be carried out in the normal manner upon entering the next
century due to system or supplier failure. These plans include but are not
limited to manual processing of information for critical information technology
systems and having increased cash on hand.
The related costs of the Year 2000 Project are expensed as incurred and
primarily included in professional services, equipment repairs (a component of
occupancy expense) and salary expense. Y2K expenses incurred to date through the
end of the first quarter of 1999 approximate $250,000 and the total cost of the
project is estimated to be a1pproximately $360,000. The Company does not believe
that the costs of addressing this problem will have a material effect on the
results of its operations.
FINANCIAL CONDITION
Total assets of the Company increased $11.3 million or 3% to $348.7 million at
March 31, 1999, from $337.4 million at December 31, 1998. During the same period
loans increased 2%, Fed funds sold and investments in total increased 10%,
deposits increased 3% and stockholder's equity increased 4%. As deposit growth
continued to outpace loan growth, excess funds were directed into short term
investments, primarily Fed funds sold which increased $10.0 million or 59% to
$27.0 million at the end of the first quarter of 1999 and represented 8% of
total assets compared to 5% at the end of 1998. Gross loans and leases, the
Company's primary use of funds, increased $5.5 million to $243.2 million and 70%
of total assets compared to $237.7 million and 70% of year end total assets.
Encouraged by the expansion of the local real estate markets, loan growth, was
centered in commercial and commercial real estate loans which increased
approximately 9% or $11.3 million and 3% or $1.8 million, respectively. SBA
loans accounted for $8.7 million of the commercial loan growth. These increases
were partially offset by installment and consumer loans which decreased 3% or
$1.0 million and real estate construction loans which decreased 30% or $6.1
million. 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. The largest change in the loan
portfolio mix was in commercial loans which increased to 57% from 54% and real
estate construction loans which decreased to 6% from 8% of total loans. The
investment portfolio decreased $4.1 million or 9% to $39.7 in 1999 from $43.8
million at the end of 1998 primarily due to the maturity of short term
government agencies. Other real estate owned decreased $280,000 to $94,000
during the first three months of 1999 from $374,000 due to the sale of two
properties carried at $306,000 and the addition of one property carried at
$26,000.
TABLE FOUR - LOAN DISTRIBUTION
(DOLLARS IN THOUSANDS)
The following table sets forth the amount of total loans outstanding in each
category and the percentage of total loans of each category at the dates
indicated.
March 31, 1999 December 31, 1998
------------------------ ------------------------
Balance Percent Balance Percent
-------- ------- -------- -------
Commercial loans ................................................. $139,637 57% $128,298 54%
Commercial real estate loans ..................................... 53,313 22 51,520 22
Installment and consumer loans ................................... 33,131 14 34,171 14
Real estate construction loans ................................... 13,819 6 19,881 8
All other loans .................................................. 3,293 1 3,832 2
-------- ------- -------- -------
Total gross loans ............................................ 243,193 100 237,702 100
------- -------
------- -------
Less: Allowance for loan and lease losses ........................ 3,620 3,592
-------- --------
Total net loans .............................................. $239,573 $234,110
-------- --------
-------- --------
12
Total deposits at March 31, 1999 increased $9.2 million or 3% to $312.3 million
from $303.1 million at December 31, 1998. As shown in Table Five, the growth in
deposits was predominately in interest-bearing accounts which increased $8.8
million or 4%. Demand deposits increased slightly by $399,000 to $100.9 million
in 1999 from $100.5 million at the end of the 1998. Within the interest-bearing
category, interest-bearing demand accounts grew approximately 6% or $2.5 million
to $45.3 million, savings accounts (including money market accounts) increased
13% or $10.3 million to $90.0 million and time deposits decreased 5% or $3.9
million to $76.1 million. The decrease in time deposits is a result of
Management's efforts to reduce interest expense by lowering the rates paid on
time deposits which is expected to continue in 1999. The most notable shift in
deposit mix was in savings accounts which increased to 29% of total deposits
during the first quarter of 1999 from 26% and in time deposits which decreased
to 24% of total deposits from 27% at year end.
TABLE FIVE - DEPOSIT DISTRIBUTION
(DOLLARS IN THOUSANDS)
The following table sets forth the amount of total loans outstanding in each
category and the percentage of total loans of each category at the dates
indicated.
March 31, 1999 December 31, 1998
------------------- -------------------
Balance Percent Balance Percent
-------- ------- ------- -------
Noninterest-bearing demand deposits .............................. $100,864 32% $100,465 33%
Interest-bearing demand deposits ................................. 45,282 15 42,824 14
Savings deposits ................................................. 90,011 29 79,684 26
Time deposits of $100,000 or more ................................ 19,124 6 20,867 7
Other time deposits .............................................. 57,022 18 59,219 20
-------- -------- -------- --------
Total deposits ............................................... $312,303 100 $303,059 100
-------- -------- -------- --------
-------- -------- -------- --------
NONPERFORMING ASSETS
TABLE SIX - NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
The following table provides information with respect to the components of the
Company's nonperforming assets at March 31, 1999 and December 31, 1998.
March 31, December 31,
1999 1998
---------- ------------
Loans 90 days or more past due and still accruing:
Commercial $ 192 $ --
------ ------
Nonaccrual loans:
Residential real estate 127 130
Commercial 222 387
Installment and consumer 393 271
------ ------
Total 742 788
------ ------
Total nonperforming loans 934 788
------ ------
Other real estate owned 94 374
------ ------
Total nonperforming assets $1,028 $1,162
------ ------
------ ------
Nonperforming loans to total gross loans 0.38% 0.33%
------ ------
------ ------
Nonperforming assets to total gross loans
plus other real estate owned 0.42% 0.49%
------ ------
------ ------
13
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.
The Bank's recorded investments in impaired loans at March 31, 1999 and December
31, 1998, were $749,000 and $954,000, respectively. The recorded investments are
stated net of reserves for loan losses of $32,000 and $48,000, respectively. The
average recorded investments in impaired loans during 1999 and 1998 were
$873,000 and $1,654,000, respectively.
ASSET/LIABILITY MANAGEMENT
LIQUIDITY
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
26.9% and 26.0% of the Company's total assets at March 31, 1999 and December 31,
1998, respectively. Liquidity management also includes the management of
unfunded commitments to make loans and undisbursed amounts under lines of
credit. At March 31, 1999, these commitments totaled $53.7 million in commercial
loans, $1.4 million in letters of credit, $11.9 million in real estate
construction loans, and $11.7 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 $17.0 million for
the purchase of Federal funds with other financial institutions and may borrow
funds at the Federal Home Loan Bank and the Federal Reserve discount window,
subject to the Bank's ability to supply collateral.
INTEREST RATE SENSITIVITY MANAGEMENT
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, 1999 approximately
64% 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.
14
TABLE SEVEN - INTEREST RATE SENSITIVITY GAP
(DOLLARS IN THOUSANDS)
This table sets forth the rate-sensitivity of the Company's interest-earning
assets and interest-bearing liabilities as of March 31, 1999, the interest
rate-sensitivity gap (interest rate-sensitive assets less interest
rate-sensitive liabilities), cumulative interest rate-sensitivity gap, the
Company's interest rate-sensitivity gap ratio (interest rate-sensitive assets
divided by interest rate-sensitive liabilities) and the Company's cumulative
interest rate-sensitivity gap ratio. For the purposes of the following table, an
asset or liability is considered rate-sensitive within a specified period when
it matures or could be repriced within such period in accordance with its
contractual terms. Nonaccrual loans of $742,000 are excluded from the
presentation.
AFTER THREE AFTER SIX AFTER ONE
WITHIN MONTHS BUT MONTHS BUT YEAR BUT AFTER
THREE WITHIN SIX WITHIN ONE WITHIN FIVE
MONTHS MONTHS YEAR FIVE YEARS YEARS TOTAL
-------- ----------- ---------- ----------- ------- ------
INTEREST-EARNINGS ASSETS:
Loans ..................... $136,203 $ 5,265 $ 10,649 $ 60,175 $ 30,159 $242,451
Investment securities ..... 7,871 2,500 7,400 14,823 7,069 39,663
Interest-bearing deposits . -- 998 -- -- -- 998
Federal funds sold ........ 27,000 -- -- -- -- 27,000
-------- -------- -------- -------- -------- --------
Total ................... 171,074 8,763 18,049 74,998 37,228 310,112
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits ................ 45,282 -- -- -- -- 45,282
Savings deposits .......... 90,011 -- -- -- -- 90,011
Time deposits ............. 30,065 18,194 16,838 11,040 9 76,146
Borrowed funds ............ 2,436 -- -- -- 378 2,814
-------- -------- -------- -------- -------- --------
Total ................... 167,794 18,194 16,838 11,040 387 214,253
Interest rate-sensitivity gap 3,280 (9,431) 1,211 63,958 36,841 $ 95,859
Cumulative interest rate
sensitivity gap ........... $ 3,280 $ (6,151) $ (4,940) $ 59,018 $ 95,859
Interest rate-sensitivity
gap ratio ................. 1.02x .48x 1.07x 6.79x 96.20x 1.45x
Cumulative interest rate
sensitivity gap ratio ..... 1.02x .97x .98x 1.28x 1.45x
As of March 31, 1999, the Company was liability-sensitive at one year and
asset-sensitive beyond one year. Liability sensitive means that rate-sensitive
liabilities exceed rate-sensitive assets. This position will generally result in
enhanced earnings in a falling interest rate environment and declining earnings
in a rising interest rate environment. Asset sensitive means that rate-sensitive
assets exceed rate-sensitive liabilities. This position will generally result in
enhanced earnings in a rising interest rate environment and declining earnings
in a falling interest rate environment because a larger volume of assets than
liabilities will reprice. However, this does not necessarily indicate the impact
of general interest rate movements on the Company's net interest yield, because
the repricing of various categories of assets and liabilities is discretionary
and is subject to competition and other pressures. As a result, various assets
and liabilities indicated as repricing within the same period may in fact price
at different times and at different rate levels. Management attempts to mitigate
the impact of changing interest rates in several ways, one of which is to manage
its interest rate- sensitivity gap. The use of a base lending rate by the
Company for the majority of its floating rate loans also allows the Company more
flexibility than the use of a national prime rate in matching changes to the
yield on floating rate loans to changes in its funding costs.
15
CAPITAL RESOURCES
Stockholders' equity increased 4% to $31.1 million at March 31, 1999 from $30.0
million at December 31, 1998. The increase in equity consists of net income of
$1,033,000, an increase of $41,000 from the exercise of stock options, partly
offset by a decrease in net unrealized gains on available for sale securities of
$21,000.
The following table provides information with respect to the Company's and the
Bank's regulatory capital ratios and regulatory minimum requirements:
TABLE EIGHT - CAPITAL RATIOS
Minimum
March 31, December 31, Required
1999 1998 Ratios
--------- ----------- --------
NORTH COUNTY BANCORP
Risk-based capital
Tier 1 11.69% 11.68% 4.00%
Total 12.94% 12.93% 8.00%
Tier 1 leverage capital 9.05% 8.80% 4.00%
NORTH COUNTY BANK
Risk-based capital
Tier 1 11.56% 11.58% 4.00%
Total 12.81% 12.83% 8.00%
Tier 1 leverage capital 8.96% 8.72% 4.00%
Management anticipates capital expenditures of approximately $2.4 million
primarily related to construction of a new facility for its existing Murrieta
branch scheduled to open in the fourth quarter of 1999, and the opening of a
full service branch office located at Palomar Airport Road and Business Park
Drive in the City of Vista, California. This office, which will be a leased
facility, is scheduled to open in the third quarter of 1999.
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.
16
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, 1999
- ----------------------------------------- ------------
Michael J. Gilligan
Vice President & Chief Financial Officer
17