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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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[ ] TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)
California 95-3669135
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(State or other jurisdction of (I.R.S. Employer
incorporation or organization) Identification Number)
444 S. Escondido Boulevard, 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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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of class)
Check whether the registrant (1) filed all reports required to be filed by
Section 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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-X contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
As of March 23, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $43,379,000.
Shares of Common Stock held by each officer and director and each person
owning more than five percent of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of the
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of Common Stock of the registrant outstanding as of
March 23, 1998 was 4,637,290.
Part of Form 10-K
Documents Incorporated by Reference: into which incorporated
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Proxy Statement for the Company's Annual
Meeting of Shareholders to be held May 20, 1998 Part III
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
North County Bancorp (the "Company") is a California corporation registered
as a bank holding company under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), and is headquartered in Escondido, California. The Company was
incorporated in October, 1981 and acquired all of the outstanding shares of
North County Bank (the "Bank") in July, 1982. The Company's only subsidiary and
principal asset is the Bank. The Company exists primarily for the purpose of
holding the stock of its subsidiary, the Bank, and of such other subsidiaries as
it may acquire or establish.
The Company's principal sources of income are dividends from the Bank. The
expenditures of the Company, including (but not limited to) the payment of
dividends to stockholders, if and when declared by the Board of Directors, and
the cost of servicing debt will generally be paid from such payments made to the
Company by the Bank. At December 31, 1997, the Company had consolidated assets
of $280.7 million, deposits of $251.6 million and stockholders' equity of $25.2
million.
The Company's Administrative Offices are located at 444 South Escondido
Boulevard, Escondido, California and its telephone number is (760) 743-2200.
References herein to the "Company" include the Company and the Bank, unless the
context indicates otherwise.
THE BANK
North County Bank, a California state-chartered bank that commenced
operations in June, 1974, conducts its business through nine full-service
branches and two loan production offices. Five of the branches are located in
San Diego County in the cities of Escondido, Poway, San Marcos and San Diego,
with the remaining in Riverside County in the cities of Temecula, Murrieta,
Beaumont and Banning. The Bank's loan production offices are in Orange County,
California and Renton, Washington. The Bank provides a wide range of banking
services to small and medium-sized businesses, real estate construction and
development companies, professionals and individuals located in San Diego and
Riverside counties, and through its loan production offices, in Orange County
and the Seattle, Washington area.
The Bank holds no material patents, trademarks, licenses (other than
licenses obtained from bank regulatory authorities), franchises or concessions,
and did not spend any amounts on research and development activities in either
of the Company's last three fiscal years. The Bank owns three subsidiaries; NCB
Joint Venture-1, Inc. and GWB Development, which participated in real estate
development, and NCB Mortgage, all of which are inactive corporations.
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RETAIL BANKING SERVICES
DEPOSITS ACCOUNTS
The Bank offers a wide variety of deposit products for the retail banking
market including checking, interest-bearing checking, savings, certificates of
deposit and retirement accounts. As of December 31, 1997, the Bank had
approximately 22,706 retail deposit accounts with a balance of $115.4 million as
compared to 20,795 retail deposit accounts with a balance of $103.6 million at
December 31, 1996. The Bank attempts to attract deposits through its product
mix, pricing, convenient locations, extended hours, and efforts to provide the
highest level of customer service. At December 31, 1997 the Bank's retail
deposits consisted of $18.4 million or 15.9% in noninterest-bearing demand
deposits, $17.4 million or 15.1% in interest-bearing demand deposits, $49.2
million or 42.6% in savings and money market deposits, $4.6 million or 4.0% in
individual retirement accounts and, $25.8 million or 22.4% in time certificates
of deposit. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Deposits.")
LOANS
The Bank also offers many types of consumer loans to its customers. These
include new and used automobile, home improvement, home equity, personal lines
of credit, overdraft protection, credit cards and other secured and unsecured
installment and consumer loans. The Bank's consumer loans totaled approximately
$41.0 million and $53.8 million at December 31, 1997 and 1996, respectively.
The Bank also makes construction loans for custom built, owner-occupied homes,
but generally does not offer long term home mortgage loans.
Additionally, the Bank offers its customers FHA Title I home improvement
loans and other home equity loan products, as well as purchasing these types of
loans from other lenders. The Bank generally sells these loans in the secondary
market, generating a fee income on the sale. The Bank originated and purchased
$43.9 million and $31.4 million in FHA Title I and other home equity loans in
1997 and 1996, respectively. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Loans.")
OTHER RETAIL PRODUCTS AND SERVICES
The Bank offers other products and services to its retail customers
which complement its deposit and loan products. These include life insurance
products, including annuities, investments, travelers' checks, safe deposit
boxes, escrow, notary, and collection services. The Bank also has
drive-through facilities with extended hours, provides its customers with
access to ATMs and POS terminals throughout the world and offers a telephone
voice response service which gives customers access to account information 24
hours a day.
Although Management believes there is a demand for trust services in the
Bank's market area the Bank does not operate or have any present intention to
seek authority to operate a trust department, since Management believes that the
costs of establishing and operating such a department would not be justified by
the potential income to be gained therefrom at this time.
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BUSINESS BANKING SERVICES
DEPOSIT ACCOUNTS
The Bank offers interest-bearing and noninterest-bearing deposit accounts
designed for small to medium-sized business customers. The services offered in
conjunction with these accounts may include providing currency and coin, armored
car pick-up, courier services, payroll services, credit card merchant services,
document collection and wire transfers. The fees charged for a business account
typically vary with the amount of services provided and the level of balances
the customer keeps on deposit. The Bank relies on marketing and promotional
activities and personal contact by its officers, directors and employees to
develop these customer relationships, emphasizing the Bank's local ownership and
decision making, personal service, community ties and financial strength. At
December 31, 1997 the Bank had approximately 7,582 business deposit accounts
totaling $129.9 million as compared to approximately 7,316 business deposit
accounts totaling $120.6 million at December 31, 1996. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition -- Deposits.")
LOANS
The Bank provides secured and unsecured loans and lines of credit for the
operating and expansion needs of businesses, ranging from inventory and accounts
receivable financing to equipment financing and letters of credit. These loans
are generally for terms of one year or less. Significant emphasis is placed on
the borrower's earnings history, capitalization, secondary sources of repayment
(such as accounts receivable) or highly liquid collateral (such as certificates
of deposit or publicly traded stocks or bonds). The Bank also makes loans to
local real estate developers for the construction of entry level to middle
income single family residences and fixed and variable rate loans on commercial
real estate with terms of up to ten years. For customers whose loan demands
exceed the Bank's legal lending limits, the Bank attempts to arrange for such
loans on a participation basis with correspondent banks. Commercial loans
(including commercial real estate loans) totaled approximately $154.6 million
and $116.8 million at December 31, 1997 and 1996, respectively.
The Bank is also one of the largest SBA lenders in its market area. SBA
Loans generally have maturities ranging from seven to 25 years, often are
secured by commercial real estate and are guaranteed up to 90% by the U.S. Small
Business Administration. The Bank sometimes sells these loans for a premium as
there is an active secondary market for these loans. The Bank originated
approximately $35.0 million and $15.4 million in SBA loans in 1997 and 1996,
respectively. The Bank's SBA loan servicing portfolio, consisting of the
guaranteed portion of SBA loans originated and sold, for which the Bank earns
servicing fee income totaled approximately $42.9 million and $55.2 million at
December 31, 1997 and 1996, respectively. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Condition
- -- Loans.")
REAL ESTATE INVESTMENTS
The Company has engaged in direct and indirect real estate development
activities on a selective basis. At December 31, 1996, the Company was involved
in one development project that originated in 1989. The project held one
remaining lot for sale at December 31, 1996, which was sold in January of 1997.
The Company has no plans for future involvement in real estate development
projects.
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COMPETITION
The banking business in southern California is highly competitive with
respect to virtually all products and services and has become increasingly so in
recent years. The industry continues to consolidate and strong, unregulated
competitors have entered banking markets with focused products targeted at
highly profitable customer segments. Many largely unregulated competitors are
able to compete across geographic boundaries and provide customers increasing
access to meaningful alternatives to banking services in nearly all significant
products. These competitive trends are likely to continue.
With respect to commercial bank competitors, the business is largely
dominated by a relatively small number of major banks with many offices
operating over a wide geographical area, which banks have, among other
advantages, the ability to finance wide-ranging and effective advertising
campaigns and to allocate their investment resources to regions of highest yield
and demand.
Several mergers of large regional banks and large savings and loan
associations with major banks, acquisitions of independent banks by major banks,
and the failures of several independent banks in the Company's market area have
significantly increased the presence of large regional banks and have reduced
the number of independent banks competing in the Company's market area. Many of
the major banks operating in the area offer certain services which the Bank does
not offer directly (but some of which the Bank offers through correspondent
institutions). By virtue of their greater total capitalization, such banks also
have substantially higher lending limits than does the Bank(1). Although major
banks have some competitive advantages over small independent banks, the Bank
has actively tried to make the loss of local independent banks a competitive
advantage by soliciting customers who prefer the personal service offered by the
Bank. The Company's promotional activities emphasize the advantages of dealing
with a local bank attuned to the particular needs of the community and relies
heavily upon local promotional activities and personal contact by its officers,
directors, and employees.
In addition to other banks, competitors include savings institutions,
credit unions, and numerous non-banking institutions, such as finance
companies, brokerage firms, mortgage companies and insurance companies. In
recent years, increased competition has also developed from specialized
finance and non-finance companies that offer wholesale finance, credit card,
and other consumer finance services, including on-line banking services and
personal finance software. Strong competition for deposit and loan products
affects the rates of those products as well as the terms on which they are
offered to customers. Mergers between financial institutions have placed
additional pressure on banks within the industry to streamline their
operations, reduce expenses, and increase revenues to remain competitive.
Competition has also intensified due to recently enacted federal and state
interstate banking laws, which permit banking organizations to expand
geographically, and the California market has been particularly attractive to
out-of-state institutions.
Technological innovation has also resulted in increased competition in
financial services markets. Such innovation has, for example, made it possible
for non-depository institutions to offer customers automated transfer payment
services that previously have been considered traditional banking products. In
addition, many customers now expect a choice of several delivery systems and
channels, including telephone, mail, home computer, ATMs, self-service branches,
and/or in-store branches. In addition to other banks, the sources of competition
for such products include savings associations, credit unions, brokerage firms,
money market and other mutual funds, asset management groups, finance and
insurance companies, and mortgage banking firms.
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(1)Legal lending limits to each customer are restricted to a
percentage of the Bank's total stockholders' equity, the exact percentage
depending upon the nature of the loan transaction.
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REGULATION AND SUPERVISION
The Company and the Bank are subject to significant regulation by Federal
and state regulatory bodies. The following discussion of statutes and
regulations is only a brief summary and does not purport to be complete. This
discussion is qualified in its entirety by reference to such statutes and
regulations. No assurance can be given that such statutes or regulations will
not change in the future.
THE COMPANY
The Company is subject to the periodic reporting requirements of Section
13 of the Securities Exchange Act of 1934 (the "Exchange Act") which requires
the Company to file annual, quarterly and other current reports with the
Securities and Exchange Commission (the "Commission"). The Company is also
subject to additional regulations including, but not limited to, the proxy
and tender offer rules promulgated by the Commission under Sections 13 and 14
of the Exchange Act; the reporting requirements of directors, executive
officers and principal stockholders regarding transactions in the Company's
Common Stock and short-swing profits rules promulgated by the Commission
under Section 16 of the Exchange Act; and certain additional reporting
requirements by principal stockholders of the Company promulgated by the
Commission under Section 13 of the Exchange Act.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act and is registered as such with the Board of Governors of the
Federal Reserve System (the "FRB"). A bank holding company is required to file
with the FRB annual reports and other information regarding its business
operations and those of its subsidiaries. It is also subject to examination by
the FRB and is required to obtain FRB approval before acquiring, directly or
indirectly, ownership or control of any voting shares of any bank if, after such
acquisition, it would directly or indirectly own or control more than 5% of the
voting stock of that bank, unless it already owns a majority of the voting stock
of that bank.
The FRB has by regulation determined certain activities in which the
Company may or may not conduct business. The Company is currently prohibited
from such activities as real estate brokerage and syndication; real estate
development; property management; underwriting of life insurance not related to
credit transactions; and, with certain exceptions, securities underwriting and
equity funding.
THE BANK
The Bank joined the Federal Reserve System as a state-chartered member
effective July 1997. As a California state-chartered bank and member of the
Federal Reserve System, the Bank is subject to regulation, supervision and
regular examination by the California Department of Financial Institutions (the
"Department") and by the FRB. The regulations of these agencies govern most
aspects of the Bank's business, including the making of periodic reports by the
Bank, and the Bank's activities relating to dividends, investments, loans,
borrowings, capital requirements, certain check-clearing activities, branching,
mergers and acquisitions, reserves against deposits and numerous other areas.
Supervision, legal action and examination of the Bank by the regulatory agencies
are generally intended to protect depositors and are not intended for the
protection of stockholders.
The earnings and growth of the Bank are largely dependent on its ability
to maintain a favorable differential or "spread" between the yield on its
interest-earning assets and the rate paid on its deposits and other
interest-bearing liabilities. As a result, the Bank's performance is
influenced by general economic conditions, both domestic and foreign, the
monetary and fiscal policies of the federal government, and the policies of
the regulatory agencies, particularly the FRB. The FRB implements national
monetary policies (such as seeking to curb inflation and combat
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recession) by its open-market operations in United States Government
securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rate applicable to borrowings by banks which are members of the Federal
Reserve System. The actions of the FRB in these areas influence the growth
of bank loans, investments and deposits and also affect interest rates
charged on loans and deposits. The nature and impact of any future changes
in monetary policies cannot be predicted.
CAPITAL ADEQUACY REQUIREMENTS
Both the Bank and the Company are subject to the regulations of the FRB
governing capital adequacy. These regulations incorporate both risk-based and
leverage capital requirements. Risk-based capital ratios are calculated to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations. Under these guidelines, the nominal dollar
amounts of assets and credit-equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans. Total
capital requirements are defined in terms of "core capital elements," or Tier 1
capital and "supplemental capital elements," or Tier 2 capital. The minimum
ratio of qualifying total capital to total risk-weighted assets is 8.0%, at
least one-half of which must be in the form of Tier 1 capital. The minimum
ratio of Tier 1 capital to total risk-weighted assets is 4%. As of December 31,
1997, the Company's total risk-based capital and Tier 1 risk-based capital
ratios were 10.88% and 12.14%, respectively, and the Bank's total risk-based
capital and Tier 1 risk-based capital ratios were 10.85% and 12.10%,
respectively.
The federal banking agencies have revised the risk-based capital standards
to take adequate account of concentrations of credit (i.e., relatively large
proportions of loans involving one borrower, industry, location, collateral or
loan type) and the risks of "non-traditional" activities (those that have not
customarily been part of the banking business). The regulations require
institutions with high or inordinate levels of risk to operate with higher
minimum capital standards, and authorize the regulators to review an
institution's management of such risks in assessing an institution's capital
adequacy.
The federal banking agencies have also revised the risk-based capital
regulations to include exposure to interest rate risk as a factor that the
regulators will consider in evaluating a bank's capital adequacy. Interest rate
risk is the exposure of a bank's current and future earnings and equity capital
arising from adverse movements in interest rates. While interest risk is
inherent in a bank's role as financial intermediary, it introduces volatility to
bank earnings and to the economic value of the bank.
The FRB also requires the maintenance of a leverage capital ratio designed
to supplement the risk-based capital guidelines. Banks and Bank Holding
Companies that have received the highest regulatory ratings must maintain a
ratio of Tier 1 capital ratio of at least 3.0%. All other institutions are
required to maintain a leverage ratio of at least 100 to 200 basis points above
the 3.0% minimum, for a minimum of 4.0% to 5.0%. Pursuant to federal
regulations, banks must maintain capital levels commensurate with the level of
risk to which they are exposed, including the volume and severity of problem
loans, and federal regulators may, however, set higher capital requirements when
a bank's particular circumstances warrant. As of December 31, 1997 the
Company's and the Bank's Tier 1 leverage capital ratios were 8.76% and 8.73%,
respectively, exceeding regulatory minimums.
PROMPT CORRECTIVE ACTION PROVISIONS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured financial institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The federal banking agencies have by regulation defined the following
five capital categories: "well
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capitalized" (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based
Capital Ratio of 6%; and Leverage Ratio of 5%); "adequately capitalized"
(Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%;
and Leverage Ratio of 4%); "undercapitalized" (Total Risk-Based Capital Ratio
of less than 8%; Tier 1 Risk-Based Capital less than 4%; or Leverage Ratio of
less than 4%) (or 3% if the institution receives the highest rating from its
primary regulator); "significantly undercapitalized" (Total Risk-Based
Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than
3%; or Leverage Ratio of less than 3%); and "critically undercapitalized"
(tangible equity to total assets less than 2%). A bank may be treated as
though it were in the next lower capital category if after notice and the
opportunity for a hearing, the appropriate federal agency finds an unsafe or
unsound condition or practice so warrants, but no bank may be treated
as"critically undercapitalized" unless its actual capital ratio warrants such
treatment.
At each successively lower capital category, an insured bank is subject to
increased restrictions on its operations. For example, a bank is generally
prohibited from paying management fees to any controlling persons or from making
capital distributions if to do so would make the bank "undercapitalized". Asset
growth and branching restrictions apply to undercapitalized banks, which are
required to submit written capital restoration plans meeting specified
requirements (including a guarantee by the parent holding company, if any).
"Significantly undercapitalized" banks are subject to broad regulatory
authority, including among other things, capital directives, forced mergers,
restrictions on the rates of interest they may pay on deposits, restrictions on
asset growth and activities, and prohibitions on paying certain bonuses without
regulatory approval. Even more severe restrictions apply to critically
undercapitalized banks. Most importantly, except under limited circumstances,
not later than 90 days after an insured bank becomes critically
undercapitalized, the appropriate federal banking agency is required to appoint
a conservator or receiver for the bank.
In addition to measures taken under the prompt corrective action
provisions, insured banks may be subject to potential actions by the federal
regulators for unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by
the agency or any written agreement with the agency. Enforcement actions may
include the issuance of cease and desist orders, termination of insurance of
deposits (in the case of a bank), the imposition of civil money penalties, the
issuance of directives to increase capital, formal and informal agreements, or
removal and prohibition orders against "institution-affiliated" parties.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted final guidelines establishing
safety and soundness standards for all insured depository institutions. Those
guidelines relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan and institute enforcement proceedings if
an acceptable compliance plan is not submitted.
PREMIUMS FOR DEPOSIT INSURANCE
FDIC insured depository institutions are required to pay insurance premiums
depending on their risk classification. Institutions such as the Bank which are
insured by the Bank Insurance Fund ("BIF"), are categorized into one of three
capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three supervisory categories based on federal
regulatory evaluations. The three supervisory categories are: financially sound
with only a few minor weaknesses (Group A), demonstrates weaknesses that could
result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C). The capital ratios used by the FDIC to define
well capitalized, adequately capitalized and undercapitalized are the same in
the FDIC's prompt corrective action regulations.
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The Bank is currently categorized as well capitalized within supervisory
category Group A. The current BIF assessment rates are summarized as
follows:
Assessment Rates Effective January 1, 1998(2)
<TABLE>
<CAPTION>
Group A Group B Group C
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<S> <C> <C> <C>
Well Capitalized . . . . . . . . . . . 0 3 17
Adequately Capitalized . . . . . . . . 3 10 24
Undercapitalized . . . . . . . . . . . 10 24 27
</TABLE>
COMMUNITY REINVESTMENT ACT
The Bank is subject to certain requirements and reporting obligations
involving Community Reinvestment Act ("CRA") activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit needs of its local communities, including low
and moderate income neighborhoods. The CRA further requires the agencies to take
a financial institution's record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic branches,
consummating mergers or acquisitions, or holding company formations. In
measuring a bank's compliance with its CRA obligations, the regulators now
utilize a performance-based evaluation system which bases CRA ratings on the
bank's actual lending service and investment performance, rather than on the
extent to which the institution conducts needs assessments, documents community
outreach activities or complies with other procedural requirements. In
connection with their assessment of CRA performance, the federal regulators
assign a rating of "outstanding," "satisfactory," "needs to improve" or
"substantial noncompliance." The Bank was last examined for CRA compliance in
1996 and received a "satisfactory" CRA Assessment Rating.
OTHER CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are increasingly focusing attention on
compliance with consumer protection laws and regulations. Banks have been
advised by federal regulators to carefully monitor compliance with various
consumer protection laws and their implementing regulations. The federal
Interagency Task Force on Fair Lending issued a policy statement on
discrimination in home mortgage lending describing three methods that federal
agencies will use to prove discrimination: overt evidence of discrimination,
evidence of disparate treatment, and evidence of disparate impact. In addition
to CRA and fair lending requirements, the Bank is subject to numerous other
federal consumer protection statutes and regulations. Due to heightened
regulatory concern related to compliance with consumer protection laws and
regulations generally, the Bank may incur additional compliance costs or be
required to expend additional funds for investments in the local communities it
serves.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") regulates the interstate activities of banks and
bank holding companies and establishes a framework for nationwide interstate
banking and branching. Since June 1, 1997, a bank in one state has generally
been permitted to merge with a bank in another state without the need for
explicit state law authorization. However, states were given the ability to
prohibit interstate mergers with banks in their own state by "opting-out"
(enacting state legislation applying equality
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(2)Subject to statutory minimum assessment of $1,000 per semi-annual period
(which also applies to all other assessment risk classifications). Assessment
figures are expressed in terms of costs per $100 in deposits.
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to all out-of-state banks prohibiting such mergers ) prior to June 1, 1997.
Limited interstate bank mergers were permitted prior to June 1, 1997 provided
the applicable states' laws met certain requirements.
Since 1995, adequately capitalized and managed bank holding companies have
been permitted to acquire banks located in any state, subject to two exceptions:
first, any state may still prohibit bank holding companies from acquiring a bank
which is less than five years old; and second, no interstate acquisition can be
consummated by a bank holding company if the acquiror would control more then
10% of the deposits held by insured depository institutions nationwide or 30%
percent or more of the deposits held by insured depository institutions in any
state in which the target bank has branches.
A bank may establish and operate DE NOVO branches in any state in which the
bank does not maintain a branch if that state has enacted legislation to
expressly permit all out-of-state banks to establish branches in that state.
Among other things, the Interstate Banking Act amended the Community
Reinvestment Act to require that in the event a bank has interstate branches,
the appropriate federal banking regulatory agency must prepare for such
institution a written evaluation of (i) the bank's record of performance; and
(ii) the bank's performance in each applicable state. Interstate branches are
now prohibited from being used as deposit production offices, and foreign banks
will be permitted to establish branches in any state other than its home state
to the same extent that a bank chartered by the foreign bank's home state may
establish such branches.
The Caldera, Weggeland, and Killea California Interstate Banking and
Branching Act of 1995 (the "Caldera Weggeland Act") was designed among other
things to implement important provisions of the Interstate Banking Act discussed
above and to repeal California's previous interstate banking laws, which were
largely preempted by the Interstate Banking Act. (Prior California law
prohibited, among other things, an out-of-state bank holding company from
establishing a DE NOVO California bank except for the purpose of taking over the
deposits of a closed bank. This restriction has been eliminated.)
As indicated above, the Interstate Banking Act generally permits a bank in
one state to merge with a bank in another state without the need for explicit
state law authorization. However, the Caldera Weggeland Act expressly prohibits
a foreign (other state) bank which does not already have a California branch
office from (i) purchasing a branch office of a California bank (as opposed to
the entire bank) and thereby establishing a California branch office or (ii)
establishing a California branch office on a DE NOVO basis.
The Interstate Banking Act also requires, among other things, approval of
the state bank supervisor of the target bank's home state for interstate
acquisitions of banks by bank holding companies. The Caldera Weggeland Act
authorizes the California Commissioner of Financial Institutions (the
"Commissioner") to approve such an interstate acquisition if the Commissioner
finds that the transaction is consistent with certain criteria specified by law.
The changes effected by Interstate Banking Act and Caldera Weggeland Act
are expected to increase competition in the environment in which the Bank
operates to the extent that out-of-state financial institutions directly or
indirectly enter the Bank's market areas. It appears that the Interstate
Banking Act has contributed to the accelerated consolidation of the banking
industry in that a number of the largest bank holding companies are expanding
into different parts of the country that were previously restricted. While many
large out-of-state banks have already entered the California market as a result
of this legislation, it is not possible to predict the precise impact of this
legislation on the Bank or the Company and the competitive environment in which
it operates.
10
<PAGE>
OTHER PENDING AND PROPOSED LEGISLATION
Other legislative and regulatory initiatives which could affect the Bank
and the banking industry in general are pending, and additional initiatives may
be proposed or introduced, before the United States Congress, the California
legislature and other governmental bodies in the future. For example, consumer
legislation has been proposed in Congress which would require banks to offer
basic, low-cost financial services to meet minimum customer needs. Other
legislation has been proposed which would reform the Glass-Steagall Act and the
Bank Holding Company Act, which restrict banks' and bank holding companies'
ability to engage in certain activities, including the underwriting of and
dealing in various securities. The latter proposal would significantly change
the makeup of the financial services industry, expand the ability of banks and
bank holding companies to offer a broader range of financial products, and
provide the opportunity for additional competitors to be able to enter the
financial services market in ways that are not currently permissible. Such
proposals, if enacted, may further alter the structure, regulation and
competitive relationship among financial institutions, and may subject the Bank
to increased regulation, disclosure and reporting requirements. In addition,
the various banking regulatory agencies often adopt new rules and regulations to
implement and enforce existing legislation. It cannot be predicted whether, or
in what form, any such legislation or regulations may be enacted or the extent
to which the business of the Bank or the Company would be affected thereby.
ACCOUNTING CHANGES
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
SFAS No. 125 was originally effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
SFAS No. 127, defers for one year the effective date of SFAS No. 125 for secured
borrowings and collateral and for repurchase agreements, dollar-rolls,
securities lending, and similar transactions. Management does not expect this
change in accounting principle to have a material effect on the Company's
results of operations.
The FASB issued SFAS No. 128, "Earnings per Share," effective for financial
statements issued for periods after December 15, 1997, including interim
periods. SFAS No. 128 simplified the computation for earnings per share ("EPS")
by replacing primary EPS with basic EPS and by altering the calculation of
diluted EPS, which replaces fully diluted EPS. Basic EPS excludes potential
dilution and is calculated by dividing income available to common stockholders
by the weighted average number of outstanding common shares. Diluted EPS gives
effect to all potential issuances of common stock that would have caused basic
EPS to be lower as if the issuance had already occurred. This change in
accounting principle did not have a material effect on the Company's results of
operations.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," effective
for fiscal years beginning after December 31, 1997. SFAS No. 130 deals with the
presentation and display of comprehensive income. The term comprehensive
income, as used in SFAS No. 130, includes all changes in equity from
transactions, other events, and circumstances from non-owner sources during a
period. Management does not expect this change in accounting principle to have
a material effect on the Company's results of operations.
EMPLOYEES
As of December 31, 1997, the Company had 142 full-time employees and 100
part-time employees. The Company's Management believes that its employee
relations are satisfactory.
11
<PAGE>
SELECTED STATISTICAL INFORMATION
Selected statistical information relating to the Company has been included
in Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 2. DESCRIPTION OF PROPERTY.
The following properties (real properties and/or improvements thereon) are
owned by the Company or the Bank and are unencumbered. In the opinion of
Management all properties are adequately covered by insurance.
<TABLE>
<CAPTION>
SQUARE FEET OF
LOCATION USE OF FACILITIES OFFICE SPACE
-------- ----------------- ------------
<S> <C> <C>
2025 Vineyard Avenue Branch Office 6,100
Escondido, California
1000 West San Marcos Blvd. Branch Office 6,100
San Marcos, California
27425 Ynez Road Branch Office 4,200
Temecula, California
568 North Tulip Street Data Processing, Operations Center, 11,500
Escondido, California Records and Purchasing Departments
499 East Sixth Street Branch Office 9,700
Beaumont, California
1735 West Ramsey Street Branch Office and Leasable 14,939
Banning, California Retail Space
41500 Ivy Street Branch Office 2,160
Murrieta, California
</TABLE>
The following facilities are leased by the Company or the Bank:
<TABLE>
<CAPTION>
SQUARE FEET OF MONTHLY RENT TERM OF
LOCATION USE OF FACILITIES OFFICE SPACE AS OF 12/31/97 LEASE
-------- ----------------- ------------ ------------- --------
<S> <C> <C> <C> <C>
444 S. Escondido Boulevard Main Banking Office, 26,100 $31,348 March 31, 2006
Escondido, California Administrative Offices (2 5-year exten-
sion options)
8085 Clairemont Mesa Branch Office 5,200 $12,910 September 30, 2003
Boulevard (3 10-year exten-
San Diego, California sion options)
27403 Ynez Road Loan Production Office 1,090 $ 828 October 31, 1998
Temecula, California
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SQUARE FEET OF MONTHLY RENT TERM OF
LOCATION USE OF FACILITIES OFFICE SPACE AS OF 12/31/97 LEASE
-------- ----------------- ------------ ------------- --------
<S> <C> <C> <C> <C>
13436 Poway Road Branch Office 1,500 $ 1,380 April 28, 2002
Poway, California (1 5-year extension
option)
171 S. Anita Drive Loan Production Office 1,458 $ 1,750 February 28, 1999
Orange, California
1400 Talbot Road South Loan Production Office 774 $ 933 March 31, 2000
Renton, Washington
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On April 20, 1994, the Bank reached an informal agreement with the FDIC and
the California Superintendent of Banks (the "Superintendent") to take or refrain
from taking certain actions, including among other things: (i) maintaining a
ratio of Tier 1 leverage capital to adjusted total assets of at least 6.75%,
(ii) maintaining an adequate allowance for loan and lease losses, (iii) reducing
classified assets to certain specified levels within prescribed time parameters,
and (iv) not paying cash dividends unless, after the payment of such dividends,
its Tier 1 leverage capital ratio would be at least 6.75%. This informal
agreement superseded a similar informal agreement entered into in March 1993.
On May 6, 1995 the Bank entered into an Order to Cease and Desist with the
FDIC (the "Order"), a formal enforcement action pursuant to Section 8(b) of the
Federal Deposit Insurance Act, as amended (the "FDI Act"). The provisions of
the Order were substantially similar to those under the informal agreement. The
FDIC requested the Bank enter into the Order to correct certain unsatisfactory
conditions disclosed in the FDIC's Report of Examination of the Bank as of
October 5, 1994 (the "1994 Examination"). The 1994 Examination determined that
the Bank had inadequate capital, had continued high asset classifications, had
an inadequate allowance for loan and lease losses, had experienced continued
deterioration of earnings, failed to comply fully with the informal agreement
and required improvements in certain internal routines and controls. The
provisions of the Order were intended to address certain criticisms cited in the
1994 Examination as well as certain other matters. The Order replaced the
informal agreement with respect to the FDIC, while the informal agreement
continued in effect with respect to the Superintendent who was not a party to
the Order.
The Order required, among other things, that the Bank; (i) by June 30, 1995
increase its ratio of Tier 1 capital to adjusted total assets to at least seven
and one-quarter percent (7.25%) and by September 30, 1995, achieve and
thereafter maintain a ratio of Tier 1 capital to adjusted total assets of at
least seven and one-half percent (7.50%); (ii) shall not pay cash dividends
without the prior written consent of the FDIC; (iii) by September 30, 1995
submit a revised strategic plan to the FDIC; (iv) within 60 days of the
effective date of the Order, submit a plan to the FDIC to control overhead; (v)
reduce the level of the Bank's classified assets to agreed upon levels within
certain time frames; and (vi) improve certain other internal routines and
controls. Throughout 1995 the Company devoted significant resources to assure
its compliance with the requirements of the Order, including the completion, in
August 1995, of a private placement of 228,194 shares of common stock for $1.7
million, $1 million of which was contributed to the Bank as additional Tier 1
capital.
In December 1995 the Bank was again examined by the FDIC and the
Superintendent. The Bank received the results of its examination by the
Superintendent on February 28, 1996. The examination report concluded that the
Bank had made significant progress in correcting the deficiencies addressed in
the informal agreement and that the Superintendent was terminating the informal
agreement effective February 26, 1996. The
13
<PAGE>
Bank received the results of its examination by the FDIC on March 7, 1996.
The FDIC Safety and Soundness examination report concluded that the Bank had
achieved full compliance with the Order and had made notable improvements in
its operations since the last Safety and Soundness examination although the
FDIC had lingering concerns resulting from the exceptions noted in FDIC
Compliance and Electronic Data Processing ("EDP") reports of examination.
Based upon this examination the FDIC terminated the Order effective May 10,
1996. At the request of the FDIC, however, the Board passed a resolution in
May 1996 stating that the Bank would: (i) maintain an adequate level of
capital, (ii) continue to reduce its overall level of classified assets,
(iii) strengthen certain credit review procedures, (iv) increase and
stabilize its earnings, and (v) correct certain deficiencies in its internal
audit and regulatory compliance programs.
In December 1996, the Bank was again examined by the FDIC and the
Superintendent. The examination report noted the Bank's return to satisfactory
condition, made only minor recommendations which were corrected in the normal
course of business and terminated the resolution. (See "Market for Common
Equity and Related Stockholder Matters -- Dividends").
In September 1993, the Company was examined by the FRB and received the
report of Holding Company Inspection in March 1994. This report, which relied
significantly on the reports of examination of the FDIC and the Superintendent,
noted the weakened financial condition of the Bank, and, pursuant to the FRB's
request, the Board of Directors of the Company passed a resolution in April 1994
resolving to take certain actions, including among other things: (i) submit a
plan to the FRB as to the actions being taken to comply with the informal
agreement and improve the Bank's financial condition, (ii) refrain from the
payment of cash dividends without prior approval of the FRB, and (iii) provide
quarterly written progress reports to the FRB detailing the Company's progress
in restoring the Bank's financial condition.
In October 1995, the Company was again examined by the FRB. Pursuant to
the results of this examination, the Board of Directors of the Company was asked
to pass an additional resolution addressing the FRB's concerns over the
financial condition of the Bank. This resolution was passed in October 1995
resolving to take certain actions, including among other things: (i) to refrain
from the payment of cash dividends without the advanced written consent of the
FRB, (ii) ensure compliance with the capital requirements of the Order, (iii)
submit to the FRB a plan to enhance the Board's supervision of the operations
and management of the consolidated Company, (iv) refrain from increasing its
borrowings, incur any additional debt or purchase or redeem any stock without
prior written approval of the FRB, and (v) not make any cash expenditure in
excess of $20,000 to any individual or entity during any calendar month without
advanced written approval of the FRB. In May of 1997, the FRB, based on the
results of its October 1996 examination, released the Company from the
restrictions imposed by the resolution.
From time to time, the Company and the Bank are defendants in legal
proceedings arising in the ordinary course of business. Some of these
proceedings which relate to lending, collections, and other activities may seek
substantial sums as damages. It may take a number of years to finally resolve
some of the pending legal proceedings due to their complexity and other reasons.
At December 31, 1997, the Bank was party to certain legal actions, the potential
exposure from which is not possible to determine with any certainty at this
time. However, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION
North County Bancorp's Common Stock trades on the Nasdaq Stock Market under
the symbol "NCBH." Although trading in the Company's Common Stock has increased
since the stock began trading on Nasdaq in July of 1996, such trades cannot be
characterized as constituting an active trading market. Based on information
provided by Nasdaq, Management believes that approximately 804,000 and 110,000
shares were traded in each of 1997 and 1996, respectively. Management is aware
of six securities dealers that make a market for the Company's Common Stock. As
reported by the National Daily Quotation Service, bid prices for the Common
Stock ranged from a low of $7.50 to a high of $14.50 during 1997 and from a low
of $3.625 to a high of $7.75 during 1996. These quotes reflect inter-dealer
prices without retail mark-ups, mark-downs or commissions and may not
necessarily have represented actual transactions. There may have been
transactions at other prices during that time. The following table provides
information with respect to the range of high and low bid prices for the
Company's stock for each quarterly period for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $10.375 $ 7.500 $4.250 $3.625
Second Quarter 9.750 7.875 5.000 4.250
Third Quarter 11.000 8.500 4.875 4.625
Fourth Quarter 14.500 11.000 7.750 4.875
</TABLE>
(b) HOLDERS
On February 18, 1998 there were approximately 1,200 stockholders of record
of the Common Stock.
(c) DIVIDENDS
As a bank holding company without significant assets other than its equity
interest in the Bank, the Company's ability to pay dividends primarily depends
upon the dividends it receives from the Bank. The Bank currently has
outstanding 75,000 shares of noncumulative preferred stock with a $2.00 per
share annual dividend and 166,677 shares of noncumulative preferred stock with a
$0.72 per share annual dividend. The Bank has no present intention to pay
dividends to the Company other than in amounts sufficient to cover the Company's
interest and operating expenses. (See "Legal Proceedings"). As with the
Company, any change in the Bank's dividend practices will depend upon the Bank's
earnings, financial position, current and anticipated cash requirements and
other factors deemed relevant by the Bank's Board of Directors at that time.
15
<PAGE>
The Bank's ability to pay dividends to the Company is also subject to
certain legal limitations. Under California law, the Bank may declare a cash
dividend out of the Bank's net profits up to the lesser of the Bank's retained
earnings or the Bank's net income for the last three (3) fiscal years (less any
distributions made to stockholders during such period), or, with the prior
written approval of the Commissioner, in an amount not exceeding the greatest of
(i) the retained earnings of the Bank, (ii) the net income of the Bank for its
last fiscal year, or (iii) the net income of the Bank for its current fiscal
year.
In addition, under federal law, the Bank is prohibited from paying any
dividends if after making such payment the Bank would fail to meet any of its
minimum capital requirements. (See "Item 1 -- Business -- Regulation and
Supervision -- Capital Adequacy Requirements" herein.). The federal regulators
also have the authority to prohibit the Bank from engaging in any business
practices which are considered to be unsafe or unsound, and in some
circumstances the regulators might prohibit the payment of dividends on that
basis even though such payments would otherwise be permissible.
The Bank resumed the payment of dividends in 1997 on the Bank's preferred
stock, such dividends had not been paid since 1994, pursuant to the formal and
informal agreements with the Bank's regulators and a Board resolution adopted in
May of 1996 the last of which was terminated in March 1997. (See "Legal
Proceedings").
The Company's ability to pay dividends is also limited by state corporation
law. The California General Corporation Law prohibits the Company from paying
dividends on the Common Stock unless: (1) its retained earnings, immediately
prior to the dividend payment, equals or exceeds the amount of the dividend or
(2) immediately after giving effect to the dividend the sum of the Company's
assets (exclusive of goodwill and deferred charges) would be at least equal to
125% of its liabilities (not including deferred taxes, deferred income and other
deferred liabilities) and the current assets of the Company would be at least
equal to its current liabilities, or, if the average of its earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of its interest expense for the two preceding fiscal
years, at least equal to 125% of the current liabilities.
The Company's practice has been to retain earnings to provide funds for the
operation and expansion of its business. Accordingly, the Company has not paid
any cash dividends on its Common Stock since 1984. Management has no current
plans to pay cash dividends in the foreseeable future. However, the Board's
practice is to review annually the advisability of paying cash dividends based
upon the Company's earnings, financial position, current and anticipated cash
requirements and other factors deemed relevant by the Board of Directors at that
time. In making any such assessment, the Board of Directors of the Company
would have to consider among other things the capital requirements of the Bank
and other factors concerning the Bank, including the dividend guidelines and
maintenance of an adequate allowance for loan losses.
Pursuant to a Board resolution passed in October 1995 the Company agreed
to refrain from the payment of cash dividends without the advanced written
consent of the FRB. The FRB lifted this restriction in May of 1997. (See
"Legal Proceedings").
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The table below sets forth certain selected consolidated financial data for
the Company and is qualified in its entirety by the detailed information and
financial data presented in the Company's Consolidated Financial Statements and
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
<TABLE>
<CAPTION>
As of or for the Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF INCOME DATA
Interest income. . . . . . . . . . . . . . . . . . $ 22,295 $ 19,840 $ 19,286 $ 17,647 $ 16,772
Interest expense . . . . . . . . . . . . . . . . . 5,941 5,112 5,164 4,525 4,307
Provision for loan and lease losses. . . . . . . . 1,122 1,300 3,306 3,135 2,265
Other income . . . . . . . . . . . . . . . . . . . 6,788 6,975 6,612 6,873 6,465
Other expense. . . . . . . . . . . . . . . . . . . 16,198 15,567 15,334 16,521 15,140
------ ------ ------ ------ ------
Income before provision for income taxes. . . . . 5,822 4,836 2,094 339 1,525
Provision for income taxes . . . . . . . . . . . . 2,313 2,092 562 254 253
------ ------ ------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . $ 3,509 $ 2,744 $ 1,532 85 $ 1,272
-------- -------- -------- ------ --------
-------- -------- -------- ------ --------
SUMMARY BALANCE SHEET DATA (PERIOD END)
Loans net of unearned income . . . . . . . . . . . $210,991 $180,410 $161,950 $166,609 $165,395
Allowance for loan and lease losses . . . . . . . 3,268 3,129 2,916 2,739 2,195
Investment securities. . . . . . . . . . . . . . . 29,679 34,461 26,172 27,168 13,274
Earning assets . . . . . . . . . . . . . . . . . . 244,670 217,071 198,622 198,049 187,044
Total assets . . . . . . . . . . . . . . . . . . . 280,734 257,306 237,034 246,840 239,872
Interest-bearing deposits . . . . . . . . . . . . 161,703 145,407 143,108 146,450 137,983
Total deposits . . . . . . . . . . . . . . . . . . 251,555 229,344 213,839 226,101 219,266
Long term obligations. . . . . . . . . . . . . . . 415 3,513 3,640 3,669 3,818
Total stockholders' equity . . . . . . . . . . . . 25,193 20,172 17,227 13,756 13,881
PER SHARE DATA (1)
Basic net income . . . . . . . . . . . . . . . . . $ 0.82 $ 0.66 $ 0.40 $ 0.02 $ 0.35
Diluted net income (2) . . . . . . . . . . . . . . 0.75 0.61 0.38 -- 0.34
Book value . . . . . . . . . . . . . . . . . . . . 5.43 4.80 4.16 3.83 3.87
Average common shares. . . . . . . . . . . . . . . 4,298,623 4,158,789 3,783,971 3,587,964 3,587,964
Average common shares assuming dilution . . . . . 4,781,510 4,672,728 4,239,292 -- 4,036,627
Common shares outstanding. . . . . . . . . . . . . 4,637,290 4,206,705 4,143,786 3,587,964 3,587,964
SELECTED FINANCIAL RATIOS (3)
Return on average stockholders' equity. . . . . . 15.72% 14.73% 9.97% 0.60% 9.99%
Return on average assets . . . . . . . . . . . . . 1.28 1.11 0.66 0.03 0.56
Net interest spread (4). . . . . . . . . . . . . . 5.90 6.18 6.47 5.96 6.11
Net interest margin (5). . . . . . . . . . . . . . 6.94 7.09 7.30 6.63 6.76
Tier 1 leverage capital ratio . . . . . . . . . . 8.76 7.70 7.17 5.47 5.74
Nonperforming loans to total gross loans . . . . 1.43 1.96 3.27 3.08 2.07
Nonperforming assets to total gross loans and
other real estate owned (6). . . . . . . . . . . 1.89 3.44 4.68 5.13 5.95
Net charge-offs to average loans . . . . . . . . . 0.50 0.63 1.89 1.54 1.32
Average stockholders' equity to average assets . . 8.14 7.54 6.61 5.79 5.57
Loans to deposits. . . . . . . . . . . . . . . . . 83.9 78.7 75.7 73.7 75.4
</TABLE>
(1) Restated to reflect stock dividends.
(2) The calculation of Diluted EPS upon conversion of the Company's
subordinated debentures proved to be anti-dilutive at December 31, 1994.
(3) For purposes of calculating the financial ratios, average balances are the
consolidated average balances of the Company and the Bank. Bank average
balances are based upon daily average balances, and Company average
balances are based upon month end balances.
(4) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
(6) Nonperforming assets consist of nonaccrual loans, loans past due 90 days or
more and other real estate owned.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis of the Company's financial condition and results of
operations for the years ended and as of December 31, 1997, 1996 and 1995 should
be read in conjunction with the consolidated financial statements and the notes
related thereto, and with reference to the discussion of the operations and
other financial information presented elsewhere in this report. For purposes of
calculating the financial ratios, average balances are comprised of both average
Company and Bank balances. Bank average balances are based upon daily average
balances, and Company average balances are based upon month end balances.
Statements contained in this Report on Form 10K that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date thereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Factors that could cause actual results to differ materially from those in such
forward-looking statements are included in the discussions below.
FINANCIAL CONDITION
SUMMARY
Total assets of the Company increased 9.1%, or $23.4 million, to $280.7
million at December 31, 1997 from $257.3 million at December 31, 1996. This
growth was primarily attributable to an increase in gross loans of 17.0% or
$30.6 million to $211.0 million at year-end 1997 from $180.4 million at
year-end 1996. The increase in loan balances was largely due an increase in
SBA, construction, and commercial real estate lending. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition -- Loans".) Investment securities decreased 13.9% or
$4.8 million to $29.7 million at December 31, 1997 from $34.5 million at
December 31, 1996. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Investment
Securities".) Total deposits increased 9.7% or $22.3 million to $251.6
million at December 31, 1997 from $229.3 million at December 31, 1996. Total
interest-bearing deposits increased $16.3 million or 11.2% to $161.7 million
at year-end 1997 from $145.4 million at year-end 1996. Noninterest-bearing
deposits increased $6.0 million or 7.0% to $89.9 million at December 31, 1997
from $83.9 million at December 31, 1996. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Deposits".) Net income of the Company increased $765,000 to
$3.5 million in 1997 compared to $2.7 million in 1996. This increase was
primarily due to an increase in net interest income of $1.6 million that was
partially offset by an increase in other expense of $631,000. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations".)
Total assets of the Company increased 8.6%, or $20.3 million, to $257.3
million at December 31, 1996 from $237.0 million at December 31, 1995. This
growth was primarily concentrated in the loan and investment portfolios.
Gross loans increased 11.4% or $18.4 million to $180.4 million at year-end
1996 from $162.0 million at year-end 1995. The increase in loan balances was
largely due to an increase in the volume of SBA and Title I loans the Company
retained in its portfolio as opposed to selling them in the secondary market
and an increase in commercial real estate lending. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition -- Loans".) Investment securities increased 31.7% or $8.3
million to $34.5 million at December 31, 1996 from $26.2 million at December
31, 1995. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations --Financial Condition -- Investment Securities".)
Total deposits increased 7.3% or $15.5 million to $229.3 million at December
31, 1996 from $213.8 million at December 31, 1995. Total noninterest-bearing
deposits increased $13.2 million or 18.7% to $83.9 million at year-end 1996
from $70.7 million at year-end 1995. Interest-bearing deposits also
increased,
18
<PAGE>
growing 1.6% or $2.3 million to $145.4 million at December 31, 1996 from
$143.1 million at December 31, 1995. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Deposits".) Net income of the Company increased to $2.7 million
in 1996 compared to $1.5 million in 1995. This increase was primarily due to
a decrease of $2.0 million in the provision for loan and lease losses and an
increase in net interest income of $606,000. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Comparison
Between 1996 and 1995".)
Total stockholders' equity at December 31, 1997 was $25.2 million compared
to $20.2 million at December 31, 1996. The increase was due to net income of
$3.5 million, the conversion of subordinated debentures into common stock of
$1.4 million, and a decrease of $84,000 in unrealized losses on available for
sale securities. The Company's Tier 1 risk-based capital, total risk-based
capital and Tier 1 leverage capital ratios were 10.88%, 12.14% and 8.76%,
respectively at December 31, 1997, compared to 9.94%, 11.96% and 7.70%
respectively at December 31, 1996. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Financial Condition --
Capital Resources.")
Total stockholders' equity at December 31, 1996 was $20.2 million compared
to $17.2 million at December 31, 1995. The increase was due to net income of
$2.7 million, the sale of common stock totaling $201,000, and a decrease of
$7,000 in unrealized losses on available for sale securities.
LOANS
Gross loans totaled $211.0 million at December 31, 1997 compared with
$180.4 million at December 31, 1996, an increase of $30.6 million or 17.0%. As
of December 31, 1996, gross loans had increased $18.4 million or 11.4% from
$162.0 million at December 31, 1995. Gross loans comprised 75.2% of total
assets at year-end 1997 compared with 70.1% at year-end 1996. Gross loans
averaged $195.5 million or 79.5% of total average deposits in 1997 compared to
average loans of $171.9 million or 77.8% of average deposits for 1996.
Real estate construction loans totaled $10.3 million at December 31, 1997,
an increase of $6.8 million or 196.9% from $3.5 million at December 31, 1996.
As of December 31, 1996, these loans had decreased $5.7 million or 62.2% from
$9.2 million at December 31, 1995. Real estate construction loans comprised
4.9% and 1.9% of gross loans at December 31, 1997 and 1996, respectively. Total
undisbursed commitments for these loans were $18.9 million at year-end 1997
compared to $3.6 million at year-end 1996. As more fully discussed below, the
growth in real estate construction lending during 1997 was largely due to
increased demand for these loans in the Company's market area indicative of the
economic improvement in Southern California, particularly in the real estate
market.
The Company's market area includes San Diego County, Riverside County,
and the southern portion of San Bernardino County, subjecting the Company's
loan portfolio to the fluctuations in the residential and commercial real
estate market in these areas. General economic conditions and more
specifically real estate market conditions could have a significant impact on
the quality of the Company's real estate and construction loan portfolio.
After a long period of significant escalation in the 1980's, over building
and general economic conditions led to in a sharp decline in real estate
values beginning in 1991 resulting in a significant increase in the Company's
nonperforming loans. (See Management Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Nonperforming
Assets and Restructured Loans.") At this time, the Company's real estate
construction lending activities slowed and its underwriting standards were
tightened, although the Company remained active in the marketplace primarily
in entry level single family residences. During 1996 the demand for real
estate in Southern California, and thus, real estate values, began improving
and have continued to improve through the end of 1997, largely accounting for
the increase in real estate construction loans outstanding and undisbursed
real estate construction loan commitments . Although there has been an
increase in the demand for real estate and in real estate values in Southern
California, it is presently unclear whether or not this trend will continue
through 1998 or beyond. Should demand continue at its current
19
<PAGE>
strong levels, Management believes that its level of real estate construction
activities would expand over that of 1997.
The Bank's risk of loss on a construction loan depends largely on the
accuracy of the estimated construction costs, including interest, and the
accuracy of the initial estimate of the value of the completed project. If the
estimated construction costs prove to have been inaccurate or costs increase as
a result of construction delays, the Bank may elect to advance funds beyond the
amount originally permitted to complete the project. In order to control the
risk of its real estate construction lending activities, the Company establishes
interest reserves and controls the disbursement of funds by requiring proper
documentation and inspections to monitor the construction progress and insure
completion within estimated costs. The Company's real estate construction loans
are primarily for single family residences located within San Diego and
Riverside counties to developers with a history of successfully developing
projects in the Company's market area. The homes are generally designed for
first time and middle income buyers and generally have a completed value of
between $100,000 and $400,000. The Company has established underwriting
standards which consider the amount of equity in the project, the borrower's
ability to qualify for permanent financing upon completion, requires that all
projects use experienced and licensed contractors, and for non-owner-occupied
home, considers the probable success for their eventual sale. These requirements
are subject to revision based upon Management's assessment of current market
conditions.
Conventional residential and commercial real estate loans totaled $45.8
million at December 31, 1997, an increase of $7.4 million or 19.4% from
December 31, 1996. At December 31, 1996, these loans totaled $38.4 million,
an increase of $11.5 million from $26.9 million at December 31, 1995. Within
this category, commercial loans secured by first trust deeds on commercial
real estate increased $7.8 million or 22.5% to $42.9 million at year-end 1997
from $35.1 million at year-end 1996. This increase was the result of the
Company's promotional efforts in the commercial real estate market as well as
stabilization of commercial real estate values in Southern California.
Residential mortgage loans decreased $428,000 or 12.8% to $2.9 million from
$3.3 million at year-end 1996. Prior to 1995, the Company originated
conventional long-term residential real estate loans for sale in the
secondary market as well as for its own portfolio. The Bank faced
significant competition in this market from large thrift institutions and
mortgage brokers and was unable to generate a sufficient volume of
residential mortgage loans to develop a profitable operation, resulting in
the closure of this operation in early 1995. At December 31, 1997 and 1996,
the amount of mortgage loans serviced was $45.7 million and $51.6 million,
respectively. The related servicing income earned on these loans was
$145,000 and $149,000 in 1997 and 1996, respectively. Declining home
mortgage rates have increased the refinancing activity. A high amount of
refinancing activity could significantly reduce the Company's income from
loan servicing.
Commercial loans increased $30.0 million or 36.8% to $111.7 million at
December 31, 1997 from $81.7 million at December 31, 1996. During 1996
commercial loans increased $6.9 million or 9.3% from $74.8 million at
December 31, 1995. Commercial lending is primarily to professionals and
companies with sales from $1 million to $15 million. A few of the Company's
lending relationships involve companies with annual sales of up to $40
million. The Bank also originates loans guaranteed by the U.S. Small
Business Administration ("SBA") which are included in the commercial loan
category and were largely responsible for the growth in 1997. SBA loans
increased $25.6 million or 86.9% to $55.1 million at year-end 1997 from $29.5
million at year-end 1996 largely due to increased originations and to
management's decision to retain these loans in portfolio rather than sell
them for a premium in the secondary market. The Bank originated
approximately $35.0 million and $15.4 million in SBA loans in 1997 and 1996,
respectively. Improvement in the Southern California economy has increased
the demand for this type of loan which is driven by growth in the business
sector. In addition, two new offices for the production of SBA lending
located in Orange County, California and Renton, Washington (near Seattle)
were opened in 1997. Loans have maturities ranging from seven to 25 years
and are guaranteed up to 90% by the SBA. The Bank sometimes sells the
guaranteed portion of these loans for a premium, retaining the unguaranteed
portion and the servicing of the loans for which it is paid a servicing fee.
During the first half of 1996 the Bank sold $8.3 million in SBA loans.
During this time period, Management's decision to reduce the volume of SBA
loan sales and retain these loans in the portfolio was due to the low level
of demand for other types of commercial loans. The Bank intends to continue
expanding its SBA lending activities possibly entering new geographic
markets in 1998. While Management does not currently intend to
20
<PAGE>
sell a significant amount of these loans, some sales may occur. Other
commercial loans increased $4.4 million or 8.5% to $56.6 million at year-end
1997 from $52.2 million at year-end 1996.
The Company provides lease financing to municipalities and school
districts in its market area subject to the same underwriting considerations
and criteria as the Bank's commercial loans. These leases totaled $1.3
million at December 31, 1997, a decrease of $1.0 million or 45.5% from $2.3
million at December 31, 1996. Leases decreased during 1996 by $1.3 million
or 35.1% from $3.6 million at December 31, 1995. These leases are qualified
tax-exempt lease obligations for federal income tax purposes. Low yields as
compared to commercial, commercial real estate and SBA loans has reduced the
Company's level of activity in these leases.
Installment and consumer loans decreased $12.8 million or 23.8% to $41.0
million at December 31, 1997. These loans totaled $53.8 million at December
31, 1996, an increase of $7.1 million or 15.1% from $46.7 million at December
31, 1995. Included in installment and consumer loans are automobile loans,
Title I home improvement loans, home equity loans and home equity lines of
credit. The decrease in installment and consumer loans in 1997 and the
increase in 1996 were due largely to the Company's Title I loan activities.
Title I loans decreased $12.6 million or 54.9% to $10.4 million at December
31, 1997. At December 31, 1996, Title I loans totaled $23.0 million, an
increase of $11.0 million or 91.5% from $12.0 million at December 31, 1995.
Title I loans are secured by junior liens on residential properties and
insured up to 90% by an agency of the U.S. Government through a reserve
calculated as 10% of the Company's outstanding Title I loan balances reduced
by claims filed (the "HUD reserve"). Title I loans may be made to qualified
home owners with little or no equity in the property. The proceeds must be
used for home improvements. In addition to offering these loans to its
customers, the Bank also purchases Title I loans from other Title I lenders.
The amount of Title I loans that the Bank originated or purchased declined to
approximately $6.8 million in 1997 from $18.0 million in 1996, due to
increased competition in the Title I market. The Bank often sells these
loans in the secondary market, sometimes retaining the servicing rights. The
Bank sold certificates of participation in the 90% guaranteed portion in 1993
and 1994, and retained the servicing rights and some of the liability for
claims. Claims on these certificates of participation, which have reduced
the Bank's HUD reserve, were $381,000 in 1997 and $628,000 in 1996. Total
claims processed against the Bank's HUD reserve totaled $825,000 in 1997 and
$916,000 in 1996. The Bank had $362,000 in its HUD reserve at December 31,
1997 against which pending claims had been filed for the balance. The Bank
has provided $1.2 million and $400,000 in loan loss provision in 1997 and
1996, respectively, to supplement its Title I HUD reserve due to the higher
than expected losses that have been experienced in this portfolio. During
1997, the Bank repurchased the participations which totaled $3.4 million.
Management made the decision to repurchase the participation certificates
with the intent to sell the underlying loans in addition to other Title I
loans from its portfolio to mitigate the potential for future losses in this
loan category. This sale, which totaled $11.5 million, was closed in
December 1997 and resulted in a pre-tax gain of $35,000. During 1997 and
1996, the Bank sold a total of $18.5 million and $5.3 million, respectively,
in Title I loans. The Bank serviced a total of $3.6 million and $9.3 million
in Title I loans at December 31, 1997 and 1996, respectively.
As a result of increased competition in the Title I market, as well as
increased demand for other types of equity loans, and to mitigate the impact
of decreased premiums from the sale of Title I loans to current income, the
Bank increased its volume in other equity loans during 1997 and 1996. These
equity loans are secured by junior trust deeds on residential properties and
may be made to home owners with little or no equity in the property. The
loan-to-value ratio for equity loans may go as high as 125%. While the face
amount of the loan can be as high as $100,000, subject to certain terms, the
average loan size approximates $35,000. These loans have maturities ranging
from 15 to 25 years. The proceeds can be used for a variety of purposes the
most common of which are home improvement and debt consolidation. The Bank
purchases and originates equity loans for immediate sale into the secondary
market. During 1997 and 1996, the Bank originated or purchased $37.1
million and $13.5 million, respectively, in equity loans which were sold in
the secondary market. At December 31, 1997, these loans totaled $4.5
million, an increase of $3.3 million or 277.9% from $1.2 million at December
31, 1996 which was up $541,000 or 84.7% from $639,000 at December 31, 1995.
Prior to 1995 the Company was not active in the equity loan market.
21
<PAGE>
Home equity lines of credit, secured primarily by second trust deeds on
single family residences, declined $915,000 to $6.5 million at December 31,
1997 from $7.4 million the prior year. Home equity lines decreased $1.1
million in 1996 from $8.5 million at December 31, 1995. The Company requires
a debt-to-value ratio of not higher than 80% for home equity lines, and the
decline in real estate values has resulted in fewer qualified borrowers.
Automobile loans decreased $211,000 or 2.2% to $9.4 million at December 31,
1997 from $9.6 million at December 31, 1996. In 1996 these loans decreased
$73,000 or 0.8% from $9.7 million at December 31, 1995. The Company offers a
wide range of new and used direct automobile financing. Automobile loan
terms vary widely depending upon the length and amount of the loan, the value
of the automobile, and the creditworthiness of the borrower. Automobile
loans are generally for terms of three to five years. Such loans may be made
for up to 100% of the purchase price for new automobiles and no more than
100% of the wholesale value for used automobiles. The borrower may not
finance the payment of tax and license fees as part of any automobile loan.
The Company contracts with a third party service to monitor the insurance
coverage of each vehicle. The Company originates and funds all of its
automobile loans directly. The decline in the volume of automobile loans is
due to the intense competition from other bank and non-bank lenders in this
market. Automobile loans represented 23.0% and 17.9% of installment and
consumer loans at December 31, 1997 and December 31, 1996, respectively.
Under laws governing California state-chartered banks, the Bank may lend
up to 15% of its adjusted capital on an unsecured basis and 25% of its
adjusted capital on a secured basis to any one borrower; provided, however,
that the total of such secured and unsecured loans shall not exceed 25% of
the Bank's adjusted capital. As of December 31, 1997, the Bank's loan limits
under these regulations were $4.2 million on an unsecured basis and $7.0
million on a secured basis.
The following table sets forth the amount of total loans outstanding in
each category at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Conventional real estate loans (1). . . . . . . . . . . $ 45,803 $ 38,352 $ 26,870 $ 26,741 $ 23,908
Lease financing . . . . . . . . . . . . . . . . . . . . 1,270 2,329 3,586 4,148 5,950
Real estate construction loans. . . . . . . . . . . . . 10,334 3,481 9,212 14,211 19,498
Commercial, financial and
agricultural loans. . . . . . . . . . . . . . . . . . 111,726 81,692 74,755 75,700 75,008
Installment and consumer loans . . . . . . . . . . . . 41,024 53,815 46,748 45,022 40,501
All other loans (including overdrafts). . . . . . . . . 834 741 779 787 530
-------- -------- -------- -------- --------
Total gross loans . . . . . . . . . . . . . . . . . 210,991 180,410 161,950 166,609 165,395
Less: Allowance for loan
and lease losses . . . . . . . . . . . . . . . . . . 3,268 3,129 2,916 2,739 2,195
-------- -------- -------- -------- --------
Total net loans (2). . . . . . . . . . . . . . . . $207,723 $177,281 $159,034 $163,870 $163,200
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The Company had standby letters of credit outstanding aggregating $1.7
million, $1.9 million, $2.6 million, $1.8 million, and $4.4 million at
December 31, 1997, 1996, 1995, 1994, and 1993, respectively. In addition,
the Company had commitments to grant real estate construction loans,
commercial loans, and installment and consumer loans of $18.9 million, $37.5
million and $10.4 million at December 31, 1997.
- --------------------
(1) Consists of $2.9 million, $3.3 million, $3.8 million, $7.4 million, and
$13.0 million, of loans secured by single family residences and $42.9
million, $35.1 million, $23.1 million, $19.3 million, and $10.9 million of
loans secured by commercial property as of December 31, 1997, 1996, 1995,
1994, and 1993, respectively.
(2) Net of participation sold of $2.2 million, $2.2 million, $2.9 million, $4.2
million, and $2.2 million in 1997, 1996, 1995, 1994, and 1993,
respectively. Participations are sold without recourse.
22
<PAGE>
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Nonperforming assets consist of nonperforming loans and other real estate
owned ("OREO"). The Company considers a loan to be nonperforming when any one
of the following events occurs: (i) any installment of principal or interest is
90 days past due; (ii) the full timely collection of interest or principal
becomes uncertain; (iii) the loan is classified as "doubtful" by bank examiners;
or (iv) 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. OREO, which is any real estate
owned other than banking premises, typically consists of foreclosed properties.
Total nonperforming assets were $4.0 million at December 31, 1997, a
decline of $2.3 million or 36.4%, as compared to $6.3 million at December 31,
1996. This decline was the result of the Company's continued efforts to reduce
nonperforming assets, as well as improvement in the Southern California economy.
Nonperforming assets at December 31, 1997 consisted of $3.0 million in
nonaccrual loans, a decrease of $520,000 or 14.7% as compared to $3.5 million at
December 31, 1996, and $1.0 million in OREO, a decrease of $1.8 million or 64.2%
as compared to $2.8 million at December 31, 1996. Commercial loans classified
as nonaccrual totaled $2.2 million at December 31, 1997, an increase of
$623,000 or 40.5%. Nonaccrual loans in the installment and consumer category
totaled $858,000 at December 31, 1997, as compared to $1.3 million at December
31, 1996, a decrease of $412,000 or 32.4%.
Total nonperforming assets were $6.3 million at December 31, 1996, a
decline of $1.4 million or 18.1%, as compared to $7.7 million at December 31,
1995. This decline was the result of the Company's continued efforts to reduce
nonperforming assets, as well as improvement in the Southern California economy.
Nonperforming assets at December 31, 1996 consisted of $3.5 million in
nonaccrual loans, a decrease of $1.8 million or 33.1% as compared to $5.3
million at December 31, 1995, and $2.8 million in OREO, an increase of $354,000
or 14.7% as compared to $2.4 million at December 31, 1995. Nonaccrual loans of
$150,000 in the conventional real estate category consisted of two loans on
single family residences. One construction loan in the amount of $581,000 on
vacant land zoned for residential use was on nonaccrual status. Commercial
loans classified as nonaccrual totaled $1.5 million at December 31, 1996, a
decline of $20,000 or 1.3%. Nonaccrual loans in the installment and consumer
category totaled $1.3 million at December 31, 1996, as compared to $1.1 million
at December 31, 1995, an increase of $141,000 or 12.5%.
OREO is recorded at its net realizable value at the time the asset is
transferred to OREO. Additional writedowns in the value of the properties may
occur depending upon changes in the market, annual appraisals of the property
and the estimated length of time needed to dispose of the property. The Company
has experienced some improvement in its ability to dispose of its OREO over the
last several years, selling 13 properties that totaled $3.3 million during 1997
and 22 properties that totaled $2.8 million during 1996. At December 31, 1997,
OREO consisted of one single family residence carried at $0, two commercial
properties totaling $196,000, and 21 parcels of vacant land zoned for
residential use totaling $790,000. Management believes that all of the Bank's
OREO will ultimately be sold at prices sufficient to recover all of the values
at which they are currently being carried on the books of the Bank. However,
until each of those properties is actually sold, it is impossible to predict
whether such prices will actually recover such values.
Interest income included in net interest income relating to nonaccrual
loans was $123,000 and $84,000 for the years ended December 31, 1997 and 1996,
respectively. Additional interest income of $212,000 and $327,000 on nonaccrual
loans would have been recorded during 1997 and 1996, respectively, if the loans
had been paid in accordance with their original terms and had been outstanding
throughout the 12 months then ended or, if not outstanding throughout the 12
months then ended, since origination.
The table on the following page provides information with respect to the
components of the Company's nonperforming assets at the dates indicated.
23
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past due
and still accruing (as to principal or interest)
Installment and consumer loans .. . . . . . . . . . . $ -- $ -- $ -- $ 14 $ 54
Nonaccrual loans
Conventional real estate . . . . . . . . . . . . . . -- 150 1,095 1,187 --
Real estate construction . . . . . . . . . . . . . . -- 581 1,506 1,389 537
Commercial. . . . . . . . . . . . . . . . . . . . . . 2,163 1,540 1,560 1,775 2,287
Installment and consumer loans. . . . . . . . . . . . 858 1,270 1,129 767 547
------- ------- ------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . 3,021 3,541 5,290 5,118 3,371
------- ------- ------- ------- --------
Total nonperforming loans. . . . . . . . . . . . . 3,021 3,541 5,290 5,132 3,425
Other real estate owned . . . . . . . . . . . . . . . . 986 2,756 2,402 3,607 6,821
------- ------- ------- ------- --------
Total nonperforming assets . . . . . . . . . . . . $ 4,007 $ 6,297 $ 7,692 $ 8,739 $10,246
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Nonperforming loans to
total gross loans . . . . . . . . . . . . . . . . . . 1.43% 1.96% 3.27% 3.08% 2.07%
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Nonperforming assets to
total gross loans plus
other real estate owned . . . . . . . . . . . . . . . 1.89% 3.44% 4.68% 5.13% 5.95%
------- ------- ------- ------- --------
------- ------- ------- ------- --------
</TABLE>
Other past due loans at December 31, 1997 included $749,000 of loans
past due more than 30 days but less than 90 days.
Restructured loans consist of loans whose terms have been modified to
provide some relief from the scheduled interest and principal payments in light
of the customer's financial difficulties, the objective of which is to maximize
the Bank's possibility of collection. Restructured loans totaled $3.9 million
and $5.4 million at December 31, 1997 and 1996, respectively. Restructured
loans includes $115,000 and $45,000 in conventional real estate loans and
commercial loans, respectively, which were accounted for as nonaccrual loans at
December 31, 1997.
The following table provides information with respect to the
components of the Company's restructured loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Restructured loans
Real estate conventional . . . . . . . . . . . . . . $3,378 $4,674 $6,459 $4,777 $ 330
Commercial. . . . . . . . . . . . . . . . . . . . . . 484 731 479 1,354 1,732
------- ------- ------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . $3,862 $5,405 $6,938 $6,131 $2,062
------- ------- ------ ------ ------
------- ------- ------ ------ ------
</TABLE>
A loan is deemed to be impaired when it is probable that a creditor
may not collect amounts due according to the original contractual terms of the
original loan agreement. Impaired loans are measured using one of the following
methods: (i) the present value of expected cash flows discounted at the loan's
effective interest rate; (ii) the observable value of the loan's market price;
or (iii) the fair value of the collateral if the loan is collateral dependent.
All impaired loans at December 31, 1997 were measured based on the fair value of
the loan collateral. Interest income on impaired loans is recognized on a cash
basis.
24
<PAGE>
The Bank's recorded investment in impaired loans at December 31,
1997 and 1996, was $2,163,000 and $2,271,000, respectively. Reserves for loan
losses of $151,000 and $342,000 were established for impaired loans at December
31, 1997 and 1996, respectively. The average recorded investments in impaired
loans during 1997 and 1996 were $2,528,000 and $3,602,000, respectively.
Interest income on impaired loans of $120,000 and $49,000 was recognized for
cash payments received in 1997 and 1996. The Company is not committed to lend
additional funds to debtors whose loans have been modified.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses at December 31, 1997 totaled $3.3
million or 1.55% of total gross loans as compared to $3.1 million or 1.73% of
total gross loans at December 31, 1996 and $2.9 million or 1.80% of total gross
loans at December 31, 1995.
It is the Company's practice to maintain the allowance for loan and lease
losses at a level considered by Management to be adequate. Each month
Management calculates an acceptable allowance for loan and lease losses using an
internal rating system based upon the risk associated with various categories of
loans. A portion of the calculation is based upon the historical loss
experience of the preceding five years and in some risk categories the degree of
collateralization. The risk assigned to each loan is first determined when the
loan is originated. It is then reviewed quarterly and revised as appropriate.
In addition, the Bank maintains a monitoring system for all credits that have
been identified either internally or externally as warranting additional
Management attention. These credits are formally reported to Management by the
lending officers on a quarterly basis and are subsequently reviewed by the Loan
Committee of the Board of Directors. Reserves against these loans are based on
the credit risk assigned to the loans as described above utilizing a schedule of
percentages developed by Management in accordance with historical loss
experience, ranging from 0.5% to 50% of the present loan balances. These
percentages may be modified, based upon current or prospective local economic
conditions. The comments of bank examiners, the Company's independent auditors
and a third party loan review consultant hired by the Bank on a periodic basis
are also considered in revising risk category assignments. In determining the
actual allowance for loan and lease losses to be maintained, Management augments
this calculation with an analysis of the present and prospective financial
condition of certain borrowers, industry concentrations within the portfolio,
trends in delinquent and nonaccrual loans and general economic conditions.
During 1997 and 1996, $1.2 million and $400,000, respectively, of the provision
for loan and lease losses was provided to supplement the Bank's Title I HUD
reserve due to potential losses arising from the Title I participation
certificates sold in 1993 and 1994. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Financial Condition --
Loans.")
The allowance for loan and lease losses is based upon estimates and
ultimate losses may vary from current estimates. The continuing evaluation of
the loan portfolio and assessment of current economic conditions will dictate
future funding levels. Management believes that the allowance for loan and
lease losses at December 31, 1997 was adequate to absorb the known and inherent
risks in the loan portfolio. However, no assurance can be given that changes in
the current economic environment in the Bank's principal market area or other
circumstances will not result in increased losses in the Bank's loan portfolio
in the future.
Net charged-off loans as a percentage of the beginning of the period
allowance for loan and lease losses were 31.4%, 37.3% and 114.2% in 1997, 1996
and 1995, respectively. The decreased level of charge-offs over the past two
years reflects improvement in the Southern California economy and real estate
values, and in the Company's asset quality. Additionally, the Bank recovered
$489,000 in 1997 on one commercial real estate loan that had been charged off
in 1996 and 1995.
The table on the following page summarizes, for the periods indicated, loan
balances at the end of each period and daily averages during the period; changes
in the allowance for loan and lease losses arising from loans charged off,
recoveries on loans previously charged off, and additions to the allowance which
have been charged to operating expense; and certain ratios relating to the
allowance for loan losses.
25
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCES:
Average loans during period. . . . . . . . . . . . . $195,536 $171,906 $165,374 $168,076 $167,402
Loans at end of period . . . . . . . . . . . . . . . 210,991 180,410 161,950 166,609 165,395
ALLOWANCE FOR LOAN AND LEASE LOSSES:
Balance at beginning of period . . . . . . . . . . . 3,129 2,916 2,739 2,195 2,134
Actual charge-offs:
Conventional real estate loans . . . . . . . . . . 13 361 183 380 197
Real estate construction . . . . . . . . . . . . . -- -- 525 71 69
Commercial, financial and
agricultural loans . . . . . . . . . . . . . . . 502 450 1,514 1,595 1,101
Installment and consumer loans. . . . . . . . . . 1,054 609 1,022 804 963
-------- -------- -------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . 1,569 1,420 3,244 2,850 2,330
Recoveries on loans previously
charged-off:
Conventional real estate loans . . . . . . . . . . 489 -- -- -- --
Commercial, financial and
agricultural loans . . . . . . . . . . . . . . . 33 274 47 184 51
Installment and consumer loans. . . . . . . . . . 64 59 68 75 75
-------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . 586 333 115 259 126
Net loan charge-offs . . . . . . . . . . . . . . . . 983 1,087 3,129 2,591 2,204
Provision for loan and lease losses . . . . . . . . 1,122 1,300 3,306 3,135 2,265
-------- -------- -------- --------- ---------
Balance at end of period . . . . . . . . . . . . . . $ 3,268 $ 3,129 $ 2,916 $ 2,739 $ 2,195
-------- -------- -------- ------- ---------
-------- -------- -------- ------- ---------
RATIOS:
Net loan charge-offs to
average loans. . . . . . . . . . . . . . . . . . . 0.50% 0.63% 1.89% 1.54% 1.32%
Allowance for loan and lease losses
to loans at end of period. . . . . . . . . . . . . 1.55 1.73 1.80 1.64 1.33
Net loan charge-offs to beginning
of the period allowance for
for loan and lease losses. . . . . . . . . . . . . 31.4 37.3 114.2 118.0 103.3
Net loan charge-offs to provision
for loan and lease losses. . . . . . . . . . . . . 87.6 83.6 94.7 82.7 97.3
</TABLE>
The primary risk element considered by Management with respect to each
installment and conventional real estate loan is lack of timely payment and the
value of the collateral. The primary risk elements with respect to real estate
construction loans are fluctuations in real estate values in the Company's
market areas, inaccurate estimates of construction costs, fluctuations in
interest rates, the availability of conventional financing, the demand for
housing in the Company's market area and general economic conditions. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Loans.") The primary risk elements with
respect to commercial loans are the financial condition of the borrower, general
economic conditions in the Company's market area, the sufficiency of collateral,
the timeliness of payment and with respect to adjustable rate loans, interest
rate fluctuations. Management has a policy of requesting and reviewing annual
financial statements from its commercial loan customers and periodically reviews
the existence of collateral and its value. Management also has a reporting
system that monitors all past due loans and has adopted policies to pursue its
creditor's rights in order to preserve the Company's position.
26
<PAGE>
Loans are charged against the allowance when, in Management's opinion, they
are deemed uncollectible, although the Bank continues to aggressively pursue
collection. Although Management believes that the allowance for loan and lease
losses is adequate to absorb losses as they arise, there can be no assurance
that (i) the Company will not sustain losses in any given period which could be
substantial in relation to the size of the allowance for loan and lease losses,
(ii) the Company's level of nonperforming loans will not increase, (iii) the
Company will not be required to make significant additional provisions to its
allowance for loan and lease losses, or (iv) the level of net charge-offs will
not increase and possibly exceed applicable reserves.
The Company anticipates total net charge-offs of approximately $1.1 million
or .50% of projected average loans during 1998 as compared to net charge-offs of
$1.0 million in 1997. This projected increase is due to loan growth combined
with a reduction in the level of loan loss recoveries as compared to 1997. It
is anticipated that net charge-offs by loan category will be as follows;
conventional real estate, $242,000; real estate construction, $54,000;
commercial, financial and agricultural, $591,000; and installment and consumer
loans, $243,000. These estimates are based upon Management's analysis of the
loan portfolio and its analysis of the adequacy of the allowance for loan and
lease losses. No assurances can be given that the net charge-offs anticipated
will not be greater than or less than $1.1 million, or that they will occur in
the projected categories.
INVESTMENT PORTFOLIO
The Company's investment securities are classified into two categories:
available for sale and held to maturity. Investments classified as available
for sale are carried at market value, with the unrealized gain or loss net of
tax effect reflected as a separate component of stockholders' equity. Held to
maturity investments are carried at amortized cost. Available for sale
securities totaled $17.5 million and $23.1 million at December 31, 1997 and
1996, respectively. Held to maturity securities totaled $12.1 million and $11.3
million at December 31, 1997 and 1996, respectively. The Company has not
transferred securities between classifications and has no investments
classified as trading account securities. Unrealized losses of $3,000 and
$156,000 for 1997 and 1996, respectively, have been recognized in the available
for sale portfolio.
The Company's investment strategy is to maximize portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the investment strategy are to provide adequate levels of investment income and
secondarily to maintain an appropriate level of liquidity. The Company's
current investment policy is to invest in securities that have a maturity or
remaining projected life of not more than seven years and an investment grade
credit rating by one or more nationally recognized rating agencies. The policy
prohibits gains trading, when-issued trading, short sales and investing in
stripped securities, mortgage-backed residuals, derivative securities and most
structured securities.
At December 31, 1997, investment securities totaled $29.7 million or
10.5% of total assets, a decrease of $4.8 million, or 13.9%, compared to
$34.5 million or 13.4% of assets at December 31, 1996. The decrease in the
total investment portfolio was prompted by an increase in loan demand in the
Company's market areas. During 1997, the mix within the available for sale
investment portfolio (as exhibited in the table on the following page) was
directed from fixed income government agency obligations which decreased $8.0
million or 88.9% into mortgage-backed securities which increased $5.5 million
or 75.2%. The shift in mix was in response to declining short-term interest
rates and designed to enhance the portfolio yield. The Company sold $14.6
million from its available for sale portfolio in 1997 comprised of $8.0
million in government agencies, $3.6 million in mortgage-backed securities
(mostly fixed rate) and $3.0 million in a government fund. The sales
resulted in net gains of $53,000. Investment purchases totaled $19.4 million
in 1997 of which $12.0 million were mortgage-backed securities. Most of the
mortgage-backed securities purchased in 1997 are comprised of adjustable rate
mortgages most commonly tied to the one year, three year or five year
treasuries or the Federal Home Loan Bank Eleventh District cost of funds
index. Although principal value may fluctuate, the individual mortgages in
these pools are periodically adjusting to current rates, resulting in an
asset with a principal value that is relatively stable compared to fixed
income securities with similar characteristics, making them less sensitive to
interest rate risk. Also, due to an active secondary market, mortgage-backed
securities can offer liquidity similar to U.S. Treasury
27
<PAGE>
securities at yields that are typically higher than comparable Treasury
securities. In 1996 investment securities increased $8.3 million, or 31.7%,
from $26.2 million or 11.0% of assets at December 31, 1995. The increase in
the investment portfolio in 1996 was primarily due to the low demand for
loans in the Company's market areas.
The table below summarizes the carrying value and distribution of the
Company's investment securities as of the end of the last three years (dollar
amounts are stated in thousands).
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury securities . . . . . . . . . . $ -- $ 501 $ 548
Obligations of other U.S.
government agencies. . . . . . . . . . . . 1,002 9,022 9,977
Obligations of states and political
sub-divisions. . . . . . . . . . . . . . . 2,116 2,142 1,599
Mortgage-backed securities . . . . . . . . . 12,896 7,362 3,014
Equity securities (1) . . . . . . . . . . . . 1,530 4,090 3,112
------- -------- -------
Total . . . . . . . . . . . . . . . . . . . $17,544 $23,117 $18,250
------- -------- -------
------- -------- -------
HELD TO MATURITY:
U.S. Treasury securities . . . . . . . . . . $ 301 $ 747 $ 1,744
Obligations of other U.S
government agencies. . . . . . . . . . . . 7,478 5,674 4,933
Obligations of states and political
sub-divisions. . . . . . . . . . . . . . . 1,748 1,751 907
Mortgage-backed securities . . . . . . . . . 2,608 3,172 338
------- -------- -------
Total . . . . . . . . . . . . . . . . . . $12,135 $11,344 $ 7,922
------- -------- -------
------- -------- -------
</TABLE>
The table below summarizes the maturity of the Company's investment
securities and their weighted average yields at December 31, 1997. Tax-exempt
income from investment securities is presented on a tax-equivalent basis
assuming a 34% federal income tax rate for 1997. Mortgage-backed securities are
categorized based on final maturity dates.
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN FIVE WITHIN TEN AFTER TEN
ONE YEAR YEARS YEARS YEARS TOTAL
---------------- ---------------- --------------- ---------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities . . . $ 301 5.74% $ -- --% $ -- --% $ -- --% $ 301 5.74%
Obligations of other U.S.
government agencies. . . . . 1,249 5.09 7,231 6.55 -- -- -- -- 8,480 6.34
Obligations of states and
political subdivisions . . . 502 6.75 2,292 6.60 1,070 9.51 -- -- 3,864 7.42
Mortgage-backed securities . . 382 6.18 336 8.25 885 6.36 13,901 6.9 15,504 6.78
Equity securities (1). . . . . 1,530 5.76 -- -- -- -- -- -- 1,530 5.76
------ ------ ------- ------- -------
Total investment securities. $3,964 5.71% $9,859 6.62% $ 1,955 8.08% $13,901 6.79% $29,679 6.67%
------ ------ ------- ------- -------
------ ------ ------- ------- -------
</TABLE>
- ---------------
(1) Equity securities in 1997, 1996 and 1995, included $498,000, $3.4 million
and $3.1 million, respectively, in government securities bond and money
market funds which invest in securities guaranteed by the U.S. Government,
$794,000 and $733,000 in Federal Home Loan Bank stock in 1997 and 1996,
respectively, and $238,000 in Federal Reserve Bank stock in 1997. Equity
securities are carried on the books of the Company at the lower of
aggregate cost or market. In 1997, 1996 and 1995 stockholders' equity was
reduced by $36,000, $68,000 and $44,000, respectively to reflect a
decline in the market value of these securities.
28
<PAGE>
DEPOSITS
Total average deposits increased $25.2 million or 11.4% to $246.0
million at year-end 1997 from $220.8 million at year-end 1996. This growth
was centered in average time deposits which increased $16.5 million or 46.8%
to $51.6 million at December 31, 1997. Average time deposits as a percentage
of total average deposits increased to 21.0% from 15.9% last year. 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. Average noninterest-bearing demand deposits
increased $8.7 million or 11.8% to $82.0 million at the end of 1997 from
$73.3 million at the end of 1996. Average noninterest-bearing demand
deposits represented 33.3% and 33.2% of average total deposits at December
31, 1997 and 1996, respectively.
Total average deposits increased to $220.8 million in 1996 compared to
$210.3 million for 1995, an increase of $10.5 million or 5.0%.
Noninterest-bearing demand accounts provided the largest average dollar
increase, growing $6.4 million or 9.6% to $73.3 million in 1996 from $66.9
million in 1995. Average noninterest-bearing demand deposits represented
33.2% and 31.3% of total average deposits in 1996 and 1995, respectively,
reflecting the retail nature of the Company's deposit base. Interest-bearing
demand deposits increased $3.0 million or 9.0% to $36.8 million and time
deposits grew $4.6 million or 14.9% to $35.2 million. Savings accounts, the
only category to decrease, dropped $3.4 million or 4.4% to $75.6 million in
1996, representing 34.2% of total average deposits compared to 37% in 1995.
The levels of noninterest-bearing demand deposits (including retail
accounts) are influenced by such factors as customer service, service charges
and the availability of banking services (i.e., extended hours, convenience
of location, availability of ATMs). No assurance can be given that the
Company will be able to maintain its current level of noninterest-bearing
deposits. The Company's percentage of noninterest-bearing deposits remains
high compared to similar sized institutions. Competition from other banks
and thrift institutions as well as money market funds, some of which offer
interest rates substantially higher than the Company, makes it difficult for
the Company to maintain the current level of noninterest-bearing deposits.
Management continually works to implement pricing and marketing strategies
designed to lower the average rate paid on interest-bearing deposits and to
maintain a stable deposit mix.
The following table summarizes the distribution of average deposits (in
thousands) and the average rates paid for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits . . . . . . . . . $ 81,958 -- $ 73,298 -- $ 66,910 --
Interest bearing
demand deposits . . . . . . . . . 36,809 1.43% 36,791 1.44% 33,744 1.70%
Savings deposits. . . . . . . . . . 75,650 3.29 75,583 3.29 79,031 3.42
Time deposits . . . . . . . . . . . 51,621 5.11 35,166 4.77 30,600 4.76
-------- -------- --------
Total deposits . . . . . . . . $246,038 2.30% $220,838 2.13% $210,285 2.25%
-------- -------- --------
-------- -------- --------
</TABLE>
As part of its asset/liability management policy, the Company generally
limits the issuance of time deposits of $100,000 or greater primarily to
customers who have other business relationships with the Company and who
reside within the Company's market area, although the Company may offer such
deposits to others to help it meet its liquidity needs. The Company
generally limits the terms of these deposits to less than one year in order
to allow it to react quickly to changing interest rates. At December 31,
1997, time deposits of $100,000 or more totaled $9.2 million, representing
19.7% and 3.7% of total time deposits and total deposits, respectively.
29
<PAGE>
At December 31, 1996, time deposits of $100,000 or more totaled $9.2 million,
representing 24.6% and 4.0% of total time deposits and total deposits,
respectively. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Asset Liability
Management.")
The scheduled maturity of the Company's time deposits in denominations of
$100,000 or greater as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
TIME DEPOSITS MATURING IN DECEMBER 31, 1997
------------------------- -----------------
(IN THOUSANDS)
<S> <C>
Three months or less. . . . . . . . . . . . . $5,181
Over three months through six months. . . . . 1,439
Over six months through twelve months . . . . 2,364
Over twelve months. . . . . . . . . . . . . . 200
------
Total . . . . . . . . . . . . . . . . . . $9,184
------
------
</TABLE>
CAPITAL RESOURCES
Stockholders' equity increased $5.0 million or 24.9% to $25.2 million
at December 31, 1997 from $20.2 million at December 31, 1996. This increase
was due to net income of $3.5 million, the conversion of subordinated
debentures, net of deferred offering costs, of $1.4 million, and a decrease
of $84,000 in unrealized losses on available for sale securities.
Stockholders' equity increased $3.0 million or 17.1% to $20.2 million at
December 31, 1996 from $17.2 million at December 31, 1995. This increase was
due to net income of $2.7 million, the sale of $201,000 of common stock, and
a decrease $7,000 in unrealized losses on available for sale securities.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations.")
Under the risk-based capital guidelines for banks and bank holding
companies adopted by the federal banking regulators in 1988 the Company and
the Bank are required to maintain a minimum ratio of total capital to total
risk-weighted assets of 8.00% (at least one-half of which must consist of
Tier 1 capital). Risk-based capital ratios are calculated to provide a
measure of capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet
as assets, and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. At December 31,
1997 the Company's risk-based capital ratios were 10.88% for Tier 1 capital
and 12.14% for total capital and the Bank's risk-based capital ratios were
10.85% for Tier 1 and 12.10% for total capital. The Company's risk-based
capital ratios at December 31, 1996 were 9.94% for Tier 1 capital and 11.96%
for total capital and the Bank's risk-based capital ratios were 11.28% for
Tier 1 capital and 12.53% for total capital.
Additionally, the federal banking regulators adopted minimum Tier 1
leverage capital ratio requirements in 1990 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 rating. All other
institutions are required to meet a minimum ratio of 4.00% to 5.00%. Tier 1
capital consists of common equity, minority interest in equity of
consolidated subsidiaries, and qualifying perpetual preferred stock. At
December 31, 1997 and 1996, the Company's Tier 1 leverage capital ratios were
8.76% and 7.70%, respectively. The Tier 1 leverage capital ratios of the
Bank were 8.73% and 8.74% at December 31, 1997 and 1996, respectively. (See
"Description of Business -- Regulation and Supervision --Capital Adequacy
Requirements" and "Legal Proceedings"). The decrease in the Bank's capital
ratios at December 31, 1997 as compared to December 31, 1996, was due to the
payment of $1.5 million in dividends to the Company during 1997, the
proceeds of which were used to payoff Company debt and for general operating
purposes.
30
<PAGE>
In May 1990, the Company issued $1.7 million in 9 1/4% convertible
subordinated debentures (the "Debentures") of which $1.5 million were
outstanding at December 31, 1996. In September 1997, at which time $1.5
million in Debentures were outstanding, the Company announced that it was
exercising its option to redeem the Debentures at a price of 102.25%
effective October 31, 1997 to holders of record on October 27, 1997. Prior
to the record date most holders of the Debentures elected to convert to
common stock, receiving 267 shares per $1,000 face value of Debentures, a
conversion price of $3.74. Holders of $5,000 in Debentures opted for cash
redemption on October 31, 1997. The conversion of Debentures during 1997
resulted in an increase in common stock, a component of Tier 1 capital, of
$1.4 million which was net of deferred offering costs of $101,000.
Outstanding Debentures of $1.5 million at December 31, 1996 qualified as Tier
2 capital under risk-based capital guidelines.
The Company had $1.6 million outstanding under two term notes as of
December 31, 1996 that were paid in full in May of 1997. Proceeds from the
notes were used to purchase $1.5 million of noncumulative perpetual preferred
stock from the Bank in 1993.
As a bank holding company without significant assets other than its
equity interest in the Bank, the Company's ability to service its debt
obligations depends upon the dividends it receives from the Bank. As of
December 31, 1995, the Bank, operating under the terms of the Order entered
into with the FDIC in May 1995, had agreed not to pay cash dividends to the
Company without the prior consent of the FDIC. Based upon the results of the
Bank's FDIC examination conducted in December of 1995, the Order was
terminated in May of 1996. (See "Legal Proceedings").
During 1998, Management anticipates capital expenditures of
approximately $1.5 million primarily for upgrades to computer and data
communications equipment, computer software and improvements to current
facilities.
RESULTS OF OPERATIONS
NET INCOME
Net income increased 27.9% or $765,000 to $3.5 million for the year
ended December 31, 1997 from $2.7 million for the year ended December 31,
1996. Basic earnings per share increased to $0.82 per share in 1997 from
$0.66 in 1996. Return on average assets, average stockholders' equity and
beginning equity were 1.28%, 15.72% and 17.39%, respectively, for 1997, up
from 1.11%, 14.73% and 15.93%, respectively, for 1996. The increase in
earnings is primarily attributable to an increase in net interest income of
$1.7 million or 11.0% partly offset by an increase in other expense of
$631,000 or 4.1%. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Net Interest
Income and Other Expense".)
NET INTEREST INCOME
Net interest income, the principal source of income for the Company, is
interest and fees earned on loans and investments less the interest paid on
deposits and borrowings. Primary factors affecting the level of net interest
income include increases or decreases in the average balances (volume) of
interest-earning assets and interest-bearing liabilities, increases or
decreases in the average rates earned and paid on these assets and
liabilities, the Company's ability to manage its earning asset portfolio and
the availability of particular sources of funds. Net interest income for the
year ended December 31, 1997 was $16.4 million compared to $14.7 million in
1996, an increase of $1.7 million or 11.0%. This increase is primarily
attributable to an increase in average interest-earning assets partly offset
by a decrease in the net interest margin.
31
<PAGE>
Interest income increased $2.5 million of which amount $2.6 million was
attributable to increased volume that was partly offset by a decrease of
$189,000 due to slightly lower yields. The largest portion of the increase
in volume was in average loans which grew $23.6 million, contributing $2.4
million to the increase in interest income partly offset by declining yields
on loans which decreased interest income by $177,000. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Financial Condition -- Loans.") Maturities of fixed rate higher yielding
loans combined with a decrease in total consumer loans outstanding and a
declining interest rate environment have decreased the yield on the loan
portfolio to 10.25% in 1997 from 10.37% in 1996. The average yield on
investments and Federal funds sold were 5.67% and 5.41%, respectively, in
1997 as compared 5.80% and 5.08%, respectively, in 1996. The average tax
equivalent yield on interest-earning assets was 9.45% in 1997 compared to
9.53% in 1996.
Interest expense increased $829,000 or 16.2% to $5.9 million at year-end
1997 from $5.1 million in 1996. This increase was primarily due to an
increase of $957,000 or 20.4% in interest on deposits . Average total
deposits grew $25.2 million to $246.0 million in 1997 compared to $220.8
million for 1996. The average rate paid on interest-bearing deposits during
1997 was 3.44% compared to 3.18% last year. Time deposits averaged $51.6
million with an average rate paid of 5.11% in 1997 compared to an average
balance of $35.2 million at an average rate of 4.77% 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%
in the first part of the year. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition
- --Deposits.") The Company's net interest spread (the average taxable
equivalent rate earned on interest-earning assets less the average rate paid
on interest-bearing liabilities) decreased to 5.90% for 1997 from 6.18% for
1996 and the net tax equivalent interest margin (net interest income as a
percentage of average interest-earning assets) decreased to 6.94% from 7.09%
during the same time period.
The yield on approximately 51.2% and 46.3% at December 31, 1997 and
1996, respectively, of the Bank's loan portfolio moves up or down within one
year as the Bank adjusts its base lending rate (generally set at between 1%
to 2% over national prime rate), with changes in the national prime rate, or
with changes in other widely used indices. An additional 8.5% of the
portfolios at December 31, 1997 and 1996, consisted of fixed rate loans which
mature in one year or less. The foregoing enables the Bank to quickly adjust
to a changing interest rate environment. Management believes that interest
rates on each category of loans in the Bank's loan portfolio are
competitively priced for banks in its market area. The yield on average loans
is also dependent on the mix of loans in the loan portfolio. Real estate
construction loans and commercial loans are typically offered at higher
interest rates and fees than conventional real estate loans, lease financing
or automobile and other consumer loans. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Financial
Condition -- Loans.")
The table on the following page shows the Company's consolidated average
balances of assets, liabilities and stockholders' equity, the amount of
interest income or interest expense, the average yield or rate for each
category of interest-earning assets and interest-bearing liabilities, and the
net interest spread and net interest margin for the year indicated.
Tax-exempt income from investment securities and loans is presented on a
tax-equivalent basis assuming a 34% federal tax rate for 1997, 1996, and 1995.
32
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ---------------------------- ----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/ AVERAGE INCOME RATE/
BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD
------- -------- ------ ------- -------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1). . . . . . . . . . $ 195,536 $ 20,050 10.25% $ 171,906 $ 17,831 10.37% $ 165,374 $ 17,617 10.65%
Taxable investment
securities. . . . . . . . 30,289 1,713 5.65 27,570 1,592 5.78 20,570 1,294 6.29
Tax-exempt investment
securities. . . . . . . . 2,861 182 5.88 2,261 138 6.09 1,223 47 3.81
Interest-bearing deposits. . 277 16 5.79 -- -- -- 44 3 5.60
Federal funds sold . . . . . 8,124 439 5.41 7,573 385 5.08 7,708 429 5.56
---------- -------- ----- --------- ------- ----- --------- ------- -----
Total earning assets . . . . 237,087 22,400 9.45 209,310 19,946 9.53 194,919 19,390 9.95
---------- -------- ----- --------- ------- ----- --------- ------- -----
---------- -------- ----- --------- ------- ----- --------- ------- -----
Noninterest-earning assets:
Cash and due from banks. . . 23,079 22,560 21,070
Premises and equipment, net. 8,328 9,184 10,026
Other assets (2) . . . . . . 9,055 9,028 9,238
---------- --------- ---------
Total noninterest-earning
assets. . . . . . . . . . 40,462 40,772 40,334
---------- --------- ---------
Less allowance for loan
and lease losses . . . . . . 3,264 3,233 2,668
---------- --------- ---------
Total assets. . . . . . . $ 274,285 $ 246,849 $ 232,585
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand . 36,809 525 1.43 36,791 528 1.44 33,744 574 1.70
Savings . . . . . . . . . 75,650 2,487 3.29 75,583 2,488 3.29 79,031 2,705 3.42
Time. . . . . . . . . . . 51,621 2,638 5.11 35,166 1,677 4.77 30,600 1,457 4.76
Other short term borrowings. 1,410 76 5.24 1,622 74 4.43 1,483 84 5.65
Capital lease. . . . . . . . 422 61 14.57 444 65 14.59 476 72 14.18
Long term debt . . . . . . . 1,624 154 9.47 3,229 280 8.67 3,178 272 8.71
---------- -------- ----- ------- ------ ----- ------- ----- ------
Total interest-bearing
liabilities . . . . . . . 167,536 5,941 3.55 152,835 5,112 3.34 148,512 5,164 3.48
---------- -------- ----- ------- ------ ----- ------- ------ ------
Noninterest-bearing liabilities:
Demand deposits. . . . . . . 81,958 73,298 66,910
Other liabilities. . . . . . 2,474 2,102 1,799
--------- -------- -------
Total liabilities. . . . . . 251,968 228,235 217,221
Stockholders' equity. . . . . . 22,317 18,614 15,364
--------- --------- -------
Total liabilities and
stockholders' equity. . . $ 274,285 $ 246,849 $ 232,585
--------- --------- -------
--------- --------- -------
Net interest income
(tax equivalent basis) . . . 16,459 14,834 14,226
Reversal of tax equivalent
adjustment . . . . . . . . . (105) (106) (104)
------- ------- --------
Net interest income . . . . . . $16,354 $14,728 $ 14,122
------- ------- --------
------- ------- --------
Net interest spread(3). . . . . 5.90% 6.18% 6.47%
---- ---- ----
---- ---- ----
Net interest margin(4). . . . . 6.94% 7.09% 7.30%
---- ---- ----
---- ---- ----
</TABLE>
- ----------------
(1)For purposes of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding.
(2)Includes average balances of real estate owned other than Company and Bank
premises during 1997, 1996, and 1995 of $1.0 million, $2.8 million, and
$3.3 million, respectively.
(3)Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(4)Represents net interest income as a percentage of average interest-earning
assets.
33
<PAGE>
The following table sets forth the dollar amount of changes in interest
earned and paid for each major category of interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes
in average balances (volume) or changes in average interest rates.
Tax-exempt income from investment securities and loans is not presented on a
tax-equivalent basis.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
----------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
------------------------------------ -------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets -- Interest income:
Loans $ 2,420 $(177) $2,243 $ 682 $(445) $ 237
Investment securities:
Taxable 154 (34) 120 411 (113) 298
Non-taxable 25 (3) 22 38 27 65
Federal funds sold 29 25 54 (8) (36) (44)
Interest-bearing deposits 16 -- 16 (2) -- (2)
------ ----- ------ ------ ---- -----
Total 2,644 (189) 2,455 1,121 (567) 554
------ ----- ------ ------ ---- ----
Deposits and borrowed funds --
Interest expense:
Interest-bearing demand
deposits -- (4) (3) 49 (95) (46)
Savings deposits 2 (4) (2) (115) (101) (216)
Time deposits 834 128 961 218 4 222
Other short term borrowings (10) 12 2 7 (19) (12)
Long term debt (150) 24 (126) 4 (1) 3
Capital lease (3) -- (3) (5) 2 (3)
------ ----- ------ ------ ---- ----
Total 673 156 829 158 (210) (52)
------ ----- ------ ------ ---- ----
Change in net interest income $1,971 $ (345) $1,626 $ 963 $ (357) $ 606
------ ----- ------ ------ ---- -----
------ ----- ------ ------ ---- -----
</TABLE>
PROVISION FOR LOAN AND LEASE LOSSES
The Company provides for loan and lease losses by a charge to operations
based upon Management's evaluation of the loan portfolio, past loan loss
experience, general economic conditions, and other pertinent factors. For
the year ended December 31, 1997, the provision for loan and lease losses
decreased $178,000 or 13.7% to $1.1 million from $1.3 million for the year
ended 1996. The decrease was due to a decline in net loans charged off to
$983,000 or 0.50% of average loans in 1997 from $1.1 million or 0.63% of
average loans outstanding in 1996, as well as a decreased provision for loan
and lease losses that in Management's opinion reflected the improvement in
the Southern California economy and in the real estate market. During 1997
and 1996, the Company provided $1.2 million and $400,000, respectively, to
the provision for loan and lease losses to supplement its Title I HUD
reserves. As of December 31, 1997 and 1996, the allowance for loan and
lease losses represented 1.55% and 1.73% of total loans, respectively. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Allowance for Loan and Lease Losses.")
OTHER INCOME
For the year ended December 31, 1997, other income decreased to $6.8
million from $7.0 million for 1996, a decrease of $187,000 or 2.7%. This
decrease was due primarily to a decrease of $124,000 or 8.7% in gains on
loan sales to $1.3 million in 1997 from $1.4 million in 1996. Gains related
to the sale of SBA loans decreased $687,000 and was partly offset by an
increase in gains related to the sales of other equity loans of $561,000.
The decline in gains on the sale of SBA loans is due to Management's decision
to enhance loan yields and to offset the slow consumer loan demand in the
Company's market area. The Company sold no SBA loans in 1997 compared to
sales of $8.3 million in 1996. During 1997, the Company sold $34.2 million
in other equity loans as compared to $15.0 million in 1996.
34
<PAGE>
OTHER EXPENSE
Other expense increased $631,000 or 4.1% to $16.2 million in 1997
compared to $15.6 million last year. Other expense consists primarily of
salaries and employee benefits which increased $1.0 million to $9.1 million,
occupancy expense which increased $137,000 to $3.2 million, expenses from
retaining professional services which increased $199,000 to $514,000, and
advertising and public relations expense which increased $187,000 to
$711,000. Expenses related to the acquisition, maintenance and sale of other
real estate owned partially offset the increases in the other expense
category with a decrease $712,000 to a net gain of $98,000 in 1997 compared
to a net loss of $614,000 in 1996.
INCOME TAXES
For 1997, the Company's provision for federal and state income taxes was
$2.3 million, reflecting an effective tax rate of 39.7% compared to an
effective rate of 43.3% for 1996. At December 31, 1997 and 1996, the
Company's deferred tax assets totaled $1.1 million and $1.3 million,
respectively, before the application of the valuation allowance. Management
has analyzed the deferred tax assets and determined that a valuation
allowance of $225,000 at December 31, 1997 and 1996 was appropriate.
IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS
The Company expects to incur expenses in the future to assure all of its
computer software will successfully process beyond December 31, 1999. Most
computer systems in use today were designed and developed when computer
memory was limited and expensive on early mainframes. As a consequence many
programs used only two digits for the year in the date field to conserve
memory. As a result, many computer applications could fail completely or
create erroneous results by the year 2000 unless corrective measures are
taken. The Company is in the process of identifying and testing critical
systems and processes and formulating contingency plans for replacing or
repairing any non-compliant systems. The Company is also assessing the
potential impact of this problem on its customers. To the extent that the
problem is not successfully addressed, consequences, the extent of which are
unknown, could follow. The Company does not believe that the costs of
addressing this problem will have a material effect on the results of
operations.
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. Funding of loan requests, providing
for liability outflows, and management of interest rate risk requires
continuous analysis in order to match the maturities of categories of loans
and investments with the maturities of deposits and bank-related borrowings.
A bank's liquidity is normally considered in terms of the nature and mix of
its sources and uses of funds. Asset liquidity is provided by cash,
certificates of deposit with other financial institutions, Federal funds
sold, maturing investments, and loan maturities and repayments. Liquid assets
(consisting of cash, Federal funds sold and investment securities) comprised
20.6% and 24.3% of the Company's total assets at December 31, 1997 and 1996,
respectively. Liquidity management also includes the management of unfunded
commitments to make loans and undisbursed amounts under lines of credit.
At December 31, 1997 these commitments totaled $37.5 million in commercial
loans, $1.7 million in letters of credit, $18.9 million in real estate
construction loans, and $10.4 million in installment and consumer loans. At
December 31, 1996 these commitments totaled $29.7 million in commercial
loans, $1.9 million in letters of credit, $3.6 million in real estate
construction loans, and $9.8 million in installment and consumer loans.
Average Federal funds sold were $8.1 million in 1997 and $7.6 million in 1996.
The Bank also has several secondary sources of liquidity. Many of the
Bank's real estate construction, and SBA loans are originated pursuant to
underwriting standards which make them readily marketable to other
35
<PAGE>
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 at the Federal Reserve discount window subject to the
Bank's ability to supply collateral. Average Federal funds purchased were
$272,000 and $74,000 in 1997 and 1996, respectively.
Asset/liability management also 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 December 31, 1997 and 1996, approximately 59.8% and 56.2%, respectively,
of the Company's total loans and 54.8% and 51.9%, respectively, of the
Company's total interest-earning assets were tied to the Company's base
lending rate, national prime rate, or mature within one year. Nearly all
(97.6% in 1997 and 96.0% in 1996) of the Company's interest-bearing
liabilities are immediately repriceable or mature in one year or less.
The following table shows the amounts of real estate construction loans,
and commercial, financial and agricultural loans outstanding as of December
31, 1997, which, based on remaining scheduled repayments of principal, were
due within one year, after one but within five years, and in more than five
years (dollars in thousands):
<TABLE>
<CAPTION>
MATURING
----------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN MORE THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Real estate construction loans . . . . . $ 8,487 $ 1,551 $ 296 $ 10,334
Commercial, financial and
agricultural loans. . . . . . . . . . . 31,563 24,902 55,261 111,726
-------- ---------- ---------- --------
Total. . . . . . . . . . . . . . . $40,050 $26,453 $55,557 $122,060
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>
The following table sets forth the sensitivity of the amounts due after
one year to changes in interest rates (dollars in thousands).
<TABLE>
<CAPTION>
MATURING
---------------------------------------
AFTER ONE
BUT WITHIN MORE THAN
FIVE YEARS FIVE YEARS TOTAL
---------- ---------- -------
<S> <C> <C> <C>
Loans:
With fixed rate interest. . . . . . $10,961 $ 6,239 $17,200
With floating rate interest . . . . 15,492 49,318 64,810
------- ------- -------
Total . . . . . . . . . . . . . $26,453 $55,557 $82,010
------- ------- -------
------- ------- -------
</TABLE>
In order to match the rate-sensitivity of its assets, the Company's
policy is to offer a significant number of variable rate deposit products and
limit the level of large dollar time deposits with maturities greater than
one year.
The table on the following page sets forth the rate-sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1997, the interest rate-sensitivity gap (interest rate-sensitive
assets less interest rate-sensitive liabilities), cumulative interest
rate-sensitivity gap, the Company's interest rate-sensitivity gap ratio
(interest rate-sensitive assets divided by interest rate-sensitive
liabilities) and the Company's cumulative interest rate-sensitivity gap
ratio. For the purposes of the following table, an asset or liability is
36
<PAGE>
considered rate-sensitive within a specified period when it matures or could
be repriced within such period in accordance with its contractual terms
(dollars in thousands).
<TABLE>
<CAPTION>
AFTER THREE AFTER SIX AFTER ONE
WITHIN MONTHS BUT MONTHS BUT YEAR BUT AFTER
THREE WITHIN SIX WITHIN ONE WITHIN FIVE
MONTHS MONTHS YEAR FIVE YEARS YEARS TOTAL
----------- ---------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNINGS ASSETS:
Loans . . . . . . . . . . . . . . . . $ 66,253 $ 52,684 $ 7,155 $53,839 $31,060 $210,991
Investment securities. . . . . . . . . 1,912 752 1,300 9,860 15,855 29,679
Federal funds sold . . . . . . . . . . 4,000 -- -- -- -- 4,000
Interest-bearing deposits. . . . . . . -- -- -- -- -- --
-------- -------- -------- ------- ------- --------
Total. . . . . . . . . . . . . . . . 72,165 53,436 8,455 63,699 46,915 244,670
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits . . . . . . . . . . . . . . 66,392 -- -- -- -- 66,392
Savings deposits . . . . . . . . . . . 48,583 -- -- -- -- 48,583
Time deposits. . . . . . . . . . . . . 21,791 11,672 9,759 3,494 12 46,728
Borrowed funds . . . . . . . . . . . . 1,194 -- -- -- 415 1,609
-------- -------- -------- ------- ------- --------
Total. . . . . . . . . . . . . . . . 137,960 11,672 9,759 3,494 427 163,312
Interest rate-sensitivity gap (65,795) 41,764 (1,304) 60,205 46,488 $ 81,358
Cumulative interest rate
sensitivity gap. . . . . . . . . . . . $(65,795) $(24,031) $(25,335) $34,870 $81,358
Interest rate-sensitivity
gap ratio. . . . . . . . . . . . . . . .52x 4.58x .87x 18.23x 109.87x 1.50x
Cumulative interest rate
sensitivity gap ratio. . . . . . . . . .52x .84x .84x 1.21x 1.50x
</TABLE>
As of December 31, 1997, the Company was liability-sensitive within one
year and asset-sensitive beyond one year. Liability sensitive means that
rate-sensitive liabilities exceed rate-sensitive assets. This position will
generally result in enhanced earnings in a falling interest rate environment
and declining earnings in a rising interest rate environment. Asset
sensitive means that rate-sensitive assets exceed rate-sensitive liabilities.
This position will generally result in enhanced earnings in a rising
interest rate environment and declining earnings in a falling interest rate
environment because a larger volume of assets than liabilities will reprice.
However, the foregoing table does not necessarily indicate the impact of
general interest rate movements on the Company's net interest yield, because
the repricing of various categories of assets and liabilities is
discretionary and is subject to competition and other pressures. As a
result, various assets and liabilities indicated as repricing within the same
period may in fact price at different times and at different rate levels.
Management attempts to mitigate the impact of changing interest rates in
several ways, one of which is to manage its interest rate-sensitivity gap.
The use of a base lending rate by the Company for the majority of its
floating rate loans also allows the Company more flexibility than the use of
a national prime rate in matching changes to the yield on floating rate loans
to changes in its funding costs. In addition to managing its
assets/liability position, the Company has taken steps to mitigate the impact
of changing interest rates by generating noninterest 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
loans. (See "Quantitative and Qualitative Disclosures About Market Risk.")
IMPACT OF INFLATION
The impact of inflation on banks differs from its impact on
non-financial institutions. Banks, as financial intermediaries, have assets
which are primarily monetary in nature and which tend to fluctuate with
inflation. This is especially true for banks with a high percentage of
rate-sensitive interest-earning assets and interest-bearing liabilities. A
bank can further reduce the impact of inflation if it can manage its
rate-sensitivity gap ( the difference between variable rate assets and
variable rate liabilities). The Company attempts to structure its assets and
liabilities and manage its gap accordingly, thus seeking to minimize the
potential effects of inflation.
37
<PAGE>
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Asset/Liability Management").
COMPARISON BETWEEN 1996 AND 1995
Net income for the year ended December 31, 1996 increased to $2.7
million from $1.5 million for the year ended December 31, 1995, an increase
of $1.2 million. Basic earnings per share increased to $0.66 in 1996 from
$0.40 in 1995. Return on average assets and average stockholders' equity
was 1.11% and 14.73%, respectively, for 1996, up from 0.66% and 9.97%,
respectively, for 1995. The primary reasons for the increase in net income
was a decrease in the provision for loan and lease losses of $2.0 million, an
increase in net interest income of $606,000, an increase in other income of
$363,000, offset by increases of $233,000 in other expense and $1.5 million
in the provision for income taxes.
Net interest income for the year ended December 31, 1996 increased
$606,000 or 4.3% to $14.7 million from $14.1 million for 1995. The increase
in net interest income was comprised of a net increase of $963,000 that was
attributable to volume, partially offset by a net decrease of $357,000 due
to declining yields. Interest income for 1996 increased $554,000 of which
$1.1 million was attributable to increased volume, offset by a net decrease
of $567,000 due to declining yields. The average yield on interest-earning
assets decreased to 9.53% for 1996 as compared to 9.95% for 1995. The
average yield on loans, investment securities and Federal funds sold for 1996
were 10.37%, 5.80% and 5.08%, respectively, compared to 10.65%, 6.15% and
5.56%, respectively, for 1995. Offsetting the decrease in the yield on
interest-earning assets was an increase in total average interest-earning
assets to $209.3 million in 1996 compared to $194.9 million in 1995, an
increase of $14.4 million or 7.4%. This increase was primarily in total
average loans which averaged $171.9 million in 1996 compared to $165.4
million in 1995, an increase of $6.5 million or 4.0%. Average investments
also increased $8.0 million or 36.9% to $29.8 million in 1996 from $21.8
million. Interest expense for 1996 was $5.1 million, decreasing $52,000 or
1.0% from $5.2 million for 1995. This decrease was primarily due to a
decline in the average rate paid on interest-bearing liabilities to 3.34% in
1996 from 3.48% in 1995, offset by an increase in average interest-bearing
liabilities of $4.3 million or 2.9% to $152.8 million in 1996 from $148.5
million in 1995. Average short-term rates during 1996 were generally lower
than those in 1995 accounting for the decreases in both the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The Company's net interest spread (the average taxable
equivalent rate earned on interest-earning assets less the average rate paid
on interest-bearing liabilities) decreased to 6.18% for 1996 from 6.47% for
1995 and the net interest margin decreased to 7.09% for 1996 from 7.30% for
1995.
For the year ended December 31, 1996, the provision for loan and lease
losses decreased $2.0 million or 60.7%, to $1.3 million from $3.3 million for
the year ended December 31, 1995. This decrease was due to a decline in net
loans charged off to $1.1 million or 0.63% of average loans outstanding in
1996 from $3.1 million or 1.89% of average loans outstanding in 1995, as well
as decreased provisions for loan and lease losses. During 1996, the Company
provided $400,000 to the provision for loan and lease losses to supplement
its Title I HUD reserves.
For the year ended December 31, 1996, other income increased to $7.0
million from $6.6 million for 1995, an increase of $363,000 or 5.5%. This
increase was due primarily to an increase of $749,000 or 24.3% in service
charges on deposit accounts, essentially overdraft and non-sufficient fund
fees, a result of revisions to the Bank's policy regarding overdrawn
accounts. Servicing fees on sold loans also grew $250,000 to $747,000 in 1996
from $497,000 in 1995. A decrease in gains on loan sales of $815,000,
partially offsetting the above increases, consisted of decreases related to
the sales of SBA loans of $297,000 and Title I loans of $1.0 million, offset
by an increase of $493,000 in gains on the sale of other equity loans. The
decline in gains on the sale of SBA and Title I loans is due to Management's
decision to sell fewer loans in an effort to boost the Company's level of
earning assets during a period of low loan demand. During 1996, $8.3 million
and $5.3 million of SBA and Title I loans, respectively, were sold as
compared to $14.1 million and $32.5 million, respectively, in 1995. During
1996, the Company sold $15.0 million in other equity loans as compared to
$595,000 in 1995.
38
<PAGE>
Other expense increased $233,000 or 1.5% to $15.6 million in 1996 from
$15.3 million in 1995. The largest increases were $591,000, $213,000 and
$148,000 in salaries and employee benefits, branch losses, and expenses
associated with the collection effort on loans and other potential losses,
respectively. Regulatory assessments were decreased $389,000 primarily due
to an improvement in the Bank's risk-based assessment category. Decreases of
$178,000 and $103,000, respectively, were also experienced in expenses
associated with the maintenance of other real estate owned and occupancy.
For 1996, the Company's provision for federal and state income taxes was
$2.1 million, reflecting an effective tax rate of 43.3% which was an increase
from an effective rate of 26.8% for 1995. The increase over 1995 was due to
a significant increase in pretax income for 1996, augmented by a decrease in
the valuation provision for deferred tax assets in 1995. There was no change
in 1996 to the valuation provision for deferred tax assets which represent
future tax deductions. At December 31, 1996 and 1995, the Company's deferred
tax assets totaled $1.3 million and $1.4 million, respectively, before the
application of the valuation allowance. Management analyzed the deferred tax
assets and determined that a valuation allowance of $225,000 at December 31,
1996 and 1995 was appropriate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The composition of the Company's balance sheet consists of investments
in interest-earning assets (primarily loans and investment securities) which
are primarily funded by interest-bearing liabilities (primarily deposits and
borrowings). These financial instruments have varying levels of sensitivity
to changes in market interest rates resulting in market risk. In evaluating
the Company's exposure to market risk, management relies primarily upon
interest-rate sensitivity gap analysis (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --- Liquidity and
Asset/Liability Management") and interest rate shock analysis. These methods
of analysis provide information as to the maturities and timing in repricing
characteristics of interest rate sensitive instruments as well as the impact
of interest rate changes upon the fair market value of these instruments.
There are certain shortcomings inherent in these methods and the following
presentation that must be considered in evaluating market risk. Although
certain assets and liabilities may have similar maturities or periods to
reprice, they may react in different degrees to changes in market interest
rates or they may anticipate or lag behind changes in market interest rates.
In addition, certain interest rate sensitive assets may have contractual
limitations to changes in interest rates on a short-term basis and over the
life of the asset. Management considers these various factors and their
anticipated effects in managing the Company's exposure to interest rate risk.
The table on the following page presents additional information about
the Company's financial instruments that are sensitive to changes in interest
rates. Cash flows in this presentation are grouped by maturity dates rather
than repricing dates with consideration given to prepayment assumptions for
mortgage-backed securities and maturity estimations for instruments without
contractual maturity dates. Loans are distinguished by variable or fixed
rates and contractual principal payments are represented in the cash flows.
Loan fair values are estimated using discounted cash flows or based on quoted
market prices for Title I and SBA loans (See "Note 9-Fair Values of Financial
Instruments" in the accompanying financial statements). Investment
securities are divided into mortgage-backed securities and other securities.
The cash flows from mortgage-backed securities are influenced by principal
prepayments, which are dependent on a number of factors, including, the
current interest rate and interest rate index on the security, the
availability of refinancing of the underlying mortgages at attractive terms,
as well as other factors in specific geographic areas which affect the sales
and price levels of residential property. Management utilizes average
prepayment speeds provided by dealers to calculate principal repayments and
the estimated maturity date for mortgage-backed securities. The cash flows
for other securities are based on the actual maturity dates of the
instruments, except for equity securities which are included in the third
year, 2000. Fair values of investment securities are based on quoted market
prices or dealer quotes. Non-maturing deposits consist of interest-bearing
demand, savings and money market accounts and have no maturity dates. Cash
flow amortizations for these deposits are based on the maximum terms
allowable under regulatory guidelines. The fair value of non-maturing
deposits is estimated to be the carrying or face value, which is the amount
payable on demand. Time deposits are grouped according to their contractual
maturity dates. The fair value of time deposits is estimated using a
discounted cash flow calculation (See "Note 9-Fair Values of Financial
39
<PAGE>
Instruments" in the accompanying financial statements). Average interest
rates represent the weighted average yield in each category.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
(DOLLARS IN THOUSANDS) ----------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total Fair Value
------ -------- ------- ------- -------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Loans:
Variable rate . . . . . . . $40,032 $10,983 $ 4,781 $3,819 $ 3,069 $47,199 $109,883 $110,464
Average interest rate . . 11.30% 11.20% 11.37% 11.57% 11.35% 12.14% 11.66%
Fixed rate. . . . . . . . . $28,552 $16,081 $11,973 $9,837 $10,101 $24,564 $101,108 $104,460
Average interest rate . . 9.12% 9.73% 9.58% 9.59% 8.98% 8.64% 9.19%
Investment securities:
Mortgage-backed securities. $ 1,247 $ 1,030 $ 1,035 $1,019 $ 929 $10,198 $ 15,458 $ 15,534
Average interest rate . . 6.59% 6.77% 6.77% 6.94% 6.78% 6.78% 6.78%
Other investment securities $ 2,194 $ 2,170 $ 3,336 $4,278 $ 1,181 $ 1,062 $ 14,221 $ 14,192
Average interest rate . . 5.54% 6.72% 6.04% 6.57% 6.88% 9.51% 6.55%
Federal funds sold. . . . . . $ 4,000 --- --- --- --- --- $ 4,000 $ 4,000
Average interest rate . . 4.00% --- --- --- --- --- 4.00%
FINANCIAL LIABILITIES:
Interest-bearing deposits:
Non-maturing deposits . . . $26,367 $31,654 $31,654 $6,325 $6,325 $12,650 $114,975 $114,975
Average interest rate . . 3.92% 2.78% 2.78% 2.01% 2.01% 2.01% 2.87%
Time deposits . . . . . . . $43,175 $ 1,773 $ 782 $ 362 $ 577 $ 59 $ 46,728 $ 46,574
Average interest rate . . 5.00% 5.33% 5.51% 5.58% 5.60% 4.18% 5.03%
U.S. Treasury demand note . . $ 1,194 --- --- --- --- --- $1,194 $ 1,194
Average interest rate . . 4.09% --- --- --- --- --- 4.09%
</TABLE>
The fair values of financial instruments may not necessarily be indicative
of the net realizable or liquidation value of these instruments. Furthermore,
management does not intend to dispose of significant portions of all of its
financial instruments and, thus, any aggregate unrealized gain or loss should
not be interpreted as a forecast of future earnings and cash flows.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
North County Bancorp's financial statements begin on page 47 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these items is contained in the Company's
definitive Proxy Statement for the Company's 1998 Annual Meeting of
Shareholders which the Company intends to file with the Commission within 120
days after the close of the Company's 1997 fiscal year in accordance with the
Commission's Regulation 14A under the Securities Exchange Act of 1934. Such
information is incorporated herein by this reference.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The following consolidated financial statements and report of
independent accountants of North County Bancorp are included in this
report commencing on page 47.
Report of Independent Accountants
Consolidated Balance Sheet - December 31, 1997 and 1996
Consolidated Statement of Income - Three Years ended December 31,
1997
Consolidated Statement of Cash Flows - Three Years ended December 31,
1997
Consolidated Statement of Stockholders' Equity - Three Years ended
December 31, 1997
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Schedules to the consolidated financial statements are omitted because
the required information is inapplicable or the information is
presented in North County Bancorp's consolidated financial statements
or related notes.
(3) EXHIBITS
Exhibits required to be filed hereunder are indexed on sequentially
numbered pages 44 through 46 hereof.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the Company's
fiscal year ended December 31, 1997.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 18, 1998 NORTH COUNTY BANCORP,
a California corporation
By: /s/ Michael J. Gilligan
-----------------------------
Michael J. Gilligan
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Alan P. Chamberlain Director March 18, 1998
- --------------------------
Alan P. Chamberlain
/s/ G. Bruce Dunn Director March 18, 1998
- --------------------------
G. Bruce Dunn
/s/ Michael J. Gilligan Vice President and Chief March 18, 1998
- -------------------------- Financial Officer
Michael J. Gilligan
/s/ Ronald K. Goode Director March 18, 1998
- --------------------------
Ronald K. Goode
/s/ James M. Gregg Chairman of the Board and March 18, 1998
- -------------------------- Chief Executive Officer
James M. Gregg
/s/ Rodney D. Jones President and Director March 18, 1998
- --------------------------
Rodney D. Jones
/s/ Jack Port Director March 18, 1998
- --------------------------
Jack Port
/s/ Clarence R. Smith Director March 18, 1998
- --------------------------
Clarence R. Smith
/s/ Raymond V. Stone Director March 18, 1998
- --------------------------
Raymond V. Stone
/s/ Burnet F. Wohlford Director March 18, 1998
- --------------------------
Burnet F. Wohlford
43
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
PAGE NUMBER IN
EXHIBIT TABLE SEQUENTIAL
REFERENCE NUMBERING
NUMBER ITEM SYSTEM
- ------------- ---- --------------
<S> <C> <C>
3.1 Articles of Incorporation of North County Bancorp filed
October 5, 1981 as amended by Certificate of Amendment
of Articles of Incorporation filed July 28, 1988.(2)
3.2 Amended and Restated Bylaws of North County Bancorp as
adopted February 21, 1990.(2)
4.1 Specimen of Common Stock Certificate.(2)
4.2 Form of Indenture between North County Bancorp and
Security Pacific National Bank, as Trustee, for up to
$3,593,000 aggregate principal amount of 9 1/4%
convertible subordinated debentures due May 15,
2002.(3)
4.3 Specimen of Debenture Certificate.(3)
10.1 Lease dated April 23, 1975 by and between Fifth Avenue
Financial Group, a general partnership, and North
County Bank, including an Amendment to Lease, effective
May 1, 1980, and Assignment of Lease, effective
August 1, 1985, for a portion of the office space at
the Fifth Avenue Financial Center in Escondido,
California.(2)
10.2 Lease Agreement dated November 1, 1989, between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California.(2)
10.3 Lease Agreement dated March 1, 1990, between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California.(3)
</TABLE>
- --------------------
Footnotes on page 46
44
<PAGE>
<TABLE>
<CAPTION>
PAGE NUMBER IN
EXHIBIT TABLE SEQUENTIAL
REFERENCE NUMBERING
NUMBER ITEM SYSTEM
- ------------- ---- --------------
<S> <C> <C>
10.4 Lease Agreement dated November 1, 1986, between Ontario
Associates, a general partnership, and North County
Bancorp, relating to a portion of the office space at
the Fifth Avenue Financial Center in Escondido,
California.(2)
10.5 Assignment of Lease dated July 1, 1989, between First
National Bank and North County Bancorp, for the
premises located at 8085 Clairemont Mesa Boulevard, San
Diego, California.(2)
10.6 North County Bancorp Incentive Stock Option Plan and
Form of Stock Option Agreement.(1)
10.7 North County Bank Employee Stock Ownership Plan
Restated as of January 1, 1989.(2)
10.8 Employment Contract between James M. Gregg and North
County Bank, dated April 14, 1983.(2)
10.9 Deferred Compensation and Stock Purchase Agreement
between James M. Gregg and North County Bank, dated
February 1, 1986.(2)
10.10 Lease Agreement dated March 1, 1990, between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California.(3)
10.11 Lease Agreement dated July 15, 1991 between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California.(4)
10.12 Adoption agreement between North County Bank and The
Prudential Bank dated August 29, 1991 for the North
County Bancorp and Subsidiaries 401(k) Plan.(4)
</TABLE>
- ---------------------------
Footnotes on following page
45
<PAGE>
<TABLE>
<CAPTION>
PAGE NUMBER IN
EXHIBIT TABLE SEQUENTIAL
REFERENCE NUMBERING
NUMBER ITEM SYSTEM
- ------------- ---- --------------
<S> <C> <C>
10.13 Lease Agreement dated August 27, 1993 between Ontario
Associates, a general partnership, and North County
Bancorp, for a portion of the office space at the Fifth
Avenue Financial Center in Escondido, California.(5)
10.14 Deferred Compensation and Stock Purchase Agreement
between Rodney D. Jones and North County Bank, dated
December 31, 1996.(6)
10.15 North County Bancorp 1997 Stock Option Plan 69
22 Subsidiaries of North County Bancorp 76
24 Consent of Price Waterhouse 78
</TABLE>
- ------------------------
(1) Incorporated by reference to the Exhibits to the North County Bancorp S-8
Registration Statement, Registration No. 2-84173, as filed with the
Commission on May 25, 1983.
(2) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1989 File
No. 0-10627, as filed with the Commission on March 1, 1990, and amended on
April 30, 1990.
(3) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1990 File
No. 0-10627, as filed with the Commission on March 31, 1991.
(4) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1991 File
No. 0-10627, as filed with the Commission on March 30, 1992.
(5) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 1993 File
No. 0-10627, as filed with the Commission on March 30, 1994.
(6) Incorporated by reference to the Exhibits to the North County Bancorp
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996
File No. 0-10627, as filed with the Commission on March 28, 1997.
46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of North County Bancorp
In our opinion, the accompanying consolidated balance sheets and and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of North County
Bancorp and its subsidiary at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
February 18, 1998
47
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
----------- ------------
Assets
- ------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 24,262 $ 25,936
Federal funds sold 4,000 2,200
-------- --------
28,262 28,136
Investment securities:
Available for sale 17,544 23,117
Held to maturity 12,135 11,344
Loans 210,991 180,410
Less: Allowance for loan and lease losses 3,268 3,129
-------- --------
207,723 177,281
Other real estate owned 986 2,756
Premises and equipment, net 8,582 8,710
Accrued interest receivable and other assets 5,502 5,962
-------- --------
$280,734 $257,306
-------- --------
-------- --------
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 89,852 $ 83,937
Interest-bearing 161,703 145,407
-------- --------
251,555 229,344
Accrued expenses and other liabilities 2,377 1,901
U. S. Treasury demand note 1,194 2,376
Notes payable --- 1,550
Capital lease obligation 415 429
Convertible subordinated debentures --- 1,534
-------- --------
Total liabilities 255,541 237,134
-------- --------
Stockholders' equity:
Common stock, no par value; authorized
10,000,000 shares; outstanding shares
4,637,290 in 1997 and 4,206,705 in 1996 16,058 11,758
Retained earnings 9,137 8,500
Unrealized loss on available for sale securities (2) (86)
-------- --------
Total stockholders' equity 25,193 20,172
-------- --------
Commitments and contingencies (Notes 8 and 16)
-------- --------
$280,734 $257,306
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $20,007 $17,764 $17,527
Investment securities:
Taxable 1,648 1,510 1,115
Exempt from Federal income taxes 120 98 33
Dividends 65 83 179
Federal funds sold 439 385 429
Deposits with other financial institutions 16 --- 3
------- ------- -------
Total interest income 22,295 19,840 19,286
------- ------- -------
Interest expense:
Deposits 5,652 4,695 4,736
Federal funds purchased 17 4 33
U. S. Treasury demand note 57 68 51
Other borrowings 215 345 344
------- ------- -------
Total interest expense 5,941 5,112 5,164
------- ------- -------
Net interest income 16,354 14,728 14,122
Provision for loan and lease losses 1,122 1,300 3,306
------- ------- -------
Net interest income after
provision for loan and lease losses 15,232 13,428 10,816
Other income 6,788 6,975 6,612
Other expense 16,198 15,567 15,334
------- ------- -------
Income before income taxes 5,822 4,836 2,094
Provision for income taxes 2,313 2,092 562
------- ------- -------
Net income $3,509 $ 2,744 $ 1,532
------- ------- -------
------- ------- -------
Earnings per share:
Basic $ 0.82 $ 0.66 $ 0.40
-------- -------- --------
-------- -------- --------
Diluted $ 0.75 $ 0.61 $ 0.38
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,509 $ 2,744 $ 1,532
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of:
Premises and equipment 1,229 1,348 1,471
Deferred loan fees and costs, net (464) (418) (495)
Investment premiums and discounts, net 147 103 50
Other 140 264 370
(Gain) loss on sale of other real estate owned (416) (285) (21)
Provision for loan and lease losses 1,122 1,300 3,306
Decrease (increase) in interest receivable 90 (204) 173
Increase (decrease) in taxes payable 233 (41) 136
Increase in accrued expenses 492 361 251
(Decrease) increase in interest payable (18) (114) 192
Decrease in loan sales receivable --- --- 1,282
Other, net 257 (1,029) 754
-------- -------- --------
Net cash provided by operating activities 6,321 4,029 9,001
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturities of investment securities 9,457 11,070 12,103
Proceeds from sale of available for sale securities 14,602 2,535 5,150
Purchase of investment securities (19,372) (22,020) (16,325)
Net (increase) decrease in loans (32,970) (22,217) 1,129
Purchase of premises and equipment (1,101) (532) (612)
Proceeds from sale of other real estate owned 3,723 3,111 3,313
-------- -------- --------
Net cash (used in) provided by investing activities (25,661) (28,053) 4,758
-------- -------- --------
Cash flows from financing activities:
Cash payments on capital lease obligations (14) (32) (29)
Net increase (decrease) in deposits 21,204 15,508 (12,266)
Net (decrease) increase in U.S. Treasury demand note (174) 1,833 (1,560)
Net (decrease) increase in other borrowings (1,550) 50 ---
Cash proceeds from sale of common stock --- 68 1,776
-------- -------- --------
Net cash provided by (used in) financing activities 19,466 17,427 (12,079)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 126 (6,597) 1,680
Cash and cash equivalents at beginning of year 28,136 34,733 33,053
-------- -------- --------
Cash and cash equivalents at end of year $ 28,262 $ 28,136 $ 34,733
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information:
Total interest paid $ 5,958 $ 5,226 $ 4,972
Total income taxes paid $ 2,212 $ 2,374 $ 793
Real estate acquired through foreclosure $ 1,871 $ 3,088 $ 2,668
Conversion of subordinated debentures into
common stock, net of deferred offering costs $ 1,433 $ 133 $ ---
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
NORTH COUNTY BANCORP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Common Stock
----------------------- Retained Unrealized Loss Total
Shares Amount Earnings on Securities Stockholders' Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,549,709 $ 7 ,380 $ 6,632 $(256) $13,756
Exercise of stock options 11,876 87 87
Sale of common stock 228,194 1,689 1,689
Decrease in unrealized loss on available
for sale securities 163 163
Net income 1,532 1,532
--------- -------- ------ ----- -------
Balance at December 31, 1995 1,789,779 9,156 8,164 (93) 17,227
Five percent stock dividend including cash for
fractional shares 89,288 759 (761) (2)
Five percent stock dividend including cash for
fractional shares 95,140 1,642 (1,647) (5)
Exercise of stock options 10,628 68 68
Conversion of subordinated debentures 18,358 133 133
Decrease in unrealized loss on available
for sale securities 7 7
Net income 2,744 2,744
--------- -------- ------ ----- -------
Balance at December 31, 1996 2,003,193 11,758 8,500 (86) 20,172
Two for one stock split declared February 19, 1997,
payable on April 15, 1997 to stockholders of
record on March 14, 1997 2,005,956 --- ---
Five percent stock dividend including cash for
fractional shares declared December 17, 1997,
payable on January 30, 1998, to stockholders of
record on December 31, 1997 220,608 2,867 (2,872) (5)
Exercise of stock options 788 --- ---
Conversion of subordinated debentures 406,745 1,433 1,433
Decrease in unrealized loss on available
for sale securities 84 84
Net income 3,509 3,509
--------- -------- ------ ----- -------
Balance at December 31, 1997 4,637,290 $16,058 $9,137 $ (2) $25,193
--------- -------- ------ ----- -------
--------- -------- ------ ----- -------
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
NORTH COUNTY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of North County Bancorp (the Company) and its wholly owned subsidiary,
North County Bank (the Bank). All significant intercompany accounts and
transactions have been eliminated. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. Economic risk is comprised of three
components - interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature and reprice at different speeds, or on a different basis,
than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities.
The Company is subject to regulations of various governmental agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
CASH AND CASH EQUIVALENTS Cash on hand, cash items in the process of
collection, amounts due from correspondent banks and the Federal Reserve Bank
and Federal funds sold to other financial institutions are included in cash and
cash equivalents.
INVESTMENT SECURITIES Securities held for investment purposes consist of
debt obligations, marketable equity securities and stock in the Federal Reserve
Bank and Federal Home Loan Bank. Investments are classified into the following
two categories: held to maturity or available for sale. Held to maturity
securities are carried at amortized cost while available for sale securities are
carried at market value. Unrealized gains and losses on available for sale
securities are recorded directly to stockholders' equity, net of tax. Gains or
losses on sales are based upon specific identification of securities sold.
LOANS Interest on loans is accrued based upon the principal amount
outstanding. The accrual of interest on loans is discontinued when, in
management's judgment, the interest will not be paid in accordance with its
terms. At that time interest previously recorded but not collected is reversed
and charged against current income. Loan origination fees, certain direct loan
origination costs and purchase premiums and discounts on loans are deferred and
amortized over the related life of the loan as an adjustment to the loan's
yield.
The Company may sell the guaranteed portions of Small Business Administration
(SBA) loans to a variety of secondary market investors. The Bank retains the
unguaranteed portions as well as the rights and obligations to service the
loans. The Company receives an interest rate differential from payments made by
the borrowers which is at least sufficient to provide for the future servicing
costs and an allowance for a reasonable profit. Gains are recorded upon the
sale of the loans based upon premiums paid by the purchasers and upon the
present value of the retained interest rate differential over the estimated
lives of the loans where the differential exceeds the Company's estimated future
servicing costs.
The Company also sells home equity loans and Federal Home Administration Title I
loans to secondary market investors. Gains or losses on the sale of these loans
are recognized upon sale as the difference between the net sales price and the
carrying value at the time of sale. Deferred origination fees and expenses are
recognized at the time of sale.
52
<PAGE>
Impaired loans are measured at the present value of expected future cash flows
discounted at the loan's effective rate, or as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. A loan is impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due (principal and interest) according to the contractual terms.
ALLOWANCE FOR LOAN AND LEASE LOSSES The Company provides an allowance for
loan and lease losses by a charge to current operations based on Management's
evaluation of the risks in the loan portfolio, prospective economic conditions,
past loss experience, and other pertinent factors which form a basis for
determining the adequacy of the allowance for loan and lease losses.
OTHER REAL ESTATE OWNED Real estate acquired in satisfaction of loans is
reported as other real estate owned. Other real estate owned is recorded at the
lower of the loan balance at the date of acquisition, the present value of
expected future cash flows or the fair value less expected selling costs.
Subsequent operating expenses or income, reductions in estimated value, and
gains or losses upon sale are charged to current operations.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
determined by use of the straight-line method over the estimated useful lives of
the assets, primarily 3 to 45 years. Maintenance and repair costs are expensed
as they are incurred, while renewals and betterments are capitalized.
INCOME TAXES The Company files consolidated Federal and combined California
state income tax returns. The Company provides for income taxes under the
liability method. A deferred tax asset and/or liability is computed for both
the expected future impact of differences between the financial statement and
tax basis of assets and liabilities, and for the expected future tax benefit to
be derived from tax loss and tax credit carryforwards. A valuation allowance
may be established to reflect the likelihood of realization of deferred tax
assets. The effect of tax rate changes is reflected in income in the period in
which such changes are enacted.
EARNINGS PER SHARE Effective December 31, 1997, the Company adopted a new
accounting standard which replaces retroactively the presentation of primary
earnings per share (EPS) and fully diluted EPS. The new basic EPS represents
net income divided by the weighted average common shares outstanding during the
period excluding any potential dilutive effects. Diluted EPS gives effect to
all potential issuances of common stock that would have caused basic EPS to be
lower as if the issuance had already occurred. A reconciliation of the income
(numerators) and shares (denominators) used in the basic and diluted EPS
computations for the three years ended December 31, 1997 is as follows (in
thousands, except share data):
<TABLE>
<CAPTION>
1997
-----------------------------------
Income Shares Per-Share
------ ------ ---------
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders $3,509 4,298,623 $0.82
-----
-----
Effect of Dilutive Shares:
Stock options 159,735
Convertible debentures 70 323,152
------ ---------
Diluted EPS:
Income available to common stockholders
and assumed conversions $3,579 4,781,510 $0.75
------ --------- -----
------ --------- -----
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
Income Shares Per-Share Income Shares Per-Share
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders $2,744 4,158,789 $0.66 $1,532 3,783,971 $0.40
----- -----
----- -----
Effect of Dilutive Shares:
Stock options 69,067 6,658
Convertible debentures 99 444,872 99 448,663
------ --------- ------ ---------
Diluted EPS:
Income available to common stockholders
and assumed conversions $2,843 4,672,728 $0.61 $1,631 4,239,292 $0.38
------ --------- ----- ------ --------- -----
------ --------- ----- ------ --------- -----
</TABLE>
NOTE 2 - REGULATORY CAPITAL:
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items. The capital amounts and
classification of the Company and the Bank are also subject to qualitative
judgments by the regulators regarding components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of Tier 1 and total capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes that the Company and the Bank
meet all capital adequacy requirements to which they are subject at December 31,
1997.
As of December 31, 1997, the most recent notification from the appropriate
regulatory agency categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum Tier 1 risk-based, total risk-based
and Tier 1 leverage capital ratios as set forth in the following table. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
The actual capital amounts and ratios of the Company and the Bank at December
31, 1997 and 1996 are presented in the table (dollars in thousands).
<TABLE>
<CAPTION>
Well Capitalized
Actual Requirement Minimum Required
------------------ ---------------- --------------------
As of December 31, 1997: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
North County Bancorp:
Risk-based capital
Tier 1 $24,875 10.88% --- --- $ 9,142 4.00%
Total 27,737 12.14% --- --- 18,283 8.00%
Tier 1 leverage capital 24,875 8.76% --- --- 11,365 4.00%
North County Bank:
Risk-based capital
Tier 1 24,750 10.85% $13,688 6.00% 9,125 4.00%
Total 27,607 12.10% 22,813 10.00% 18,250 8.00%
Tier 1 leverage capital 24,750 8.73% 14,181 5.00% 11,345 4.00%
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Well Capitalized
Actual Requirement Minimum Required
----------------- --------------- ------------------
As of December 31, 1996: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
North County Bancorp:
Risk-based capital
Tier 1 $19,907 9.94% --- --- $ 8,011 4.00%
Total 23,953 11.96% --- --- 16,023 8.00%
Tier 1 leverage capital 19,907 7.70% --- --- 10,340 4.00%
North County Bank:
Risk-based capital
Tier 1 22,528 11.28% $11,987 6.00% 7,992 4.00%
Total 25,034 12.53% 19,979 10.00% 15,983 8.00%
Tier 1 leverage capital 22,528 8.74% 12,893 5.00% 10,314 4.00%
</TABLE>
NOTE 3 - INVESTMENT SECURITIES:
The amortized cost and market value of investment securities as of
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
>Available for sale at December 31, 1997:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- ------
<S> <C> <C> <C> <C>
U. S. Government and
Federal agencies $ 1,000 $ 2 $ --- $ 1,002
States and municipalities 2,104 13 (1) 2,116
Mortgage-backed 12,847 69 (20) 12,896
Equity securities 1,596 -- (66) 1,530
------- --- ------ -------
$17,547 $84 $(87) $17,544
------- --- ----- -------
------- --- ----- -------
</TABLE>
Held to maturity at December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U. S. Government and
Federal agencies $ 7,779 $22 $(18) $ 7,783
States and municipalities 1,748 12 --- 1,760
Mortgage-backed 2,608 31 --- 2,639
------- --- ----- -------
$12,135 $65 $(18) $12,182
------- --- ----- -------
------- --- ----- -------
</TABLE>
<TABLE>
<CAPTION>
Available for sale at December 31, 1996:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- ------
<S> <C> <C> <C> <C>
U. S. Government and
Federal agencies $ 9,539 $10 $ (26) $ 9,523
States and municipalities 2,134 8 --- 2,142
Mortgage-backed 7,387 28 (53) 7,362
Equity securities 4,213 -- (123) 4,090
------- --- ------ -------
$23,273 $46 $(202) $23,117
------- --- ------ -------
------- --- ------ -------
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Held to maturity at December 31, 1996:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U. S. Government and
Federal agencies $ 6,421 $17 $(29) $ 6,409
States and municipalities 1,751 10 (6) 1,755
Mortgage-backed 3,172 9 (13) 3,168
------- --- ---- -------
$11,344 $36 $(48) $11,332
------- --- ---- -------
------- --- ---- -------
</TABLE>
Investment securities with a carrying value of $7,538,000 and $12,466,000 at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits as well as for other purposes required by law. Sales of available
for sale securities during 1997 resulted in gross gains and losses of $95,000
and $42,000, respectively, and resulted in net taxes of $21,000. Sales of
available for sale securities during 1996 resulted in gross gains and losses
of $2,000 and $26,000, respectively, and resulted in a net tax benefit of
$9,000.
The maturity distribution of debt securities is presented in the tables below
(in thousands). No maturity breakdown is presented for mortgage-backed
securities because of the unpredictability as to the timing and amount of
principal repayments on these securities.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------ -----------------------------
December 31, 1997: Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Within one year $ --- $ --- $ 2,052 $ 2,048
After one but within five years 2,042 2,048 7,475 7,495
After five but within ten years --- --- --- ---
After ten years 1,062 1,070 --- ---
Mortgage-backed securities 12,847 12,896 2,608 2,639
------- ------- ------- -------
$15,951 $16,014 $12,135 $12,182
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------------- ------------------------------
December 31, 1996: Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Within one year $ 1,591 $ 1,595 $ 2,177 $ 2,184
After one but within five years 9,678 9,673 5,918 5,904
After five but within ten years 404 397 77 77
After ten years --- --- --- ---
Mortgage-backed securities 7,387 7,362 3,172 3,167
------- ------- ------- -------
$19,060 $19,027 $11,344 $11,332
------- ------- ------- -------
------- ------- ------- --------
</TABLE>
56
<PAGE>
NOTE 4 - LOANS:
Loans at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Commercial, financial and agricultural $111,726 $ 81,692
Installment and consumer 41,024 53,815
Real estate mortgage 45,803 38,352
Real estate construction 10,334 3,481
Lease financing receivables 1,270 2,329
Other 834 741
-------- --------
$210,991 $180,410
-------- --------
-------- --------
</TABLE>
A summary of the changes in the allowance for loan and lease losses is as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 3,129 $ 2,916 $ 2,739
Provision charged to operating expense 1,122 1,300 3,306
Recoveries on loans previously charged off 586 333 115
Loans charged off (1,569) (1,420) (3,244)
-------- -------- --------
Balance at end of year $ 3,268 $ 3,129 $ 2,916
-------- -------- --------
-------- -------- --------
</TABLE>
At December 31, 1997 and 1996, loans on a nonaccrual basis were $3,021,000
and $3,541,000, respectively. Interest income collected relating to
nonaccrual loans was $123,000 and $84,000 for the years ended December 31,
1997 and 1996. Additional interest income of $212,000 and $327,000 would have
been recorded during 1997 and 1996, respectively, if the loans had been paid
in accordance with their original terms.
The Company's recorded investment in impaired loans at December 31, 1997 and
1996, was $2,163,000 and $2,271,000, respectively. Reserves for loan losses
of $151,000 and $342,000 were established for impaired loans at December 31,
1997 and 1996, respectively. The average recorded investments in impaired
loans during 1997 and 1996 were $2,528,000 and $3,602,000, respectively.
Interest income on impaired loans of $120,000 and $49,000 was recognized for
cash payments received in 1997 and 1996. The Company is not committed to
lend additional funds to debtors whose loans have been modified.
The Company in the normal course of business to meet the financing needs of
its customers is a party to financial instruments with off-balance sheet
risk. The Company's maximum potential exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to extend credit and letters of credit is represented by the
contractual amounts of those instruments.
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer
to a third party. The credit risk in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on management's credit evaluation
of the borrower. Since certain of the commitments are expected to expire
without being drawn upon, they do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis.
57
<PAGE>
The Company's off-balance sheet credit risk for undisbursed loan commitments
and letters of credit at December 31, was as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Commercial loans $37,534 $29,677
Installment and consumer loans 10,370 9,832
Real estate construction loans 18,884 3,641
Letters of credit 1,652 1,944
------- -------
$68,440 $45,094
------- -------
------- -------
</TABLE>
Most of the Company's business activity is with customers located within San
Diego and Riverside counties of Southern California. Accordingly, the
Company's financial performance may be significantly impacted by the economic
conditions of the area.
NOTE 5 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land $ 2,068 $ 2,068
Building and improvements 7,536 7,407
Furniture, fixtures and equipment 9,063 8,097
-------- --------
18,667 17,572
Less: Accumulated depreciation and amortization 10,085 8,862
-------- --------
$ 8,582 $ 8,710
-------- --------
-------- --------
</TABLE>
Building and improvements include a capitalized lease on the main branch
premises of $580,000, less accumulated amortization of $420,000, as of
December 31, 1997 (see Note 8). Amortization on this capital lease was
$20,000 in both 1997 and 1996.
NOTE 6 - DEPOSITS:
Deposits at December 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Noninterest-bearing demand $ 89,852 $ 83,937
Interest-bearing demand 36,620 35,631
Savings 78,352 72,237
Time deposits of $100,000 or more 9,184 9,227
Time deposits of less than $100,000 37,547 28,312
--------- ---------
$251,555 $229,344
--------- ---------
--------- ---------
</TABLE>
58
<PAGE>
The following table summarizes the maturity distribution of time deposits of
$100,000 or more at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Three months or less $5,181 $5,076
Over three months through six months 1,439 1,978
Over six months through one year 2,364 1,973
Over one year through three years 200 200
-------- --------
$9,184 $9,227
-------- --------
-------- --------
</TABLE>
NOTE 7 - NOTES PAYABLE AND CONVERTIBLE SUBORDINATED DEBENTURES:
In May 1990, the Company issued $1,678,000 in 9 1/4% convertible subordinated
debentures (the "Debentures") of which $1,534,000 were outstanding at
December 31, 1996. In September 1997, at which time $1,492,000 in Debentures
were outstanding, the Company announced that it was exercising its option to
redeem the Debentures at a price of 102.25% effective October 31, 1997 to
holders of record on October 27, 1997. Prior to the record date holders of
$1,487,000 in Debentures elected to convert to common stock, receiving 267
shares per $1,000 face value of Debentures, a conversion price of $3.74.
Holders of $5,000 in Debentures opted for cash redemption on October 31,
1997. The conversion of Debentures during 1997 resulted in an increase in
common stock, a component of Tier 1 capital, of $1,433,000 which was net of
deferred offering costs of $101,000. Outstanding Debentures of $1,534,000 at
December 31, 1996 qualified as Tier 2 capital under risk-based capital
guidelines.
NOTE 8 - LEASE OBLIGATIONS:
The Company leases the main office premises under a long-term capital lease
agreement which will expire in 2006 and other office space and equipment
under various operating leases. The future minimum lease payments for all
lease obligations consisted of the following at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
---------- ----------
<S> <C> <C>
1998 $ 214 $ 642
1999 214 608
2000 214 470
2001 214 364
2002 214 355
Thereafter 699 779
---------- ----------
Total minimum lease payments 1,769 $3,218
----------
Amounts representing interest (375)
Cost escalation (979)
----------
Present value of net minimum lease payments $ 415
----------
----------
</TABLE>
The amount of future lease payments is contingent upon normal cost escalation
clauses. Rent expense on the operating leases was $607,000, $489,000 and
$477,000 in 1997, 1996 and 1995, respectively.
59
<PAGE>
NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amount and estimated fair value of the Company's financial
instruments as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- ---------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 24,262 $ 24,262
Federal funds sold 4,000 4,000
Investment securities 29,679 29,726
Loans 210,991 214,924
Financial liabilities:
Deposits $251,555 $251,401
U.S. Treasury demand note 1,194 1,194
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each material class of financial instruments at December 31, 1997:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD The carrying amount of cash
and due from banks and Federal funds sold approximates the fair value.
INVESTMENT SECURITIES The fair value of securities held as investments is
based on quoted market prices or dealer quotes.
LOANS The fair value of loans is estimated using discounted cash flows. The
discount rate used to determine the present value of these loans is equal to
current market rates at which similar loans would be made to borrowers with
similar credit ratings and for similar maturities. Where credit
deterioration has occurred, management has reduced estimated cash flows to
give effect to estimated future losses. Title I and SBA loans were valued
based on quoted market prices.
DEPOSITS The carrying amount of demand and savings deposits is the estimated
fair value, which is the amount payable on demand. The carrying amount for
variable rate, fixed term time deposit accounts approximates fair value. The
fair value of fixed rate time deposits is estimated using a discounted cash
flow calculation. The discount rate on such deposits is based upon rates
currently offered for deposits of similar remaining maturities.
U.S. TREASURY DEMAND NOTE The fair value of U.S. Treasury demand note is
estimated to approximate carrying value.
LETTERS OF CREDIT AND UNDISBURSED LOAN FUNDS The fair value of letters of
credit and undisbursed loan funds is estimated to be the cost to terminate or
otherwise settle such obligations with counterparties.
The fair values of financial instruments may not necessarily be indicative of
the net realizable or liquidation value of these instruments. Furthermore,
management does not intend to dispose of significant portions of all of its
financial instruments and, thus, any aggregate unrealized gain or loss should
not be interpreted as a forecast of future earnings and cash flows.
These fair value disclosures do not include certain financial instruments
such as equity investments in consolidated subsidiaries, obligations for
pension and other post retirement benefits and deferred compensation
arrangements. In addition, fair value estimates do not attempt to estimate
the value of anticipated future business which may result from
60
<PAGE>
existing customer relationships, or the value of assets and liabilities that
are not considered financial instruments, such as deferred tax assets,
intangible assets or property, plant and equipment.
NOTE 10 - OTHER INCOME AND EXPENSE:
Other income for each year consists of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service charges on deposits $3,974 $3,827 $3,078
Gain on sale of loans 1,301 1,425 2,240
Loan servicing fees 753 747 497
Fees on sold loans 118 119 192
Other 642 857 605
------ ------ ------
$6,788 $6,975 $6,612
------ ------ ------
------ ------ ------
</TABLE>
Other expense for each year consists of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Salaries and employee benefits $ 9,148 $ 8,136 $ 7,545
Occupancy expense 3,232 3,095 3,198
Advertising and public relations 711 524 447
Telephone and postage 689 645 582
Professional services 514 315 270
Printing, stationery and supplies 346 275 322
Collection expense 233 321 173
Branch losses 182 323 110
Regulatory assessments 91 228 617
Other real estate owned (98) 614 792
Other 1,150 1,091 1,278
------- ------- -------
$16,198 $15,567 $15,334
------- ------- -------
------- ------- -------
</TABLE>
61
<PAGE>
NOTE 11 - INCOME TAXES:
The provision for income taxes for each year consists of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current taxes:
Federal $1,494 $1,393 $741
State 648 611 202
------ ------ ------
2,142 2,004 943
Deferred taxes:
Federal 179 122 (384)
State (8) (34) 3
------ ------ ------
171 88 (381)
------ ------ ------
$2,313 $2,092 $562
------ ------ ------
------ ------ ------
</TABLE>
Deferred tax (assets) liabilities at December 31
are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Loan fees deferred $ (516) $ (371) $ (354)
Provision for loan and lease losses (471) (500) (503)
Deferred compensation (202) (162) (129)
Writedown of other real estate owned (107) (499) (664)
Capital lease amortization (105) (103) (108)
Securities held for sale (29) (67) (116)
Unrealized loss on securities (2) (71) (76)
-------- -------- --------
Gross deferred tax assets (1,432) (1,773) (1,950)
-------- -------- --------
Depreciation 214 334 424
Loan origination cost capitalized 112 87 73
Loan servicing rights 16 22 30
-------- -------- --------
Gross deferred tax liabilities 342 443 527
-------- -------- --------
Deferred tax assets valuation allowance 225 225 225
-------- -------- --------
$ (865) $(1,105) $(1,198)
-------- -------- --------
-------- -------- --------
</TABLE>
62
<PAGE>
A reconciliation between the provision for income taxes at the statutory
Federal rate and the actual effective provision for income taxes for each
year is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal tax at statutory rates $1,979 $1,644 $ 711
State tax, net of Federal tax effect 422 381 157
Tax exempt income (63) (83) (83)
Deferred valuation allowance --- --- (125)
Other (25) 150 (98)
------ ------ ------
$2,313 $2,092 $ 562
------ ------ ------
------ ------ ------
</TABLE>
Tax exempt income consists of income from investment securities and municipal
lease financing.
NOTE 12 - STOCK OPTION PLAN:
The Company has granted incentive stock options and non-qualified options to
purchase up to 1,002,077 shares of common stock as of December 31, 1997 under
three stock option plans. No compensation cost has been recognized for its
employee stock option grants, which are fixed in nature, as the options have
been granted at a price equal to the market value of the Company's common
stock at the date of grant. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant date rather than market value during the year ended December 31, 1997,
the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below (in thousands, except per share data).
No options were granted during 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Net Income:
As reported $3,509 $2,744
Pro forma 3,489 2,724
Basic earnings per share:
As reported $0.82 $0.66
Pro forma $0.81 $0.65
Diluted earnings per share:
As reported $0.75 $0.61
Pro forma $0.74 $0.60
</TABLE>
The fair value for each option grant was estimated at the date of grant using
the following assumptions for 1997 and 1996, respectively: volatility factors
of 0.27 and 0.20; expected option lives of seven and ten years; risk-free
interest rates of 5.83% and 6.60%; and a dividend yield of 0.0% for both
years.
63
<PAGE>
A summary of transactions for the three years ended December 31, 1997, after
giving retroactive effect for stock dividends declared, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 443,198 $ 3.19 398,388 $3.02 425,885 $3.03
Granted 65,103 12.38 106,502 3.67 --- ---
Exercised (2,333) 2.50 (23,619) 2.90 (27,497) 3.16
Expired (5,788) 3.68 (38,073) 2.97 --- ---
------- ------ ------- ----- ------- -----
Outstanding at end of year 500,180 $ 4.38 443,198 $3.19 398,388 $3.02
------- ------ ------- ----- ------- -----
------- ------ ------- ----- ------- -----
Options exercisable at end of year
and weighted average exercise price 214,600 $ 3.06 182,746 $3.06 170,249 $3.04
Weighted average fair value per share of
options granted during the year $ 5.34 $2.53
</TABLE>
At December 31, 1997, the Company had outstanding options to purchase 500,180
shares of common stock at exercise prices that ranged from $2.50 to $12.38
per share with a weighted average exercise price of $4.38 per share. The
outstanding options have a weighted average remaining contractual life of
5.30 years.
NOTE 13 - EMPLOYEE RETIREMENT PLANS:
The Company has established an Employee Stock Ownership Plan (ESOP) to
provide an ownership interest in the Company and retirement benefits to
substantially all full-time employees. The amount of annual contributions is
at the discretion of the Board of Directors, subject to a maximum of 15
percent of the total annual compensation of all eligible participants. The
Company contributed $150,000 in 1997 and 1996 and made no contribution to the
ESOP in 1995. The ESOP has purchased $800,000 of the Company's stock in the
open market and $280,000 in newly issued common stock since it was
established in 1981.
Additionally, all full-time employees who have at least six months of service
are eligible to contribute up to 15% annually of their pretax compensation to
a retirement account under the North County Bancorp 401(k) Plan. Employees
control the investment of their funds and may elect to invest in the
Company's common stock. The Company matches 50% of an employee's
contribution up to 5% annually of the employee's covered compensation for
those who have at least six months of service and who elect to contribute
under the plan. The Company contributed $100,000, $94,000 and $89,000 to
the plan in 1997, 1996 and 1995, respectively.
64
<PAGE>
NOTE 14 - NORTH COUNTY BANCORP (PARENT CORPORATION):
Condensed financial statements presented on a parent company only basis are
as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
(In Thousands) December 31,
-------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 22 $ 301
Investment securities 145 145
Investment in subsidiary 25,068 22,808
Premises and equipment, net 160 180
Other assets 229 340
------- -------
$25,624 $23,774
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 17 $ 89
Notes payable --- 1,550
Capital lease obligation 415 429
Convertible subordinated debentures --- 1,534
------- -------
432 3,602
------- -------
Stockholders' equity
Common stock, no par value 16,057 11,758
Retained earnings and other 9,135 8,414
------- -------
Total stockholders' equity 25,192 20,172
------- -------
$25,624 $23,774
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
(In Thousands) Year Ended December 31,
-----------------------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Dividends from subsidiary $1,510 $ --- $ ---
Interest income 3 4 ---
Other income 281 261 247
------ ------ ------
Total income 1,794 265 247
------ ------ ------
Interest expense 215 345 344
Other operating expense 356 282 439
------ ------ ------
Total expenses 571 627 783
------ ------ ------
Income (loss) before income tax 1,223 (362) (536)
Applicable income tax benefit 107 145 243
Equity in undistributed income of subsidiary 2,179 2,961 1,825
------ ------ ------
Net income $3,509 $2,744 $1,532
------ ------ ------
------ ------ ------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands) Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,509 $ 2,744 $ 1,532
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 131 42 20
Equity in undistributed income of subsidiary (2,179) (2,961) (1,825)
(Decrease) increase in accrued expenses (73) (119) 83
Other, net 2 21 14
-------- -------- -------
Net cash flows provided by (used in) operating activities 1,390 (273) (176)
-------- -------- -------
Cash flows used in investing activities:
Purchase of investment securities --- (145) ---
Cash invested in subsidiary --- --- (1,000)
-------- -------- -------
Net cash used in investing activities --- (145) (1,000)
-------- -------- -------
Cash flows from financing activities:
Cash payments on capital lease obligations (14) (32) (29)
Net (decrease) increase in notes payable (1,550) 50 ---
Net decrease in convertible subordinated debentures (1,534) (144) ---
Issuance of common stock 1,429 195 1,776
-------- -------- -------
Net cash (used in) provided by financing activities (1,669) 69 1,747
-------- -------- -------
Net (decrease) increase in cash and cash equivalents (279) (349) 571
Cash and cash equivalents at beginning of year 301 650 79
-------- -------- -------
Cash and cash equivalents at end of year $ 22 $ 301 $ 650
------- ------- -------
------- ------- -------
</TABLE>
NOTE 15 - RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Company and their associates
are customers of and have other transactions with the Bank in the ordinary
course of business. Loans and commitments included in such transactions are
made on substantially the same terms as those prevailing at the time for
comparable transactions with other persons. Such loans aggregated $695,000
and $617,000 at December 31, 1997 and 1996, respectively. During 1997 new
loans (including drawdowns on revolving lines of credit and loan renewals)
aggregated $467,000 and repayments (including payments on revolving lines of
credit and loan renewals) aggregated $389,000.
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
At December 31, 1997, 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 December 31, 1997, the Company had unsecured lines of credit totaling
$8,000,000 for the purchase of Federal funds with other financial
institutions. In addition the Company may borrow from the Federal Home Loan
Bank and at the Federal Reserve discount window, subject to the Company's
ability to supply collateral.
66
<PAGE>
NOTE 17 - SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
1997 Quarters Ended
--------------------------------------------------------
(Dollars in thousands, except per share data) December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Interest income. . . . . . . . . . . . . . . . . . . . . . . $5,994 $5,837 $5,492 $4,972
Interest expense . . . . . . . . . . . . . . . . . . . . . . 1,454 1,580 1,549 1,358
------ ------ ------ ------
Net interest income. . . . . . . . . . . . . . . . . . . . . 4,540 4,257 3,943 3,614
Provision for loan and lease losses. . . . . . . . . . . . . 400 104 283 335
Other income . . . . . . . . . . . . . . . . . . . . . . . . 1,902 1,748 1,693 1,445
Other expense. . . . . . . . . . . . . . . . . . . . . . . . 4,240 4,264 4,012 3,682
------ ------ ------ ------
Income before income taxes . . . . . . . . . . . . . . . . . 1,802 1,637 1,341 1,042
Income tax expense . . . . . . . . . . . . . . . . . . . . . 698 695 528 392
------ ------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $1,104 $ 942 $ 813 $ 650
------ ------ ------ ------
------ ------ ------ ------
Basic EPS. . . . . . . . . . . . . . . . . . . . . . . . . . $0.24 $0.22 $0.19 $0.16
Diluted EPS. . . . . . . . . . . . . . . . . . . . . . . . . $0.23 $0.20 $0.18 $0.14
<CAPTION>
1996 Quarters Ended
--------------------------------------------------------
(Dollars in thousands, except per share data) December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Interest income. . . . . . . . . . . . . . . . . . . . . . . $5,246 $5,049 $4,798 $4,747
Interest expense . . . . . . . . . . . . . . . . . . . . . . 1,332 1,322 1,229 1,229
------ ------ ------ ------
Net interest income. . . . . . . . . . . . . . . . . . . . . 3,914 3,727 3,569 3,518
Provision for loan and lease losses. . . . . . . . . . . . . 200 100 700 300
Other income . . . . . . . . . . . . . . . . . . . . . . . . 1,591 1,679 2,187 1,518
Other expense. . . . . . . . . . . . . . . . . . . . . . . . 4,026 3,834 3,945 3,762
------ ------ ------ ------
Income before income taxes . . . . . . . . . . . . . . . . . 1,279 1,472 1,111 974
Income tax expense . . . . . . . . . . . . . . . . . . . . . 637 570 444 441
------ ------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 642 $ 902 $ 667 $ 533
------ ------ ------ ------
------ ------ ------ ------
Basic EPS. . . . . . . . . . . . . . . . . . . . . . . . . . $0.15 $0.22 $0.16 $0.13
Diluted EPS. . . . . . . . . . . . . . . . . . . . . . . . . $0.14 $0.20 $0.15 $0.12
</TABLE>
67
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
EXHIBITS
TO
1997 FORM 10-K
Under
The Securities Exchange Act of 1934
____________________
68
<PAGE>
EXHIBIT 10.15
69
<PAGE>
EXHIBIT 10.15
NORTH COUNTY BANCORP
1997 STOCK OPTION PLAN
ADOPTED APRIL 16, 1997
1. PURPOSE. The purpose of the North County Bancorp 1997 Stock Option
Plan (the "Plan") is to strengthen NORTH COUNTY BANCORP (the "Company") and
those corporations which are or hereafter become subsidiary corporations of
the Company, within the meaning of Section 424(f) of the Internal Revenue
Code of 1986, as amended (the "Code"), by providing to participating
employees and directors added incentive for high levels of performance and
for unusual efforts to increase the earnings of the Company and its
subsidiary corporations. The Plan seeks to accomplish those purposes and
results by providing a means whereby such employees and directors may
purchase shares of the common stock of the Company pursuant to (a) options
granted pursuant to the Incentive Stock Option Plan (the "Incentive Plan")
(Division A hereof) which will qualify as incentive stock options under
Section 422 of the Code ("Incentive Options"), or (b) options granted
pursuant to the Non-Qualified Stock Option Plan (the "Non-Qualified Plan")
(Division B hereof) which are intended to be non-qualified stock options as
described in Treas. Reg. s 1.83-7 to which Section 421 of the Code does not
apply ("Non-Qualified Options"). (Hereinafter, the term "Options" shall refer
collectively to Incentive Options and Non-Qualified Options.)
2. ADMINISTRATION. This Plan shall be administered by the Board of
Directors of the Company (the "Board of Directors"). Any action of the Board
of Directors with respect to administration of the Plan shall be taken
pursuant to a majority vote of its members; provided, however, that with
respect to action by the Board of Directors in granting an option to an
individual director, such action must be authorized by the required number of
directors without counting the interested director, who shall abstain as to
any vote on his option. An interested director may be counted in determining
the presence of a quorum at a meeting of the Board of Directors where such
action will be taken.
Subject to the express provisions of the Plan, the Board of
Directors shall have the authority to construe and interpret the Plan, and to
define the terms used herein, to prescribe, amend, and rescind rules and
regulations relating to administration of the Plan, to determine the duration
and purposes of leaves of absence which may be granted to participants
without constituting a termination of their employment for purposes of the
Plan, and to make all other determinations necessary or advisable for
administration of the Plan, including without limitation, compliance with
Rule 16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as
amended. Determination of the Board of Directors on matters referred to in
this section shall be final and conclusive.
3. PARTICIPATION: LIMITATION ON AMOUNT OF OUTSTANDING OPTIONS. All
employees of the Company and its subsidiary shall be eligible for selection
to receive both Incentive Options and Non-Qualified under the Plan.
Directors of the Company and its subsidiary corporations who are not
employees of the Company or a subsidiary corporation shall be eligible to
receive only Non-Qualified Options under the Plan. Subject to the express
provisions of the Plan, the Board of Directors shall select from the eligible
class and determine the individuals who shall receive Options, whether such
Options shall be Incentive Options or Non-Qualified Options, and the terms
and provisions of the Options ( which need not be identical), and shall grant
such Options to such individuals. An individual who has been granted an
Option (an "Optionee") may, if such individual is otherwise eligible, be
granted additional Options if the Board of Directors shall so determine.
4. STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in
Section 13 hereof, the stock to be offered under the Plan shall be shares of
the Company's authorized but unissued common stock, no par value (hereinafter
called "stock") and the aggregate amount of stock to be delivered upon
exercise of all Options granted under the Plan, whether Incentive Options or
Non-Qualified Options, shall not exceed Four Hundred Thousand (400,000)
70
<PAGE>
shares. If any Option shall expire for any reason without having been
exercised in full, the unpurchased shares subject thereto shall again be
available for purposes of the Plan.
5. OPTION PRICE. The purchase price of stock subject to each
Option shall be determined by the Board of Directors but shall not be less
than one hundred percent (100%) of the fair market value of such stock at the
time such Option is granted. As to any Incentive Option granted to an
Optionee who, immediately before the Option is granted, owns beneficially
more than ten percent (10%) of the outstanding stock of the Company, the
purchase price must be at least one hundred ten percent (110%) of the fair
market value of the stock at the time when such Option is granted. The fair
market value of stock shall be determined in accordance with any reasonable
valuation method, including the valuation methods described in Teas. Reg. s
20.2031-2. The purchase price of any shares purchased shall be paid in full
in cash at the time of each such purchase.
6. OPTION PERIOD. Each Option and all rights or obligations
thereunder shall expire on such date as Board of Directors may determine, but
not later than ten (10) years the date such Option is granted, an shall be
subject to earlier termination as provided elsewhere in the Plan. As to any
Incentive Option granted to an Optionee who, immediately before the option is
granted, owns beneficially more than ten percent (10%) of the outstanding
stock of the Company (whether acquired upon exercise of Options or otherwise),
such option must not be exercisable by its terms after five (5) years form
the date of its grant.
7. CONTINUATION OF EMPLOYMENT. In the case of employees, nothing
contained in the Plan (or in any agreement) shall obligate the Company or its
subsidiary corporations to employ any Optionee for any period or interfere in
any way with the right of the Company or its subsidiary corporations to
reduce such Optionee's compensation.
8. EXERCISE OF OPTIONS. Each Option shall be exercisable in such
installments, which need not be equal, and upon such conditions as the Board
of Directors shall determine; provided ,however, that if an Optionee shall
not in any given installment period purchase all of the shares which such
Optionee is entitled to purchase in such installment period, such Optionee's
right to purchase any shares not purchase in such installment period shall
continue until the expiration such Option. No Option or installment thereof
shall be exercisable except in respect of whole shares, and fractional share
interest shall be disregarded except that they may be accumulated in
accordance with the next preceding sentence. Options may be exercised by ten
(10) days written notice delivered to the Company stating the number of
shares with respect to which the Option is being exercised, together with
cash in the amount of the purchase price for such shares. No fewer than
ten (10) shares may be purchased at one time unless the number purchased is
the total number which may be purchase under the Option. As a condition to
the exercise of a Non-Qualified Option, in whole or in part, by an Optionee
who is an employee of the company or any of its subsidiary corporations (or
who was an employee during the term of the Option), the Optionee shall be
required to pay to the Company , in addition to the purchase price for the
shares being exercised, an amount equal to any taxes required to be withheld
by the Company in order to enable the Company to claim a deduction in
connection with the exercise of the Option.
9. NONTRANSFERABILITY OF OPTIONS. Each Option shall, by its terms, be
nontransferable by the Optionee, other than by Will or the laws of descent
and distribution , and shall be exercisable during such Optionee's lifetime
only by the Optionee.
10. CESSATION OF EMPLOYMENT; DISABILITY. Except as provided in
Sections 6 and 11 hereof, if an Optionee ceases to be employed by or ceases
to serve as a director of the Company or a subsidiary corporation for any
reason other than death or disability, such Optionee's Option shall expire
ninety (90) days thereafter, and during such period after such Optionee
ceases to be an employee or director, such Option shall be exercisable only
as to those shares with respect to which installments, if any, had accrued as
of the date on which the Optionee ceased to be employed by or ceased to serve
as a director of the Company or such subsidiary corporation. Except as
provided in Sections 6 and 11 hereof, if an Optionee ceases to be employed by
or ceases to serve s a director of the Company or as subsidiary corporation
by reason of disability ( within the meaning of Section 22(e) (3) of the
Code), such Optionee's Option
71
<PAGE>
shall expire not later than one (1) year thereafter, and during such period
after such Optionee ceases to be an employee or director, such Option shall
be exercisable only as to those shares with respect to which installments, if
any, had accrued as of the date on which the Optionee ceased to be employed
by or ceased to serve as a director of the Company or such subsidiary
corporation.
11. TERMINATION OF EMPLOYMENT FOR CAUSE. If an employment by or
service as a director of the Company or a subsidiary corporation is
terminated for cause, such Optionee's Option shall expire immediately;
provided, however, that the Board of Directors may, in its sole discretion,
within thirty (30) days so such termination, waive the expiration of the
Option by giving written notice of such waiver to the Optionee at such
Optionee's last know address. In the event of such waiver, the Optionee may
exercise the Option only to such extent, for such time, and upon such terms
and condition as if such optionee had ceased to be employed by or ceased to
serve as a director of the Company or such subsidiary corporation upon the
date of such termination for a reason other than cause, disability, or death.
In the case of an employee, termination for cause shall include termination
for malfeasance or gross misfeasance in the performance of duties, conviction
of illegal activity in connection therewith, any conduct seriously
detrimental to the interests of the Company or a subsidiary corporation, or
removal pursuant to the exercise of regulatory authority by the Board of
Governors of the Federal Reserve System (the "FRB") or any applicable bank
supervisory agency; and in any event, the determination of the Board of
Directors with respect thereto shall be final and conclusive. In the case of
a director, termination for cause shall include removal pursuant to Section
302 or 304 of the California Corporations Code or removal pursuant to the
exercise of regulatory authority by the FRB or any applicable bank
supervisory agency.
12. DEATH OF OPTIONEE. Except as provided in Section 6 hereof, if any
Optionee dies while employed by or serving as a director of the Company or a
subsidiary corporation or during the 90-day or one year period referred to in
Section 10 hereof, such Optionee's Option shall expire one (1) year after the
date of such death. After such death but before such expiration, the persons
to whom the Optionee's rights under the Option shall have passed by Will or
by the applicable laws of descent and distribution shall have the right to
exercise such Option to the extent that installments ,if any, had accrued as
of the date on which the Optionee ceased to be employed by or ceased to serve
as a director of the Company or such subsidiary corporation.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. If the outstanding
shares of the stock of the Company are increased, decreased, or changed into,
or exchanged for a different number or class of shares or securities of the
Company, without receipt of consideration by the Company, through
reorganization, merger, recapitalization, reclassification, stock split,
stock dividend, stock consolidation, or otherwise, an appropriate and
proportionate adjustment shall me made in the number and class of shares as
to which Options may be granted. A corresponding adjustment changing the
number or class of shares and the exercise price per share allocated to
unexercised Options, or portions thereof, which shall have been granted prior
to any such change shall likewise be made. Any such adjustment, however, in
an outstanding Option shall be made without change in the total price
applicable to the unexercised portion of the Option but with a corresponding
adjustment in the price for each share subject to the Option. No fractional
shares of stock shall be issued under the Plan on account of any such
adjustment.
14. TERMINATING EVENTS. Not less than thirty (30) days prior to a
"Terminating Event," i.e., a dissolution or liquidation of the Company; or a
reorganization, merger, or consolidation of the Company with one or more
corporations as a result of which the Company will not be the surviving
entity; or a sale of substantially all the assets and property of the Company
to another person; or in the event of any other transaction involving the
Company where there is a change in ownership of at least twenty-five percent
(25%), except as may result from a transfer of shares to another corporation
in exchange for at least eighty percent (80%) control of that corporation,
the Board of Directors shall notify each Optionee of the pendency of the
Terminating Event. Upon delivery of said notice, any Option granted prior to
the Terminating Event shall be, notwithstanding the provisions of Section 8
hereof, exercisable in full and not only as to those shares with respect to
which installments, if any, have then accrued, subject, however, to earlier
expiration or termination as provided elsewhere in the Plan. Upon the date
sixty (60) days after delivery of said notice, any Option thereof not
exercised shall terminate, and upon the effective date of the Terminating
Event, the Plan and any
72
<PAGE>
Options granted thereunder shall terminate, unless provisions is made in
connection with the Terminating Event for assumption of Options therefore
granted by the successor or acquiror, as applicable, or substitution for such
Options of new options covering stock of a successor employer corporation ,
or a parent or subsidiary corporation thereof, with appropriate adjustments
as to number and class of shares and prices.
15. AMENDMENT AND TERMINATION BY BOARD OF DIRECTORS. The Board of
Directors may at any time suspend, amend, or terminate the Plan and may, with
the consent of an Optionee, make such modification of the terms and
conditions of such Optionee's Option as it shall deem advisable; provided
that, except as permitted under the provisions of Section 13 hereof, any
amendment or modification of the Plan which would:
(a) increase the maximum number of shares which may be purchased
pursuant to Options granted under the Plan.
(b) change the minimum option price;
(c) increase the maximum term of Options provided for herein; or
(d) permit Options to be granted to anyone other than a director or
employee of the Company or a subsidiary corporation,
requires the approval of the Company's shareholders as described below. Any
amendment or modification requiring share holder approval shall be deemed
adopted as of the date of the action of the Board of Directors effecting such
amendment or modification and shall be effective immediately, unless
otherwise provided therein, subject to approval thereof within twelve (12)
months before or after the effective date by shareholders of the company
holding not less than a majority of the voting power of the Company;
provided, however, that the Board of Directors may amend the Plan IN TOTO
without shareholder approval if the Plan has not yet been approved by the
shareholders.
Notwithstanding the above, the Board of Directors may grant to an
Optionee, if such Optionee is otherwise eligible, additional Options or, with
the consent of the Optionee, grant a new Option in lieu of an outstanding
Option for a number of shares, at a purchase price and for a term which in
any respect in greater or less that of the earlier Option, subject to the
limitations of Sections 5,6 and A-2 hereof.
No Option may be granted during any suspension of the Plan or after
termination of the Plan. Amendment suspension, or termination of the Plan
shall not, without the consent of the Optionee, alter or impair any rights or
obligations under any Option outstanding prior to such amendment, suspension
or termination of the Plan.
16. TIME OF GRANTING OPTIONS. The time an Option is granted, sometimes
referred to as the date of grant, shall be the date of the action of the
Board of Directors described in the second sentence of Section 2 hereof;
provided, however, that if appropriate resolutions of the Board of Directors
indicate that an Option is to be granted as of and on some future date, the
time such Option is granted shall be such future date. If action by the
Board of Directors is taken by unanimous written consent of its members, the
action of the Board of Directors shall be deemed to be at the time the last
Board member signs the consent.
17. PRIVILEGES OF STOCK OWNERSHIP; SECURITIES LAWS COMPLIANCE; NOTICE
OF SALE. No Optionee shall be entitled to the privileges of stock ownership
as to any shares of stock not actually issued and delivered. No shares shall
be issued upon the exercise of any Option unless and until any then
applicable requirements of any regulatory agencies having jurisdiction, and
of any exchanges upon which stock of the Company may be listed, shall have
been fully complied with. The Company will diligently endeavor to comply
with all applicable securities laws before any
73
<PAGE>
Options are granted under the Plan and before any stock is issued pursuant to
Options. The Company shall register the underlying shares of common stock
with the Securities and Exchange Commission and deliver to each Optionee an
Information Statement relating to the Plan which meets the requirements of
Section 10(a) of the securities Act of 1933, as amended. With respect to
Options granted to affiliates of the Company of its subsidiary corporations,
the Company shall file an offer prospectus and any required prospectus
supplements to facilitate the disposition of such shares of stock owned by
such affiliates after the exercise of Options granted thereto. Additionally,
the Optionee shall comply with all applicable federal and state securities
laws in connection with any sale or other disposition of such common stock.
18. EFFECTIVE DATE OF THE PLAN. The Plan shall be deemed adopted as of
the date first shown herein and shall be effective immediately, subject to
approval hereof within twelve (12) months before or after said date by
shareholders holding not less than a majority of the voting power of the
Company.
19. TERMINATION. Unless previously terminated by the Board of
Directors or as provided in Section 14 hereof, the Plan shall terminate at
the close of business on April__. 2007 and no Options shall be granted under
it thereafter, but such termination shall not affect any Option theretofore
granted.
20. OPTION AGREEMENT. Each Option shall be evidenced by a written
Stock Option Agreement executed by the Company and the Optionee and shall
contain each of the provisions and agreements herein specifically required to
be contained therein, including whether the Option is an Incentive Option or
Non-Qualified Option, and such other terms and conditions as are deemed
desirable and are not inconsistent with the Plan.
21. EXCULPATION AND INDEMNIFICATION. The Company shall indemnify and
hold harmless each member of the Board of Directors in any action brought
against such member or member to the maximum extent permitted by then
applicable law and the Articles of Incorporation and Bylaws of the Company
and any amendments thereto.
74
<PAGE>
DIVISION A
INCENTIVE STOCK OPTION PLAN
A-1. ELIGIBLE PERSONS.. All employees of the Company and its
subsidiary corporations shall be eligible for selection to participate in the
Incentive Plan. Notwithstanding any provision of this Plan to the contrary,
no director of the Company or any subsidiary corporation who is not an
employee of the Company or any subsidiary corporation may be granted options
under the Incentive Plan.
A-2. LIMIT EXERCISABILITY OF OPTIONS. The aggregate fair market value
(determined as of the time the Option is granted) of the stock for which any
full-time salaried employee may be granted Incentive Options which are FIRST
EXERCISABLE during any one calendar year (under all Incentive Stock Option
Plans of such employees's employer corporation and its parent and subsidiary
corporations) shall not exceed One Hundred Thousand Dollars ($100,000),
regardless of any unused limits of previous years.
A-3. INCORPORATION BY REFERENCE. The provisions of Section 5, 6, 9 and
18 of the Plan are hereby incorporated by this reference into this Incentive
Stock Option Plan.
A-4. INTERPRETATION OF PLAN. Options granted pursuant to the Incentive
Plan are intended to be "incentive stock options" within the meaning of
Section 422 of the Code, and the Incentive Plan shall be construed to
implement that intent. If all or any part of an Incentive Option shall not
be deemed an "incentive stock option" within the meaning of Section 422 of
the Code, said Option shall nevertheless be valid and carried into effect as
a Non-Qualified Option.
DIVISION B
NON-QUALIFIED STOCK OPTION PLAN
B-1. ELIGIBLE PERSONS. All directors and employees of the Company and
its subsidiary corporations shall be eligible for selections to participate
in the Non-Qualified Plan.
B-2. INTERPRETATION OF PLAN. Options granted pursuant to the
Non-Qualified Plan are intended to be non-qualified stock options described
in Treas. 1.83-7 to which Section 421 of the Code does not apply, and the
Non-Qualified Plan shall be construed to implement that intent.
75
<PAGE>
EXHIBIT 22
76
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF NORTH COUNTY BANCORP
1. North County Bank, a California state chartered bank, is a subsidiary of
North County Bancorp.
2. NCB Joint Venture-I, Inc. a California corporation, is a subsidiary of
North County Bank, and is a participant in Ledford/NCB-I, a California
joint venture.
3. GWB Development, a California corporation, is a subsidiary of North County
Bank, and is a partner in B & G Joint Venture, a California general
partnership.
4. NCB Mortgage, a California corporation, is a subsidiary of North County
Bank.
77
<PAGE>
EXHIBIT 24
78
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 2-84173) of
North County Bancorp of our report dated February 18, 1998 appearing on page
47 of the Annual Report to Shareholders which is incorporated in this Annual
Report on Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
March 23, 1998
79
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON
PAGES 48 AND 49 OF THE COMPANY'S 10-K FOR DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,262
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,544
<INVESTMENTS-CARRYING> 12,135
<INVESTMENTS-MARKET> 12,182
<LOANS> 210,991
<ALLOWANCE> 3,268
<TOTAL-ASSETS> 280,734
<DEPOSITS> 251,555
<SHORT-TERM> 1,194
<LIABILITIES-OTHER> 2,377
<LONG-TERM> 415
0
0
<COMMON> 16,058
<OTHER-SE> 9,135
<TOTAL-LIABILITIES-AND-EQUITY> 280,734
<INTEREST-LOAN> 20,007
<INTEREST-INVEST> 1,833
<INTEREST-OTHER> 455
<INTEREST-TOTAL> 22,295
<INTEREST-DEPOSIT> 5,652
<INTEREST-EXPENSE> 5,941
<INTEREST-INCOME-NET> 16,354
<LOAN-LOSSES> 1,122
<SECURITIES-GAINS> 53
<EXPENSE-OTHER> 16,251
<INCOME-PRETAX> 5,822
<INCOME-PRE-EXTRAORDINARY> 3,509
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,509
<EPS-PRIMARY> .82
<EPS-DILUTED> .75
<YIELD-ACTUAL> 9.45
<LOANS-NON> 3,021
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,862
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,129
<CHARGE-OFFS> 1,569
<RECOVERIES> 586
<ALLOWANCE-CLOSE> 3,268
<ALLOWANCE-DOMESTIC> 3,268
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME CONTAINED IN THE COMPANY'S
REPORTS FILED ON FORM 10-KSB FOR DECEMBER 31, 1996 AND FORMS 10-QSB FOR MARCH
31, JUNE 30, AND SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 24,233 25,936 20,831 22,825
25,435
<INT-BEARING-DEPOSITS> 0 0 0 0
0
<FED-FUNDS-SOLD> 10,500 7,200 9,000 7,500
11,200
<TRADING-ASSETS> 0 0 0 0
0
<INVESTMENTS-HELD-FOR-SALE> 18,250 23,117 20,238 16,976
21,734
<INVESTMENTS-CARRYING> 7,922 11,344 9,840 11,151
10,085
<INVESTMENTS-MARKET> 7,952 11,342 9,833 10,991
9,995
<LOANS> 161,950 180,410 165,320 172,019
175,580
<ALLOWANCE> 2,916 3,129 3,105 3,601
3,385
<TOTAL-ASSETS> 237,034 257,306 240,243 244,689
258,548
<DEPOSITS> 213,836 229,344 216,314 216,983
229,235
<SHORT-TERM> 543 2,376 499 3,805
4,278
<LIABILITIES-OTHER> 1,788 1,901 2,162 1,822
2,029
<LONG-TERM> 3,640 3,513 3,608 3,725
3,680
0 0 0 0
0
0 0 0 0
0
<COMMON> 9,156 11,758 9,924 9,958
9,958
<OTHER-SE> 8,071 8,414 7,736 8,396
9,368
<TOTAL-LIABILITIES-AND-EQUITY> 237,034 257,306 240,243 244,689
258,548
<INTEREST-LOAN> 17,527 17,764 4,277 8,645
13,151
<INTEREST-INVEST> 1,327 1,691 357 745
1,155
<INTEREST-OTHER> 432 385 118 155
288
<INTEREST-TOTAL> 19,286 19,840 4,747 9,545
14,594
<INTEREST-DEPOSIT> 4,736 4,695 1,138 2,263
3,474
<INTEREST-EXPENSE> 5,164 5,112 1,229 2,463
3,780
<INTEREST-INCOME-NET> 14,122 14,728 3,518 7,087
10,814
<LOAN-LOSSES> 3,306 1,300 300 1,000
1,100
<SECURITIES-GAINS> (10) (24) 0 (24)
(24)
<EXPENSE-OTHER> 15,324 15,543 3,762 7,683
11,517
<INCOME-PRETAX> 2,094 4,836 974 2,085
3,557
<INCOME-PRE-EXTRAORDINARY> 1,532 2,744 533 1,200
2,102
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 1,532 2,744 533 1,200
2,102
<EPS-PRIMARY> .40 .66 .13 .29
.51
<EPS-DILUTED> .38 .61 .12 .27
.47
<YIELD-ACTUAL> 9.95 9.53 9.65 9.54
9.53
<LOANS-NON> 5,290 3,541 5,093 4,340
5,415
<LOANS-PAST> 0 0 0 0
0
<LOANS-TROUBLED> 6,938 5,405 4,648 4,648
4,388
<LOANS-PROBLEM> 0 0 0 0
0
<ALLOWANCE-OPEN> 2,739 2,916 2,916 2,916
2,916
<CHARGE-OFFS> 3,244 1,420 325 543
887
<RECOVERIES> 115 333 214 228
256
<ALLOWANCE-CLOSE> 2,916 3,129 3,105 3,601
3,385
<ALLOWANCE-DOMESTIC> 2,916 3,129 3,105 3,601
3,385
<ALLOWANCE-FOREIGN> 0 0 0 0
0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME CONTAINED IN
THE COMPANY'S REPORTS FILED ON FORM 10-Q FOR THE PERIODS ENDED MARCH 31, JUNE
30, AND SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 26,775 28,290 25,491
<INT-BEARING-DEPOSITS> 499 499 199
<FED-FUNDS-SOLD> 19,500 8,400 9,000
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 22,034 21,538 21,644
<INVESTMENTS-CARRYING> 10,220 12,937 11,360
<INVESTMENTS-MARKET> 10,162 12,946 11,411
<LOANS> 185,820 194,976 206,045
<ALLOWANCE> 3,304 3,253 3,527
<TOTAL-ASSETS> 278,891 279,421 285,871
<DEPOSITS> 248,908 252,610 254,020
<SHORT-TERM> 3,940 1,112 2,464
<LIABILITIES-OTHER> 1,765 2,084 4,765
<LONG-TERM> 3,477 1,914 1,685
0 0 0
0 0 0
<COMMON> 11,771 11,797 12,008
<OTHER-SE> 9,030 9,904 10,929
<TOTAL-LIABILITIES-AND-EQUITY> 278,891 279,421 285,871
<INTEREST-LOAN> 4,470 9,338 14,569
<INTEREST-INVEST> 444 919 1,379
<INTEREST-OTHER> 58 207 353
<INTEREST-TOTAL> 4,972 10,464 16,301
<INTEREST-DEPOSIT> 1,243 2,715 4,235
<INTEREST-EXPENSE> 1,358 2,907 4,487
<INTEREST-INCOME-NET> 3,614 7,557 11,814
<LOAN-LOSSES> 335 618 722
<SECURITIES-GAINS> 0 (42) (21)
<EXPENSE-OTHER> 3,682 7,652 11,937
<INCOME-PRETAX> 1,042 2,383 4,020
<INCOME-PRE-EXTRAORDINARY> 650 1,463 2,405
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 650 1,463 2,405
<EPS-PRIMARY> .16 .35 .58
<EPS-DILUTED> .14 .32 .52
<YIELD-ACTUAL> 9.23 9.31 9.37
<LOANS-NON> 3,720 4,105 3,881
<LOANS-PAST> 47 0 0
<LOANS-TROUBLED> 4,367 4,350 3,711
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 3,129 3,129 3,129
<CHARGE-OFFS> 171 523 897
<RECOVERIES> 11 29 573
<ALLOWANCE-CLOSE> 3,304 3,253 3,527
<ALLOWANCE-DOMESTIC> 3,304 3,253 3,527
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
