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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 June 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
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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 August 7, 1997 the Registrant had 4,019,130 shares of no par value common
stock issued and outstanding.
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NORTH COUNTY BANCORP
Page
Part I FINANCIAL INFORMATION ----
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet -
June 30, 1997 and December 31, 1996 2
Consolidated Statement of Income -
Three Months Ended and Six Months Ended
June 30, 1997 and 1996 3
Consolidated Statement of Cash Flows -
Six Months Ended June 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
June 30, December 31,
1997 1996
-------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 28,789,000 $ 25,936,000
Federal funds sold 8,400,000 2,200,000
------------ ------------
37,189,000 28,136,000
Investment securities:
Available for sale 21,538,000 23,117,000
Held to maturity 12,937,000 11,344,000
Loans, net 191,723,000 177,281,000
Other real estate owned 1,920,000 2,756,000
Premises and equipment, net 8,317,000 8,710,000
Accrued interest receivable and other assets 5,797,000 5,962,000
------------ ------------
$279,421,000 $257,306,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 82,769,000 $ 83,937,000
Interest bearing 169,841,000 145,407,000
------------ ------------
252,610,000 229,344,000
Accrued expenses and other liabilities 2,084,000 1,901,000
U.S. Treasury demand note 1,112,000 2,376,000
Notes payable -- 1,550,000
Capital lease obligation 422,000 429,000
Convertible subordinated debentures 1,492,000 1,534,000
------------ ------------
Total liabilities 257,720,000 237,134,000
------------ ------------
Stockholders' equity:
Common stock, no par value,
Authorized, 10,000,000 shares;
Outstanding shares 4,019,130 in 1997
and 4,006,386 in 1996 11,797,000 11,758,000
Retained earnings 9,963,000 8,500,000
Unrealized loss on available for sale
securities, net of tax (59,000) (86,000)
------------ ------------
Total stockholders' equity 21,701,000 20,172,000
------------ ------------
$279,421,000 $257,306,000
------------ ------------
------------ ------------
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 Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $4,868,000 $4,373,000 $ 9,338,000 $ 8,645,000
Investment securities 475,000 388,000 919,000 745,000
Federal funds sold 140,000 37,000 198,000 155,000
Deposits with other financial institutions 9,000 -- 9,000 --
Total interest income 5,492,000 4,798,000 10,464,000 9,545,000
---------- ---------- ----------- -----------
Interest expense:
Deposits 1,472,000 1,125,000 2,715,000 2,263,000
Federal funds purchased and U.S. Treasury demand note 16,000 17,000 48,000 22,000
Long term debt 61,000 87,000 144,000 173,000
---------- ---------- ----------- -----------
Total interest expense 1,549,000 1,229,000 2,907,000 2,458,000
---------- ---------- ----------- -----------
Net interest income 3,943,000 3,569,000 7,557,000 7,087,000
Provision for loan losses 283,000 700,000 618,000 1,000,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 3,660,000 2,869,000 6,939,000 6,087,000
Other income 1,693,000 2,187,000 3,138,000 3,705,000
Other expense 4,012,000 3,945,000 7,694,000 7,707,000
---------- ---------- ----------- -----------
Income before income taxes 1,341,000 1,111,000 2,383,000 2,085,000
Provision for income taxes 528,000 444,000 920,000 885,000
---------- ---------- ----------- -----------
Net income $ 813,000 $ 667,000 $ 1,463,000 $ 1,200,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Primary earnings per share $ 0.20 $ 0.17 $ 0.35 $ 0.30
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Fully diluted earnings per share $ 0.18 $ 0.16 $ 0.33 $ 0.28
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
------ ------
Cash flows from operating activities:
Net income $ 1,463,000 $ 1,200,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of:
Office property and equipment 661,000 674,000
Deferred loan fees and costs, net (147,000) (210,000)
Investment premiums and discounts, net 55,000 52,000
Loan servicing rights 60,000 115,000
Other 24,000 25,000
Provision for loan and lease losses 618,000 1,000,000
Decrease (increase) in interest receivable 54,000 (68,000)
Increase (decrease) in taxes payable 97,000 (221,000)
(Decrease) increase in accrued expenses (78,000) 275,000
Increase in interest payable 262,000 75,000
Increase in SBA loan sales receivable -- (561,000)
Other, net 46,000 (276,000)
------------ -----------
Net cash provided by operating activities 3,115,000 2,080,000
------------ -----------
Cash flows from investing activities:
Proceeds from sales and maturities of
investment securities 8,860,000 10,109,000
Purchase of investment securities (8,930,000) (12,140,000)
Net increase in loans (15,657,000) (11,917,000)
Purchase of premises and equipment (268,000) (277,000)
Proceeds from sale of other real estate owned 1,491,000 1,383,000
------------ -----------
Net cash used in investing activities (14,504,000) (12,842,000)
------------ -----------
Cash flows from financing activities:
Cash payments on notes payable and capital
lease obligations (7,000) (16,000)
Net increase in deposits 23,265,000 3,148,000
Net (decrease) increase in short term borrowings (1,264,000) 3,262,000
Net decrease in long term borrowings (1,591,000) (78,000)
Cash proceeds from sale of common stock 39,000 38,000
------------ -----------
Net cash provided by financing activities 20,442,000 6,354,000
------------ -----------
Net increase (decrease) in cash and cash equivalents 9,053,000 (4,408,000)
Cash and cash equivalents at beginning of year 28,136,000 34,733,000
------------ -----------
Cash and cash equivalents at end of period $ 37,189,000 $30,325,000
------------ -----------
------------ -----------
Disclosures:
Total interest paid $ 2,645,000 $ 2,565,000
------------ -----------
------------ -----------
Total taxes paid $ 842,000 $ 1,255,000
------------ -----------
------------ -----------
Foreclosed real estate loans $ 745,000 $ 1,743,000
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------------ -----------
See accompanying notes to consolidated financial statements.
4
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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,
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 six month periods ended June
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 4,132,281 and 4,130,463 for the three and six months
ended June 30, 1997, respectively, and 4,010,046 and 4,005,033 for the three and
six months ended June 30, 1996, respectively. The calculation of fully diluted
earnings per share assumes the issuance of 398,930 and 447,861 shares of common
stock at June 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 4,523,684 and 4,524,990 for
the three and six months ended June 30, 1997 and 1996, respectively, and
4,457,907 and 4,452,894 for the three and six months ended June 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.
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 $22.1 million or 8.6% to $279.4 million at
June 30, 1997, from $257.3 million at December 31, 1996. Federal funds sold
increased $6.2 million or 281.8%. Gross loans increased $14.6 million or 8.1%
to $195.0 million at period end from $180.4 million at the end of 1996. The
increase in the loan portfolio was primarily in SBA loans which increased $11.2
million or 38.1% to $40.7 million, other commercial loans which increased $3.2
million or 6.2% to $55.4 million, commercial real estate loans which increased
$2.4 million or 6.9% to $37.4 million and construction loans which increased
$1.3 million or 37.8% to $4.8 million. These increases were partially offset by
declines in consumer lending of $2.3 million or 4.3% to $51.5 million,
municipal lease financing of $650,000 or 27.9% to $1.7 million and residential
mortgage loans of $538,000 or 16.1% to $2.8 million. Total commercial loans,
including SBA loans, increased to 49.3% as a percentage of gross loans from
45.3% at year end. Consumer loans declined to 26.4% of gross loans compared to
29.8% at year end. Although the Company has benefitted from improved loan
demand from the business sector of the economy, it 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 increases in the loan portfolio and Federal funds sold were funded by a
deposit promotion during March of 1997 that raised approximately $17.0 million
in seven month certificates of deposit. The deposit promotion was aimed at
increasing the Company's share of its current market areas by developing new and
expanding existing customer relationships. The promotion was also timed in
anticipation of meeting seasonal liquidity needs that historically the Company
has experienced during the second quarter. Other real estate owned decreased
$836,000 to $1.9 million from $2.8 million in the first six months of 1997.
During this time period the Company sold six properties with a carrying value of
$1.2 million and foreclosed on two additional properties that totaled $745,000.
Two properties that totaled $789,000 were in escrow at June 30, 1997.
Total deposits at June 30, 1997 increased $23.3 million or 10.1% from December
31, 1996. The growth in deposits consisted of interest bearing accounts which
increased $24.4 million or 16.8% partially offset by noninterest-bearing demand
deposits which decreased $1.2 million or 1.4%. A promotional campaign during
the month of March 1997, contributed approximately $17.0 million to time
deposits which increased a total of $21.9 million to $59.4 million or 23.5% of
total deposits compared to $37.5 million or 16.4% of deposits at year end. In
the other interest-bearing deposit categories, NOW accounts increased $4.5
million and savings and money market accounts decreased $1.9 million. U.S.
Treasury demand note, which consists of Treasury tax deposits that are payable
to the Treasury on demand, decreased $1.3 million or 53.2% to $1.1 million at
period end. 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 June 30, 1997 was $21.7
million compared to $20.2 million at December 31, 1996, an increase of $1.5
million or 7.6%. The Company's Tier I risk based capital, total risk based
capital and Tier I leverage capital ratios were 10.11%, 12.07% and 7.86%,
respectively at June 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 10.77%, 12.02% and
8.37%, respectively at June 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 six months ended June 30, 1997 increased $263,000 or 21.9% to
$1.5 million from $1.2 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 $470,000 or 6.6% to $7.6 million for the first six months of
1997 from $7.1 million for the same 1996 period. The provision for loan and
lease losses decreased $382,000 or 38.2% to $618,000 from $1.0 million. Other
income and other expense decreased $567,000 or 15.3% and $13,000 or 0.2%,
respectively. The provision for income taxes increased $35,000 to $920,000 for
the first six months of 1997 from $885,000 for the same prior year period due to
an increase of $298,000 or 14.3%
6
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in pre-tax earnings. Return on average assets and average stockholders' equity
increased during the first half of 1997 to 1.10% and 13.95%, respectively, from
1.00% and 13.45%, respectively for the same 1996 period. Primary and fully
diluted earnings per share for the first six months of 1997 increased to $0.35
and $0.33, respectively, from $0.30 and $0.28, respectively, for the same 1996
period. The 1996 earnings per share calculations have been restated to reflect
two 5% stock dividends paid on March 29, 1996 and February 28, 1997,
respectively, 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 June 30, 1997, the Company reported net income of $813,000
compared to $667,000, an increase of $146,000 or 21.9% over the same 1996
period. The increase in second quarter earnings is primarily due to a decrease
of $417,000 in the provision for loans and lease losses combined with an
increase in net interest income of $374,000 which was partially offset by a
decrease of $494,000 in other income and an increase of $67,000 in other
expense. The provision for income taxes increased $84,000 to $528,000 for the
second quarter of 1997. The return on average assets and average stockholders'
equity for the quarter ended June 30, 1997 increased to 1.19% and 15.23%,
respectively, from 1.10% and 14.72%, respectively, for the second quarter of
1996. Primary and fully diluted earnings per share for the second quarter of
1997 were $0.20 and $0.18, respectively, compared to $0.17 and $0.15,
respectively last year.
NET INTEREST INCOME
Net interest income for the six months ended June 30, 1997 compared to 1996
increased $470,000 or 6.6% primarily due to increased volume in interest earning
assets. Interest income increased $919,000 or 9.6% to $10.5 million from $9.6
million. The increase in interest income was comprised of increases of $693,000
in interest and fees on loans, $174,000 in investment securities income, $43,000
in interest on Federal funds sold and $9,000 in interest on deposits at other
financial institutions. The increase in loan income was due to an increase of
$18.1 million to $186.6 million in average loans for the first half of 1997 from
$168.5 million for the same prior year period. The increase in interest on
loans due to volume was partially offset by a decrease in the average tax
equivalent yield on loans to 10.11% from 10.39%. 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 9.31% at June 30, 1997 from 9.54% 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 5.73%
from 5.44%. The average volume of investments also increased to $33.2 million
from $28.3 million. Interest income on Federal funds sold increased due to
increased average balances of $1.3 million to $7.4 million from $6.1 million
further augmented by an increase in yield to 5.39% from 5.14%. The net tax
equivalent interest margin (net interest income as a percentage of average
interest-earning assets) was 6.74% and 7.10% for the six months ended June 30,
1997 and 1996, respectively.
Interest expense increased $449,000 or 18.3% for the first six months of 1997
compared to the same period in 1996. The increase in interest expense consisted
of increases of $452,000 and $26,000 in interest paid on deposits and U.S.
Treasury demand note, respectively, and a decrease of $29,000 in interest paid
on notes payable, capital lease obligation and subordinated convertible
debentures. The average rate paid on deposits increased during this time
period to 3.45% at June 30, 1997 compared to 3.14% for the same 1996 period.
The average rate paid on NOW and savings accounts changed slightly to 1.43% and
3.29%, respectively, from 1.44% and 3.28%, respectively. In the same period the
average rate paid on time deposits increased to 5.15% from 4.72%. In addition
to the rate increase on average time deposits, average balances on time deposits
grew by 49.2% or $16.4 million in the first half of 1997 to $49.9 million from
$33.5 million for the same 1996 period. The increase in both average volume and
yield on time deposits in the first half of 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")
The U.S. Treasury demand note account averaged $1.7 million for the first six
months of 1997 compared to $1.1 million for the same period last year.
OTHER INCOME AND OTHER EXPENSE
Other income and expense decreased $567,000 and $13,000, respectively, for the
six months ended June 30, 1997 compared to the same 1996 period. The decrease
in other income is primarily due to a decrease of $697,000 or 64.5% in gains on
loan sales. The decrease in gain on loan sales consists of decreases of $692000
and $121,000 related to SBA and Title I loan sales
7
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which were partially offset by an increase of $116,000 in gains from the sale of
other home equity loans. The decrease in SBA and Title I loan sales 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. Other expense consists primarily of salaries and employee benefits which
increased $238,000 to $4.3 million, occupancy expense which increased $7,000 to
$1.7 million, expenses from retaining professional services which increased
$75,000 to $222,000, and other real estate owned expenses which decreased
$292,000 to a net gain of $106,000.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses for the six months ended June 30, 1997
was $618,000 compared to $1.0 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 $300,000 for the first half of 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. The Company has tendered offers to the participation
certificate holders to repurchase the certificates. If repurchased, 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
increased to $494,000 for the first six months of 1997 from $314,000 for the
same prior year period. The annualized ratio of net charge offs to total loans
was 0.51%, 0.60% and 0.37% at June 30, 1997, December 31, 1996, and June 30,
1996, respectively. The loan and lease loss reserve was 1.67%, 1.73% and 2.09%
of total gross loans at June 30, 1997, December 31, 1996 and June 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 June 30, 1997 and December 31, 1996:
June 30, December 31,
1997 1996
-------- ------------
Commercial loans 90 days or more
due and still accruing $ -- $ --
Nonaccrual loans:
Conventional real estate 145 150
Real estate construction -- 581
Commercial 2,749 1,540
Installment and consumer 1,211 1,270
------ ------
Total 4,105 3,541
------ ------
Total nonperforming loans 4,105 3,541
Other real estate owned 1,920 2,756
------ ------
Total nonperforming assets $6,025 $6,297
------ ------
------ ------
Nonperforming assets to total
gross loans plus other real
estate owned 3.06% 3.44%
------ ------
------ ------
8
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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.
Impaired loans were recorded at $2.0 million and $642,000 for commercial loans
and real estate mortgage loans, respectively, at June 30, 1997. The recorded
investments are stated net of reserves for loan losses of $241,000 and $29,000,
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
25.7% and 24.3% of the Company's total assets at June 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 June 30, 1997, these commitments totaled $37.2 million in commercial
loans, $1.6 million in letters of credit, $9.2 million in real estate
construction loans, and $9.2 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 $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 June 30, 1997 approximately
48% 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.
9
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CAPITAL RESOURCES
Stockholders' equity increased 7.6% to $21.7 million at June 30, 1997 from $20.2
million at December 31, 1996. Net income of $1,463,000 and a decrease in net
unrealized losses on available for sale securities of $59,000 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:
June 30, December 31, Regulatory Minimum
1997 1996 Ratios
-------- ------------ ------------------
NORTH COUNTY BANCORP
Risk-based capital
Tier 1 10.11% 9.94% 4.00%
Total 12.07% 11.96% 8.00%
Tier 1 leverage capital 7.86% 7.70% 4.00% - 5.00%
NORTH COUNTY BANK
Risk-based capital
Tier 1 10.77% 11.28% 4.00%
Total 12.02% 12.53% 8.00%
Tier 1 leverage capital 8.37% 8.74% 4.00% - 5.00%
The decrease in the Bank's capital ratios at June 30, 1997 as compared to
December 31, 1996, reflect the effect of a special dividend payment of $1.3
million to the Company in May of 1997. The Company applied the proceeds of the
dividend to payment in full of two term notes that totaled $1.5 million.
At June 30, 1997, the Company had $1.5 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 $3.74 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 102.25% at June 30, 1997 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.
Management anticipates 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 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 May 21, 1997, 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 each matter voted upon and the number of
affirmative and negative votes cast with respect to each matter.
Matter voted upon Affirmative votes Negative votes Abstain
- ----------------- ----------------- -------------- -------
Election of directors (largest tally) 3,041,621 173,896 2,692
Approval of the 1997 North County
Bancorp Stock Option Plan 2,386,020 339,919 319,444
The 1997 North County Bancorp Stock Option Plan provides for the granting of
540,000 shares. The option price shall not be less than one hundred percent
(100%) of the fair market value (determined under any reasonable valuation
method) of such stock at the time of grant, except in the case of shares granted
to an optionee who owns more that 10% of the total shares outstanding, in which
case the exercise price shall not be less that one hundred ten percent (110%) of
the market value at the date of grant. The plan will expire on April 16, 2007.
As of June 30, 1997, no options under the plan had been granted.
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: August 8, 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
PAGE 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 28,290,000
<INT-BEARING-DEPOSITS> 499,000
<FED-FUNDS-SOLD> 8,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,538,000
<INVESTMENTS-CARRYING> 12,937,000
<INVESTMENTS-MARKET> 12,946,000
<LOANS> 194,976,000
<ALLOWANCE> 3,253,000
<TOTAL-ASSETS> 279,421,000
<DEPOSITS> 252,610,000
<SHORT-TERM> 1,112,000
<LIABILITIES-OTHER> 2,084,000
<LONG-TERM> 1,914,000
0
0
<COMMON> 11,797,000
<OTHER-SE> 9,904,000
<TOTAL-LIABILITIES-AND-EQUITY> 21,701,000
<INTEREST-LOAN> 9,338,000
<INTEREST-INVEST> 919,000
<INTEREST-OTHER> 207,000
<INTEREST-TOTAL> 10,464,000
<INTEREST-DEPOSIT> 2,715,000
<INTEREST-EXPENSE> 2,907,000
<INTEREST-INCOME-NET> 7,557,000
<LOAN-LOSSES> 618,000
<SECURITIES-GAINS> (42,000)
<EXPENSE-OTHER> 7,652,000
<INCOME-PRETAX> 2,383,000
<INCOME-PRE-EXTRAORDINARY> 1,463,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,463,000
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 9.31
<LOANS-NON> 4,105,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,350,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,129,,000
<CHARGE-OFFS> 523,000
<RECOVERIES> 29,000
<ALLOWANCE-CLOSE> 3,253,000
<ALLOWANCE-DOMESTIC> 3,253,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
