SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 1996
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to________________
Commission File No. 33-97422
COUNTY FINANCIAL CORPORATION
(Name of Small Business Issuer as Specified in its Charter)
FLORIDA 59-2320497
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
801 N.E. 167 STREET
NORTH MIAMI BEACH, FLORIDA 33162
(Address of Principal Executive Offices)
ISSUER'S TELEPHONE NUMBER: (305) 651-7110
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days.
Yes [X] No [ ]
As of October 31, 1996, the registrant had 1,263,628 outstanding shares of
common stock $.01 par value.
Transitional Small Business Disclosure Format (check
one): Yes [ ] No [X]
Total Pages: 26 Exhibit Index : Page 20
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of County Financial Corporation and
its subsidiaries (the "Company" or "CFC") for the nine months ended September
30, 1996 and 1995 are set forth on pages 22 to 26 of this Form 10-QSB.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995
SETTLEMENT OF PREMIUM GROUP LITIGATION
On October 9, 1996, the Company's wholly-owned subsidiary, County National
Bank of South Florida ("CNB"), agreed to settle all of the pending litigation
arising from the failure of the Premium Group. Under the terms of the proposed
settlement, CNB will pay the amount of $3 million to various plaintiffs in
January 1997. The parties are currently negotiating the terms of the settlement
agreement, which must be approved by the Courts involved. CNB expects that such
approval will be obtained in December 1996. The impact of the settlement on
CFC's financial condition and future results is discussed in greater detail in
the section below entitled "Impact of Premium Group Settlement." The background
of the litigation is described in Part II - Item 1 - "Legal Proceedings."
RESULTS OF OPERATIONS
CFC's consolidated net income for the first nine months of 1996 was
$2,727,000 or 64.5% more than the $ 1,658,000 earned in the same period in 1995.
Net income per common share was $ 2.16 in 1996 and $ 1.31 in 1995. CFC's
performance in the first nine months of 1996 resulted in a return on average
stockholders' equity of 17.2%, compared to 11.6% in 1995. The return on average
assets was 1.58% in 1996, compared to 0.98% in 1995.
On January 12, 1996, the Company acquired Carney Bank. The acquisition was
treated as a "pooling of interests" for accounting purposes, and accordingly,
all prior period financial information has been restated.
The improvement in CFC's performance is primarily due to the utilization
of Carney Bank's net operating loss carryforward, as well as increased interest
income and reduced operating expenses.
2
<PAGE>
NET INTEREST INCOME
Net interest income is defined as the total of interest income on earning
assets less interest expense on deposits and other interest-bearing liabilities.
Earning assets, which consist of loans, investment securities and federal funds
sold are financed by a large base of interest-bearing funds in the form of
money-market, NOW, savings and time deposits. Earning assets are also funded by
the net amount of non-interest related funds, which consist of non-interest
bearing demand deposits, the allowance for loan losses and stockholders' equity,
reduced by non-interest bearing assets such as cash and due from banks, and
premises and equipment, and other real estate owned ("OREO").
3
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the Company's average balance sheets and
related interest, yield and rate information for the first nine months of 1996
and 1995.
AVERAGE BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
SEPTEMBER 30,
1996 1995
------------------------------- ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS
EARNING ASSETS:
Loans, net of unearned income $139,300 $10,347 9.92% $133,408 $10,387 10.41%
Investment Securities 61,043 2,728 5.97% 64,685 2,647 5.47%
Federal funds sold 10,153 401 5.28% 8,020 357 5.95%
-------- ------- ----- -------- ------- -----
Total earning assets 210,496 13,476 8.55% 206,113 13,391 8.69%
-------- ------- ----- -------- ------- -----
NON-INTEREST EARNING
ASSETS:
Cash and due from banks 12,703 11,853
Premises and equipment, net 4,232 4,274
Other Real Estate Owned, net 3,307 3,999
Other assets 2,672 2,769
Allowance for loan losses (2,617) (2,887)
-------- --------
Total non-interest
earning assets 20,297 20,008
-------- --------
TOTAL ASSETS $230,793 $226,121
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Savings accounts $ 23,763 $ 502 2.82% $ 26,039 $ 571 2.93%
Money market/NOW accounts 74,055 1,304 2.35% 72,987 1,465 2.68%
Time deposits 50,832 2,033 5.34% 50,258 1,980 5.27%
Repurchase agreements 839 21 3.34% 863 19 2.94%
Other borrowings 901 68 10.08% 1,071 87 10.86%
-------- -------- ------ -------- ------- ------
Total interest
bearing liabilities 150,390 3,928 3.49% 151,218 4,122 3.64%
-------- -------- ------ -------- ------- ------
NON-INTEREST BEARING
LIABILITIES:
Demand deposits 57,230 53,799
Other liabilities 2,016 1,926
Total non-interest -------- --------
bearing liabilities 59,246 55,725
-------- --------
Total liabilities 209,636 206,943
STOCKHOLDERS' EQUITY 21,157 19,178
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $230,793 $226,121
======== ========
Net interest Income/Spread $9,548 5.06% $ 9,269 5.05%
======== =======
Net Interest
Yield 6.06% 6.01%
====== ======
<FN>
Notes:
- The amounts set forth as average balances are based on daily
averages for each period.
- Loan fees, which are included in interest income and in the
calculation of average yields, were $201,000 and $ 251,000 in the
first nine months of 1996 and 1995, respectively.
- Tax exempt income is not calculated on a tax equivalent basis.
- Non-accruing loans are included in average loans.
</FN>
</TABLE>
4
<PAGE>
Net interest income is primarily affected by changes in the amounts and
types of earning assets, interest-bearing funds and net non-interest related
funds, as well as their relative sensitivity to interest rate movements.
Net interest income for the first nine months of 1996 was $ 9,548,000, up
3.0% from $9,269,000 in 1995. Interest income from earning assets increased from
$13,391,000, in the first nine months of 1995 to $13,476,000 in the same period
of 1996. This increase was due to the increase in the yield on investment
securities from 5.47% in the first nine months of 1995 to 5.97% in the same
period of 1996; although, the average investment balance decreased $3,642,000.
Average federal funds sold increased $2,133,000, as well as average loans which
showed a $5,892,000 increase. The increase in average loans was accompanied by a
decline in the average yield which dropped from 10.41% for the first nine months
of 1995 to 9.92% in the first nine months of 1996. The effect of these factors
was to cause the yield on the Company's earning assets to decline from 8.69% for
the first nine months of 1995 to 8.55% for the first nine months of 1996.
Interest expense on interest bearing liabilities decreased from $4,122,000
in the first nine months of 1995 to $3,928,000 in the first nine months of 1996.
This decrease was due to a $2,276,000 decrease in average savings, and a
decrease in the yield on average Money Market/NOW accounts, from 2.68% in 1995
to 2.35% in 1996, even though the average balance increased $1,068,000. These
decreases more than offset a $ 574,000 increase in average time deposits during
the same period. The cumulative impact of these changes was to decrease the
average cost of funds from 3.64% for all interest bearing liabilities for the
first nine months of 1995 to 3.49% for the first nine months of 1996.
NON-INTEREST INCOME
Non-interest income in the first nine months of 1996 totaled $ 2,063,000,
compared with $2,116,000 in 1995. Customer service charges on deposit accounts
totaled $ 1,795,000 in 1996, down 2.4% from $1,840,000 in 1995 due to customers
shifting their funds to time deposits, which do not pay service charges.
5
<PAGE>
INVESTMENT SECURITIES GAINS AND LOSSES
At September 30, 1996, the Company held investment securities with a
market value of $55,680,000, which was $308,000 lower than the amortized cost of
the portfolio. This difference consisted of $164,000 of gross unrealized gains
and $472,000 of gross unrealized losses. There were net losses of $ 11,000 from
the sale of securities in the first nine months of 1996, versus net losses of $
12,000 in the same period of 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $ 18,000 in the first nine months of
1996 compared to $107,000 in 1995. The decrease of $ 89,000 was due to the
charge-off of a $40,000 real estate loan of Carney Bank in August, 1995, and an
additional $49,000 added to its allowance for loan losses as a contingency for
possible charge-offs. See "Allowance and Provision for Loan Losses."
NON-INTEREST EXPENSES
Non-interest expenses for the first nine months of 1996 totaled
$8,812,000, which was down 0.2% from $8,833,000 in 1995. Non-interest expenses
are discussed below in more detail.
PERSONNEL. Personnel expense (which includes salaries and benefits)
represented 47.9% of total non-interest expenses in 1996. Personnel expenses
decreased 1.3% to $4,224,000 in 1996 from $4,281,000 in 1995. Staff on a
full-time equivalent basis averaged 159 in 1996 compared to 179 in 1995. These
decreases were the result of the reduction of several employees after the
consummation of the merger with Carney Bank, the elimination of the internal
audit department which was replaced by an external source, and other positions
absorbed due to attrition and reorganization.
OCCUPANCY EXPENSE. Net occupancy expense in 1996 totaled $1,217,000, up
6.9% from $1,138,000 in 1995. The increase was due to the opening of a new
branch in Coral Springs, Florida in March 1995, and higher rent at existing
branch locations due to CPI increases.
PREMISES AND EQUIPMENT EXPENSE. Premises and equipment expense, which
includes furniture and equipment depreciation, rental and maintenance, totaled
$443,000 in 1996, down 2.4% from $454,000 in 1995. The decrease was due to the
elimination of several of Carney Bank's equipment maintenance contracts after
the consummation of the merger.
OTHER NON-INTEREST EXPENSES. Other non-interest expenses for the first
nine months of 1996 totaled $2,928,000, down 1.1% from $2,960,000 in 1995. This
category of expenses continues to be impacted by relatively high legal and
professional service fees. Legal and other professional fees for the Premium
Group matter were $650,000 in the first nine months of 1996, compared to
$271,000 in 1995. See "Legal Proceedings." This increase was more than offset by
a decline in several expense categories, including a decline in the FDIC
assessment which dropped
6
<PAGE>
from $275,000 in 1995 to $7,000 in 1996; and the level of OREO write-downs which
decreased from $100,000 in 1995 to $35,000 in the same period of 1996.
PROVISION FOR INCOME TAXES
The provision for income tax totaled $54,000 in 1996 compared with
$787,000 in 1995. The decrease is due to the utilization of Carney Bank's net
operating loss carryforwards of approximately $2.7 million which became
available to CFC upon consummation of the merger. During the first quarter of
1996 CFC recalculated the estimated net operating loss carryforward and as a
result of the recalculation the amount of the NOL decreased from $2.9 million
to $2.7 million. The Company is eligible to utilize this loss for income earned
after January 12, 1996 (i.e., the date of the merger). Based on the Company's
earnings during the first 10 months of 1996, the NOL has been fully utilized.
CAPITAL EXPENDITURES
CFC's capital expenditures are reviewed by its Board of Directors. CFC
makes capital expenditures in order to improve its ability to provide quality
services to its customers. Capital expenditures for the first nine months of
1996 equaled $297,000 compared to $464,000 in 1995, and were principally related
to equipment purchased for various branch sites and changes in equipment due to
technological advances. CFC received approval from the Office of the Comptroller
of the Currency for the opening of a new branch in Pembroke Pines, Florida on
August 30, 1996. The opening date is anticipated for the second quarter of 1997
and capital expenditures have been estimated at $507,000. A new application was
filed with the O.C.C. on October 29, 1996 for the opening of a branch in Boca
Raton, Florida. The opening date is anticipated for the first quarter of 1997
and capital expenditures have been estimated at $50,000. The Company also
expects to incur other start up costs and expenses in connection with the
opening of these branches.
ASSET QUALITY AND CREDIT RISK
INVESTMENT SECURITIES. CFC maintains a high quality investment portfolio
including U.S. Treasury securities, securities of other U.S. government
entities, state and municipal securities, and other securities such as Federal
Reserve Bank stock. Securities issued by the U.S. Treasury, other U.S.
government entities and states constitute approximately 99% of CFC's investment
portfolio at September 30, 1996. CFC believes that the securities have very
little risk of default. At September 30, 1996, 100% of the securities held in
CFC's investment portfolio were classified available for sale. Of those
securities, 99.8% were rated "A" or better (with a majority rated triple "A"). A
rating of "A" or better means that the bonds are of "upper medium grade, with
strong ability to repay, possibly with some susceptibility to adverse economic
conditions or changing circumstances." Only one security, a $95,000 municipal
bond acquired through the merger, is rated A minus ("A-"). Ratings are assigned
by independent rating agencies and are subject to the accuracy of reported
information concerning the issuers and the subjective judgment and analysis of
the rating agencies. They are not a guarantee of collectibility. Approximately
41.6% of these
7
<PAGE>
securities mature in one year or less and 97.9% in five years or less. As such,
the risk of significant fluctuations in value due to changes in the general
level of interest rates is limited.
The following table sets forth information regarding the composition of
the investment portfolio at September 30, 1996 and 1995 (amounts in thousands).
INVESTMENT PORTFOLIO
SEPTEMBER 30,
------------------
1996 1995
---- ----
(amounts in thousands)
U.S. Treasury Securities $31,377 $46,792
Securities of other U.S. Government 23,682 16,372
agencies and corporations
Obligations of states and political 96 2,422
subdivisions
Other Securities 525 360
------- -------
Total investments $55,680 $65,946
======= =======
CFC's investment portfolio decreased by 15.6% from the period of September
30, 1995 to 1996, as a result of the sale of U.S. Treasury securities needed to
fund loan growth and to accommodate the decline in total deposits. During this
period, CFC has adjusted the mix of its investment securities from U.S. Treasury
securities to securities of U.S. Government agencies to obtain higher yields.
U.S. Treasury securities represented 56.4% in 1996, and 71.0% in 1995, while
securities of U.S. Government agencies and municipals represented 42.7% in 1996,
and 28.5% in 1995.
LOANS. CFC maintains a high quality portfolio of real estate, commercial
and consumer loans. All loans are reviewed and approved by CFC's loan committee,
which ensures that loans comply with applicable credit standards. In most cases,
CFC requires collateral from the borrower. The type and amount of collateral
varies but may include residential or commercial real estate, deposits held by
financial institutions, U.S. Treasury securities, other marketable securities
and personal property. Collateral values are monitored to ensure that they are
maintained at proper levels.
As of September 30, 1996, approximately 77% of all CFC's loans were real
estate loans secured by real estate in South Florida. This level of
concentration could present a potential credit risk to CFC because the ultimate
collectibility of these loans' are susceptible to adverse changes in real estate
market conditions in this market. CFC has addressed this risk by limiting
8
<PAGE>
most loans to a maximum of 70% of the appraised value of the underlying real
estate and maximum amortization schedules of 20 years.
Most of the loans have a stated maturity of five to ten years and may be
renewed or rolled over at maturity. At that time, CFC undertakes a complete
review of the borrower's credit worthiness and the value of any collateral. If
these items are satisfactory, CFC will generally renew the loan at prevailing
interest rates. The following table divides CFC's loan portfolio into five
categories.
TYPES OF LOANS
SEPTEMBER 30,
------------------------
1996 1995
-------- --------
(amounts in thousands)
Commercial, financial and agricultural $ 31,977 $ 34,175
Real estate - construction 9,304 9,035
Real estate - mortgage 101,730 88,428
Installment loans 1,621 2,572
Overdrafts 157 88
-------- --------
Total loans $144,789 $134,298
======== ========
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS. CFC makes commercial,
financial and agricultural loans to businesses located in South Florida. The
credit risk associated with business lending is influenced by general economic
conditions, deterioration in a borrower's capital position resulting in
increasing debt to equity ratios, deterioration in a borrower's cash position
resulting in a liquidity problem, and decreasing revenues due to inefficient
operations of the borrower. These loans are generally secured by corporate
assets, marketable securities or other liquid financial instruments. These loans
totaled approximately $31,977,000 at September 30, 1996, and $34,175,000 at
September 30, 1995. Legally binding commitments to extend credit and letters of
credit for these borrowers totaled $16,301,000 at September 30, 1996 compared to
$20,882,000 at September 30, 1995.
REAL ESTATE CONSTRUCTION LOANS. CFC makes real estate construction loans
from time to time for real estate projects located in South Florida. CFC
generally requires security in the form of a mortgage on the underlying real
property and the improvements constructed thereon and personal guarantees. CFC
attempts to limit its credit exposure to 70% of the appraised value of the
underlying real property. On September 30, 1996, construction loans totaled
$9,304,000. Risks associated with construction loans include variations from
vacancy projections, delays in
9
<PAGE>
construction, environmental factors, reliability of subcontractors and timing
and reliability of inspections, and costs overruns.
REAL ESTATE MORTGAGE LOANS. CFC makes both commercial and residential real
estate loans. These loans were $101,730,000 at September 30, 1996. Risks
associated with real estate mortgage loans include reliability of appraisals,
deterioration of market value, environmental contamination, and accelerated
depreciation of property due to deferred maintenance.
CFC makes real estate loans secured by commercial real estate, including
loans to acquire or refinance office buildings, warehouses and apartments. At
September 30, 1996, these loans totaled $80 million, or 55.3% of total loans.
Most of these loans have a maturity of five years or less. Almost all of these
loans are secured by real property located in South Florida. These loans
generally require a loan-to-collateral value of not more that 70%. At September
30, 1996, CFC had $3.7 million in legally binding commitments to extend credit
or standby letters of credit involving commercial real estate borrowers,
compared to $0.4 million at September 30, 1995.
Residential real estate loans totaled $22 million, or 15.2% of total loans
at September 30, 1996, compared with $20 million, or 14.9% at September 30,
1995. Residential real estate loans are predominately adjustable rate home
mortgages which generally require a loan-to-collateral value of not more than
70% and equity credit lines which generally limit the loan-to-collateral value
to not more than 70% to 80%. Most loans have a maximum term of five to seven
years. CFC does not ordinarily charge any points on its real estate loans.
Almost all of the residential real estate loans are secured by homes in South
Florida. Legally binding commitments to extend credit secured by residential
mortgages totaled $2,068,000 as of September 30, 1996 compared to $1,209,000 as
of September 30, 1995.
INSTALLMENT LOANS. CFC offers consumer loans and personal and secured
loans. The security for these loans ordinarily consists of automobiles, consumer
goods, marketable securities, certificates of deposit and similar items. These
loans totaled approximately $1.6 million, or 1.1% of total loans, on September
30, 1996, compared with $2.6 million, or 1.9% of total loans, on September 30,
1995. Risks associated with installment loans include loss of employment of
borrowers, declines in the financial condition of borrowers resulting in
delinquencies, and rapid depreciation of loan collateral.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets consist of non-accrual loans and residential and
commercial properties acquired in partial or total satisfaction of problem loans
which are known as "other real estate owned" or "OREO." Past due loans are loans
that are delinquent 30 days or more which are still accruing interest.
Maintaining a low level of non-performing assets is important to the
ongoing success of any financial institution. CFC's credit review and approval
process is critical to CFC's ability to minimize non-performing assets on a long
term basis. In addition to the negative impact on interest income,
non-performing assets also increase operating costs due to the expense of
10
<PAGE>
collection efforts. It is CFC's policy to place all loans which are past due 90
days or more on non-accrual status, subject to exceptions made on a case by case
basis. Prior to 1995 CFC's results were adversely affected due to a relatively
high level of OREO. This problem was mitigated in 1995 by CFC's success in
selling a large amount of its OREO.
The following table presents CFC's non-performing assets and past due
loans for 1996 and 1995.
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
SEPTEMBER 30,
----------------------
1996 1995
-------- --------
(amounts in thousands)
Non-Accrual Loans $2,333 $1,311
OREO, net 3,266 3,671
------ ------
Total Non Performing Assets $5,599 $4,982
------ ------
Accruing Loans Past Due 90 Days $ 0 $ 280
====== ======
Of the total loan portfolio of $144.8 million at September 30, 1996, $5.6
million or 3.9%, was non-performing, an increase of $617,000 from September 30,
1995. Non-performing loans at September 30, 1996 consisted of commercial and
residential real estate loans. The increase in non-accrual loans of $1,022,000
was the result of eight real estate loans in the process of foreclosure.
Subsequent to September 30, 1996, CFC entered into a settlement agreement with
one borrower, and, as a result of such settlement, a loan in the amount of
$357,000 was removed from the non-accrual category.
Other real estate owned at September 30, 1996 consisted of $1,063,000 of
residential real estate and $2,203,000 of commercial real estate. OREO at
September 30, 1995 consisted of $1,233,000 of residential real estate and
$2,438,000 of commercial real estate. CFC believes that the carrying value of
its OREO portfolio is realizable.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
CFC evaluates the adequacy of its allowance for loan losses as part of its
ongoing credit review and approval process. The review process is intended to
identify, as early as possible, customers who may be facing financial
difficulties. Once identified, the extent of the client's financial difficulty
is carefully monitored by CFC's loan review officer, who recommends to the
directors loan committee the portion of any credit that needs a specific reserve
allocation or should be charged off. Other factors considered by the loan
committee in evaluating the adequacy
11
<PAGE>
of the allowance include overall loan volume, historical net loan loss
experience, the level and composition of non-accrual and past due loans, local
economic conditions, and value of any collateral. From time to time, specific
amounts of the reserve are designated for certain loans in connection with the
loan committee's and review officer's analysis of the adequacy of the allowance
for loan losses.
While the largest portion of this allowance is typically intended to cover
specific loan losses, it is considered a general reserve which is available for
all credit-related purposes. The allowance is not a precise amount, but is
derived based upon the above factors and represents management's best estimate
of the amount necessary to adequately cover probable losses from current credit
exposures. The provision for loan losses is a charge against current earnings
and is determined by management as the amount needed to maintain an adequate
allowance.
The overall credit quality of the loan portfolio has improved in recent
years as evidenced by CFC's relatively low level of non-performing loans and net
charge-offs. Management relied on these factors, as well as its assessment of
the financial condition of specific clients facing financial difficulties, in
deciding to permit the level of the allowance for loan losses to drop to
$2,502,000 at September 30, 1996, from $3,040,000 at December 31, 1995.
CFC's allowance for loan losses at September 30, 1996 represents
approximately 1.73% of total loans.
For the nine months ended September 30, 1996, less that 0.38% of the
entire loan portfolio was charged off, with net charge-offs being $556,000. In
1995, net charge-offs were 0.04% of the entire portfolio. During the third
quarter of 1996, CFC experienced a lower level of net charge-offs which amount
to $91,000. The net amounts charged-off were $24,000 in commercial loans,
$73,000 in residential real estate loans, $3,000 in installment loans, and
recoveries of $9,000 in commercial real estate loans.
FINANCIAL CONDITION
CFC's goal is to maintain a high quality and liquid balance sheet. CFC
seeks to achieve this objective through increases in collateralized loans, a
strong portfolio of real estate loans and a stable portfolio of investment
securities of high quality.
INVESTMENT SECURITIES. As of September 30, 1996, investment securities
averaged $61.0 million or 29.0% of total earning assets. CFC's management
strategy for its investment account is to maintain a very high quality portfolio
with generally short-term maturities. The average investment portfolio, all of
which has been classified as available for sale, decreased 5.6% from $ 64.7
million at September 30, 1995 to $ 61.0 million at September 30, 1996.
LOANS. Loans averaged $ 139.3 million in the first nine
months of 1996 compared to $133.4 million for the same period of
1995, or an increase of 4.4%. See "Asset Quality and Credit Risk
- - Loans," above.
12
<PAGE>
INTEREST-BEARING LIABILITIES. Total interest-bearing liabilities averaged
$ 150.4 million in the first nine months of 1996, down from $ 151.2 million in
1995. The decline in average savings of $ 2.3 million or 8.7% was due to lower
interest rates which resulted in customers shifting their funds into higher
yielding investments, a loss of some former Carney customers and continuing
competition from mutual funds and credit unions. Average money market and now
deposits increased $1.1 million or 1.5%, and average time deposits increased
$0.6 million or 1.1% compared to 1995.
LIQUIDITY AND RATE SENSITIVITY
The principal functions of asset and liability management are to provide
for adequate liquidity, to manage interest rate exposure by maintaining a
prudent relationship between rate sensitive assets and liabilities and to manage
the size and composition of the balance sheet so as to maximize net interest
income.
Liquidity is the ability to provide funds at minimal cost to meet
fluctuating deposit withdrawals or loan demand. These demands are met by
maturing assets and the capacity to raise funds from internal and external
sources. CFC primarily utilizes cash, federal funds sold and securities
purchased under repurchase agreements to meet its liquidity needs. Although not
utilized in managing daily liquidity needs, the sale of investment securities
provides a secondary source of liquidity.
Fluctuating interest rates, increased competition and changes in the
regulatory environment continue to significantly affect the importance of
interest rate sensitivity management. Rate sensitivity arises when interest
rates on assets change in a different period of time or a different proportion
than that of interest rates on liabilities. The primary objective of interest
rate sensitivity management is to prudently structure the balance sheet so that
movements of interest rates on assets and liabilities are highly correlated and
produce a reasonable net interest margin even in periods of volatile interest
rates.
Regular monitoring of assets and liabilities that are rate sensitive
within 30 days, 90 days, 180 days and one year is an integral part of CFC's
rate-sensitivity management process. It is CFC's policy to maintain a reasonable
balance of rate-sensitive assets and liabilities on a cumulative one year basis,
thus minimizing net interest income exposure to changes in interest rates. CFC's
sensitivity position at September 30, 1996 was such that net interest income
would decline modestly if there were an increase in short-term interest rates.
CFC monitors the interest rate risk sensitivity with traditional gap
measurements. The gap table has certain limitations in its ability to accurately
portray interest sensitivity; however, it does provide a static reading of CFC's
interest rate risk exposure.
As of September 30, 1996, CFC remained asset sensitive (interest sensitive
assets subject to repricing exceeded interest sensitive liabilities subject to
repricing) on a 365-day basis to the extent of $24.2 million. This positive gap
at September 30, 1996 was 10.5% of total assets compared with 9.6% at September
30, 1995. The primary cause for this increase in the gap was
13
<PAGE>
the increase in the percentage of variable rate loans to total loans, from 72%
at September 30, 1995 to 77% at September 30, 1996, which represented an
increase in the amount of interest sensitive loans maturing within one year of
$9.5 millions.
CFC's targeted gap position is in the range of negative 5 percent to
positive 10 percent. Therefore, the 10.5% interest sensitive gap position for
September 30, 1995 is an exception to the policy. CFC intends to address this
issue, as well as its overall exposure to changing rates, in its next ALCO
meeting. At this meeting, CFC expects to reevaluate the structure of its
interest sensitive assets and liabilities and the adequacy of its current policy
limits. CFC measures its gap position as a percentage of its total assets.
While the absolute level of gap is a measurement of interest rate risk,
the quality of the assets and liabilities in the balance sheet must be analyzed
in order to understand the degree of interest rate risk taken by CFC. CFC does
not invest in any derivative products in order to manage or hedge its interest
rate risk.
CAPITAL
One of management's primary objectives is to maintain a strong capital
position to merit the confidence of customers, bank regulators and stockholders.
A strong capital position helps CFC withstand unforeseen adverse developments
and take advantage of attractive lending and investment opportunities when they
arise. During the first nine months of 1996, stockholders' equity increased by $
2.3 million, or 11.4%, from December 31, 1995.
The Federal Reserve's final rules pertaining to risk-based capital became
effective as of December 31, 1992. Under these rules, at September 30, 1996,
CFC's tier one capital was 14.1% and the total capital was 15.4% of risk-based
assets. These risk-based capital ratios are well in excess of the minimum
requirements of 4% for tier one and 8% for total risk-based capital ratios. All
of these capital ratios increased during the third quarter of 1996 compared to
the same period of 1995 as equity capital increased by 13.0% and assets only
increased by 1.6%. CFC's leverage ratio (tier one capital to total average
quarterly assets) of 9.9% at September 30, 1996, is also well in excess of the
minimum 4% requirement.
IMPACT OF PREMIUM GROUP SETTLEMENT
In October 1996, CFC agreed to settle all of the outstanding litigation
arising from the failure of the Premium Sales Corporation and certain of its
affiliates (the "Premium Group"). This litigation is described in greater detail
in Part II - Item 1 - "Legal Proceedings."
Under the terms of the proposed settlement, CNB will pay $3 million to the
plaintiffs in January 1997. The settlement is subject to the completion of a
definitive settlement agreement and its subsequent approval by the Courts
involved. This is expected to occur in December 1996.
CFC expects that it will expense the entire amount of the settlement for
accounting purposes during the fiscal year ended December 31, 1996. As a result,
earnings for 1996 will be
14
<PAGE>
almost entirely offset by the amount of the settlement. The settlement is also
expected to reduce interest income in 1997 due to the decrease in earning assets
of CFC. However, such drop is expected to be substantially offset by reduced
legal and professional fees resulting from the settlement of the case.
For income tax purposes, CFC expects to expense the settlement at the time
of payment (i.e., in January 1997). Assuming that CFC continues its current
level of operating profitability, the $3 million settlement will, for tax
purposes, offset a substantial portion of CFC's anticipated taxable income for
1997.
CFC will fund the settlement from its existing cash (and due from banks)
which were more that $15 million as of September 30, 1996. As a result, CFC does
not expect that the settlement will have a significant impact on CFC's liquidity
which is currently at a relatively high level.
At the time of the payment, CFC's stockholder equity will be decreased by
$3 million. This will result in an immediate decrease of the book value per
share of the outstanding common stock. Assuming that the settlement had been
consummated as of September 30, 1996, CFC's book value per share would have
decreased from $ 18.17 per share to $ 15.79 per share.
The proposed settlement will reduce CFC's regulatory capital. Assuming
that the settlement had been consummated as of September 30, 1996, CFC's tier
one capital would have declined from 14.1% to 12.3%, and its total capital would
have declined from 15.4% of risk-based assets to 13.5% of risk-based assets. In
each case, the lower ratios would still exceed the minimum capital requirements
of 4% for tier one capital and 8% for total risk-based capital. Likewise, CFC's
leverage ratio (tier one capital to total average quarterly assets) would have
declined from 9.9% on September 30, 1996 to 8.6%, which amount would still
exceed the minimum 4% requirement.
The foregoing discussion of the impact of the Premium Group settlement on
the earnings and financial condition of CFC assumes that the settlement is
consummated on the terms outlined in the proposed settlement agreement. The
completion of the settlement is, however, subject to the execution of a
definitive settlement agreement as well as the approval of such agreement by the
courts. There can be no assurance that these matters will be consummated under
the terms outlined. Furthermore, the analysis of the impact of the proposed
settlement is based on a variety of assumptions regarding future conditions and
the application of accounting and income tax principles. However, it is possible
that upon further review certain of these assumptions may need to be revised,
which would result in changes to the analysis.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PREMIUM GROUP LITIGATION
As previously reported, CNB is party to several legal proceedings arising
out of the failure of the food "diverting" business owned and operated by
Premium Sales Corporation, Plaza Trading Corporation and certain of their
affiliates and associates (the "Premium Group"). In June 1993, the Premium Group
was forced into bankruptcy and a receiver was appointed for the principal
members of the Premium Group. It appears that the Premium Group financed a major
portion of their operations by attracting funds from private investors. Many of
the investors in the Premium Group have alleged that the Premium Group was
involved in a "Ponzi" scheme in which the Premium Group paid high rates of
return to early investors from funds raised from later investors.
WALCO INVESTMENTS ET AL. V. KENNETH THENEN, ET AL.
In June 1994, certain investors in the Premium Group filed a class action
complaint in the United States District Court for the Southern District of
Florida seeking in excess of $250 million in damages for losses sustained by
them by investing in the Premium Group.
The plaintiffs have alleged that CNB, primarily through the actions of one
of its officers, Larry Robinette, facilitated the scheme and is liable for the
plaintiff's losses due to violations of federal and state RICO statutes and
common law fraud. The plaintiffs are seeking to recover their alleged damages of
more than $250 million as well as treble damages and punitive damages. CNB and
Larry Robinette have filed an answer to the complaint denying all allegations.
On October 9, 1996 the Class Plaintiffs, CNB, and Harley Tropin as Trustee
and Receiver for certain Premium Group companies agreed to settle the pending
Premium litigation for payment by CNB of $3,000,000. The details of this
settlement are being finalized and CNB expects a formal agreement to be executed
and submitted to the Court for approval in the near future.
IN RE: PREMIUM SALES CORPORATION ET AL., DEBTOR; HARLEY S. TROPIN, TRUSTEE V.
COUNTY NATIONAL BANK OF SOUTH FLORIDA AND LARRY ROBINETTE.
In July 1995, Harley S. Tropin, as the Chapter 11 trustee for the estates
of Premium Sales Corporation, Plaza Trading Corporation and the designated
corporate representative of Windsor Wholesale Corporation (the "Premium
Debtors"), commenced an adversary proceeding against CNB and Larry Robinette in
the United States Bankruptcy Court for the Southern District of Florida.
16
<PAGE>
In his complaint, the trustee alleged that various transactions between
CNB and the Premium Debtors represented avoidable transfers under federal
bankruptcy and federal and state fraudulent conveyance laws. He has requested a
judgment against CNB for all amounts involved in these transactions, which have
not been specified but could exceed $750 million. The trustee further alleged
that CNB extended unsecured credit to the Premium Debtors by providing access to
uncollected funds and by permitting certain overdrafts. He has also alleged that
CNB should be required to return the profits which it received from servicing of
the Premium Group accounts under a theory of unjust enrichment. CNB has filed an
answer denying all of the trustee's allegations.
In October 1996, CNB and Harley S. Tropin, as trustee, agreed to settle
this case as part of the settlement for the Walco case described above.
HARLEY S. TROPIN, AS RECEIVER, V. KENNETH THENEN, ET AL.
On December 23, 1993, Harley S. Tropin, as receiver for certain members of
the Premium Group, filed a complaint in the United States District Court for the
Southern District of Florida against various parties seeking to recover
unspecified damages suffered by the Premium Group from the defendants'
participation and assistance in the allegedly fraudulent scheme conducted by the
Premium Group. In October 1995, the receiver amended its complaint to add CNB as
an additional defendant in the litigation. In its complaint, the receiver has
alleged that CNB aided, abetted and participated in the fraudulent scheme and,
therefore, is liable to the receiver for the damages suffered by these
corporations as a result of the "Ponzi" scheme.
In October 1996, CNB and Harley S. Tropin, as receiver, agreed to settle
this case as part of the settlement for the Walco case described above.
GRAND JURY INVESTIGATION
CNB is aware that the U.S. Attorney convened a grand jury to investigate
possible criminal violations with respect to the Premium Group matter. To date,
several directors and officers of CNB have appeared as witnesses before the
grand jury. A federal grand jury has indicted the principal Premium players
alleging fraud. This has been under investigation for several years. One officer
of CNB, Larry Robinette, has been indicted for complicity in the fraud. Mr.
Robinette has vigorously denied the charges and is entitled to the
constitutional presumption of innocence. No other officer or director of CNB nor
was the Bank itself named either as a target of the investigation or charged
with any wrongdoing.
RELATED MATTERS
CNB has expended approximately $ 1,400,000 through September 30, 1996 in
legal fees and other expenses in connection with the legal proceedings related
to the failure of the Premium Group. CNB is currently spending more than $70,000
per month for legal fees and related items with respect to the pending
litigation. These costs have largely diminished since the October 9th
settlement, however, fees will continue to accrue at a reduced level as the
settlement is finalized.
17
<PAGE>
The Premium Group matter has been highly publicized in South Florida and widely
reported by the local media. This has resulted in adverse publicity for CNB, and
may have caused a loss of business for CNB in the form of deposit withdrawals
and other customer relationships.
POTENTIAL LITIGATION INVOLVING FLORIDA HOME FINDERS, INC.
In June 1995, CNB made a loan in the amount of $2,000,000 to the
principals of Florida Home Finders, Inc. ("FHF"). The loan was utilized to pay
part of the purchase price of FHF owed by the principals to the former owners of
FHF. The loan was secured by a pledge of a $2,000,000 certificate of deposit
established by FHF at the time of the loan. FHF is a property management
company. As part of its business, it apparently received security deposits from
tenants at properties managed by FHF. It has been alleged that FHF utilized
these tenant security deposits to establish the certificate of deposit at CNB.
In September, 1995, the Florida Department of Business Regulation (the
"DBR") filed an action in the Circuit Court for St. Lucie County against FHF and
its principals based on the alleged misuse of the tenant security deposits and
other items. As part of this proceeding, the DBR sought a temporary injunction
preventing CNB from offsetting the $2,000,000 certificate of deposit against the
amount of the loan. In seeking the injunction, the DBR alleged that the
certificate of deposit represented tenants' security deposits and that such
funds should have been held in segregated accounts by FHF. The court granted the
temporary injunction without notice to CNB. CNB subsequently intervened in the
proceeding and requested the court to dissolve the injunction because: (i) CNB
had a valid and perfected security interest in the certificate of deposit, (ii)
FHF had the right under Florida law to utilize the security deposits to
establish the certificate of deposit because it had posted a $250,000 bond with
the State of Florida; and (iii) certain other reasons. The court subsequently
held that the injunction would dissolve within 10 days unless the DBR either
posted a bond in the amount of $25,000,000 with the court, or filed a motion
with the appellate court with respect to its obligation to post the bond. The
DBR failed to take either action within the required time period.
In October, 1995, CNB took the position that the injunction against CNB
was dissolved because the DBR had failed to take either of the required actions
within the required time period. Accordingly, CNB applied the certificate of
deposit against the outstanding balance of the loan. The receiver for FHF
subsequently notified CNB that the set off of the certificate of deposit was
improper, and demanded that the certificate of deposit be reestablished.
In August 1996, the receiver for FHF filed an amended complaint against a
variety of plaintiffs with respect to the activities of FHF. In the amended
complaint, the receiver seeks, among other things, the return of the $2 million
certificate of deposit set off by CNB based upon theories of fraudulent
transfer, negligence and unjust enrichment. Although CNB has not yet filed its
answer to the amended complaint, it intends to vigorously defend its position in
this litigation.
18
<PAGE>
CERTAIN ENVIRONMENTAL MATTERS
At the time of the merger, Carney Bank was involved in an environmental
matter with respect to hazardous substances on certain real property. As a
result of the merger, the Company is now subject to such proceedings as
successor in interest to Carney Bank.
In 1993, Carney Bank took title to the premises of a former dry cleaner
located in Coral Springs, Florida pursuant to a foreclosure sale. Carney Bank
then arranged to sell the property to a third party. The purchaser required that
an environmental study be performed after the closing and that Carney Bank
indemnify the purchaser against any expenses that might result from the presence
of hazardous substances on the property. After the sale, Carney Bank engaged an
independent consultant to perform an environmental study of the property. This
study indicated that hazardous substances were located at the property. Based on
this study, Carney Bank's environmental consultant prepared a remedial action
plan (the "RAP") and submitted it to the Broward County Department of Natural
Resource Protection ("Broward County"). The RAP sets forth a plan to clean up
the hazardous substances over a period of two years. Carney Bank's consultant
has estimated that the cost of the plan will be approximately $178,000. There
can be no assurance that the actual cost of clean up will not exceed the
estimate made by Carney Bank's consultant. The RAP has received final approval
from Broward County.
In 1994, the State of Florida established a Dry Cleaning Solvent Superfund
program (the "Program") under which the State of Florida will pay for the
clean-up of certain contaminated dry cleaning sites. The State of Florida has
not yet issued regulations and an application form under the Program. When the
application form becomes available, the Company will apply for inclusion in the
Program. Based on the eligibility criteria set forth in the legislation, the
property would appear to qualify for inclusion in the Program. The Program
preempts local government and private enforcement actions with respect to
contaminated sites eligible for inclusion in the Program.
During 1995, Broward County requested Carney Bank to proceed with the RAP
at its own expense. Carney Bank resisted this request because it would
jeopardize its right to receive benefits of the Program. In October, 1995,
Carney Bank met with officials of Broward County to discuss this matter. Based
on the discussions, Carney Bank concluded that it was unlikely that Broward
County would institute an enforcement action with respect to the property.
If Broward County institutes enforcement action against the Company with
respect to the property, the Company intends to vigorously defend such actions
based on applicable provisions of Florida law. Although there can be no
assurance that those defenses would be successful or that the Company would not
be required to pay for clean up of the property, the Company believes that any
enforcement action against the Company will not have a material adverse effect
on the business or financial position of the Company.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSB
(a) The exhibits set forth in the following Index of Exhibits are files as
a part of this report.
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- ----------
Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1996.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of North Miami Beach, Florida, on Novermber 13, 1996.
COUNTY FINANCIAL CORPORATION
By: /s/ George M. Apelian
---------------------------------------
George M. Apelian, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
November 13, 1996.
SIGNATURES TITLE
- ---------- -----
/s/ George M. Apelian President, Chief Executive Officer and Director
George M. Apelian (Principal Executive Officer)
/s/ Eileen A. Salsano Executive Vice President and Chief Operating Officer
Eileen A. Salsano (Principal Financial Officer and Principal Accounting
Officer)
21
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
(unaudited)
------------- ------------
<S> <C> <C>
EARNING ASSETS:
Loans $ 144,789 $ 139,387
Less: Unearned Income (812) (110)
Allowance for loan losses (2,502) (3,040)
--------- ---------
Total loans, net 141,475 136,237
Securities held to maturity 0 1,635
Securities available for sale 55,680 58,719
Federal funds sold 8,537 12,136
--------- --------
Total earning assets 205,692 208,727
CASH AND DUE FROM BANKS 15,179 14,732
PREMISES AND EQUIPMENT, Net 4,223 4,369
OTHER REAL ESTATE OWNED, Net 3,266 3,329
INTEREST RECEIVABLE 1,339 1,865
OTHER ASSETS 1,226 1,000
--------- ---------
TOTAL $ 230,925 $ 234,022
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $ 23,337 $ 23,479
Interest checking, interest checking plus, and
moneyfund accounts 74,883 74,247
Certificates of deposit, $100,000 and over 12,718 12,928
Other certificates of deposit 36,466 40,904
--------- ---------
Total interest bearing deposits 147,404 151,558
Securities sold under repurchase agreements 250 1,777
Other borrowings 875 950
--------- ---------
Total interest bearing liabilities 148,529 154,285
Demand deposits 56,729 57,687
--------- ---------
Total 205,258 211,972
Interest payable 699 730
Other liabilities 2,206 890
--------- ---------
Total liabilities 208,163 213,592
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value; 1,500,00 shares
authorized; 1,263,628 at September 30, 1996 and
1,263,617 at December 31, 1995, issued and outstanding 13 13
Capital surplus 13,553 13,553
Retained earnings 9,388 6,661
Net unrealized (loss) gain on securities available
for sale, net of taxes (192) 203
--------- ---------
Total stockholders' equity 22,762 -20,430
--------- ---------
TOTAL $ 230,925 $ 234,022
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
1996 1995 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 3,601 $ 3,541 $ 10,347 $ 10,387
Interest on investment securities:
Taxable 869 888 2,715 2,576
Non-taxable 2 24 13 71
Interest on federal funds sold 147 131 401 357
----------- ---------- ----------- -----------
Total interest income 4,619 4,584 13,476 13,391
----------- ---------- ----------- -----------
INTEREST EXPENSE:
Savings 164 185 502 571
Interest checking, interest checking plus and moneyfund 450 459 1,304 1,465
Certificates of deposit, $100,000 and over 173 197 533 457
Other certificates of deposit 490 577 1,500 1,523
Interest on other borrowings 9 34 89 106
----------- ---------- ----------- -----------
Total interest expense 1,286 1,452 3,928 4,122
----------- ---------- ----------- -----------
NET INTEREST INCOME 3,333 3,132 9,548 9,269
Provision for loan losses 6 (38) 18 107
----------- ---------- ----------- -----------
NET CREDIT INCOME 3,327 3,170 9,530 9,162
----------- ---------- ----------- -----------
NON-INTEREST OPERATING INCOME:
Service charges on deposit accounts 575 577 1,795 1,840
Net loss on sale of investment securities (4) 0 (11) (12)
Other 87 114 279 288
----------- ---------- ----------- -----------
Total non-interest operating income 658 691 2,063 2,116
----------- ---------- ----------- -----------
NON-INTEREST OPERATING EXPENSE:
Personnel expense 1,350 1,411 4,224 4,281
Occupancy expense, net 416 401 1,217 1,138
Premises and equipment expense 154 153 443 454
Other 1,040 909 2,928 2,960
----------- ---------- ----------- -----------
Total non-interest operating expense 2,960 2,874 8,812 8,833
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,025 987 2,781 2,445
PROVISION FOR INCOME TAXES 0 292 54 787
----------- ---------- ----------- -----------
NET INCOME $ 1,025 $ 695 $ 2,727 $ 1,658
=========== ========== =========== ===========
EARNINGS PER COMMON SHARE $ 0.81 $ 0.55 $ 2.16 $ 1.31
=========== ========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING 1,263,628 1,263,617 1,263,628 1,263,617
=========== ========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------------------------------------------------------------------
NET
UNREALIZED
GAIN (LOSS) ON
SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 (as reported) $10 $ 4,679 $ 11,982 $ 203 $ 16,874
Merger with Carney Bank 3 8,874 (5,321) 0 3,556
BALANCE, DECEMBER 31, 1995 (as restated) 13 13,553 6,661 203 20,430
--- ------- -------- ----- --------
Net change in unrealized gain (loss)
on securities available for sale,
net of taxes 0 0 0 (395) (395)
Net income for the nine months ended 0 0 2,727 0 2,727
--- ------- -------- ----- --------
BALANCE SEPTEMBER 30, 1996 (unaudited) $13 $13,553 $ 9,388 ($192) $ 22,762
=== ======= ======== ===== ========
</TABLE>
24
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,727 1,658
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 18 107
Depreciation and amortization 339 508
Deferred income tax benefit (17) (14)
Net loss on sale of investment securities 11 12
Decrease in interest receivable 526 80
Decrease (increase) in other assets 145 (97)
(Decrease) increase in interest payable (30) 179
Increase in other liabilities 1,200 647
-------- -------
Net cash provided by operating activities 4,919 3,080
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities held to maturity 0 10,655
Proceeds from sales and maturities of securities available 27,637 8,603
Purchase of securities available for sale (23,710) (15,505)
(Increase) decrease in loans, net (5,024) 1,720
Proceeds from sale of other real estate owned 37 26
Purchases of premises and equipment, net (297) (464)
-------- -------
Net cash (used in) provided by investing activities (1,357) 5,035
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in savings accounts (142) (3,845)
Increase/(Decrease) in interest checking, interest checking plus
and moneyfund 636 (9,649)
(Decrease) increase in certificates of deposit (4,648) 13,222
(Decrease) increase in securities sold under repurchase agreements (1,527) 678
Repayment of other borrowings (75) (75)
Decrease in demand deposits (958) (6,757)
-------- -------
Net cash used in financing activities (6,714) (6,426)
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,152) 1,689
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,868 17,317
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,716 19,006
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 3,958 2,872
======== =======
Income Taxes $ 0 909
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
25
<PAGE>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
County Financial Corporation ("C.F.C."), a one Bank holding company, its
wholly-owned banking subsidiary, County National Bank of South Florida (the
"Bank") and its inactive wholly-owned non-banking subsidiary, Carnco
Corporation ("Carnco") are primarily engaged in the traditional banking
practices of gathering deposits and investing in loans and investment
securities. The Bank offers these services through its main office and
eleven branches located in Dade, Broward, and Palm Beach County, Florida.
Substantially all of the Bank's activities are conducted with customers in
South Florida.
The accounting and reporting policies and practices of C.F.C., the Bank, and
Carnco conform to the practices in the banking industry and generally
accepted accounting principles.
The accounting policies followed for quarterly reporting purposes are the
same as those disclosed in the 1995 Annual Report to Stockholders of County
Financial Corporation. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary for a fair presentation of the
information provided. These statements have been prepared by C.F.C. without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnotes have been omitted pursuant to
such rules and regulations. Although C.F.C. believes that the disclosures
are adequate to make the information presented not misleading, it is
suggested that these unaudited consolidated financial statements be read in
conjunction with C.F.C.'s audited 1995 consolidated financial statements and
the notes thereto.
2. MERGER WITH CARNEY BANK
On January 12, 1996, Carney Bank was merged with and into the Bank with the
Bank being the surviving corporation. The merger was made pursuant to an
Agreement and Plan of Reorganization and related Agreement to Merge (the
"Merger Agreement"), dated May 10, 1995. Under the terms of the Merger
Agreement, the Company issued 284,564 shares of its common stock in exchange
for all outstanding common stock, stock options, and warrants of Carney
Bank. The merger was accounted for as a pooling of interests, and
accordingly, all prior period financial information has been restated.
26
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 15,179
<INT-BEARING-DEPOSITS> 147,404
<FED-FUNDS-SOLD> 8,537
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,680
<INVESTMENTS-CARRYING> 55,988
<INVESTMENTS-MARKET> 55,680
<LOANS> 144,789
<ALLOWANCE> 2,502
<TOTAL-ASSETS> 230,925
<DEPOSITS> 204,133
<SHORT-TERM> 250
<LIABILITIES-OTHER> 2,905
<LONG-TERM> 875
0
0
<COMMON> 13
<OTHER-SE> 22,749
<TOTAL-LIABILITIES-AND-EQUITY> 230,925
<INTEREST-LOAN> 10,347
<INTEREST-INVEST> 2,728
<INTEREST-OTHER> 401
<INTEREST-TOTAL> 13,476
<INTEREST-DEPOSIT> 3,839
<INTEREST-EXPENSE> 3,928
<INTEREST-INCOME-NET> 9,548
<LOAN-LOSSES> 18
<SECURITIES-GAINS> (11)
<EXPENSE-OTHER> 2,928
<INCOME-PRETAX> 2,781
<INCOME-PRE-EXTRAORDINARY> 2,727
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,727
<EPS-PRIMARY> 2
<EPS-DILUTED> 2
<YIELD-ACTUAL> 6
<LOANS-NON> 2,333
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,735
<ALLOWANCE-OPEN> 3,040
<CHARGE-OFFS> 759
<RECOVERIES> 203
<ALLOWANCE-CLOSE> 2,502
<ALLOWANCE-DOMESTIC> 2,502
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 626
</TABLE>
