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____June 30, 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
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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 July 29, 1999 the Registrant had 4,925,185 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 -
June 30, 1999 and December 31, 1998 2
Consolidated Statement of Income -
Three Months Ended and Six Months Ended
June 30, 1999 and 1998 3
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1999 and 1998 4
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 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 19
1
NORTH COUNTY BANCORP
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In thousands)
June 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 28,052 $ 26,885
Federal funds sold 18,090 17,000
-------------- --------------
46,142 43,885
Investment securities:
Available for sale 18,499 17,193
Held to maturity 18,570 26,628
Loans 253,979 237,702
Less: Allowance for loan and lease losses 3,563 3,592
-------------- --------------
250,416 234,110
Other real estate owned 94 374
Premises and equipment, net 9,802 10,013
Accrued interest receivable and other assets 5,480 5,210
-------------- --------------
$ 349,003 $ 337,413
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 101,929 $ 100,465
Interest-bearing 210,657 202,594
-------------- --------------
312,586 303,059
Accrued expenses and other liabilities 2,059 2,416
Federal funds purchased and U.S. Treasury demand note 1,816 1,551
Capital lease obligation 370 387
-------------- --------------
Total liabilities 316,831 307,413
-------------- --------------
Stockholders' equity:
Common stock, no par value, authorized
10,000,000 shares; outstanding shares
4,917,798 in 1999 and 4,868,906 in 1998 19,275 19,127
Retained earnings 12,986 10,834
Accumulated other comprehensive income (89) 39
-------------- --------------
Total stockholders' equity 32,172 30,000
-------------- --------------
$ 349,003 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
1998 1998 1998 1998
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans $ 5,806 $ 5,827 $ 11,540 $ 11,185
Investment securities 560 408 1,130 848
Federal funds sold 225 107 507 212
Deposits with other financial institutions 14 - 16 -
---------- ---------- ---------- ----------
Total interest income 6,605 6,342 13,193 12,245
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,509 1,470 3,121 2,873
Federal funds purchased and U.S. Treasury demand note 10 12 24 20
Long term debt 12 14 26 29
---------- ---------- ---------- ----------
Total interest expense 1,531 1,496 3,171 2,922
---------- ---------- ---------- ----------
Net interest income 5,074 4,846 10,022 9,323
Provision for loan losses 100 450 200 1,040
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,974 4,396 9,822 8,283
Other income 1,536 1,755 2,890 3,742
Other expense 4,596 4,207 9,053 8,419
---------- ---------- ---------- ----------
Income before income taxes 1,914 1,944 3,659 3,606
Provision for income taxes 795 805 1,507 1,467
---------- ---------- ---------- ----------
Net income $ 1,119 $ 1,139 $ 2,152 $ 2,139
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $ 0.23 $ 0.23 $ 0.44 $ 0.44
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.22 $ 0.23 $ 0.42 $ 0.42
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average common shares outstanding 4,887,620 4,868,906 4,881,135 4,868,906
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted average common shares outstanding 5,078,086 5,057,825 5,075,762 5,058,654
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements.
3
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 2,152 $ 2,139
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 717 541
Deferred loan fees and costs, net (349) (385)
Investment premiums and discounts, net (6) 108
Other 16 18
Gain on sale of other real estate owned (58) (76)
Provision for loan and lease losses 200 1,040
Decrease (increase) in interest receivable 17 (147)
(Decrease) increase in taxes payable (126) 85
Decrease in accrued expenses (493) (261)
Increase in interest payable 136 112
Other, net (305) 233
---------- ----------
Net cash provided by operating activities 1,901 3,407
---------- ----------
Cash flows from investing activities:
Proceeds from sales and maturities of investment securities 28,208 6,683
Purchase of investment securities (21,449) (6,492)
Net increase in loans (16,184) (12,989)
Purchase of premises and equipment (506) (1,628)
Proceeds from sale of other real estate owned 364 434
---------- ----------
Net cash used in investing activities (9,567) (13,992)
---------- ----------
Cash flows from financing activities:
Cash payments on notes payable and capital lease obligations (17) (7)
Net increase in deposits 9,527 23,916
Net increase in short term borrowings 265 1,007
Cash proceeds from exercise of stock options 148 -
---------- ----------
Net cash provided by financing activities 9,923 24,916
---------- ----------
Net increase in cash and cash equivalents 2,257 14,331
Cash and cash equivalents at beginning of year 43,885 28,262
---------- ----------
Cash and cash equivalents at end of period $ 46,142 $ 42,593
---------- ----------
---------- ----------
Disclosures:
Total interest paid $ 3,035 $ 2,810
---------- ----------
---------- ----------
Total taxes paid $ 1,578 $ 1,293
---------- ----------
---------- ----------
Foreclosed real estate loans $ 26 $ 140
---------- ----------
---------- ----------
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 $24 30 30
Net income 2,139 2,139
--------------
Total comprehensive income 2,169
---------- --------- ---------- ---------------- --------------
Balance June 30, 1998 4,637,290 16,058 11,276 28 27,362
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 $9 11 11
Net income 2,630 2,630
--------------
Total comprehensive income 2,641
---------- --------- ---------- ---------------- --------------
Balance December 31, 1998 4,868,906 19,127 10,834 39 30,000
Exercise of stock options 48,892 148 148
Comprehensive income:
Unrealized holding loss on available
for sale securities, net of tax of $101 (128) (128)
Net income 2,152 2,152
--------------
Total comprehensive income 2,024
---------- --------- ---------- ---------------- --------------
Balance June 30, 1999 4,917,798 $19,275 $ 12,986 $ (89) $ 32,172
---------- --------- ---------- ---------------- --------------
---------- --------- ---------- ---------------- --------------
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 and six months ended June
30, 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
Basic earnings per share (EPS) represents net income divided by the weighted
average common shares outstanding during the period adjusted retroactively
for stock dividends. 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
common stock upon the conversion of stock options of 209,180 and 188,919
shares for the three months ended June 30, 1999 and 1998, respectively, and
206,856 and 189,748 shares for the six months ended June 30, 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 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 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
The Company reported earnings of $2,152,000 or $0.42 per diluted share for
the six months ended 1999. This compares with net income of $2,139,000 or
$0.42 per diluted share for the same period of 1998. The annualized return on
average assets and average stockholders' equity declined to 1.26% and 13.79%,
respectively, for the first half of 1999, from 1.48% and 16.20%,
respectively, for the corresponding 1998 period. A comparison of second
quarter results for 1999 and 1998 indicates a $20,000 decline in earnings to
$1,119,000 or $0.22 per diluted share from $1,139,000 or $0.23 per diluted
share last year. Second quarter earnings produced annualized return on
average assets and average stockholders' equity of 1.31% and 14.07%,
respectively, in 1999, compared to 1.55% and 16.91% respectively, in 1998. A
decline in the Company's net interest margin, primarily due to lower loan
yields, and a lower volume of loan sales in 1999 were primary factors in the
slower earnings growth this year and this quarter. These factors were
partially offset by a decrease in the provision for loan and lease losses due
to several elements, including improved asset quality, a lower net charge off
ratio, as well as loan growth this year being generated primarily by well
collateralized SBA and commercial real estate loans.
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 three months and six months ended June 30, 1999 and 1998
are analyzed in Table One. Analysis of the Company's net interest income and
average balance sheet levels for the three and six month periods are
presented in Tables Two and Three.
7
TABLE ONE - CHANGES IN NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
This table sets forth information regarding changes in net interest income
for the three and six month periods ended June 30, 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. The
table is not presented on a tax equivalent basis as the effects are not
material.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 VS. 1998 1999 VS. 1998
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
Earning assets -- Interest income:
Loans $519 $(540) $ (21) $1,087 $(732) $355
Investment securities 151 1 152 311 (29) 282
Federal funds sold 129 (11) 118 321 (26) 295
Interest-bearing deposits 14 -- 14 16 --- 16
----- ----- ---- ------ ----- ----
Total 813 (550) 263 1,735 (787) 948
----- ----- ---- ------ ----- ----
Deposits and borrowed funds --
Interest expense:
Interest-bearing demand deposits 14 (15) (1) 30 (32) (2)
Savings deposits 76 (131) (55) 118 (274) (156)
Time deposits 200 (105) 95 544 (138) 406
Other short term borrowings 1 (3) (2) 6 (2) 4
Capital lease (1) (1) (2) (2) (1) (3)
----- ----- ----- ------- ------ ----
Total 290 (255) 35 696 (447) 249
----- ----- ----- ------- ------ ----
Change in net interest income $523 $(295) $ 228 $ 1,039 $(340) $699
===== ===== ===== ======= ====== ====
Net interest income for the first half of 1999 compared to 1998 increased
$699,000 or 8% to $10.0 million from $9.3 million. An increase of $47.3
million or 19% in average earning assets and a 11% reduction in the average
rate paid on interest-bearing liabilities, down 36 basis points, were
principal reasons for the increase in net interest income, but were partially
offset by a 9%, or 88 basis points, reduction in the yield on earning assets.
During the first six months, interest income increased $948,000 or 8% to
$13.2 million in 1999 from $12.2 million in 1998. The growth in earning
assets was led by loans which increased $22.0 million or 10% to $239.5
million for the first half of 1999 from $217.5 million for the same 1998
period. Interest and fees on loans increased $355,000 or 3% to $11.5 million
in 1999 from $11.2 million in 1998. The effect of the increase in loan volume
on interest income was partially countered by a decrease in the average yield
on loans to 9.72% from 10.37% primarily due to the decline in the prime
lending rate during the last half of 1998. The recent increase in the prime
lending rate will improve loan yields during the second half of 1999. Deposit
growth outpaced loan growth in the last half of 1998, 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 for the six months of 1999 increased $11.2 million and $13.5
million, respectively, over the first six months of 1998, and contributed
$282,000 and $295,000, respectively, to the increase in interest income. The
net interest margin (net interest income as a percentage of average
interest-earning assets) was 6.69% and 7.37% for the six months ended June
30, 1999 and 1998, respectively.
Interest expense increased approximately 9% or $249,000 for the first half of
1999 compared to the corresponding period in 1998, mainly due to an increase of
$248,000 in interest paid on deposits. Average interest-bearing deposits for the
first half of 1999 increased $35.8 million or 21% to $206.3 million at an
average rate of 3.05% compared to $170.5 million at an average rate of 3.40% for
the same 1998 period. Time deposit interest expense increased $406,000 to $1.7
million in 1999 from $1.3 million last year due to growth of $23.5 million in
average balances partially offset by a decline in the average rate paid on these
deposits to 4.59% in 1999 from 5.08% in 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
8
time deposit growth as well as lower the related interest expense. During
this same period the average rate paid on savings accounts (including money
market accounts) decreased to 2.66% on average balances of $85.8 million in
1999 from an average rate of 3.33% on balances of $78.2 million last year.
Interest expense related to savings deposits decreased $156,000 to $1.1
million in the first half of 1999 compared to $1.3 million for the first half
of last year. The average rates paid on total interest-bearing liabilities
were 3.07% and 3.43% for the first six months of 1999 and 1998, respectively.
Net interest income for the second quarter of 1999 increased $228,000 or 5%
to $5.1 million from $4.8 million for the second quarter of 1998. Interest
income increased $263,000 or 4% to $6.6 million in 1999 from $6.3 million
last year. Second quarter average loans increased 9% or $20.8 million to
$243.4 million in 1999 from $222.6 million last year, but at significantly
lower yields, 9.68% compared to 10.62%, causing loan income to decline
$21,000. A recent increase in the prime lending rate should improve the loan
yield in the third quarter. Interest income from investment securities and
Fed funds sold increased $152,000 and $118,000, respectively, due to volume
growth in these categories as the Company continued to channel excess
liquidity into short term investments and overnight funds. Second quarter
interest expense increased $35,000 or 2% in 1999 due to an increase in
average interest-bearing deposits of 18% or $31.8 million to $205.1 million
at an average rate of 2.98% in 1999, from $173.3 million at an average rate
of 3.44% in 1998. The net interest margin was 6.78% and 7.56% for the three
months ended June 30, 1999 and 1998, respectively.
9
TABLE TWO - THREE MONTH ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
This table presents an analysis of net interest income and average balance sheet
levels for the second quarter of 1999 and 1998.
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/
BALANCE EXPENSE YIELD (1) BALANCE EXPENSE YIELD (1)
------- --------- --------- ------- -------- ---------
ASSETS
Interest-earning assets:
Loans (2)................................. $243,371 $5,806 9.68% $222,593 $5,827 10.62%
Investment securities (3)................. 39,906 560 5.69 29,177 408 5.67
Interest-bearing deposits................. 1,197 14 5.12 -- -- --
Federal funds sold........................ 18,848 225 4.82 8,124 107 5.36
-------- ------ ----- -------- ------ -----
Total earning assets...................... 303,322 6,605 8.83 259,894 6,342 9.90
-------- ------ ----- -------- ------ -----
Noninterest-earning assets:
Cash and due from banks................... 26,912 22,148
Premises and equipment, net............... 9,882 8,984
Other assets ............................. 6,378 6,740
-------- --------
Total noninterest-earning assets.......... 43,172 37,872
-------- --------
Less allowance for loan and lease losses.... 3,642 3,353
-------- --------
Total assets................................ $342,852 $294,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand................. $ 45,560 138 1.23 $ 41,261 139 1.37
Savings................................. 87,429 576 2.67 77,265 631 3.31
Time.................................... 72,076 795 4.47 54,747 700 5.18
Other short term borrowings............... 1,171 10 3.46 1,096 12 4.56
Capital lease............................. 373 12 13.58 410 14 14.38
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities........ 206,609 1,531 3.01 174,779 1,496 3.47
------ ----- ------ -----
Noninterest-bearing liabilities:
Demand deposits........................... 101,953 90,134
Other liabilities......................... 2,491 2,560
-------- --------
Total liabilities......................... 311,053 267,473
Stockholders' equity........................ 31,799 26,940
-------- --------
Total liabilities and stockholders' equity.. $342,852 $294,413
======== ========
Net interest income......................... $ 5,074 $4,846
======= ======
Net interest spread (4)..................... 5.83% 6.43%
===== ======
Net interest margin (5)..................... 6.78% 7.56%
===== ======
- -------------
(1) Yields are not presented on a tax equivalent basis as the effects are not
material.
(2) Nonaccrual loans are included in the daily average loan amounts
outstanding.
(3) The average balance sheet amounts and yields on available for sale debt
securities are based on the average of historical amortized cost balances.
(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.
10
TABLE THREE - SIX MONTH ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
This table presents an analysis of net interest income and average balance
sheet levels for the first six months of 1999 and 1998.
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
1999 1998
------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/
BALANCE EXPENSE YIELD(1) BALANCE EXPENSE YIELD(1)
--------- -------- ----------- --------- -------- ------------
ASSETSInterest-earning assets:
Loans (2)...................... $ 239,501 $11,540 9.72% $ 217,502 $ 11,185 10.37%
Investment securities (3)...... 40,717 1,130 5.60 29,546 848 5.79
Interest-bearing deposits...... 681 16 5.09 -- -- --
Federal funds sold............. 21,421 507 4.77 7,933 212 5.39
--------- -------- ----------- --------- -------- -----------
Total earning assets........... 302,320 13,193 8.80 254,981 12,245 9.68
--------- -------- ----------- --------- -------- -----------
Noninterest-earning assets:
Cash and due from banks........ 26,589 21,945
Premises and equipment, net.... 9,923 8,836
Other assets................... 6,322 6,882
--------- ---------
Total noninterest-earning
assets...................... 42,835 37,663
--------- ---------
Less allowance for loan
and lease losses............... 3,636 3,297
--------- ---------
Total assets..................... $ 341,519 $ 289,347
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand...... $ 44,840 266 1.20 $ 40,071 268 1.35
Savings...................... 85,809 1,133 2.66 78,170 1,289 3.33
Time......................... 75,690 1,722 4.59 52,212 1,316 5.08
Other short term borrowings.... 1,266 24 3.78 959 20 4.29
Capital lease.................. 377 26 14.03 411 29 14.37
--------- -------- ----------- --------- -------- -----------
Total interest-bearing
liabilities 207,982 3,171 3.07 171,825 2,922 3.43
--------- -------- ----------- -------- -----------
Noninterest-bearing liabilities:
Demand deposits................ 99,926 88,526
Other liabilities.............. 2,398 2,583
--------- ---------
Total liabilities.............. 310,307 262,933
Stockholders' equity.............. 31,212 26,414
--------- ---------
Total liabilities and
stockholders' equity........... $ 341,519 $ 289,347
========= =========
Net interest income............... $ 10,022 $ 9,323
======== ========
Net interest spread (4)........... 5.73% 6.26%
- =========== ===========
Net interest margin (5)........... 6.69% 7.37%
- =========== ===========
(1) Yields are not presented on a tax equivalent basis as the effects are not
material.
(2) Nonaccrual loans are included in the daily average loan amounts
outstanding.
(3) The average balance sheet amounts and yields on available for sale debt
securities are based on the average of historical amortized cost balances.
(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.
11
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the six months ended June 30,
1999 was $200,000 compared to $1.0 million for the corresponding 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 and assessment of the overall risk in the loan
portfolio, the Company's loan loss experience, and current and expected
economic conditions. The lower current year provision is based on improvement
in the credit quality of the Company's loan portfolio, particularly as
related to the Title I loan portfolio, as well as loan growth this year being
generated primarily by lower risk, well collateralized SBA and commercial
real estate loans. The provision for loan and lease losses during the first
half of 1998 reflected a provision of $490,000 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 Four, net charge offs
decreased to $229,000 in 1999 from $780,000 for the first six months of 1998.
The allowance for loan and lease losses represented 1.40% and 1.48% of total
gross loans at June 30, 1999 and 1998, respectively.
The provision for loan and lease losses for the three months ended June 30,
1999 was $100,000 compared to $450,000 for the second quarter of 1998. The
provision for loan and lease losses during the second quarter of 1998
reflected a provision of $150,000 compared to $0 in 1999 to supplement the
Company's Title I HUD reserve. Second quarter net charge offs decreased to
$157,000 in 1999 from $250,000 in 1998.
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 FOUR - 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.
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- --------
BALANCES:
Average loans during the period......................... $239,501 $217,502
Loans at the end of period.............................. 253,979 237,702
ALLOWANCE FOR LOAN AND LEASE LOSSES:
Balance at beginning of period.......................... 3,592 3,268
Actual charge-offs:
Commercial loans..................................... 49 189
Installment and consumer loans....................... 268 726
-------- --------
Total.............................................. 317 915
Recoveries on loans previously charged off:
Commercial loans..................................... 38 84
Installment and consumer loans....................... 50 51
-------- --------
Total.............................................. 88 135
Net loan charge-offs to average loans................... 229 780
Provision for loan and lease losses..................... 200 1,040
-------- --------
Balance at end of period................................ $ 3,563 $ 3,528
======== ========
RATIOS:
Annualized net loan charge-offs to average loans ....... 0.10% 0.36%
Allowance for loan and lease losses to loans at end of period 1.40% 1.48%
12
NONINTEREST INCOME
A comparison of noninterest income for the six months ended June 30, 1999 and
1998, indicates a decrease of approximately 23% or $852,000 essentially due
to a decrease in gain on loan sales of $827,000 for the first half of the
year. Title I and equity loans sold totaled $5.9 million for gains of
$157,000 for the first half of 1999 compared to $21.8 million sold in the
first half of 1998 for total gains of $714,000. The secondary market demand
for these loans decelerated in the last half of 1998 and the first half of
1999, and consequently the Company's sales volume has declined. SBA loan
sales totaled $2.4 million for gains of $52,000 during 1999 compared to $4.6
million in loan sales for gains of $322,000 in the first half of 1998. Most
of the 1999 SBA loan sales ($2.2 million) consisted of long term commercial
real estate loans ("504 loans") which generate lower premiums. Management's
decision on whether or not to sell SBA loans depends upon, among other
factors, loan demand, premium levels and prepayment risk. While the amount of
SBA loans expected to be sold during the second half of 1999 is not known at
this time, Management does anticipate a higher level of sales than in the
first half of the year. Second quarter noninterest income decreased 12% or
$219,000 in 1999 compared to 1998 due a decrease of $227,000 in gain on loan
sales.
NONINTEREST EXPENSE
Noninterest expense for the six months ended June 30, 1999 increased 8% or
$634,000 compared to the corresponding 1998 period. This category consists of
salaries and employee benefits which increased $316,000 to $5.2 million,
occupancy expense which increased $294,000 to $1.9 million, telephone expense
which increased $151,000 to $368,000, and advertising and other public
relations which increased $1,000 to $335,000. The Company incurred
approximately $108,000 in noninterest expense during the first half of 1999,
from testing and remediation costs associated with the Year 2000 issue (See
"Impact of Year 2000"). Decreases in noninterest expense stemmed from branch
operational losses less recoveries which decreased $87,000 to a net gain of
$1,000 and professional services which decreased $67,000 to $189,000. The
Company 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 may open one or more additional SBA loan production offices
in the second half of the year. Second quarter noninterest expense increased
9% or $389,000 in 1999 compared to 1998.
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.
In accordance with its Year 2000 Project Plan, the Company completed all
required testing by 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
13
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 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 has developed 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 half of 1999 approximate $285,000 ($108,000 in
the first six months of 1999) and the total cost of the project is estimated
to be approximately $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 $11.6 million or 3% to $349.0 million
at June 30, 1999, from $337.4 million at December 31, 1998. During the same
period loans increased 7%, Fed funds sold and investments in total decreased
9%, deposits increased 3% and stockholder's equity increased 7%. Gross loans
and leases, the Company's primary use of funds, increased $16.3 million to
$254.0 million and 73% 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 27% or $14.0
million, respectively. Refinancing activity generated approximately $8.0
million in commercial real estate loans and is not expected to continue at
this level in the second half of the year. SBA loans accounted for $7.9
million of the commercial loan growth. These increases were partially offset
by consumer loans which decreased 9% or $3.1 million and real estate
construction loans which decreased 29% or $5.8 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 real estate loans which increased to 26% from 22%, consumer loans
which decreased to 12% from 14% and real estate construction loans which
decreased to 6% from 8% of total loans. The investment portfolio decreased
$6.7 million or 15% to $37.1 in 1999 from $43.8 million at the end of 1998
primarily due to the maturity of short term government agencies.
TABLE FIVE - 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.
JUNE 30, 1999 DECEMBER 31, 1998
----------------- ------------------
BALANCE PERCENT BALANCE PERCENT
-------- ------- -------- -------
Commercial loans........................................ $139,649 55% $128,298 54%
Commercial real estate loans............................ 65,509 26 51,520 22
Consumer loans.......................................... 31,095 12 34,171 14
Real estate construction loans.......................... 14,149 6 19,881 8
All other loans......................................... 3,577 1 3,832 2
-------- ------- -------- -------
Total gross loans............................ 253,979 100 237,702 100
======= ======
Less: Allowance for loan and lease losses............... 3,563 3,592
-------- --------
Total net loans.............................. $250,416 $234,110
======== ========
Total deposits at June 30, 1999 increased $9.5 million or 3% to $312.6
million from $303.1 million at December 31, 1998.
14
As shown in Table Six, the growth in deposits was predominately in
interest-bearing accounts which increased $8.1 million or 4%. Demand deposits
increased $1.4 million or 2% to $101.9 million in 1999 from $100.5 million at
the end of 1998. Within the interest-bearing deposit category,
interest-bearing demand accounts grew approximately 7% or $2.8 million to
$45.6 million, savings accounts (including money market accounts) increased
13% or $10.2 million to $89.9 million and time deposits decreased 6% or $5.0
million to $75.1 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. The most notable shift in deposit mix was in savings accounts
which increased to 29% of total deposits during the first half of 1999 from
26% at year end and in total time deposits which decreased to 24% from 27%.
TABLE SIX - DEPOSIT DISTRIBUTION
(DOLLARS IN THOUSANDS)
The following table sets forth the amount of total deposits outstanding in
each category and the percentage of total deposits of each category at the
dates indicated.
JUNE 30, 1999 DECEMBER 31, 1998
----------------- -----------------
BALANCE PERCENT BALANCE PERCENT
------- ------- ------- -------
Noninterest-bearing demand deposits..................... $101,929 33% $100,465 33%
Interest-bearing demand deposits........................ 45,627 14 42,824 14
Savings deposits........................................ 89,931 29 79,684 26
Time deposits of $100,000 or more....................... 22,453 7 20,867 7
Other time deposits..................................... 52,646 17 59,219 20
-------- --- -------- ---
Total deposits............................... $312,586 100 $303,059 100
======== === ======== ===
NONPERFORMING ASSETS
TABLE SEVEN - NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
The following table provides information with respect to the components of
the Company's nonperforming assets at June 30, 1999 and December 31, 1998.
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
Nonaccrual loans:
Residential real estate 60 130
Commercial 2,098 387
Installment and consumer 315 271
------ ------
Total nonperforming loans 2,473 788
------ ------
Other real estate owned 94 374
------ ------
Total nonperforming assets $2,567 $1,162
====== ======
Nonperforming loans to total gross loans 0.97% 0.33%
====== =====
Nonperforming assets to total gross
loans plus other real estate owned 1.01% 0.49%
====== =====
Nonperforming assets increased $1.4 million in the second quarter of 1999 due
to an increase of $1.7 million in nonaccrual loans that was attributable to
one borrower. Management does not expect any significant losses due to this
borrowing which is well collateralized and partially guaranteed by the SBA.
Other real estate owned decreased $280,000 to $94,000 during the first six
months of 1999 from $374,000 due to the sale of two properties that totaled
$306,000 and the addition of one property for $26,000.
15
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.
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
24% and 26% of the Company's total assets at June 30, 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 June 30, 1999, these commitments totaled $50.0 million in
commercial loans, $2.0 million in letters of credit, $14.1 million in real
estate construction loans, and $12.0 million in consumer 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
$20.0 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 June 30, 1999
approximately 59% 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.
Table Eight sets forth the rate-sensitivity of the Company's interest-earning
assets and interest-bearing liabilities as of June 30, 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 $2.5 million are excluded from the
presentation.
16
TABLE EIGHT - INTEREST RATE SENSITIVITY GAP
(DOLLARS IN THOUSANDS)
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 ........................... $135,236 $ 8,275 $ 8,437 $63,065 $36,492 $251,505
Investment securities............ 2,808 2,726 7,322 17,970 6,243 37,069
Interest-bearing deposits........ 1,198 100 -- -- -- 1,298
Federal funds sold............... 18,090 -- -- -- -- 18,090
-------- -------- ------- ------- ----------- --------
Total.......................... 157,332 11,101 15,759 81,035 42,735 307,962
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits....................... 45,627 -- -- -- -- 45,627
Savings deposits................. 89,931 -- -- -- -- 89,931
Time deposits.................... 39,491 12,944 12,436 10,208 20 75,099
Borrowed funds................... 1,816 -- -- -- 370 2,186
-------- -------- -------- -------- --------- --------
Total.......................... 176,865 12,944 12,436 10,208 390 212,843
Interest rate-sensitivity gap...... (19,533) (1,843) 3,323 70,827 42,345 $ 95,119
Cumulative interest rate
sensitivity gap.................. $(19,533) $(21,376) $(18,053) $52,774 $95,119
Interest rate-sensitivity
gap ratio........................ .89x .86x 1.27x 7.94x 109.58x 1.45x
Cumulative interest rate
sensitivity gap ratio............ .89x .89x .91x 1.25x 1.45x
As of June 30, 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.
17
CAPITAL RESOURCES
Stockholders' equity increased 7% to $32.2 million at June 30, 1999 from
$30.0 million at December 31, 1998. The increase in equity consists of net
income of $2.2 million, an increase of $49,000 from the exercise of stock
options, partly offset by a decrease in net unrealized gain (loss) on
available for sale securities of $128,000. The following table provides
information with respect to the Company's and the Bank's regulatory capital
ratios and regulatory minimum requirements:
TABLE NINE - CAPITAL RATIOS
MINIMUM
JUNE 30, DECEMBER 31, REQUIRED
1999 1998 RATIOS
-------- ------------ ----------
NORTH COUNTY BANCORP
Risk-based capital
Tier 1 11.73% 11.68% 4.00%
Total 12.98% 12.93% 8.00%
Tier 1 leverage capital 9.34% 8.80% 4.00%
NORTH COUNTY BANK
Risk-based capital
Tier 1 11.54% 11.58% 4.00%
Total 12.79% 12.83% 8.00%
Tier 1 leverage capital 9.20% 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.
18
PART II - OTHER INFORMATION
All items of Part II other than Items 4 and 6 below are either inapplicable
or would be responded to in the negative.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
North County Bancorp held its Annual Meeting of Shareholders on June 16, 1999,
at which the following nine directors were elected.
Alan P. Chamberlain Jack Port
G. Bruce Dunn Clarence R. Smith
Ronald K. Goode Raymond V. Stone
James M. Gregg Burnet F. Wohlford
Rodney D. Jones
All directors are elected each year at the Annual Meeting and hold office
until the next Annual Meeting or until their successors are elected.
The following table describes the number of affirmative and negative votes
cast (largest tally) with respect to the election.
AFFIRMATIVE VOTES NEGATIVE VOTES
----------------- --------------
4,139,421 18,740
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.
19
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: AUGUST 6, 1999
- ----------------------------------------- --------------
Michael J. Gilligan
Vice President & Chief Financial Officer
20