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 March 31, 1997
[ ] 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 April 30, 1997 the registrant had 1,264,881 outstanding shares
of common stock $.01 par value.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Total Pages: 24 Exhibit Index : Page 17
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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 three months ended March
31, 1997 and 1996 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 THREE
MONTHS ENDED MARCH 31, 1997 AND 1996
RESULTS OF OPERATIONS
CFC's consolidated net income for the first three months of 1997 was
$937,000 or 15.8% more than the $808,000 earned in the same period in 1996. Net
income per common share was $0.74 in 1997 vs. $0.64 in 1996.
CFC's performance in the first three months of 1997 resulted in a
return on average stockholders' equity of 17.9%, compared to 16.0% in 1996. The
return on average assets was 1.61% in 1997, compared to 1.43% in 1996.
The improvement in CFC's performance is primarily due to increased
interest income and the tax benefit resulting from payment of the litigation
settlement which were partially mitigated by increased operating expenses.
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").
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The following table sets forth the Company's average balance sheets and
related interest, yield and rate information for the first three months of 1997
and 1996.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
MARCH 31,
1997 1996
-------------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
ANNUALIZED ANNUALIZED
<S> <C> <C> <C> <C> <C> <C>
ASSETS
EARNING ASSETS:
Loans, net of unearned income $144,657 $ 3,566 10.00% $ 133,574 $ 3,289 9.90%
Investment Securities 59,248 930 6.37% 60,245 869 5.80%
Federal funds sold 9,895 131 5.37% 13,511 178 5.30%
------- ------- ------- -------- -------- ------
Total earning assets 213,800 4,627 8.78% 207,330 4,336 8.41%
------- ------- ------- -------- -------- ------
NON-INTEREST EARNING
ASSETS:
Cash and due from banks 13,573 12,832
Premises and equipment, net 4,223 4,112
Other Real Estate Owned, net 3,262 3,256
Other assets 2,760 2,475
Allowance for loan losses (2,423) (2,639)
------- --------
Total non-interest
earning assets 21,395 20,036
------- --------
TOTAL ASSETS $235,195 $227,366
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Savings accounts $ 23,630 $ 175 3.00% $ 23,362 $ 172 2.96%
Money market/NOW accounts 70,314 395 2.28% 73,223 441 2.42%
Time deposits 53,182 721 5.50% 50,140 674 5.41%
Repurchase agreements 2,103 16 3.09% 2,471 23 3.74%
Other borrowings 825 21 10.32% 926 23 9.99%
------- ------- ------- -------- -------- ------
Total interest
bearing liabilities 150,054 1,328 3.59% 150,122 1,333 3.57%
------- ------- ------- -------- -------- ------
NON-INTEREST BEARING
LIABILITIES:
Demand deposits 62,056 55,275
Other liabilities 1,891 1,682
------- --------
Total non-interest
bearing liabilities 63,947 56,957
------- --------
Total liabilities 214,001 207,079
STOCKHOLDERS' EQUITY 21,194 20,287
------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $235,195 $ 227,366
======== =========
Net interest Income/Spread $ 3,299 5.19% $ 3,003 4.84%
======== =======
Net Interest Yield 6.26% 5.83%
</TABLE>
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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 $143,000
and $71,000 in the first three months of 1997 and
1996, respectively.
- Tax exempt income is not calculated on a tax
equivalent basis.
- Non-accruing loans are included in average loans.
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 three months of 1997 was $3,299,000,
up 9.9% from $3,003,000 in 1996. Interest income from earning assets increased
from $4,336,000, in the first three months of 1996 to $4,627,000 in the same
period of 1997. This increase was due to the increase in the yield on investment
securities from 5.80% in the first three months of 1996 to 6.37% in the same
period of 1997; although, the average investment balance decreased $997,000.
Average federal funds sold decreased $3,616,000, as average loans increased
$11,083,000 resulting in a net increase of $6,470,000 in total earning assets.
The increase in average loans was accompanied by a rise in the average yield
which increased from 9.90% for the first three months of 1996 to 10.00% in the
first three months of 1997. The effect of these factors was to cause the yield
on the Company's earning assets to rise from 8.41% for the first three months of
1996 to 8.78% for the first three months of 1997.
Interest expense on interest bearing liabilities decreased from
$1,333,000 in the first three months of 1996 to $1,328,000 in the first three
months of 1997. Average Money Market/Now accounts declined $2,909,000 with a
decrease in yield from 2.42% to 2.28%. Likewise, Repurchase agreements and other
borrowing balances decreased $368,000 and $101,000 respectively with increased
yields. The decreases were offset by average time deposit and savings increases
of $3,042,000 and $268,000, accompanied by small yield increases. The cumulative
impact of these changes was to increase the average cost of funds from 3.57% for
all interest bearing liabilities for the first three months of 1996 to 3.59% for
the first three months of 1997.
NON-INTEREST INCOME
Non-interest income in the first three months of 1997 totaled $728,000,
compared with $733,000 in 1996. Gains on the sale of O.R.E.O. totaling $21,000
were offset by reduced deposit fee income from $619,000 in 1996, to $611,000 in
1997 and a $10,000 reduction in miscellaneous income.
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INVESTMENT SECURITIES GAINS AND LOSSES
At March 31, 1997, the Company held investment securities with a market
value of $58,483,000, which was $502,000 lower than the amortized cost of the
portfolio. This difference consisted of $137,000 of gross unrealized gains and
$639,000 of gross unrealized losses. There were net gains of $ 4,000 from the
sale of securities in the first three months of 1997, versus net gains of
$13,000 in the same period of 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $ 6,000 in both the first three
months of 1997 and 1996 as improved loan performance over prior years continued.
See "Allowance and Provision for Loan Losses."
NON-INTEREST EXPENSES
Non-interest expenses for the first three months of 1997 totaled
$3,084,000, which was up 7.5% from $2,868,000 in 1996. Non-interest expenses are
discussed below in more detail.
PERSONNEL. Personnel expense (which includes salaries and benefits)
represented 48.3% of total non-interest expenses in 1997. Personnel expenses
increased 0.2% to $1,489,000 in 1997 from $1,488,000 in 1996. Staff on a
full-time equivalent basis averaged 166 in 1997 compared to 164 in 1996. The
slight increase reflects additional staffing for a new branch opened February
1997.
OCCUPANCY EXPENSE. Net occupancy expense in 1997 totaled $438,000, up
14.1% from $384,000 in 1996. The increase was due to the opening of a new branch
in Boca Raton, Florida in February 1997, and higher maintenance and 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
$164,000 in 1997, up 17.1% from $140,000 in 1996. The increase is due to
additional depreciation and maintenance costs on equipment purchases and
technological upgrades for existing branches and new branches.
OTHER NON-INTEREST EXPENSES. Other non-interest expenses for the first
three months of 1997 totaled $992,000, up 16.0% from $855,000 in 1996. This
category of expenses benefited from a legal settlement in December, 1996 which
was primarily responsible for a reduction of legal fees and other professional
fees from a total of $371,000 for the first three months of 1996 to $99,000 for
the same period of 1997. This decrease was more than offset by an increase in
O.R.E.O. write downs and expense which increased from $53,945 in 1996 to
$302,948 in 1997, due to the reduced value of the Ron Martin property as
determined by a current appraisal, in addition to increases in several expense
categories due to growth.
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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 three months of
1997 equaled $176,000 compared to $117,000 in 1996, and were principally related
to equipment purchased for various branch sites and changes in equipment due to
technological advances. Capital expenditures through March 31, 1997 for the new
branch opened February 1997 in Boca Raton, Florida totaled $77,000. 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. The Company also expects to incur other start up costs
and expenses in connection with the opening of this branch.
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 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 99.9% of CFC's investment portfolio at March 31,
1997. CFC believes that the securities have very little risk of default. At
March 31, 1997, 100% of the securities held in CFC's investment portfolio were
classified available for sale. Of those securities, 99.9% 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.". 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 33.1% of these securities mature or
reprice in one year or less and 96.0% 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 March 31, 1997 and 1996 (amounts in thousands).
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INVESTMENT PORTFOLIO
MARCH 31,
------------------------------
1997 1996
---------- ----------
(amounts in thousands)
U.S. Treasury Securities $37,302 $ 43,497
Securities of other U.S. Government 20,657 24,776
agencies and corporations
Obligations of states and political -0- 96
subdivisions
Other Securities 524 524
---------- ----------
Total investments $58,483 $68,893
========== ==========
CFC's investment portfolio decreased by 15.1% from the period of March
31, 1996 to 1997, as a result of the sale of U.S. Treasury securities, the
proceeds of which are currently held in more liquid assets consisting of
Federal funds and cash and are therefore more readily available to fund loan
growth.
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 March 31, 1997, approximately 74% 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 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
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renew the loan at prevailing interest rates. The following table divides CFC's
loan portfolio into five categories.
TYPES OF LOANS
MARCH 31,
----------------------------
1997 1996
--------- ---------
(amounts in thousands)
Commercial, financial and agricultural $ 33,389 $ 35,221
Real estate - construction 9,638 7,479
Real estate - mortgage 95,441 94,109
Installment loans 1,463 1,618
Overdrafts 187 134
--------- ---------
Total loans $ 140,118 $ 138,561
========= =========
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 $33,389,000 at March 31, 1997, and $35,221,000 at March
31, 1996. Legally binding commitments to extend credit and letters of credit for
these borrowers totaled $18,957,000 at March 31, 1997 compared to $15,015,000 at
March 31, 1996.
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 March 31, 1997, construction loans totaled
$9,638,000. Risks associated with construction loans include variations from
vacancy projections, delays in 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 $95,441,000 at March 31, 1997. Risks
associated with real estate
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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 March 31, 1997, these loans totaled $78 million, or 55.7% 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
March 31, 1997, CFC had $2.7 million in legally binding commitments to extend
credit or standby letters of credit involving commercial real estate borrowers,
compared to $2.9 million at March 31, 1996.
Residential real estate loans totaled $18 million, or 12.9% of total
loans at March 31, 1997, compared with $23 million, or 16.5% at March 31, 1996.
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
$2,009,000 as of March 31, 1997 compared to $1,897,000 as of March 31, 1996.
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 $1.4 million, or 1.0% of total loans, on March 31,
1997, compared with $1.6 million, or 1.2% of total loans, on March 31, 1996.
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
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.
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The following table presents CFC's non-performing assets and past due
loans for 1997 and 1996.
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
MARCH 31,
-------------------------
1997 1996
--------- ---------
(amounts in thousands)
Non-Accrual Loans $1,411 $1,730
OREO, net 3,855 3,308
--------- ---------
Total Non Performing Assets $ 5,266 $ 5,038
========= =========
Accruing Loans Past Due $ 0 $ 0
90 Days ========= =========
Of the total loan portfolio of $140.1 million at March 31, 1997, $5.3
million or 3.8%, was non-performing, an increase of $228,000 from March 31,
1996. Non-performing loans at March 31, 1997 consisted of commercial and
residential real estate loans. The decrease in non-accrual loans of $319,000 was
the result of a reduction to four real estate loans in the process of
foreclosure.
Other real estate owned at March 31, 1997 consisted of $1,029,000 of
residential real estate and $2,826,000 of commercial real estate. OREO at March
31, 1996 consisted of $1,116,000 of residential real estate and $2,192,000 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 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.
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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
$2,153,000 at March 31, 1997, from $2,676,000 at March 31, 1996.
CFC's allowance for loan losses at March 31, 1997 represents
approximately 1.54% of total loans.
For the three months ended March 31, 1996, and the three months ended
March 31, 1997, charge-offs were less than 0.27% of the entire loan portfolio.
Charge-offs increased proportionally to loan growth from $370,000 to $377,000.
The net amounts charged-off were $86,000 in commercial loans, $292,000 in real
estate loans and recoveries of $1,000 in installment 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 March 31, 1997, investment securities
averaged $59.1 million or 27.9% 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 11.8% from $ 67.1
million at March 31, 1996 to $ 59.1 million at March 31, 1997.
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LOANS. Loans averaged $ 144.7 million in the first three months of 1997
compared to $133.6 million for the same period of 1996, or an increase of 8.3%.
See "Asset Quality and Credit Risk - Loans," above.
INTEREST-BEARING LIABILITIES. Average total interest-bearing
liabilities decreased slightly from $150,122,000 for the first three months of
1996 to $150,054,000 for the same period in 1997. The composition of
interest-bearing liabilities changed as funds shifted from money market accounts
and repurchase agreements to higher yielding time deposits. As a result, time
deposits increased from 33.4% of total interest-bearing liabilities in 1997 to
35.4% in 1997. The effect of this change in deposit mix on interest expense was
mitigated by a decrease in the yield of money market accounts from 2.42% in 1996
to 2.28% in 1997.
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 March 31, 1997 was such that net interest income would
increase 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.
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As of March 31, 1997, 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 $ 14.1 million. This positive gap
at March 31, 1997 was 6.0% of total assets compared with 5.8% at March 31, 1996.
The primary cause for this increase in the gap was the increase in the
percentage of variable rate loans to total loans, from 52% at March 31, 1996 to
63% at March 31, 1997, which represented an increase in the amount of interest
sensitive loans maturing within one year of $16.7 millions.
CFC's targeted gap position is in the range of negative 5 percent to
positive 10 percent. Therefore, the 6.0% interest sensitive gap position for
March 31, 1997 is within established parameters. 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 three months of 1997, stockholders' equity increased by
$681,000, or 3.2%, from December 31, 1996.
The Federal Reserve's final rules pertaining to risk-based capital
became effective as of December 31, 1992. Under these rules, at March 31, 1997,
CFC's tier one capital was 13.8% and the total capital was 15.0% 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 as of the first quarter of 1997 compared to
the same period of 1996 as equity capital increased by 4.4% and assets only
increased by 0.7%. CFC's leverage ratio (tier one capital to total average
quarterly assets) of 9.4% at March 31, 1997, is also well in excess of the
minimum 4% requirement.
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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").
On October 9 1996 CNB entered into settlements with respect to all
pending legal matters related to the Premium Group matter in exchange for a
payment of $3,000,000. CFC expensed the entire amount of the settlement for
accounting purposes during the fiscal year ending December 31, 1996 although the
cash payment was not made until January 1997. The amount of the payment will be
treated as a deduction for income tax purposes during 1997. Accordingly, this
payment will reduce a large part of CFC's anticipated taxable income during
1997. CFC funded the settlement from its existing cash reserves, which were
purposefully maintained at relatively high levels. As a result, the settlement
did not have a significant impact on CFC's liquidity levels.
CNB is aware that the U.S. Attorney has convened a grand jury to
investigate possible criminal violations with respect to the Premium Group
matter. This has been under investigation for several years. To date, several
directors and officers of CNB have appeared as witnesses before the grand jury.
On August 1996, a federal grand jury indicted several principals of Premium for
fraud. 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 CNB itself , has been named as either a target of the investigation or
charged with any wrongdoing.
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
14
<PAGE>
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 $2,000,000
certificate of deposit set off by CNB based upon theories of fraudulent
transfer, negligence and unjust enrichment. In January 1997, the receiver of FHF
voluntarily dismissed (without prejudice) its complaint against all of the
defendants in order, according to the receiver, to conserve the legal assets of
the estate of FHF. In the event that the receiver renews its legal proceedings,
CFC intends to vigorously defend its position.
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.
15
<PAGE>
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.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSB
(a) The exhibits set forth in the following Index of Exhibits are filed
as a part of this report.
EXHIBIT NO. DESCRIPTION SEQUENTIAL PAGE NO.
27 Financial Data Schedule 24
(b) The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1997.
17
<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 May 20, 1997.
COUNTY FINANCIAL CORPORATION
By: /s/ EILEEN A. SALSANO
----------------------------------
Eileen A. Salsano, Executive Vice President
and Chief Operating Officer (Principal
Financial Officer and Principal
Accounting Officer)
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 May 20, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE
<S> <C>
/s/ EILEEN A. SALSANO Executive Vice President and Chief Operating
- --------------------------------- Officer (Principal Financial Officer
Eileen A. Salsano and Principal Accounting Officer)
</TABLE>
18
<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. NEW ACCOUNTING PRONOUNCEMENTS
C.F.C's adopted Statement of Financial Accounting Standard ("SFAS") No.
125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, effective January 1, 1997. This statement
provides consistent guidance for distinguishing transfers of financial
assets (securitizations) that are sales from transfers that are secured
borrowings. The adoption of SFAS No. 125 did not have a material impact on
C.F.C.'s financial condition or results of operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, EARNINGS PER SHARE. This statement is effective for financial
statements for periods ending after December 15, 1997, and changes the
method in which earnings per share will be determined. Adoption of SFAS
No. 128 by C.F.C. will not have a material impact on earning per share.
19
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
- ----------------------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 1997 1996
(unaudited)
EARNING ASSETS:
<S> <C> <C>
Loans 140,118 146,271
Less: Unearned Income (1)
Allowance for loan losses (2,153) (2,524)
---------------- ---------------
Total loans, net 137,965 143,746
Securities available for sale 58,483 56,460
Federal funds sold 12,698 19,585
---------------- ---------------
Total earning assets 209,146 219,791
CASH AND DUE FROM BANKS 14,584 15,617
PREMISES AND EQUIPMENT, Net 4,208 4,186
OTHER REAL ESTATE OWNED, Net 3,855 3,338
INTEREST RECEIVABLE 1,486 1,450
OTHER ASSETS 1,775 1,564
---------------- ---------------
TOTAL 235,054 245,946
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Savings accounts 23,813 24,360
Interest checking, interest checking plus and moneyfund accounts 69,762 71,288
Certificate of deposit, $100,000 and over 16,260 14,437
Other certificates of deposit 37,828 38,275
---------------- ---------------
Total interest bearing deposits 147,663 148,360
Securities sold under repurchase agreements 1,476 4,750
Other borrowings 825 850
---------------- ---------------
Total interest bearing liabilities 149,964 153,960
Demand deposits 61,399 64,950
---------------- ---------------
Total 211,363 218,910
Interest payable 841 775
Other liabilities 1,030 5,122
---------------- ---------------
Total Liabilities 213,234 224,807
---------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value; 1,500,000 shares
authorized; 1,264,328, issued and outstanding 13 13
Capital Surplus 13,562 13,562
Retained earnings 8,558 7,621
Net unrealized loss on securities available for sale,
net of taxes (313) (57)
---------------- ---------------
Total stockholders' equity 21,820 21,139
---------------- ---------------
TOTAL 235,054 245,946
================ ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
20
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
- --------------------------------------------------------------------------------------------------
For the Three Months Ended
March 31, March 31,
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans 3,566 3,289
Interest on investment securities:
Taxable 930 860
Non-taxable 9
Interest on federal funds sold 131 178
------------ ------------
Total interest income 4,627 4,336
INTEREST EXPENSE:
Savings 175 172
Interest checking, interest checking plus and moneyfund accounts 395 441
Certificates of deposit, $100,000 and over 219 169
Other certificates of deposit 502 505
Interest on other borrowings 37 46
------------ ------------
Total interest expense 1,328 1,333
------------ ------------
NET INTEREST INCOME 3,299 3,003
Provision for loan losses (6) (6)
------------ ------------
Net interest income after provision for loan losses 3,293 2,997
------------ ------------
NON-INTEREST OPERATING INCOME:
Service charges on deposit accounts 611 619
Net gain on sale of investment securities 4 13
Other 113 101
------------ ------------
Total non-interest operating income 728 733
------------ ------------
NON-INTEREST OPERATING EXPENSE:
Personnel expense 1,491 1,489
Occupancy expense, net 438 384
Premises and equipment expense 164 140
Other 991 855
------------ ------------
Total non-interest operating expense 3,084 2,868
------------ ------------
INCOME BEFORE INCOME TAXES 937 862
PROVISION FOR INCOME TAXES 54
------------ ------------
NET INCOME 937 808
============ ============
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT 0.74 0.64
============ ============
AVERAGE SHARES OUTSTANDING 1,264,328 1,263,617
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
21
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
loss On
Securities
Common Capital Retained Available
Stock Surplus Earnings For Sale Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 13 $ 13,562 $ 7,621 $ (57) $ 21,139
Net change in unrealized loss
on securities available for sale,
net of taxes. (256) (256)
Net income for the three months ended. 937 937
------------ ------------ ----------- -------------- -----------
BALANCE MARCH 31, 1997 (unaudited) $ 13 $ 13,562 $ 8,558 $ (313) $ 21,820
============ ============ =========== ============== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
-------------------------------------------------------------------------------------------------------------
For the Three Months Ended
March 31,
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 937 $ 808
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Provision for loan losses 6 6
Depreciation and Amortization 134 148
Deferred income tax benefit (17)
Net gain on sale of investment securities (4) (13)
(Increase) Decrease in interest receivable (36) 40
(Increase) Decrease in other assets (57) 117
Increase (Decrease) in interest payable 66 (23)
(Decrease) Increase in other liabilities (4,092) 96
--------------- ---------------
Net cash (used) provided by operating activities (3,046) 1,162
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities available for sale 3,552 10,365
Purchase of securities available for sale (5,961) (19,501)
Decrease in loans, net 5,238 407
Proceeds from sale of other real estate owned 20 16
Purchases of premises and equipment, net (176) (117)
--------------- ---------------
Net cash provided by (used in) investing activities 2,673 (8,830)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in savings accounts (547) 650
Decrease in interest checking, checking plus
and money fund (1,526) (686)
Increase (Decrease) in certificates of deposit 1,376 (1,009)
Decrease in securities sold under repurchase agreements (3,274) (153)
Repayment of other borrowings (25) (24)
(Decrease) Increase in demand deposits (3,551) 31
--------------- ---------------
Net cash used in financing activities (7,547) (1,191)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,920) (8,859)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,202 26,868
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 27,282 18,009
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest 1,308 1,310
=============== ===============
Income Taxes 185
===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
23
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,584
<INT-BEARING-DEPOSITS> 147,663
<FED-FUNDS-SOLD> 12,698
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,483
<INVESTMENTS-CARRYING> 58,483
<INVESTMENTS-MARKET> 58,483
<LOANS> 140,118
<ALLOWANCE> 2,153
<TOTAL-ASSETS> 235,054
<DEPOSITS> 209,062
<SHORT-TERM> 841
<LIABILITIES-OTHER> 1,030
<LONG-TERM> 0
0
0
<COMMON> 13
<OTHER-SE> 21,807
<TOTAL-LIABILITIES-AND-EQUITY> 235,054
<INTEREST-LOAN> 3,566
<INTEREST-INVEST> 930
<INTEREST-OTHER> 131
<INTEREST-TOTAL> 4,627
<INTEREST-DEPOSIT> 1,291
<INTEREST-EXPENSE> 1,328
<INTEREST-INCOME-NET> 3,299
<LOAN-LOSSES> 6
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 3,085
<INCOME-PRETAX> 936
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 936
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 6.26
<LOANS-NON> 1,411
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,266
<ALLOWANCE-OPEN> 2,524
<CHARGE-OFFS> 405
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 2,153
<ALLOWANCE-DOMESTIC> 2,153
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,489
</TABLE>
