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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-----------------------------------------
-- 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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (760) 743-2200
------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 5, 1997 the Registrant had 4,416,682 shares of no par value
common stock issued and outstanding.
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NORTH COUNTY BANCORP
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Page
Part I FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 2
Consolidated Statement of Income -
Three Months Ended and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
---------------------------------------------
Part II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 11
1
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NORTH COUNTY BANCORP
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION> September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents:
Cash and due from banks $ 25,690,000 $ 25,936,000
Federal funds sold 9,000,000 2,200,000
------------- ------------
34,690,000 28,136,000
Investment securities:
Available for sale 21,644,000 23,117,000
Held to maturity 11,360,000 11,344,000
Loans, net 202,518,000 177,281,000
Other real estate owned 1,752,000 2,756,000
Premises and equipment, net 8,262,000 8,710,000
Accrued interest receivable and other assets 5,645,000 5,962,000
------------- ------------
$285,871,000 $257,306,000
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------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Non-interest bearing $ 83,990,000 $ 83,937,000
Interest bearing 170,030,000 145,407,000
------------- ------------
254,020,000 229,344,000
Accrued expenses and other liabilities 4,765,000 1,901,000
Fed funds purchased, repurchase agreements and
U.S. Treasury demand note 2,464,000 2,376,000
Notes payable -- 1,550,000
Capital lease obligation 419,000 429,000
Convertible subordinated debentures 1,266,000 1,534,000
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Total liabilities 262,934,000 237,134,000
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Stockholders' equity:
Common stock, no par value,
Authorized, 10,000,000 shares;
Outstanding shares 4,079,545 in 1997
and 4,006,386 in 1996 12,008,000 11,758,000
Retained earnings 10,905,000 8,500,000
Unrealized loss on available for sale securities, net of tax 24,000 (86,000)
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Total stockholders' equity 22,937,000 20,172,000
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$285,871,000 $257,306,000
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</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,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $5,231,000 $4,506,000 $14,569,000 $13,151,000
Investment securities 460,000 410,000 1,379,000 1,155,000
Federal funds sold 139,000 133,000 337,000 288,000
Deposits with other financial institutions 7,000 -- 16,000 --
---------- ---------- ---------- ----------
Total interest income 5,837,000 5,049,000 16,301,000 14,594,000
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,520,000 1,211,000 4,235,000 3,474,000
Fed funds purchased, repurchase agreements and
U.S. Treasury demand note 11,000 25,000 59,000 47,000
Long term debt 49,000 86,000 193,000 259,000
---------- ---------- ---------- ----------
Total interest expense 1,580,000 1,322,000 4,487,000 3,780,000
---------- ---------- ---------- ----------
Net interest income 4,257,000 3,727,000 11,814,000 10,814,000
Provision for loan losses 104,000 100,000 722,000 1,100,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,153,000 3,627,000 11,092,000 9,714,000
Other income 1,748,000 1,679,000 4,886,000 5,384,000
Other expense 4,264,000 3,834,000 11,958,000 11,541,000
---------- ---------- ---------- ----------
Income before income taxes 1,637,000 1,472,000 4,020,000 3,557,000
Provision for income taxes 695,000 570,000 1,615,000 1,455,000
---------- ---------- ---------- ----------
Net income $ 942,000 $ 902,000 $ 2,405,000 $ 2,102,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Primary earnings per share $ 0.23 $ 0.22 $ 0.58 $ 0.52
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted earnings per share $ 0.21 $ 0.21 $ 0.55 $ 0.49
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,405,000 $2,102,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 977,000 1,012,000
Deferred loan fees and costs, net (276,000) (362,000)
Investment premiums and discounts, net 103,000 73,000
Loan servicing rights 78,000 164,000
Other 57,000 38,000
Provision for loan and lease losses 722,000 1,100,000
Decrease in interest receivable 53,000 24,000
Increase (decrease) in taxes payable 330,000 (70,000)
Increase (decrease) in accrued expenses 2,179,000 (220,000)
Increase in interest payable 376,000 342,000
Increase in SBA loan sales receivable -- 8,000
Other, net 3,000 (1,186,000)
------------ -----------
Net cash provided by operating activities 7,007,000 3,025,000
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Cash flows from investing activities:
Proceeds from sales and maturities of investment securities 17,863,000 11,262,000
Purchase of investment securities (16,531,000) (17,007,000)
Net increase in loans (26,492,000) (16,172,000)
Purchase of premises and equipment (529,000) (460,000)
Proceeds from sale of other real estate owned 2,050,000 2,038,000
------------ ------------
Net cash used in investing activities (23,639,000) (20,339,000)
------------ ------------
Cash flows from financing activities:
Cash payments on notes payable and capital lease obligations (10,000) (24,000)
Net increase in deposits 24,676,000 15,399,000
Net increase in short term borrowings 88,000 3,735,000
Net decrease (increase) in long term borrowings (1,818,000) 68,000
Cash proceeds from issuance of common stock 250,000 38,000
------------ ------------
Net cash provided by financing activities 23,186,000 19,216,000
------------ ------------
Net increase in cash and cash equivalents 6,554,000 1,902,000
Cash and cash equivalents at beginning of year 28,136,000 34,733,000
------------ ------------
Cash and cash equivalents at end of period $ 34,690,000 $ 36,635,000
------------ ------------
------------ ------------
Disclosures:
Total interest paid $4,111,000 $ 3,772,000
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------------ ------------
Total taxes paid $ 1,172,000 $ 1,874,000
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Foreclosed real estate loans $ 810,000 $ 2,274,000
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</TABLE>
See accompanying notes to consolidated financial statements.
4
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NORTH COUNTY BANCORP
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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, 1996.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management,
the unaudited financial information for the three and nine month periods
ended September 30, 1997 and 1996, 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 4,154,033 and 4,138,932 for the three and nine
months ended September 30, 1997, respectively, and 4,017,113 and 4,010,420
for the three and nine months ended September 30, 1996, respectively. The
calculation of fully diluted earnings per share assumes the issuance of
338,503 and 441,954 shares of common stock at September 30, 1997 and 1996,
respectively, upon conversion of the Company's convertible subordinated
debentures. The weighted average number of shares outstanding for fully
diluted earnings per share was 4,497,115 and 4,489,611 for the three and nine
months ended September 30, 1997, respectively, and 4,466,201 and 4,459,508 for
the three and nine months ended September 30, 1996, respectively.
NOTE 3 - STOCK SPLIT
- --------------------
On February 19, 1997, the Company declared a two for one stock split to
stockholders effective March 14, 1997. This resulted in the issuance of
2,005,956 shares of common stock.
NOTE 4 - REDEMPTION OF CONVERTIBLE SUBORDINATED DEBENTURES
- ----------------------------------------------------------
The Company exercised its option to redeem its 9 1/4% Convertible
Subordinated Debentures due May 15, 2002 (the "Debentures") at a price of
102.25% effective October 31, 1997. The redemption offer did not restrict
the holders' ability to convert the Debentures into common stock of the
Company prior to October 28, 1997 in accordance with the terms of the
Debentures at a conversion price of $3.74. At September 30, 1997, the
Company had $1,266,000 in Debentures outstanding of which amount holders of
$1,261,000 opted for conversion into 337,137 shares of common stock prior to
the final redemption date and on October 31, 1997, $5,000 was redeemed for
$5,112.50.
5
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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. The accompanying financial
information should be read in conjunction with the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
FINANCIAL CONDITION
-------------------
Total assets of the Company increased $28.6 million or 11.1% to $285.9
million at September 30, 1997, from $257.3 million at December 31, 1996.
Federal funds sold increased $6.8 million or 309.1%. Gross loans increased
$25.6 million or 14.2% to $206.0 million at period end from $180.4 million at
the end of 1996. The increase in the loan portfolio continues to be primarily
in SBA loans which increased $17.8 million or 60.3% to $47.3 million. Other
loan category increases included other commercial loans which increased $2.8
million or 5.4% to $55.0 million, commercial real estate loans which
increased $6.5 million or 18.5% to $41.5 million and construction loans which
increased $3.3 million or 95.5% to $6.8 million. These increases were
partially offset by declines in consumer lending of $2.6 million or 4.9% to
$51.2 million, municipal lease financing of $835,000 or 35.9% to $1.5 million
and residential mortgage loans of $1.1 million or 31.5% to $2.3 million.
Total commercial loans, including SBA loans, increased to 49.6% as a
percentage of gross loans from 45.3% at year end. Consumer loans declined to
24.8% of gross loans compared to 29.8% at year end. The Company continues to
experience poor demand for consumer financing primarily due to increased
competition from non-bank lenders as well as other, mostly larger financial
institutions in its market area. To fund the increase in the loan portfolio
the Company ran a local deposit promotion during March of 1997 that raised
approximately $17.0 million in seven month certificates of deposit. In
addition to funding loan growth, the promotion was aimed at increasing the
Company's market share by developing new business and expanding existing
customer relationships. Other real estate owned decreased $1.0 million in
the first nine months of 1997 to $1.8 million from $2.8 million due to the
sale of ten properties with a carrying value of $1.7 million partially offset
by foreclosures of three additional properties that totaled $810,000.
Total deposits at September 30, 1997 increased $24.7 million or 10.8% from
December 31, 1996. The growth in deposits was centered in time deposits
which grew $19.5 or 51.8% to $57.0 million from $37.5 million year end due to
the deposit promotion discussed above. Total time deposits at the end of
September were 22.4% of total deposits compared to 16.4% at the end of 1996.
In the other interest-bearing deposit categories, NOW accounts increased $3.6
million and savings and money market accounts increased $1.6 million. Demand
deposits which were fairly static in total, increasing only $100,000 in the
first nine months, accounted for 33.1% of total deposits compared to 36.6% at
the end of 1996. The Company had two term notes outstanding at December 31,
1996 that totaled $1.6 million which were paid in full in the first half of
1997. (See "CAPITAL RESOURCES") Total stockholders' equity at September 30,
1997 was $22.9 million compared to $20.2 million at December 31, 1996, an
increase of $2.7 million or 13.7%. The Company's Tier I risk based capital,
total risk based capital and Tier I leverage capital ratios were 10.29%,
12.12% and 8.02%, respectively at September 30, 1997, as compared to 9.94%,
11.96% and 7.70%, respectively at December 31, 1996. The Bank's Tier I risk
based capital, total risk based capital and Tier I leverage capital ratios
were 10.83%, 12.08 and 8.44%, respectively at September 30, 1997, as compared
to 11.28%, 12.53% and 8.74%, respectively at December 31, 1996.
RESULTS OF OPERATIONS
---------------------
SUMMARY
- -------
Net income for the nine months ended September 30, 1997 increased $303,000 or
14.4% to $2.4 million from $2.1 million for the same period in 1996. The
increase is attributable to a number of factors, the largest of which was an
increase in net interest income of $1.0 million or 9.2% to $11.8 million for
the first nine months of 1997 from $10.8 million for the same 1996 period.
The provision for loan and lease losses decreased $378,000 or 34.4% to
$722,000 from $1.1 million. Other income decreased $498,000 or 9.2% and
other expense increased $417,000 or 3.6%. The provision for income taxes
increased $160,000 to $1.6 million for the first nine months of 1997 from
$1.5 million for the same prior year period due to an increase of $463,000 or
13.0% in pre-tax earnings. Return on average assets and average stockholders'
equity for the first nine months of 1997 were 1.18% and 14.94%, respectively,
compared to 1.15% and 15.38%, respectively, for the same 1996 period. Primary
and fully diluted earnings per share for the first nine months of 1997
increased to $0.58 and $0.55, respectively, from $0.52 and $0.49,
6
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respectively, for the same 1996 period. The 1996 earnings per share
calculations have been restated to reflect a 5% stock dividend paid on
February 28, 1997 and a two for one stock split effective March 14, 1997.
(See "RESULTS OF OPERATIONS -- PROVISION FOR LOAN AND LEASE LOSSES", "RESULTS
OF OPERATIONS -- NET INTEREST INCOME", and "RESULTS OF OPERATIONS -- OTHER
INCOME AND EXPENSE")
For the quarter ended September 30, 1997, the Company reported net income of
$942,000 compared to $902,000, an increase of $40,000 or 4.4% over the third
quarter of 1996. The increase in third quarter earnings is due to an
increase in interest income and other income of $788,000 and $69,000,
respectively. Partially offsetting these increases in earnings were increases
in interest expense and other expense of $258,000 and $430,000, respectively.
The provision for income taxes increased $125,000 to $695,000 for the third
quarter of 1997. The return on average assets and average stockholders'
equity for the quarter ended September 30, 1997 were 1.33% and 16.80%,
respectively, compared to 1.44% and 19.01%, respectively, for the second
quarter of 1996. Primary and fully diluted earnings per share for the second
quarter of 1997 were $0.23 and $0.21, respectively, compared to $0.22 and
$0.21, respectively last year.
NET INTEREST INCOME
- -------------------
Net interest income for the nine months ended September 30, 1997 compared to
1996 increased $1.0 million or 9.2% primarily due to increased volume in
interest earning assets. Interest income increased $1.7 million 11.7% to
$16.3 million from $14.6 million primarily due to loan income. Interest and
fees on loans increased $1.4 million or 10.8% due to loan growth. Also
contributing to interest income were increases of $224,000 in investment
securities income, $49,000 in interest on Federal funds sold and $16,000 in
interest on deposits at other financial institutions. Average loans
increased $21.6 million over the same prior year period. The impact that
loan growth had on interest income was partially offset by a decline in the
tax equivalent yield on loans at period end to 10.20% from 10.40% for the
same prior year period. Maturities of fixed rate higher yielding loans and a
decrease in total consumer loans outstanding have contributed to lower yields
on the total loan portfolio over the past year and resulted in a decrease in
the taxable equivalent yield on total earning assets to 9.37% at September
30, 1997 from 9.53% for the same 1996 period. Generally higher short term
interest rates in the securities market during this time period caused the
tax equivalent yield on the investment portfolio to increase to 5.65% from
5.53%. The average volume of investments also increased to $33.4 million
from $28.4 million. Interest income on Federal funds sold increased due to
increased average balances of $739,000 to $8.3 million from $7.6 million
further augmented by an increase in yield to 5.42% from 5.08%. The net tax
equivalent interest margin (net interest income as a percentage of average
interest-earning assets) was 6.80% and 7.07% for the nine months ended
September 30, 1997 and 1996, respectively.
Interest expense increased $707,000 or 18.7% for the first nine months of
1997 compared to the same period in 1996. The increase was primarily due to
an increase of $761,000 in interest on deposits related to the deposit
promotion in 1997. Average total deposits grew $25.8 million to $243.3
million with for the first nine months of 1997 compared to $217.5 million for
the same period in 1996. The average rate paid on total deposits during 1997
was 3.48% compared to 3.17% last year. Time deposits averaged $52.7 million
with an average rate paid of 5.16% in 1997 compared to an average balance of
$34.3 million at an average rate of 4.75% in 1996. The increase in both
average volume and the rate paid on deposits in 1997 is largely attributable
to the Company's efforts to increase its market share by offering a short
term (seven months) certificate of deposit at a rate of 6.0%. (See
"FINANCIAL CONDITION") Interest expense related to notes payable, the
capital lease obligation and the convertible subordinated debentures
decreased $66,000 due to the payment in full of two notes totaling $1.6
million and the conversion into common stock of $268,000 in convertible
subordinated debentures during the first nine months of 1997.
OTHER INCOME AND OTHER EXPENSE
- ------------------------------
Other income decreased $498,000 for the nine months ended September 30, 1997
compared to the same 1996 period. The decrease in other income is largely due
to a decrease of $488,000 or 38.0% in gains on loan sales. The decrease in gain
on loan sales consists of decreases of $687,000 and $96,000 related to SBA and
Title I loan sales which were partially offset by an increase of $294,000 in
gains from the sale of other home equity loans. In the case of SBA loan sales
the decrease is largely due to management's decision to retain these loans in
its portfolio to enhance loan yields and to offset the slow consumer loan demand
in the Company's market area. The decrease in gains on the sale of Title I
loans is due to a lower volume of loans generated (a result of declining
popularity of this product) as well as lower premiums as a percentage of the
loans. Other expense increased $417,000 compared to last year. Other expense
consists primarily of salaries and employee benefits which
7
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increased $584,000 to $6.6 million, occupancy expense which increased $80,000
to $2.5 million, expenses from retaining professional services which
increased $154,000 to $372,000, and advertising and public relations expense
which increased $80,000 to $492,000. Expenses related to the acquisition,
maintenance and sale of other real estate owned partially offset the
increases in the other expense category by decreasing $402,000 to a net gain
of $96,000 in 1997 compared to the same prior year period.
PROVISION FOR LOAN AND LEASE LOSSES
- -----------------------------------
The provision for loan and lease losses for the nine months ended September
30, 1997 was $722,000 compared to $1.1 million for the comparable 1996
period. The amount of the provision reflects management's judgement as to
the adequacy of the reserve for loan and lease losses and is generally
determined by the periodic review of the loan portfolio, the Bank's loan loss
experience, and current and expected economic conditions. The provision for
loan and lease losses included a provision of $650,000 in 1997 to supplement
the Company's Title I HUD reserve due to potential losses arising from the
Title I participations sold in 1993 and 1994 which have experienced higher
than expected losses. As reported last quarter, the Company has tendered
offers to the participation certificate holders to repurchase the
certificates. So far this year the Company has repurchased five of the
certificates that totaled $2.6 million. The Company has offers outstanding
to repurchase the last two certificates. The Company intends to sell these
and other Title I loans currently in portfolio to mitigate the potential for
future losses in this loan category. Net charge offs decreased to $324,000
for the first nine months of 1997 from $631,000 for the same prior year
period primarily due to a $489,000 recovery on a single construction loan.
The annualized ratio of net charge offs to total loans was 0.21%, 0.60% and
0.48% at September 30, 1997, December 31, 1996, and September 30, 1996,
respectively. The loan and lease loss reserve was 1.71%, 1.73% and 1.93% of
total gross loans at September 30, 1997, December 31, 1996 and September 30,
1996, 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.
NONPERFORMING ASSETS
The following table provides information with respect to the components of
the Company's nonperforming assets at September 30, 1997 and December 31,
1996:
September 30, December 31,
1997 1996
------------ ------------
Loans 90 days or more past
due and still accruing $ -- $ --
Nonaccrual loans:
Conventional real estate -- 150
Real estate construction -- 581
Commercial 2,669 1,540
Installment and consumer 1,212 1,270
----------- -----------
Total 3,881 3,541
----------- -----------
Total nonperforming loans 3,881 3,541
Other real estate owned 1,752 2,756
----------- -----------
Total nonperforming assets $5,633 $6,297
----------- -----------
----------- -----------
Nonperforming assets to total
gross loans plus other real
estate owned 2.71% 3.44%
------------ ------------
------------ ------------
8
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The nonaccrual loans totals include the guaranteed portion of SBA loan
balances for which the Bank bears no exposure to loss. The guaranteed SBA
balances were $1.5 million and $261,000 at September 30, 1997 and December
31, 1996, respectively.
The Company considers a loan to be nonperforming when any one of the
following events occurs: (a) any installment of principal or interest is 90
days past due; (b) the full timely collection of interest or principal
becomes uncertain; (c) the loan is classified as "doubtful" by bank
examiners; or (d) a portion of its principal balance has been charged-off.
The Company's policy is to classify loans which are 90 days past due as
nonaccrual loans unless Management determines that the loan is adequately
collateralized and in the process of collection or other circumstances exist
which would justify the treatment of the loan as fully collectible.
Impaired loans were recorded at $2.0 million and $482,000 for commercial
loans and real estate mortgage loans, respectively, at September 30, 1997.
The recorded investments are stated net of reserves for loan losses of
$168,000 and $21,000, respectively. Impaired loans at December 31, 1996 were
recorded at $1.1 million and $846,000 for commercial loans and real estate
mortgage loans, respectively, net of reserves for loan losses of $274,000 and
$68,000, respectively.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
----------------------------------------
The liquidity of a banking institution reflects its ability to provide funds
to meet customer credit needs, to accommodate possible outflows in deposits,
to provide funds for day-to-day operations, and to take advantage of interest
rate market opportunities. Asset liquidity is provided by cash, certificates
of deposit with other financial institutions, Federal funds sold, investment
maturities and sales and loan maturities, repayments and sales. Liquid
assets (consisting of cash, Federal funds sold and investment securities)
comprised 23.7% and 24.3% of the Company's total assets at September 30, 1997
and December 31, 1996, respectively. Liquidity management also includes the
management of unfunded commitments to make loans and undisbursed amounts
under lines of credit. At September 30, 1997, these commitments totaled
$38.5 million in commercial loans, $1.7 million in letters of credit, $9.0
million in real estate construction loans, and $10.6 million in consumer and
installment loans.
In addition to loan and investment sales and deposit growth, the Bank has
several secondary sources of liquidity. Many of the Bank's real estate
construction loans are originated pursuant to underwriting standards which
make them readily marketable to other financial institutions or investors in
the secondary market. There is an active secondary market for the guaranteed
portion of SBA loans of which the Bank had $20.0 million outstanding at
September 30, 1997. In addition, in order to meet liquidity needs on a
temporary basis, the Bank has unsecured lines of credit in the amount of $8.0
million for the purchase of Federal funds with other financial institutions
and may borrow funds from the Federal Home Loan Bank and the Federal Reserve
discount window, subject to the Bank's ability to supply collateral.
Asset/Liability Management involves minimizing the impact of interest rate
changes on the Company's earnings through the 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, 1997
approximately 51% 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.
The Company was able to raise approximately $17.0 million through a special
certificate of deposit offering (seven months at 6.0%) during the first half of
1997. As of October 31, 1997, approximately $8.2 million of these deposits had
been renewed or transferred into other types of deposits within the Bank with
another $8.6 million leaving the Bank. Management does not anticipate any
significant impact on the Bank's liquidity due to the non-renewal of these
deposits.
9
<PAGE>
CAPITAL RESOURCES
-----------------
Stockholders' equity increased 13.7% to $22.9 million at September 30, 1997
from $20.2 million at December 31, 1996. Net income of $2,405,000, $250,000
from the conversion of the Company's Subordinated Debentures into common
stock, and a decrease in net unrealized losses on available for sale
securities of $110,000 contributed to the increase in equity.
The following table provides information with respect to the Company's and
the Bank's regulatory capital ratios and regulatory minimum requirements:
September 30, December 31, Regulatory Minimum
1997 1996 Ratios
------------ ------------ ------------------
NORTH COUNTY BANCORP
Risk-based capital
Tier 1 10.29% 9.94% 4.00%
Total 12.12% 11.96% 8.00%
Tier 1 leverage capital 8.02% 7.70% 4.00% - 5.00%
NORTH COUNTY BANK
Risk-based capital
Tier 1 10.83% 11.28% 4.00%
Total 12.08% 12.53% 8.00%
Tier 1 leverage capital 8.44% 8.74% 4.00% - 5.00%
The decrease in the Bank's capital ratios at September 30, 1997 as compared
to December 31, 1996, reflect the effect of $1.4 million in dividend payments
to the Company. The Company applied the proceeds of the dividends to the
payment in full of two term notes that totaled $1.5 million and to the
payment of interest on its debentures.
At September 30, 1997, the Company had $1.3 million in 9 1/4% Convertible
Subordinated Debentures ("Debentures") due May 15, 2002 outstanding. The
debentures qualified as Tier 2 capital under the risk-based capital
regulations. On September 10, 1997, the Company exercised its right to redeem
the outstanding debentures at a price of 102.25% effective October 31, 1997.
The majority of the debenture holders chose to convert their debentures into
common stock of the Company prior to the redemption date at a conversion
price of $3.74. The effect of this transaction on the Company's capital was
a shift of the $1.3 million from Tier 2 capital into Tier 1 capital.
Management anticipated capital expenditures of approximately $750,000 to $1.1
million primarily for upgrades to computer and data communications equipment
and computer software during 1997.
10
<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.
11
<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, 1997
------------------- ----------------
Michael J. Gilligan
Vice President & Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOUND
ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10Q FOR SEPTEMBER 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,491,000
<INT-BEARING-DEPOSITS> 199,000
<FED-FUNDS-SOLD> 9,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,644,000
<INVESTMENTS-CARRYING> 11,360,000
<INVESTMENTS-MARKET> 11,411,000
<LOANS> 206,045,000
<ALLOWANCE> 3,527,000
<TOTAL-ASSETS> 285,871,000
<DEPOSITS> 254,020,000
<SHORT-TERM> 2,464,000
<LIABILITIES-OTHER> 4,765,000
<LONG-TERM> 1,685,000
0
0
<COMMON> 12,008,000
<OTHER-SE> 10,929,000
<TOTAL-LIABILITIES-AND-EQUITY> 285,871,000
<INTEREST-LOAN> 14,569,000
<INTEREST-INVEST> 1,379,00
<INTEREST-OTHER> 353,000
<INTEREST-TOTAL> 16,301,000
<INTEREST-DEPOSIT> 4,235,000
<INTEREST-EXPENSE> 4,487,000
<INTEREST-INCOME-NET> 11,814,000
<LOAN-LOSSES> 722,000
<SECURITIES-GAINS> (21,000)
<EXPENSE-OTHER> 11,937,000
<INCOME-PRETAX> 4,020,000
<INCOME-PRE-EXTRAORDINARY> 2,405,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,405,000
<EPS-PRIMARY> .58
<EPS-DILUTED> .55
<YIELD-ACTUAL> 9.37
<LOANS-NON> 3,881,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,711,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,129,000
<CHARGE-OFFS> 897,000
<RECOVERIES> 573,000
<ALLOWANCE-CLOSE> 3,527,000
<ALLOWANCE-DOMESTIC> 3,527,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
