-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cm6MXu2HWgzh9nS8ZhRozhSmMIcsvly2Hh+hLXKegE3rHsQwPvy+8lZXZCcznOyd 0awEUAckKBdiV6rOVU1jAA== 0001047469-99-019612.txt : 19990513 0001047469-99-019612.hdr.sgml : 19990513 ACCESSION NUMBER: 0001047469-99-019612 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH COUNTY BANCORP CENTRAL INDEX KEY: 0000357262 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953669135 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10627 FILM NUMBER: 99617968 BUSINESS ADDRESS: STREET 1: 444 S ESCONDIDO BLVD PO BOX 1476 CITY: ESCONDIDO STATE: CA ZIP: 92025 BUSINESS PHONE: 6197432200 MAIL ADDRESS: STREET 2: PO BOX 462990 CITY: ESCONDIDO STATE: CA ZIP: 920462990 10-Q 1 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 ------------------------------------------- --- TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ________ Commission file number ______________ 0-10627 ______________ NORTH COUNTY BANCORP - ------------------------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) California 95-3669135 - -------------------------------------- ------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 444 S. Escondido Blvd., P.O. Box 462990, Escondido, California 92025 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (760) 743-2200 ------------------- - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 7, 1999 the Registrant had 4,882,705 shares of no par value common stock issued and outstanding. NORTH COUNTY BANCORP
Page ---- Part I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheet - March 31, 1999 and December 31, 1998 2 Consolidated Statement of Income - Three Months Ended March 31, 1999 and 1998 3 Consolidated Statement of Cash Flows - Three months Ended March 31, 1999 and 1998 4 Consolidated Statement of Stockholders' Equity - Three months Ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 Part II OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
1 NORTH COUNTY BANCORP PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET (In thousands)
March 31, December 31, 1999 1998 ----------- ------------ (Unaudited) ASSETS Cash and cash equivalents: Cash and due from banks $ 27,250 $ 26,885 Federal funds sold 27,000 17,000 ----------- ------------ 54,250 43,885 Investment securities: Available for sale 17,763 17,193 Held to maturity 21,900 26,628 Loans 243,193 237,702 Less: Allowance for loan and lease losses 3,620 3,592 ----------- ------------ 239,573 234,110 Other real estate owned 94 374 Premises and equipment, net 9,880 10,013 Accrued interest receivable and other assets 5,260 5,210 ----------- ------------ $348,720 $337,413 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $100,864 $100,465 Interest-bearing 211,439 202,594 ----------- ------------ 312,303 303,059 Accrued expenses and other liabilities 2,550 2,416 Federal funds purchased and U.S. Treasury demand note 2,436 1,551 Capital lease obligation 378 387 ----------- ------------ Total liabilities 317,667 307,413 ----------- ------------ Stockholders' equity: Common stock, no par value, authorized 10,000,000 shares; outstanding shares 4,882,705 in 1999 and 4,868,906 in 1998 19,168 19,127 Retained earnings 11,867 10,834 Accumulated other comprehensive income 18 39 ----------- ------------ Total stockholders' equity 31,053 30,000 ----------- ------------ $348,720 $337,413 ----------- ------------ ----------- ------------
See accompanying notes to consolidated financial statements. 2 NORTH COUNTY BANCORP CONSOLIDATED STATEMENT OF INCOME (Unaudited, in thousands except per share data)
Three Months Ended March 31, ---------------------------- 1999 1998 ------------- ------------- Interest income: Interest and fees on loans $5,734 $5,358 Investment securities 570 440 Federal funds sold 282 105 Deposits with other financial institutions 2 -- ------------- ------------- Total interest income 6,588 5,903 ------------- ------------- Interest expense: Deposits 1,612 1,403 Federal funds purchased and U.S. Treasury demand note 14 8 Other borrowings 14 15 ------------- ------------- Total interest expense 1,640 1,426 ------------- ------------- Net interest income 4,948 4,477 Provision for loan and lease losses 100 590 ------------- ------------- Net interest income after provision for loan and lease losses 4,848 3,887 ------------- ------------- Noninterest income 1,354 1,987 Noninterest expense 4,457 4,212 ------------- ------------- Income before income taxes 1,745 1,662 Provision for income taxes 712 662 ------------- ------------- Net income $1,033 $1,000 ------------- ------------- ------------- ------------- Earnings per share: Basic $ 0.21 $ 0.21 ------------- ------------- ------------- ------------- Diluted $ 0.20 $ 0.20 ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 3 NORTH COUNTY BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, in thousands)
Three Months Ended March 31, ---------------------------- 1998 1998 ------------- ------------- Cash flows from operating activities: Net income $ 1,033 $ 1,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of: Office property and equipment 357 264 Deferred loan fees and costs, net (213) (202) Investment premiums and discounts, net (15) 45 Other 8 9 (Gain) on sale of other real estate owned (24) (77) Provision for loan and lease losses 100 590 Decrease (increase) in interest receivable 2 (130) Increase in taxes payable 598 569 Decrease in accrued expenses (634) (346) Increase in interest payable 107 96 Other, net 21 202 ------------- ------------- Net cash provided by operating activities 1,340 2,020 ------------- ------------- Cash flows from investing activities: Proceeds from sales and maturities of investment securities 19,775 3,331 Purchase of investment securities (15,601) (3,317) Net increase in loans (5,377) (11,705) Purchase of premises and equipment (223) (489) Proceeds from sale of other real estate owned 330 77 ------------- ------------- Net cash used in investing activities (1,096) (12,103) ------------- ------------- Cash flows from financing activities: Cash payments on notes payable and capital lease obligations (8) (3) Net increase in deposits 9,244 12,232 Net increase (decrease) in short term borrowings 885 (194) ------------- ------------- Net cash provided by financing activities 10,121 12,035 ------------- ------------- Net increase in cash and cash equivalents 10,365 1,952 Cash and cash equivalents at beginning of year 43,885 28,262 ------------- ------------- Cash and cash equivalents at end of period $ 54,250 $ 30,214 ------------- ------------- ------------- ------------- Disclosures: Total interest paid $ 1,532 $ 1,330 ------------- ------------- ------------- ------------- Total taxes paid $ 24 $ -- ------------- ------------- ------------- ------------- Foreclosed real estate loans $ 26 $ 140 ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 4 NORTH COUNTY BANCORP CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited, dollars in thousands)
Common Stock Accumulated Other Total ---------------------- Retained Comprehensive Stockholders' Shares Amount Earnings Income Equity ---------- ---------- ---------- ----------------- ------------- Balance December 31, 1997 4,637,290 $16,058 $ 9,137 $ (2) $25,193 Comprehensive income: Unrealized holding gain on available for sale securities, net of tax of $20 26 26 Net income 1,000 1,000 ------------- Total comprehensive income 1,026 ---------- ---------- ---------- ----------------- ------------- Balance March 31, 1998 4,637,290 16,058 10,137 24 26,219 Five percent stock dividend including cash for fractional shares 231,616 3,069 (3,072) (3) Comprehensive income: Unrealized holding gain on available for sale securities, net of tax of $13 15 15 Net income 3,769 3,769 ------------- Total comprehensive income 3,784 ---------- ---------- ---------- ----------------- ------------- Balance December 31, 1998 4,868,906 19,127 10,834 39 30,000 Exercise of stock options 13,799 41 41 Comprehensive income: Unrealized holding gain on available for sale securities, net of tax of $18 (21) (21) Net income 1,033 1,033 ------------- Total comprehensive income 1,012 ---------- ---------- ---------- ----------------- ------------- Balance March 31, 1999 4,882,705 $19,168 $11,867 $18 $31,053 ---------- ---------- ---------- ----------------- ------------- ---------- ---------- ---------- ----------------- -------------
See accompanying notes to consolidated financial statements. 5 NORTH COUNTY BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying financial information has been prepared in accordance with the Securities and Exchange Commission rules and regulations for quarterly reporting and therefore does not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. This information should be read in conjunction with the Company's Annual Report on Form 10K for the year ended December 31, 1998. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial information for the three months ended March 31, 1999 and 1998, reflect all adjustments, consisting only of normal recurring accruals and provisions, necessary for a fair presentation thereof. NOTE 2 - EARNINGS PER SHARE Earnings per share is based upon the weighted average number of common stock and common stock equivalent shares outstanding adjusted retroactively for stock dividends. Basic earnings per share (EPS) represents net income divided by the weighted average common shares outstanding during the period. The weighted average number of shares outstanding for basic EPS was 4,874,579 and 4,868,906 for the three months ended March 31, 1999 and 1998, respectively. Diluted EPS gives effect to all potential issuances of common stock that would have caused basic EPS to be lower as if the issuance had already occurred. The calculation of diluted EPS for the three months ended March 31, 1999 and 1998, assumes the issuance of 227,132 and 183,820 shares of common stock, respectively, upon the conversion of stock options. The weighted average number of shares outstanding for diluted EPS was 5,101,711 and 5,052,726 for the three months ended March 31, 1999 and 1998, respectively. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS North County Bancorp (the "Company") has one wholly owned subsidiary, North County Bank (the "Bank"). North County Bank's operations are the only significant operations of the Company. The accompanying financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Statements contained in this Report on Form 10Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, intentions, beliefs or strategies regarding the future. All forward- looking statements included in this document are based on information available to the Company on the date thereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Factors that could cause actual results to differ materially from those in such forward-looking statements include general economic conditions, particularly in the Company's market areas, changes in prevailing interest rates, competitive products and pricing, inflation, credit and other risks of lending and investment activities, fiscal and monetary policies of the U.S. and other governments, regulations affecting financial institutions, and other risks and uncertainties affecting the Company's operations and personnel. RESULTS OF OPERATIONS SUMMARY A comparison of the first quarter results for the three months ended March 31, 1999 and 1998 reflects net income growth of 3% in 1999, amounting to $1,033,000 compared to $1,000,000 in 1998. The increase in earnings is attributable to a number of factors, primarily a decrease of $490,000 or 83% in the provision for loan and lease losses and an increase in net interest income of $471,000 or 11% to $5.0 million for the first quarter of 1999 from $4.5 million for the first quarter of last year. These additions to earnings were partially offset by a decrease in noninterest income of $633,000 or 6% and an increase in noninterest expense of $245,000 or 6%. The 1999 results produced return on average assets and average stockholders' equity of 1.21% and 13.49%, respectively, compared to 1.41% and 15.46%, respectively, for the same 1998 period. Basic and diluted earnings per share measured $0.21 and $0.20, respectively, for the first three months of both 1999 and 1998. The 1998 earnings per share calculations have been restated to reflect a 5% stock dividend paid on March 10, 1999. NET INTEREST INCOME Net interest income, the principal source of income for the Company, is interest and fees earned on loans and investments less the interest paid on deposits and borrowings. Primary factors affecting the level of net interest income include increases or decreases in the average balances (volume) of interest-earning assets and interest-bearing liabilities, increases or decreases in the average rates earned and paid on these assets and liabilities, the Company's ability to manage its earning asset portfolio and the availability of particular sources of funds. The changes in net interest income between the quarters ended March 31, 1999 and 1998 are analyzed in Table One. An analysis of the Company's taxable-equivalent net interest income and average balance sheet levels for the two quarters is presented in Table Two. Interest income and yields in the following discussion are on a tax-equivalent basis. Net interest income for the three months ended March 31, 1999 compared to 1998 increased $468,000 or 10% to $5.0 million from $4.5 million. The increase was the result of growth in earning assets and deposit pricing management efforts. Average earning assets grew $51.2 million or 20% to $301.3 million at an average yield of 8.89% from $250.1 million at a yield of 9.60% last year. The growth in earning assets was led by loans which increased $23.2 million or 11% to $235.6 million for the first quarter of 1999 from $212.4 million for the same 1998 period. Interest income on earning assets increased $682,000 or 12% to $6.6 million compared to $5.9 million. Interest and fees on loans increased $371,000 or 7% to $5.7 million in 1999 from $5.4 million for the same prior year period. The effect on interest income of the increase in 7 loan volume was partially countered by a decrease in the average yield on loans to 9.87% from 10.24% primarily due to the decline in the prime lending rate during the last half of 1998. Deposit growth continued to outpace loan growth in 1999 constraining the net yield on earning assets as excess funds were invested in lower yielding short-term investments and Fed funds. Average investment securities and Fed funds sold increased over the first quarter of 1998 by $11.6 million and $16.3 million, respectively, and contributed $132,000 and $177,000, respectively, to the increase in interest income. The net interest margin (net interest income as a percentage of average interest-earning assets) was 6.68% and 7.29% for the three months ended March 31, 1999 and 1998, respectively. Interest expense increased approximately 15% or $214,000 for the first three months of 1999 compared to the same period in 1998 primarily due to an increase of $209,000 in interest paid on deposits. Average interest-bearing deposits for the first quarter of 1999 increased $40.0 million or 24% to $207.6 million at an average rate paid of 3.15% compared to $167.6 million at an average rate of 3.40% for the same prior year period. Time deposits averaged $79.3 million at an average rate paid of 4.74% in 1999 compared to $49.7 million at an average rate paid of 5.03% for the first quarter of 1998. The decrease in rates paid on deposits is attributable to government easing of short term interest rates and the Company generally lowering interest rates to limit time deposit growth as well as lower the related interest expense. Time deposit interest expense increased $312,000 to $927,000 in 1999 from $615,000 last year. During this same period the average rate paid on savings accounts (including money market accounts) decreased to 2.68% on average balances of $84.2 million in 1999 from an average rate of 3.38% on balances of $79.1 million last year. Interest expense related to savings deposits decreased $102,000 to $557,000 in 1999 compared to $659,000 for the same period last year. The average rates paid on total interest-bearing liabilities were 3.18% and 3.43% for the first three months of 1999 and 1998, respectively. TABLE ONE - CHANGES IN TAXABLE-EQUIVALENT NET INTEREST INCOME (DOLLARS IN THOUSANDS) This table sets forth information regarding changes in net interest income on a fully taxable-equivalent basis for the first quarter ended March 31, 1999 and 1998. The changes for each major category of interest income and interest expense are divided between the portion of change attributable to the variance in average balances (volume) or average rates for that category. The amount of change that cannot be separated is allocated to each variance proportionately. Nonaccrual loans are included in average balances for these computations.
1999 vs. 1998 ----------------------------------- Increase (Decrease) Due to Changes in ----------------------------------- Volume Rate Total --------- ---------- ------------ Earning assets -- Interest income: Loans $570 $(199) $ 371 Investment securities: Taxable 157 (33) 124 Non-taxable 8 -- 8 Federal funds sold 192 (15) 177 Interest-bearing deposits 2 -- 2 --------- ---------- ------------ Total 929 (247) 682 --------- ---------- ------------ Deposits and borrowed funds -- Interest expense: Interest-bearing demand deposits 16 (17) (1) Savings deposits 40 (142) (102) Time deposits 348 (36) 312 Other short term borrowings 6 -- 6 Capital lease (1) -- (1) --------- ---------- ------------ Total 409 (195) 214 --------- ---------- ------------ Change in net interest income $520 $ (52) $ 468 --------- ---------- ------------ --------- ---------- ------------
8 TABLE TWO - ANALYSIS OF TAXABLE-EQUIVALENT NET INTEREST INCOME (DOLLARS IN THOUSANDS) This table presents an analysis of net interest income and average balance sheet levels for the first three months of 1999 and 1998. Tax-exempt income is presented on a tax-equivalent basis assuming a 34% federal tax rate.
THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------------------ 1999 1998 ------------------------------------------------------------------------ INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/ BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD --------- ---------- -------- ---------- --------- --------- ASSETS - ------ Interest-earning assets: Loans (1) ........................... $ 235,630 $ 5,735 9.87% $ 212,411 $ 5,364 10.24% Taxable investment securities (2) ... 38,111 534 5.68 27,071 410 6.14 Tax-exempt investment securities (2) 3,418 50 5.96 2,845 42 5.99 Interest-bearing deposits ........... 166 2 5.11 -- -- -- Federal funds sold .................. 23,993 282 4.77 7,741 105 5.49 --------- --------- -------- --------- --------- -------- Total earning assets ................ 301,318 6,603 8.89 250,068 5,921 9.60 --------- --------- -------- --------- --------- -------- Noninterest-earning assets: Cash and due from banks ............. 26,267 21,741 Premises and equipment, net ......... 9,965 8,689 Other assets (3) .................... 6,266 7,024 --------- --------- Total noninterest-earning assets .... 42,498 37,454 --------- --------- Less allowance for loan and lease losses .................... 3,630 3,242 --------- --------- Total assets ........................ $ 340,186 $ 284,280 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Interest-bearing demand ........... $ 44,121 128 1.18 $ 38,882 129 1.34 Savings ........................... 84,189 557 2.68 79,075 659 3.38 Time .............................. 79,304 927 4.74 49,677 615 5.03 Other short term borrowings ......... 1,361 14 4.11 823 8 3.98 Capital lease ....................... 381 14 14.63 413 15 14.52 --------- -------- --------- --------- -------- ------ Total interest-bearing liabilities... 209,356 1,640 3.18 168,870 1,426 3.43 -------- --------- -------- ------ Noninterest-bearing liabilities: Demand deposits ..................... 97,900 86,917 Other liabilities ................... 2,305 2,605 --------- --------- Total liabilities ................... 309,561 258,392 Stockholders' equity ................... 30,625 25,888 --------- --------- Total liabilities and stockholders' equity .............. $ 340,186 $ 284,280 --------- --------- --------- --------- Net interest income (tax equivalent basis) ........... 4,963 4,495 Reversal of tax equivalent adjustment (15) (18) --------- --------- Net interest income ................. $ 4,948 $ 4,477 --------- --------- --------- --------- Net interest spread (4) ............. 5.71% 6.18% ------- ------ ------- ------ Net interest margin (5) ............. 6.68% 7.29% ------- ------ ------- ------
- ----------------------- (1) Nonaccrual loans are included in the daily average loan amounts outstanding. (2) The average balance sheet amounts and yields on available for sale debt securities are based on the average of historical amortized cost balances. (3) Includes average balances of real estate owned other than Company and Bank premises during 1999 and 1998 of $365,000 and $1.1 million, respectively. (4) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (5) Represents net interest income as a percentage of average interest-earning assets. 9 PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses for the three months ended March 31, 1999 was $100,000 compared to $590,000 for the comparable 1998 period. The amount of the provision reflects management's judgement as to the adequacy of the reserve for loan and lease losses and is generally determined by the periodic review of the loan portfolio, the Company's loan loss experience, and current and expected economic conditions. Improvement in the credit quality of the Company's loan portfolio at the end of the first quarter of 1999 compared to the same quarter of last year is evidenced by a reduction in the amounts provided for losses, particularly as related to the Title I loan portfolio. The provision for loan and lease losses during the first quarter of 1998 reflected a provision of $340,000 compared to $0 in 1999 to supplement the Company's Title I HUD reserve due to potential losses in the Title I portfolio at that time. As presented in Table Three, net charge offs decreased to $72,000 in 1999 from $530,000 for the first three months of 1998. The annualized ratio of net charge offs to average loans was 0.12% at March 31, 1999 compared to 1.00% at March 31, 1998. The allowance for loan and lease losses represented 1.49% and 1.50% of total gross loans at March 31, 1999 and March 31, 1998, respectively. Loans are charged against the reserve, when in management's opinion, they are deemed uncollectible, although the Bank continues to aggressively pursue collection. Although management believes that the reserve for loan and lease losses is adequate to absorb losses as they arise, there can be no assurance that the Company will not sustain losses in any given period which could be substantial in relation to the size of the reserve. TABLE THREE - ALLOWANCE AND PROVISION FOR LOAN AND LEASE LOSSES (DOLLARS IN THOUSANDS) This table summarizes loan balances at the end of each period and daily averages during the period, changes in the allowance for loan and lease losses arising from loan charge-offs and recoveries, additions to the allowance which have been charged to operating expense, and certain ratios relating to the allowance for loan losses.
Three Months Ended March 31, --------------------------- 1999 1998 --------- --------- BALANCES: Average loans during the period ................ $235,630 $212,411 Loans at the end of period ..................... 243,193 222,228 ALLOWANCE FOR LOAN AND LEASE LOSSES: Balance at beginning of period ................. 3,592 3,268 Actual charge-offs: Commercial loans ............................ 47 109 Installment and consumer loans .............. 73 450 -------- -------- Total ..................................... 120 559 Recoveries on loans previously charged off: Commercial loans ............................ 11 4 Installment and consumer loans .............. 37 25 -------- -------- Total ..................................... 48 29 Net loan charge-offs to average loans .......... 72 530 Provision for loan and lease losses ............ 100 590 -------- -------- Balance at end of period ....................... $ 3,620 $ 3,328 ======== ======== RATIOS: Annualized net loan charge-offs to average loans 0.12% 1.00% Allowance for loan and lease losses to loans at end of period ...................... 1.49% 1.50%
10 NONINTEREST INCOME Noninterest income for the first three months of 1999 decreased approximately 32% or $633,000 due mainly to a decrease of $600,000 in gains on the sale of loans. Title I and equity loans sold totaled $1.6 million for gains of $62,000 in 1999 compared to $10.8 million sold in the first quarter of 1998 for total gains of $358,000. The secondary market demand for these loans decelerated in the last half of 1998 and the first quarter of 1999, and consequently the Company's sales volume has declined. SBA loan sales totaled $212,000 for gains of $8,000 during 1999 compared to $1.9 million in loan sales for gains of $250,000 in the first quarter of 1998. Management's decision on whether or not to sell these loans depends upon, among other factors, loan demand, premium levels and prepayment risk. While Managements does not anticipate the sale of a significant amount of these loans in 1999, some sales are likely. NONINTEREST EXPENSE Noninterest expense increased $245,000 or 6% for the first three months of 1999 compared to 1998. This category consists of salaries and employee benefits which increased $94,000 to $2.6 million, occupancy expense which increased $185,000 to $976,000, telephone expense which increased $59,000 to $173,000, and advertising and other public relations which increased $5,000 to $171,000. Decreases in noninterest expense stemmed from branch operational losses which decreased $77,000 to $4,000 and professional services which decreased $28,000 to $60,000. The Company currently plans the opening of a new full service branch in Vista, California and the construction of a new facility for its Murrieta branch in the second half of 1999, and expects to open one or more additional SBA loan production offices in 1999. IMPACT OF YEAR 2000 Noninterest expense includes the cost of projects to ensure accurate date recognition and data processing with respect to the century date change (commonly referred to as "Y2K"). The Y2K issue confronting the Company, its suppliers, customers, customer's suppliers and competitors centers on the potential inability of computer systems to recognize the year 2000. Some computer systems in use today were designed and developed when computer memory was limited and expensive on early mainframes. As a consequence many programs used only two digits for the year in the date field to conserve memory. As a result, these computer applications could fail completely or create erroneous results by the year 2000 unless corrective measures are taken. To the extent that the problem is not successfully addressed, consequences, the extent of which are unknown, could impact the Company's business, operations, customers and vendors. According to its Year 2000 Project Plan, the Company will complete all required testing before June 30, 1999. As of March 31, 1999, the Company had identified critical systems and processes and had completed the testing, validation and remediation of substantially all its critical systems. The Company is also assessing the potential impact of this problem on its suppliers. Vendors upon whom there is significant reliance have been identified and inquiries made regarding their year 2000 readiness plans and status. Appropriate measures to minimize risk will be undertaken with those that appear to pose a significant risk. Replacements may be effected where necessary. However, where no viable alternative for some suppliers, such as power distribution and local telephone companies exist contingency plans are being formulated. As with all financial institutions, a high degree of reliance is placed on the systems of other institutions, including government agencies, to settle transactions. Principal settlement methods associated with major payment systems will be tested as part of their integration with the Company's processing system. The Company is also assessing the potential impact of this problem on its customers. Borrowers, funding sources and large depositors with a significant financial relationship with the Company are being reviewed to assess their Y2K readiness preparation and the risk potential to the Company. Borrowing relationships with credit commitments of $750,000 or more are assigned one of three risk levels based on their level of preparation: low, medium or high. Borrowers in the high risk category will be reassessed quarterly, while borrowers in the medium risk category will be reassessed semiannually. The risk mitigation plan has been 11 incorporated into the normal credit review process. To mitigate the potential loss of large deposits, the Company has reviewed and increased its secondary sources of liquidity. The Company is developing business resumption contingency plans specific to the year 2000 that address the actions that would be taken if critical business functions cannot be carried out in the normal manner upon entering the next century due to system or supplier failure. These plans include but are not limited to manual processing of information for critical information technology systems and having increased cash on hand. The related costs of the Year 2000 Project are expensed as incurred and primarily included in professional services, equipment repairs (a component of occupancy expense) and salary expense. Y2K expenses incurred to date through the end of the first quarter of 1999 approximate $250,000 and the total cost of the project is estimated to be a1pproximately $360,000. The Company does not believe that the costs of addressing this problem will have a material effect on the results of its operations. FINANCIAL CONDITION Total assets of the Company increased $11.3 million or 3% to $348.7 million at March 31, 1999, from $337.4 million at December 31, 1998. During the same period loans increased 2%, Fed funds sold and investments in total increased 10%, deposits increased 3% and stockholder's equity increased 4%. As deposit growth continued to outpace loan growth, excess funds were directed into short term investments, primarily Fed funds sold which increased $10.0 million or 59% to $27.0 million at the end of the first quarter of 1999 and represented 8% of total assets compared to 5% at the end of 1998. Gross loans and leases, the Company's primary use of funds, increased $5.5 million to $243.2 million and 70% of total assets compared to $237.7 million and 70% of year end total assets. Encouraged by the expansion of the local real estate markets, loan growth, was centered in commercial and commercial real estate loans which increased approximately 9% or $11.3 million and 3% or $1.8 million, respectively. SBA loans accounted for $8.7 million of the commercial loan growth. These increases were partially offset by installment and consumer loans which decreased 3% or $1.0 million and real estate construction loans which decreased 30% or $6.1 million. The Company continues to experience poor demand for consumer financing primarily due to increased competition from non-bank lenders as well as other financial institutions in its market area. The largest change in the loan portfolio mix was in commercial loans which increased to 57% from 54% and real estate construction loans which decreased to 6% from 8% of total loans. The investment portfolio decreased $4.1 million or 9% to $39.7 in 1999 from $43.8 million at the end of 1998 primarily due to the maturity of short term government agencies. Other real estate owned decreased $280,000 to $94,000 during the first three months of 1999 from $374,000 due to the sale of two properties carried at $306,000 and the addition of one property carried at $26,000. TABLE FOUR - LOAN DISTRIBUTION (DOLLARS IN THOUSANDS) The following table sets forth the amount of total loans outstanding in each category and the percentage of total loans of each category at the dates indicated.
March 31, 1999 December 31, 1998 ------------------------ ------------------------ Balance Percent Balance Percent -------- ------- -------- ------- Commercial loans ................................................. $139,637 57% $128,298 54% Commercial real estate loans ..................................... 53,313 22 51,520 22 Installment and consumer loans ................................... 33,131 14 34,171 14 Real estate construction loans ................................... 13,819 6 19,881 8 All other loans .................................................. 3,293 1 3,832 2 -------- ------- -------- ------- Total gross loans ............................................ 243,193 100 237,702 100 ------- ------- ------- ------- Less: Allowance for loan and lease losses ........................ 3,620 3,592 -------- -------- Total net loans .............................................. $239,573 $234,110 -------- -------- -------- --------
12 Total deposits at March 31, 1999 increased $9.2 million or 3% to $312.3 million from $303.1 million at December 31, 1998. As shown in Table Five, the growth in deposits was predominately in interest-bearing accounts which increased $8.8 million or 4%. Demand deposits increased slightly by $399,000 to $100.9 million in 1999 from $100.5 million at the end of the 1998. Within the interest-bearing category, interest-bearing demand accounts grew approximately 6% or $2.5 million to $45.3 million, savings accounts (including money market accounts) increased 13% or $10.3 million to $90.0 million and time deposits decreased 5% or $3.9 million to $76.1 million. The decrease in time deposits is a result of Management's efforts to reduce interest expense by lowering the rates paid on time deposits which is expected to continue in 1999. The most notable shift in deposit mix was in savings accounts which increased to 29% of total deposits during the first quarter of 1999 from 26% and in time deposits which decreased to 24% of total deposits from 27% at year end. TABLE FIVE - DEPOSIT DISTRIBUTION (DOLLARS IN THOUSANDS) The following table sets forth the amount of total loans outstanding in each category and the percentage of total loans of each category at the dates indicated.
March 31, 1999 December 31, 1998 ------------------- ------------------- Balance Percent Balance Percent -------- ------- ------- ------- Noninterest-bearing demand deposits .............................. $100,864 32% $100,465 33% Interest-bearing demand deposits ................................. 45,282 15 42,824 14 Savings deposits ................................................. 90,011 29 79,684 26 Time deposits of $100,000 or more ................................ 19,124 6 20,867 7 Other time deposits .............................................. 57,022 18 59,219 20 -------- -------- -------- -------- Total deposits ............................................... $312,303 100 $303,059 100 -------- -------- -------- -------- -------- -------- -------- --------
NONPERFORMING ASSETS TABLE SIX - NONPERFORMING ASSETS (DOLLARS IN THOUSANDS) The following table provides information with respect to the components of the Company's nonperforming assets at March 31, 1999 and December 31, 1998.
March 31, December 31, 1999 1998 ---------- ------------ Loans 90 days or more past due and still accruing: Commercial $ 192 $ -- ------ ------ Nonaccrual loans: Residential real estate 127 130 Commercial 222 387 Installment and consumer 393 271 ------ ------ Total 742 788 ------ ------ Total nonperforming loans 934 788 ------ ------ Other real estate owned 94 374 ------ ------ Total nonperforming assets $1,028 $1,162 ------ ------ ------ ------ Nonperforming loans to total gross loans 0.38% 0.33% ------ ------ ------ ------ Nonperforming assets to total gross loans plus other real estate owned 0.42% 0.49% ------ ------ ------ ------
13 The Company considers a loan to be nonperforming when any one of the following events occurs: (a) any installment of principal or interest is 90 days past due; (b) the full timely collection of interest or principal becomes uncertain; (c) the loan is classified as "doubtful" by bank examiners; or (d) a portion of its principal balance has been charged-off. The Company's policy is to classify loans which are 90 days past due as nonaccrual loans unless Management determines that the loan is adequately collateralized and in the process of collection or other circumstances exist which would justify the treatment of the loan as fully collectible. The Bank's recorded investments in impaired loans at March 31, 1999 and December 31, 1998, were $749,000 and $954,000, respectively. The recorded investments are stated net of reserves for loan losses of $32,000 and $48,000, respectively. The average recorded investments in impaired loans during 1999 and 1998 were $873,000 and $1,654,000, respectively. ASSET/LIABILITY MANAGEMENT LIQUIDITY The liquidity of a banking institution reflects its ability to provide funds to meet customer credit needs, to accommodate possible outflows in deposits, to provide funds for day-to-day operations, and to take advantage of interest rate market opportunities. Asset liquidity is provided by cash, certificates of deposit with other financial institutions, Federal funds sold, investment maturities and sales and loan maturities, repayments and sales. Liquid assets (consisting of cash, Federal funds sold and investment securities) comprised 26.9% and 26.0% of the Company's total assets at March 31, 1999 and December 31, 1998, respectively. Liquidity management also includes the management of unfunded commitments to make loans and undisbursed amounts under lines of credit. At March 31, 1999, these commitments totaled $53.7 million in commercial loans, $1.4 million in letters of credit, $11.9 million in real estate construction loans, and $11.7 million in consumer and installment loans. In addition to loan and investment sales and deposit growth, the Bank has several secondary sources of liquidity. Many of the Bank's real estate construction loans are originated pursuant to underwriting standards which make them readily marketable to other financial institutions or investors in the secondary market. In addition, in order to meet liquidity needs on a temporary basis, the Bank has unsecured lines of credit in the amount of $17.0 million for the purchase of Federal funds with other financial institutions and may borrow funds at the Federal Home Loan Bank and the Federal Reserve discount window, subject to the Bank's ability to supply collateral. INTEREST RATE SENSITIVITY MANAGEMENT Asset/Liability Management involves minimizing the impact of interest rate changes on the Company's earnings through the management of the amount, composition and repricing periods of rate sensitive assets and rate sensitive liabilities. Emphasis is placed on maintaining a rate sensitivity position within the Company's policy guidelines to avoid wide swings in spreads and to minimize risk due to changes in interest rates. At March 31, 1999 approximately 64% of the Company's interest earning assets have interest rates which are tied to the Bank's base lending rate or mature in one year or less. In order to match the rate sensitivity of its assets, the Company's policy is to offer a large number of variable rate deposit products and limit the level of large dollar time deposits with maturities of one year or longer. In addition to managing its asset/liability position, the Company has taken steps to mitigate the impact of changing interest rates by generating non-interest income through service charges, offering products which are not interest rate sensitive, such as escrow services and insurance products, and through the servicing of mortgage loans. 14 TABLE SEVEN - INTEREST RATE SENSITIVITY GAP (DOLLARS IN THOUSANDS) This table sets forth the rate-sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of March 31, 1999, the interest rate-sensitivity gap (interest rate-sensitive assets less interest rate-sensitive liabilities), cumulative interest rate-sensitivity gap, the Company's interest rate-sensitivity gap ratio (interest rate-sensitive assets divided by interest rate-sensitive liabilities) and the Company's cumulative interest rate-sensitivity gap ratio. For the purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it matures or could be repriced within such period in accordance with its contractual terms. Nonaccrual loans of $742,000 are excluded from the presentation.
AFTER THREE AFTER SIX AFTER ONE WITHIN MONTHS BUT MONTHS BUT YEAR BUT AFTER THREE WITHIN SIX WITHIN ONE WITHIN FIVE MONTHS MONTHS YEAR FIVE YEARS YEARS TOTAL -------- ----------- ---------- ----------- ------- ------ INTEREST-EARNINGS ASSETS: Loans ..................... $136,203 $ 5,265 $ 10,649 $ 60,175 $ 30,159 $242,451 Investment securities ..... 7,871 2,500 7,400 14,823 7,069 39,663 Interest-bearing deposits . -- 998 -- -- -- 998 Federal funds sold ........ 27,000 -- -- -- -- 27,000 -------- -------- -------- -------- -------- -------- Total ................... 171,074 8,763 18,049 74,998 37,228 310,112 INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits ................ 45,282 -- -- -- -- 45,282 Savings deposits .......... 90,011 -- -- -- -- 90,011 Time deposits ............. 30,065 18,194 16,838 11,040 9 76,146 Borrowed funds ............ 2,436 -- -- -- 378 2,814 -------- -------- -------- -------- -------- -------- Total ................... 167,794 18,194 16,838 11,040 387 214,253 Interest rate-sensitivity gap 3,280 (9,431) 1,211 63,958 36,841 $ 95,859 Cumulative interest rate sensitivity gap ........... $ 3,280 $ (6,151) $ (4,940) $ 59,018 $ 95,859 Interest rate-sensitivity gap ratio ................. 1.02x .48x 1.07x 6.79x 96.20x 1.45x Cumulative interest rate sensitivity gap ratio ..... 1.02x .97x .98x 1.28x 1.45x
As of March 31, 1999, the Company was liability-sensitive at one year and asset-sensitive beyond one year. Liability sensitive means that rate-sensitive liabilities exceed rate-sensitive assets. This position will generally result in enhanced earnings in a falling interest rate environment and declining earnings in a rising interest rate environment. Asset sensitive means that rate-sensitive assets exceed rate-sensitive liabilities. This position will generally result in enhanced earnings in a rising interest rate environment and declining earnings in a falling interest rate environment because a larger volume of assets than liabilities will reprice. However, this does not necessarily indicate the impact of general interest rate movements on the Company's net interest yield, because the repricing of various categories of assets and liabilities is discretionary and is subject to competition and other pressures. As a result, various assets and liabilities indicated as repricing within the same period may in fact price at different times and at different rate levels. Management attempts to mitigate the impact of changing interest rates in several ways, one of which is to manage its interest rate- sensitivity gap. The use of a base lending rate by the Company for the majority of its floating rate loans also allows the Company more flexibility than the use of a national prime rate in matching changes to the yield on floating rate loans to changes in its funding costs. 15 CAPITAL RESOURCES Stockholders' equity increased 4% to $31.1 million at March 31, 1999 from $30.0 million at December 31, 1998. The increase in equity consists of net income of $1,033,000, an increase of $41,000 from the exercise of stock options, partly offset by a decrease in net unrealized gains on available for sale securities of $21,000. The following table provides information with respect to the Company's and the Bank's regulatory capital ratios and regulatory minimum requirements: TABLE EIGHT - CAPITAL RATIOS
Minimum March 31, December 31, Required 1999 1998 Ratios --------- ----------- -------- NORTH COUNTY BANCORP Risk-based capital Tier 1 11.69% 11.68% 4.00% Total 12.94% 12.93% 8.00% Tier 1 leverage capital 9.05% 8.80% 4.00% NORTH COUNTY BANK Risk-based capital Tier 1 11.56% 11.58% 4.00% Total 12.81% 12.83% 8.00% Tier 1 leverage capital 8.96% 8.72% 4.00%
Management anticipates capital expenditures of approximately $2.4 million primarily related to construction of a new facility for its existing Murrieta branch scheduled to open in the fourth quarter of 1999, and the opening of a full service branch office located at Palomar Airport Road and Business Park Drive in the City of Vista, California. This office, which will be a leased facility, is scheduled to open in the third quarter of 1999. Part II - Other Information --------------------------- All items of Part II other than Item 6 below are either inapplicable or would be responded to in the negative. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) None (b) No reports on Form 8-K have been filed during the period, and no events have occurred which would require one to be filed. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTH COUNTY BANCORP (Registrant) /s/ MICHAEL J. GILLIGAN Date: May 10, 1999 - ----------------------------------------- ------------ Michael J. Gilligan Vice President & Chief Financial Officer 17 EX-27 2 EX-27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10Q FOR MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 26,252 998 27,000 0 17,763 21,900 21,851 243,193 3,620 348,720 312,303 2,436 2,550 378 0 0 19,168 11,885 348,720 5,734 570 284 6,588 1,612 1,640 4,948 100 0 4,457 1,745 1,033 0 0 1,033 0.21 0.20 6.68 742 192 5,062 0 3,592 120 48 3,620 3,620 0 0
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