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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
--------------------------------
--- TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10627
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NORTH COUNTY BANCORP
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(Exact name of small business issuer as specified in its charter)
California 95-3669135
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 S. Escondido Blvd., P.O.Box 1476, Escondido, California 92025
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 743-2200
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of November 3, 1995 the Registrant had 1,789,778 shares of no
par value common stock issued and outstanding.
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NORTH COUNTY BANCORP
Page
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Part I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statement of Financial Condition -
September 30, 1995 and December 31, 1994 2
Consolidated Statement of Income -
Three Months Ended and Nine months Ended
September 30, 1995 and 1994 3
Consolidated Statement of Cash Flows -
Nine months Ended September 30, 1995
and September 30,1994 4
Notes to Consolidated Financial Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
1
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NORTH COUNTY BANCORP
Part I - Financial Information
------------------------------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------- -------------
(Unaudited)
<S> <C> <C>
Assets
------
Cash and cash equivalents:
Cash and due from banks $ 21,070,000 $ 30,553,000
Federal funds sold 8,000,000 2,500,000
-------------- -------------
29,070,000 33,053,000
Investment securities:
Held to maturity 7,940,000 11,566,000
Available for sale 14,839,000 15,602,000
Mortgage loans held for sale -- 1,772,000
Loans, net 162,051,000 163,870,000
Other real estate owned 2,610,000 3,607,000
Premises and equipment, net 9,790,000 10,386,000
Other assets 7,576,000 6,984,000
-------------- -------------
$233,875,000 $246,840,000
-------------- -------------
-------------- -------------
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Non-interest bearing $ 67,641,000 $ 79,651,000
Interest bearing 143,270,000 146,450,000
-------------- -------------
210,911,000 226,101,000
Accrued expenses and other liabilities 1,651,000 1,211,000
Short term borrowings 1,047,000 2,103,000
Notes payable 1,500,000 1,500,000
Capital lease obligation 469,000 491,000
Convertible subordinated debentures 1,678,000 1,678,000
-------------- -------------
Total liabilities 217,256,000 233,084,000
-------------- -------------
Stockholders' equity:
Common stock, no par value,
Authorized, 5,000,000 shares;
Outstanding shares 1,789,778 in 1995
and 1,549,709 in 1994 9,156,000 7,380,000
Retained earnings 7,463,000 6,376,000
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Total stockholders' equity 16,619,000 13,756,000
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$233,875,000 $246,840,000
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
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NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $4,427,000 $4,227,000 $13,332,000 $12,211,000
Investment securities 231,000 258,000 868,000 577,000
Federal funds sold 173,000 142,000 239,000 292,000
Deposits with other financial institutions --- 1,000 2,000 2,000
---------- ---------- ----------- -----------
Total interest income 4,831,000 4,628,000 14,441,000 13,082,000
---------- ---------- ----------- -----------
Interest expense:
Deposits 1,251,000 1,097,000 3,523,000 2,935,000
Federal funds purchased 1,000 --- 33,000 1,000
U.S. Treasury demand note 12,000 13,000 46,000 35,000
Long term debt 87,000 96,000 259,000 270,000
---------- ---------- ----------- -----------
Total interest expense 1,351,000 1,206,000 3,861,000 3,241,000
---------- ---------- ----------- -----------
Net interest income 3,480,000 3,422,000 10,580,000 9,841,000
Provision for loan losses 925,000 800,000 2,661,000 1,160,000
---------- ---------- ----------- -----------
Net interest income after provision
for loan losses 2,555,000 2,622,000 7,919,000 8,681,000
Other income 1,634,000 2,480,000 5,017,000 5,131,000
Other expense 4,134,000 3,914,000 11,828,000 12,140,000
---------- ---------- ----------- -----------
Income before income taxes 55,000 1,188,000 1,108,000 1,672,000
Provision for income taxes (59,000) 579,000 229,000 716,000
---------- ---------- ----------- -----------
Net income $ 114,000 $ 609,000 $ 879,000 $ 956,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Primary earnings per share $ 0.07 $ 0.39 $ 0.56 $ 0.62
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Fully diluted earnings per share $ 0.07 $ 0.36 $ 0.53 $ .59
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
3
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NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 879,000 $ 956,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 1,132,000 999,000
Deferred loan fees and costs, net (80,000) (395,000)
Investment premiums and discounts, net 25,000 164,000
Loan servicing rights 240,000 271,000
Other 37,000 38,000
Provision for loan loss 2,661,000 1,160,000
Origination of mortgage loans for sale (344,000) (3,362,000)
Proceeds from sale of mortgage loans 357,000 4,338,000
Gain on sale of mortgage loans and loan servicing (13,000) 2,461,000
Loss on sale of investment securities 11,000 --
Decrease (increase) in interest receivable 178,000 (228,000)
(Decrease) increase in taxes payable (143,000) 87,000
Increase in accrued expenses 127,000 328,000
Increase in interest payable 312,000 210,000
Other, net 331,000 (804,000)
------------ ------------
Net cash provided by operating activities 5,710,000 6,223,000
------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities of investment securities 13,559,000 2,306,000
Purchase of investment securities (9,206,000) (14,488,000)
Net (increase) decrease in loans (1,827,000) 944,000
Purchase of premises and equipment (536,000) (1,947,000)
Proceeds from sale of other real estate owned 2,808,000 3,583,000
Net cash provided by (used in) investing activities 4,798,000 (9,602,000)
Cash flows from financing activities:
Cash payments on notes payable and capital lease obligations (21,000) (8,000)
Net (decrease) increase in deposits (15,191,000) 12,881,000
Net (decrease) increase in short term borrowings (1,055,000) 185,000
Net decrease in long term borrowings -- (139,000)
Cash proceeds from sale of common stock 1,776,000 --
------------ ------------
Net cash (used in) provided by financing activities (14,491,000) 12,919,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,983,000) 9,540,000
Cash and cash equivalents at beginning of year 33,053,000 37,606,000
------------ ------------
Cash and cash equivalents at end of period $ 29,070,000 $ 47,146,000
------------ ------------
------------ ------------
Disclosures:
Total interest paid $ 3,549,000 $ 3,777,000
------------ ------------
------------ ------------
Total taxes paid $ 485,000 $ 514,000
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------------ ------------
Foreclosed real estate loans $ 2,836,000 $ 681,000
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------------ ------------
</TABLE>
4
See accompanying notes to consolidated financial statements.
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NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with the
Securities and Exchange Commission rules and regulations for quarterly reporting
and therefore does not necessarily include all information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. This information should be read
in conjunction with the Company's Annual Report for the year ended December 31,
1994.
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 month and nine month periods ended
September 30, 1995 and 1994, reflect all adjustments, consisting only of normal
recurring accruals and provisions, necessary for a fair presentation thereof.
NOTE 2 - EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common stock
and common stock equivalent shares outstanding adjusted retroactively for stock
dividends. The weighted average number of shares outstanding for primary
earnings per share was 1,638,475 and 1,581,995 for the three and nine months
ended September 30, 1995, respectively, and 1,549,709 for the three and nine
months ended September 30, 1994. The calculation of fully diluted earnings per
share assumes the issuance of 203,888 shares of common stock upon conversion of
the Company's convertible subordinated debentures. The weighted average number
of shares outstanding for fully diluted earnings per share was 1,842,363 and
1,785,884 for the three and nine months ended September 30, 1995, respectively,
and 1,753,597 for the three and nine months ended September 30, 1994.
NOTE 3 - INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Accounting Standards
No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity
Securities. SFAS 115 requires that upon acquisition, an investment security be
classified as "held to maturity," "available for sale," or "trading."
Generally, investments classified as "held to maturity" are carried at amortized
cost, investments classified as "available for sale" are carried at market
value, with the unrealized gain or loss, net of tax effects, reflected as a
separate component of stockholders' equity, and investments classified as "
trading" are carried at market value, with the unrealized gain or loss reflected
in the income statement.
NOTE 4 - LOANS
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standard No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended. SFAS 114 requires that impaired loans be measured (1) at the present
value of expected future cash flows discounted at the loan's effective interest
rate, (2) at the loan's observable market price, or (3) at the fair value of the
collateral if the loan is collateral dependent. The Company's recorded
investment in impaired loans at September 30, 1995 was $4,527,000 for which it
had established reserves of $341,000.
NOTE 5 - NOTES PAYABLE AND CONVERTIBLE SUBORDINATED DEBENTURES
Notes payable at September 30, 1995 included $1,000,000 and $500,000 outstanding
under two term notes with directors of the Company. Both notes are unsecured
and carry a fixed interest rate of 8.00%. Terms on the $1,000,000 note consist
of quarterly interest payments commencing April 1, 1996, with final repayment on
January 1, 1999 of principal and interest
5
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in full. Terms for the $500,000 note call for principal and interest payments
beginning October 1, 1995 until paid in full on July 1, 1998.
In May, 1990 the Company issued $1,678,000 in 9 1/4% convertible subordinated
debentures (the "Debentures") which mature on May 15, 2002. Interest is payable
semiannually on May 15 and November 15. The debentures are convertible at the
option of the holder into Common Stock of the Company at a conversion price of
$8.23 per share, subject to adjustment for stock splits, stock dividends or
certain other events. The debentures are redeemable in whole or in part at the
option of the Company at declining redemption prices that range from 104.25% at
September 30, 1995 to par on or after May 15, 1999. Underwriting discounts and
expenses totaling $259,000 associated with the issuance were capitalized and are
being amortized over the life of the debentures. The debentures are
subordinated to deposits and other liabilities incurred by the Company in the
normal course of business. Under current regulatory capital guidelines the
debentures are included as part of regulatory capital. The dentures qualify as
Tier 2 capital under risk-based capital guidelines.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
At September 30, 1995, the Bank was party to certain legal actions. The Company
has reviewed these matters with legal counsel and, in management's opinion, the
ultimate resolution of these actions will not have a material effect on the
Company's financial position.
At September 30, 1995, the Company had unsecured lines of credit totaling
$5,000,000 for the purchase of Federal funds with other financial institutions
and may borrow funds at a correspondent financial institution and at the Federal
Reserve discount window, subject to the Bank's ability to supply collateral.
6
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
North County Bancorp (the "Company") has one wholly owned subsidiary, North
County Bank (the "Bank"). North County Bank's operations are the only
significant operations of the Company.
FINANCIAL CONDITION
Total assets of the Company decreased $12.9 million or 5.3% to $233.9
million at September 30, 1995, from $246.8 million at December 31, 1994.
Cash and cash equivalents showed an overall decrease of 12.0% or $4 million.
Within this category cash and due from banks, which does not earn interest,
decreased 31.0% or $9.4 million to $21.1 million at period end from $30.6
million at the end of 1994. A portion of these funds, $5.5 million, were
moved into Federal funds sold which increased 220.0% during this same time
frame. This was a result of the Company's efforts to decrease float and
improve cash management. Investment securities decreased $4.4 million or
16.2% to $22.8 million at September 30, 1995 from $27.2 million at the end of
the year. The decrease was caused by $9.1 million in maturities and $4.5
million from the sale of investments in May offset by the purchase of
securities totaling $9.2 million during the period. The security sale was a
temporary measure taken to meet short term liquidity needs that were
eventually abated by a regularly scheduled sale of Title I loans in June.
Net loans decreased 1.1% or $1.8 million to $162.1 million at period end from
$163.9 million at the end of 1994. Despite recent declines in interest rates
making borrowing more attractive, the Company continues to experience poor
demand for commercial, mortgage and consumer financing due to the sluggish
economy and low level of consumer confidence. A depressed residential
lending market precipitated the Company's decision to close its residential
real estate division during the first quarter of 1995 as reflected by the
$1.8 million or 100% decline in mortgage loans held for sale. Other real
estate owned decreased 27.6% or $1 million to $2.6 million from $3.6 million
during the first nine months of 1995. In spite of the slow real estate
market the Company was able to sell fifteen properties which totaled $2.5
million from its other real estate owned portfolio. These sales have been
partially offset by new foreclosures during the first nine months of 1995.
Total deposits at September 30, 1995 decreased $15.2 million or 6.7% from
December 31, 1994. Most of the reduction was in demand deposits which
decreased $12.1 million or 15.1% to $67.6 million at period end from $79.7
million at the end of 1994. The drop in demand deposits was due to the loss of
several title and escrow company accounts. Management informed these depositors
during the latter part of 1994, that it intended to stop offering certain
customer services consisting primarily of data processing and courier services
prompting these customers to seek relationships with other institutions willing
to offer these services. Interest bearing deposits also decreased $3.2 million
or 2.2% to $143.3 million from $146.5 million at December 31, 1994. The overall
drop in interest bearing deposits by category was as follows: savings and money
market accounts decreased $12.5 million or 14.2%, NOW accounts decreased
$361,000 or 1.1%, and an increase in time deposits of $9.7 million or 24.3% of
which $2.2 million was in certificates of deposits of $100,000 or more. The
U.S. Treasury demand note account decreased $1.1 million or 50.2% to $1 million
at September 30, 1995 from $2.1 million at the end of 1994. This was due to the
management's efforts to reduce interest expense and relieve excess liquidity.
Total stockholders' equity at September 30, 1995 was $16.6 million as compared
to $13.8 million at December 31, 1994, an increase of $2.8 million or 20.8%.
The Company successfully completed a sale of common stock through a private
placement offering in August which raised $1.7 million (See CAPITAL RESOURCES).
The remainder of the growth in equity consisted of $879,000 in earnings,
$208,000 from a decrease in net unrealized losses on available for sale
securities, and $87,000 from the exercise of stock options by Company
directors. The Company's Tier I risk based capital, total risk based capital
and Tier I leverage capital ratios were 8.50%, 10.62% and 7.08%, respectively at
September 30, 1995, as compared to 6.99%, 9.10% and 5.47%, respectively at
December 31, 1994. The Bank's Tier I risk based capital, total risk based
capital and Tier I leverage capital ratios were 9.70%, 10.95% and 8.05%,
respectively at September 30, 1995, as compared to 8.35%, 9.60% and 6.52%,
respectively at December 31, 1994.
7
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RESULTS OF OPERATIONS
SUMMARY
Net income for the nine months ended September 30, 1995 decreased $77,000 or
8.1% to $879,000 from $956,000 for the same period in 1994. The decrease is
attributable to a number of factors. The provision for loan loss increased $1.5
million or 129.4% to $2.7 million from $1.2 million. This was partially offset
by net interest income which increased $739,000 or 7.5% and other expenses which
decreased $312,000 or 2.6%. Return on average assets and average stockholders'
equity for the first nine months of 1995 were .51% and 7.06%, respectively,
compared to .53% and 9.01%, respectively for the same 1994 period. Primary and
fully diluted earnings per share for the first nine months of 1995 decreased to
$.56 and .53, respectively, from $.62 and $.59, respectively for the same 1994
period. (See RESULTS OF OPERATIONS -- PROVISION FOR POSSIBLE LOAN LOSSES,
RESULTS OF OPERATION -- NONPERFORMING ASSETS, and RESULTS OF OPERATIONS -- OTHER
INCOME AND EXPENSE.)
For the three months ended September 30, 1995, the Company recorded net income
of $114,000 compared to $609,000 for the third quarter of 1994. Primary and
fully diluted earnings per share for the third quarter of 1995 decreased to $.07
each from $.39 and $.36, respectively for the same 1994 period. Pretax income
for the third quarter of 1995 was down $1.1 million or 95.4% to $55,000 from
$1.2 million for the same quarter last year. The decrease in third quarter
earnings is largely due to a decrease in gains on the sale of loans as
discussed more fully below (See RESULTS OF OPERATIONS -- OTHER INCOME AND
EXPENSE.)
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 1995 increased
$739,000 to $10.6 million as compared $9.8 million for the first nine months of
1994. Generally higher short term interest rates over the past year improved
the taxable equivalent yield on earning assets to 10.05% at September 30, 1995
from 8.91% for the same 1994 period. During this time period the tax equivalent
yield on loans increased to 10.77% from 9.83%. The yield on the investment
portfolio increased to 5.58% from 3.94%. The net tax equivalent interest margin
(net interest income as a percentage of average interest-earning assets) was
7.45% and 6.72% for the nine months ended September 30, 1995 and 1994
respectively.
Deposit rates also increased during this time period but not at the same rate as
loans and investment securities. Interest expense increased $620,000 or 19.1% to
$3.9 million during the first nine months of 1995 as compared to the same period
in 1994. Interest expense on deposits increased $587,000 or 20% during this
same time period. The yield on average interest bearing deposits increased to
3.30% for the nine months ended September 30, 1995 compared to 2.66% for the
same period last year. The average rate paid on all interest bearing
liabilities increased to 3.39% for the nine months ended September 30, 1995,
from 2.84% for the same 1994 period.
OTHER INCOME AND OTHER EXPENSE
Other income decreased $114,000 and other expense decreased $312,000 for the
nine months ended September 30, 1995 as compared to the same 1994 period. The
decrease in other income is attributable to a decrease of $844,000 or 34.3% in
gains from the sale of loans. Gains from the sales of Title I and SBA loans
decreased $338,000 and $449,000, respectively, to $613,000 and $991,000,
respectively. The decrease in gain on loan sales for 1995 as compared to 1994
occurred primarily in the third quarter of 1995. Total Title I loan sales for
the first nine months of 1995 were $20.2 million as compared to $25.3 million
during the same 1994 period. The Company sold $436,000 in Title I loans during
the third quarter of 1995 for gains of $16,000 as compared to sales of $16.2
million which realized $804,000 in gains during the third quarter of 1994. The
Company elected to retain Title I loans in its portfolio during the third
quarter of this year due both to the lack of loan demand and the attractive
yields on this product. A change in accounting method contributed approximately
$569,000 to the SBA gains recorded during the third quarter of 1994. The
decrease in gain from the sale of loans was partially offset by an increase in
service charges on deposit accounts of $512,000 or 28.7% to $2.3 million for the
first nine months of 1995
8
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from $1.8 million during the same 1994 period. The increase in service charges
is largely due to a renewed emphasis by management on analyzing customer
profitability and collecting service charges. Other expense consists primarily
of salaries and employee benefits which decreased $195,000 to $5.7 million,
occupancy expense which increased $221,000 to $2.6 million, advertising and
other public relations which decreased $371,000 to $338,000, and other real
estate owned expense which decreased $49,000 to $652,000. The overall reduction
in other expenses in 1995 is due in part to vigorous cost containment and
reduction measures implemented by management to reduce overhead costs.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the nine months ended September 30, 1995 was
$2.7 million compared to $1.2 million for the comparable 1994 period. The
amount of the provision reflects management's judgement as to the adequacy of
the reserve for loan losses and is generally determined by the periodic review
of the loan portfolio, the Bank's loan loss experience, and current and expected
economic conditions. The increase in the provision for loan loss reflects an
increase in net charge offs to $2.6 million for the first nine months of 1995 as
compared to $1.4 million for the same prior year period. The annualized ratio of
net charge offs to total loans was 2.24%, 1.54% and 1.15% at September 30,
1995, December 31, 1994, and September 30, 1994, respectively. The loan loss
reserve was 1.70%, 1.63% and 1.20% of total gross loans at September 30, 1995,
December 31, 1994 and September 30, 1994, 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 possible loan
losses is adequate to absorb losses as they arise, there can be no assurance
that the Company will not sustain losses in any given period which could be
substantial in relation to the size of the reserve for possible loan losses.
NONPERFORMING ASSETS
The following table provides information with respect to the components of the
Company's nonperforming assets at September 30, 1995 and December 31, 1994:
September 30, December 31,
1995 1994
---------- ------------
Loans 90 days or more past due
and still accruing:
Installment and consumer $ -- $ 14
------ ------
Total -- 14
Nonaccrual loans:
Conventional real estate 518 1,187
Real estate construction 1,557 1,389
Commercial 1,516 1,775
Installment and consumer 1,075 767
------ ------
Total 4,666 5,118
------ ------
Total nonperforming loans 4,666 5,132
Other real estate owned 2,610 3,607
------ ------
Total nonperforming assets $7,276 $8,739
------ ------
------ ------
Nonperforming assets to total
gross loans plus other real
estate owned 4.34% 5.08%
------ ------
------ ------
9
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The Company considers a loan to be nonperforming when any one of the following
events occurs: (a) any installment of principal or interest is 90 days past due;
(b) the full timely collection of interest or principal becomes uncertain; (c)
the loan is classified as "doubtful" by bank examiners; or (d) a portion of its
principal balance has been charged-off. The Company's policy is to classify
loans which are 90 days past due as nonaccrual loans unless Management
determines that the loan is adequately collateralized and in the process of
collection or other circumstances exist which would justify the treatment of the
loan as fully collectible.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The liquidity of a banking institution reflects its ability to provide funds to
meet customer credit needs, to accommodate possible outflows in deposits, to
provide funds for day-to-day operations, and to take advantage of interest rate
market opportunities. Asset liquidity is provided by cash, certificates of
deposit with other financial institutions, Federal funds sold, investment
maturities and sales and loan maturities, repayments and sales. Liquid assets
(consisting of cash, Federal funds sold and investment securities) comprised
22.2% and 24.4% of the Company's total assets at September 30, 1995 and December
31, 1994, respectively. Liquidity management also includes the management of
unfunded commitments to make loans and undisbursed amounts under lines of
credit. At September 30, 1995, these commitments totaled $22.2 million in
commercial loans, $2.5 million in letters of credit, $4.7 million in real estate
construction loans, and $8.9 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 $5.0 million for
the purchase of Federal funds with other financial institutions and may borrow
funds at a correspondent financial institution and the Federal Reserve discount
window, subject to the Bank's ability to supply collateral.
Asset/Liability Management involves minimizing the impact of interest rate
changes on the Company's earnings through the management of the amount,
composition and repricing periods of rate sensitive assets and rate sensitive
liabilities. Emphasis is placed on maintaining a rate sensitivity position
within the Company's policy guidelines to avoid wide swings in spreads and to
minimize risk due to changes in interest rates. At September 30, 1995
approximately 58% of the Company's interest earning assets have interest rate
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 sale and servicing of
mortgage loans.
10
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CAPITAL RESOURCES
Stockholders' equity increased 20.8% to $16.6 million at September 30, 1995 from
$13.8 million at December 31, 1994. The Company raised $1.7 million from the
sale of 228,194 shares of common stock in a private placement offering during
the third quarter of 1995. As a result the Company contributed $1 million to
the Bank's capital surplus. The exercise of stock options by Company directors
raised an additional $87,000. Additional increases to equity came from net
income of $879,000 and a reduction in net unrealized losses on available for
sale securities of $208,000 for the nine months ended September 30, 1995.
In December 1988 the Federal Reserve Board (FRB) and the Federal Deposit
Insurance Corporation (FDIC) adopted the final risk-based capital guidelines for
banks and bank holding companies effective December 31, 1990. The guidelines
consist of a definition of capital, a system for assigning assets and off-
balance sheet items to risk categories, and a schedule for phasing in a minimum
risk-based capital ratio. Under these guidelines the Company and the Bank are
required to maintain a minimum ratio of total capital to risk-weighted assets of
8% (of which at least 4% must consist of Tier 1 capital). The Company's risk-
based capital ratios at September 30, 1995 were 8.50% for Tier 1 capital and
10.62% for total capital and the Bank's risk-based capital ratios were 9.70% for
Tier 1 capital and 10.95% for total capital. At December 31, 1994 the Company's
risk-based capital ratios were 6.99% for Tier 1 capital and 9.10% for total
capital and the Bank's risk-based capital ratios were 8.35% for Tier 1 capital
and 9.60% for total capital.
The FRB and the FDIC have also adopted minimum Tier 1 leverage capital ratio
requirements supplementing the risked-based capital regulations and replacing
minimum leverage ratios used prior to 1990. The rules require a minimum ratio
of Tier 1 capital to total assets of 3.00% for institutions receiving the
highest regulatory ratings. All other institutions are required to meet a
minimum ratio of 4% to 5%. Tier 1 capital consists of common equity, minority
interest in equity of consolidated subsidiaries, and qualifying perpetual
preferred stock. At September 30, 1995 and December 31, 1994, the Company's
Tier 1 leverage capital ratios were 7.08% and 5.47%, respectively. In April
1995 the Bank signed an agreement with the FDIC by which, among other things,
the Bank agreed to maintain a ratio of Tier 1 capital to adjusted total assets
of (I) at least seven and one-quarter percent (7.25%) by September 30, 1995 and
(ii) at least seven and one-half percent (7.50%) by September 30, 1995. The
Bank's Tier 1 leverage capital ratios were 8.05% and 6.52% at September 30, 1995
and December 31, 1994, respectively.
At September 30, 1995, the Company had $1.7 million in 9 1/4% Convertible
Subordinated Debentures ("Debentures") due May 15, 2002 outstanding. The
debentures are convertible at the option of the holder into common stock of the
Company at a conversion price $8.23 per share, subject to adjustments for stock
splits, stock dividends or other certain events. The debentures are redeemable,
in whole or in part, at the option of the Company at declining redemption prices
that range from 106.25% at September 30, 1995 to par on or after May 15, 1999.
Under the risk-based capital regulations the debentures qualify as Tier 2
capital. The Company used a portion of the proceeds of the debentures to
purchase $1.5 million of noncumulative perpetual preferred stock from the Bank,
increasing the Bank's capital ratios. Additionally, the Company had $1.5
million outstanding under two term notes with directors of the Company as of
September 30, 1995. The notes are unsecured and have a fixed interest rate of
8.00%. The notes have varying interest and principal payment schedules and
mature on January 1, 1999. The Company also used the proceeds of these notes to
purchase $1.5 million of noncumulative perpetual preferred stock from the Bank.
Management anticipates no significant capital expenditures during 1995.
11
<PAGE>
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.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH COUNTY BANCORP
(Registrant)
/s/ MICHAEL J. GILLIGAN Date: November 6, 1995
- ------------------------------- ----------------
Michael J. Gilligan
Vice President & Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR SEPTEMBER 30, 1995,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000357262
<NAME> NORTH COUNTY BANCORP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 21,070,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,839,000
<INVESTMENTS-CARRYING> 7,940,000
<INVESTMENTS-MARKET> 7,939,000
<LOANS> 164,856,000
<ALLOWANCE> 2,805,000
<TOTAL-ASSETS> 233,875,000
<DEPOSITS> 210,911,000
<SHORT-TERM> 1,047,000
<LIABILITIES-OTHER> 1,651,000
<LONG-TERM> 3,647,000
<COMMON> 9,156,000
0
0
<OTHER-SE> 7,463,000
<TOTAL-LIABILITIES-AND-EQUITY> 16,619,000
<INTEREST-LOAN> 13,332,000
<INTEREST-INVEST> 868,000
<INTEREST-OTHER> 241,000
<INTEREST-TOTAL> 14,441,000
<INTEREST-DEPOSIT> 3,523,000
<INTEREST-EXPENSE> 3,861,000
<INTEREST-INCOME-NET> 10,580,000
<LOAN-LOSSES> 2,661,000
<SECURITIES-GAINS> (11,000)
<EXPENSE-OTHER> 11,817,000
<INCOME-PRETAX> 1,108,000
<INCOME-PRE-EXTRAORDINARY> 1,108,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 879,000
<EPS-PRIMARY> .56
<EPS-DILUTED> .53
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<LOANS-NON> 4,666,000
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