<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the quarterly period ended
September 30, 1996
------------------
--- Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) for the period
from to
-------- ----------
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
----------------------------------
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (408) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 the past 90 days.
Yes X No
--- ---
As of November 1, 1996, the Corporation had 879,465 shares of common stock
outstanding.
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 DECEMBER 31
1996 1995
------------ -----------
ASSETS:
Cash and Cash Equivalents 3,028,300 10,328,900
Time deposits with financial institutions 0 99,000
Investment Securities, available for sale
(Note 1) 0 623,500
Investment Securities, held to maturity
(Note 1) 2,795,300 436,700
Federal Funds Sold 4,800,000 0
Loans Held for Sale 334,200 790,400
Gross Loans (Note 2) 25,580,900 21,730,800
Allowance for Possible Loan Losses (Note 3) (262,500) (224,800)
Deferred Origination Fees (39,900) (26,900)
---------- ----------
Net Loans 25,278,500 21,479,100
Bank Premises and Equipment, Net 1,620,800 1,696,100
Interest Receivable and Other Assets 1,296,600 1,243,800
---------- ----------
Total Assets 39,153,700 36,697,500
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 33,560,600 31,187,600
Interest Payable and Other Liabilities 2,468,600 2,734,400
---------- ----------
Total Liabilities 36,029,200 33,922,000
---------- ----------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1996 and 1995
Outstanding:879,465 in 1996 and 1995 2,779,600 2,779,600
Accumulated Earnings 344,900 1,600
Unrealized Gain (Loss) Available
for Sale Securities 0 (5,700)
---------- ----------
Total Shareholders' Equity 3,124,500 2,775,500
---------- ----------
Total Liabilities & Shareholders' Equity 39,153,700 36,697,500
---------- ----------
---------- ----------
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ---------------------
1996 1995 1996 1995
-------- -------- --------- ---------
INTEREST INCOME:
Interest and Fees on Loans 716,700 664,900 2,015,500 1,947,300
Interest on Time Deposits with
Financial Institutions 1,700 10,900 5,500 21,800
Interest on Investment Securities 25,000 5,700 40,700 21,800
Interest on Gov't Guar SBA Loan
Pools (400) 8,800 (400) 38,800
Interest on Federal Funds 81,500 76,400 267,100 171,900
------- ------- --------- ---------
Total Interest Income 824,900 766,700 2,328,400 2,201,600
------- ------- --------- ---------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 27,200 25,600 79,200 75,800
Interest on Savings Accounts 19,100 20,200 55,700 62,500
Interest on Time Deposits 269,000 249,700 795,600 648,700
Interest on Other Borrowed Funds 23,000 23,300 68,600 68,800
------- ------- --------- ---------
Total Interest Expense 338,300 318,800 999,100 855,800
------- ------- --------- ---------
Net Interest Income 486,600 447,900 1,329,300 1,345,800
PROVISION FOR POSSIBLE LOAN LOSSES 20,000 50,000 45,000 90,000
------- ------- --------- ---------
Net Interest Income After
Provision for Possible Loan
Losses 466,600 397,900 1,284,300 1,255,800
------- ------- --------- ---------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 95,300 75,200 270,600 261,000
SBA Loan Sales & Servicing Income 70,800 176,800 250,600 341,000
Other Operating Income 100,100 80,200 264,600 220,300
------- ------- --------- ---------
Total Noninterest Income 266,200 332,200 785,800 822,300
------- ------- --------- ---------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 280,100 255,400 857,500 790,800
Occupancy and Equipment Expense 64,600 69,500 195,300 190,200
Professional Fees 17,000 35,900 60,100 95,500
Data Processing 36,700 36,700 107,500 108,000
FDIC & State Assessments 2,900 6,700 8,600 45,400
Other Operating Expenses 172,200 134,600 497,800 456,900
------- ------- --------- ---------
Total Noninterest Expense 573,500 538,800 1,726,800 1,686,800
------- ------- --------- ---------
NET INCOME (LOSS) 159,300 191,300 343,300 391,300
------- ------- --------- ---------
------- ------- --------- ---------
INCOME (LOSS) PER COMMON SHARE 0.16 0.18 0.34 0.38
------- ------- --------- ---------
------- ------- --------- ---------
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
----------- ------------
NET INCOME 343,300 391,200
Adjustments to net income:
Depreciation and amortization expense 91,800 78,800
Amortization/Accretion on investments 53,200 3,900
(Gain) loss on sale of securities (5,700) 0
Provision for possible loan losses 45,000 90,000
Amortization of deferred servicing premium 6,100 6,200
Amortization of deferred income (3,100) (1,200)
Increase (decrease) in accrued expenses (218,800) (340,300)
(Increase) decrease in prepaid expenses 168,900 250,300
Increase (decrease) in interest payable (3,700) 39,100
(Increase) decrease in interest receivable (9,100) (14,600)
(Increase) decrease in loans held for sale 456,200 (338,100)
---------- ----------
Total adjustments to net income 580,800 (225,900)
---------- ----------
---------- ----------
Net cash provided (used) by operations 924,100 165,300
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of due from time 99,000 198,000
Proceeds from maturity of investments 200,000 200,000
Proceeds from sale of investments 497,100 209,200
Principal payments on investments 78,600 141,200
Purchase of securities (2,554,500) (207,200)
Unrealized gain (loss) available for
sale securities 5,600 (6,400)
Net (increase) decrease in loans (4,106,900) 886,600
Proceeds from sale of equipment 12,000 0
Capital expenditures (28,500) (266,000)
---------- ----------
Net cash provided (used) in investing
activities (5,797,600) 1,155,400
---------- ----------
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit
accounts 2,372,900 1,983,000
Net cash provided (used) by financing
activities 2,372,900 1,983,000
---------- ----------
---------- ----------
Net increase (decrease) in cash &
cash equivalents (2,500,600) 3,303,700
Cash & cash equivalents - beginning
of year 10,328,900 5,545,100
---------- ----------
---------- ----------
Cash & cash equivalents - end of year 7,828,300 8,848,800
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30 DECEMBER 31
1996 1995
------------ -----------
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
SBA Guaranteed Loan Pool Certificates 0 623,500
---------- ----------
---------- ----------
Held to maturity:
US Treasury Securities 500,100 195,900
US Government Securities 2,000,000
Other Securities 295,200 240,800
---------- ----------
2,795,300 436,700
---------- ----------
---------- ----------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 10,055,300 9,268,800
Real Estate - Construction 0 0
Real Estate - Mortgage 14,628,400 11,246,100
Installment 584,600 887,800
Government Guaranteed Loans Purchased 312,600 328,100
---------- ----------
Gross Loans 25,580,900 21,730,800
---------- ----------
---------- ----------
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 224,800 244,900
Recoveries 12,600 19,500
Provision for Possible Loan Losses (19,900) 120,000
Loans Charged Off 45,000 (159,600)
---------- ----------
Balance at End of Period 262,500 224,800
---------- ----------
---------- ----------
(NOTE 4) DEPOSITS:
Demand 7,153,900 5,509,100
Interest-Bearing Transaction 6,543,700 6,766,100
Savings 2,161,500 2,458,000
Time Under $100,000 12,328,700 10,735,900
Time Equal to or Greater than $100,000 5,372,800 5,718,500
---------- ----------
33,560,600 31,187,600
---------- ----------
---------- ----------
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 9/30/96 9/30/95
---------- ----------
Interest 999,100 855,900
Income Taxes 63,900 25,200
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE 6) GAAP/RAP DIFFERENCES:
These financial statements have been presented under generally accepted
accounting principals (GAAP). In some cases, the FDIC's rules and/or
regulations require a different treatment of the accounting for a specific
issue. When this occurs, certain items on the Bank's financial statements will
differ from the same items on the reports prepared under regulatory accounting
principals (RAP). The following two items are GAAP/RAP differences that are
being carried by the Bank:
- - When the guaranteed portion of an SBA loan is sold there is a provision in
the sales agreement that in the very unlikely situation that the loan pays
off or goes into default during the first three months, the SBA or Bank
agree to repurchase the loan and the seller agrees to return any premium
paid on the loan. Under GAAP the sale is reported assuming the most likely
scenario, which is that the loan will last more than three months. FDIC
rules specify that any condition of sale should be considered as likely to
happen, and therefore, the income from the sale cannot be reported under
RAP until three months after the sale. This has the effect of deferring
income under RAP. Depending upon timing circumstances, current earnings
may be increased or decreased under RAP.
- - The Bank's investment in an SBA loan is allocated among the retained
portion of the loan, excess servicing retained, and the sold portion of the
loan, based on the relative fair market values of each portion at the time
of loan origination, adjusted for payments and other activities. Excess
Servicing fees for GAAP are reflected as an asset which is amortized over
the assumed half life of the loan. FDIC examiners have determined that
excess SBA servicing rights do not constitute an asset under RAP.
Therefore, under RAP a servicing asset is not created at the time of the
sale, and any GAAP amortization must be eliminated. The Bank has not
recorded any excess servicing for GAAP purposes since 1991. As of
September 30, 1996, the Bank has under GAAP taken $126,300 into income from
excess servicing fees net of amortization. The amortization of these
excess servicing fees will increase income under RAP.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be read
in conjunction with the financial statements and the other financial data
presented elsewhere herein. The Corporation has had no activities other than
its organization.
For the nine months ended September 30, 1996 net income was $343,300, a
decrease of $48,000 when compared to the same period in 1995. The decrease in
earnings during this period was the result of a $28,500 increase in net
interest income after provision for loan losses and a $76,500 decrease in net
noninterest income.
The Bank has received approval from the California State Banking Department
and the Federal Deposit Insurance Corporation to establish a full service branch
office at 542 Lighthouse Ave., Pacific Grove, California. The opening of this
branch by year-end 1996, will afford the Bank the opportunity to better serve
existing customers and enter a new market. The response to the Bank's entry
into the Pacific Grove has been very positive; governmental, civic, and business
leaders have expressed support of the Bank.
The Bank has also received approval of the California State Banking
Department to discontinue the activities of its SBA Loan Production located at
428 Salinas Street, Salinas, California. The Bank's decision to close the
office on November 30, 1996 was based on lower than anticipated volume of loans
generated by the office. The Bank will continue to be active in the Salinas
market after the office is closed.
7
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at, and for the nine months ended, September 30, 1996 and 1995.
For the nine months For the nine months
Ended September 30, 1996 Ended September 30, 1995
------------------------ ------------------------
(Dollars in thousands except per share data)
Summary of Operating Results:
Total interest income 2,328 2,202
Total interest expense 999 856
------- -------
Net interest income 1,329 1,346
Provision for possible
loan losses 45 90
------- -------
Net interest income after
provision for loan loss 1,284 1,256
Total other income 786 822
Total other expense 1,663 1,662
------- -------
Income (loss) before taxes 407 416
Provision for income tax 64 25
------- -------
Net income (loss) 343 391
Per Common Share Data:
Net income (1) 0.34 0.38
Book value, end of period 3.55 3.38
Avg shares outstanding (2) 879,465 879,465
Balance Sheet Data:
Total loans, net of
unearned income (3) 25,875 23,542
Total assets 39,154 36,090
Total deposits 36,029 33,115
Stockholders' equity 3,125 2,975
8
<PAGE>
For the nine months For the nine months
Ended September 30, 1996 Ended September 30, 1995
------------------------ ------------------------
Selected Financial Ratios (4):
Return on average assets(5) 1.27% 1.50%
Return on average
stockholders' equity(5) 16.43% 18.18%
Net interest spread 4.83% 5.51%
Net interest margin 5.44% 5.99%
Avg shareholders' equity
to average assets 7.74% 8.23%
Risked-Based capital ratios
Tier 1 11.24% 12.98%
Total 10.24% 14.12%
Total loans to total deposits
at end of period 71.82% 79.68%
Allowance to total loans
at end of period 1.01% 1.11%
Nonperforming loans to total
loans at end of period 1.44% 0.31%
Net charge-offs to
average loans 0.03% 0.30%
(1) Earnings (loss) per share amounts were computed on the basis of the
weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents include
employee stock options. The weighted average number of shares used for this
computation was 1,021,965 and 1,044,465 for September 30, 1996 and 1995,
respectively.
(2) Weighted average common shares.
(3) Includes loans being held for sale.
(4) Averages are of daily balances.
(5) September 30, 1996 calculated on an annualized basis.
9
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned on
interest-earning assets and (b) interest paid on interest-bearing liabilities,
is the most significant component of the Bank's earnings. Changes in net
interest income from period to period result from increases or decreases in the
average balances of interest-earning assets portfolio, the availability of
particular sources of funds and changes in prevailing interest rates.
Net interest income for the nine month period ended September 30, 1996 was
$1,329,300 compared to $1,345,800 for the same period in 1995. The decrease of
$16,500 resulted from total interest expense increasing $143,300, while total
interest income increased $126,800. Average interest earning assets increased
$2,704,000 (9.16%), while the average rate earned decreased 23 basis points.
The decrease in the average interest rate earned was due to a increased
investment in instruments other than loans, which bear lower yields than loans.
Average interest bearing liabilities increased $1,752,000 (6.67%), while the
average rate paid increased 41 basis points, reflecting increases in certificate
of deposit rates.
The following table shows the components of the Bank's net interest
income, setting forth, for each the nine months ended September 30, 1995 and
1996, (i) average assets, liabilities and investments, (ii) interest income
earned on interest-earning assets and interest expense paid on
interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, (iv) the net
interest spread (i.e., the average yield earned on interest-earning assets
less the average rate paid on interest-bearing liabilities) and (v)the net
interest yield on average interest-earning assets (i. e., net interest income
divided by average interest-earning assets). Yields are not computed on a
tax-equivalent basis. Nonaccrual loans and overdrafts are included in
average loan balances. Average loans are presented net of unearned income.
10
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
The Nine Months The Twelve Months
Ended September 30, Ended December 31,
1996 1995 1995
------------------ -------------------- --------------------
Int Avg Int Avg Int Avg
Avg Earn % Avg Earn % Avg Earn %
Bal Paid Rate Bal Paid Rate Bal Paid Rate
-------------------- -------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 94 5 7.09 288 22 10.19 240 24 10.00
Invest securities 1,089 41 5.02 1,243 60 6.46 1,189 76 6.39
Federal funds sold 6,696 267 5.32 4,011 172 5.72 5,094 279 5.48
-------------- -------------- ---------------------
Total investments 7,879 313 5.30 5,542 254 6.12 6,523 379 5.81
Loans
Real estate 12,619 961 10.15 13,009 963 9.87 12,661 1,371 10.83
Installment 734 66 11.90 1,015 85 11.12 994 112 11.27
Commercial 10,993 989 12.00 9,955 880 11.79 10,008 1,090 10.89
-------------- -------------- ---------------------
Total loans 24,345 2,016 11.04 23,979 1,928 10.72 23,663 2,573 10.87
Total Interest
earning assets 32,225 2,329 9.63 29,521 2,182 9.86 30,186 2,952 9.78
-------------- -------------- ---------------------
-------------- -------------- ---------------------
Interest Bearing Liabilities:
Int-bearing demand 4,407 46 1.39 4,523 45 1.32 4,538 61 1.34
Money market savings 1,860 33 2.37 1,857 31 2.24 1,864 42 2.25
Savings deposits 2,529 56 2.94 2,872 63 2.90 2,812 81 2.88
Time deposits GREATER
THAN $100M 5,666 247 5.82 4,827 202 5.58 5,019 302 6.02
Time deposits LESS
THAN $100M 11,572 548 6.32 10,203 447 5.84 9,814 605 6.16
Other Borrowing 2,000 69 4.58 2,000 69 4.59 2,000 92 4.60
-------------- -------------- ---------------------
Total interest
bearing
liabilities 28,034 999 4.75 26,282 856 4.34 26,047 1,183 4.54
-------------- -------------- ---------------------
-------------- -------------- ---------------------
Net interest income 1,329 1,326 1,769
Net interest spread 4.88 5.51 5.24
Net yield on interest
earning assets 5.50 5.99 5.86
</TABLE>
(1) Yield in 1996 negatively impacted by $9,800 write off of premium due to the
early payoff of an SBA Guaranteed Pool.
11
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
Nine Months Twelve Months
Ended September 30, Ended December 31,
1996 vs 1995 1995 vs 1994
----------------------- -------------------
Increase(Decrease) Increase(Decrease)
Due to Changes Due to Changes
----------------------- -------------------
Avg Avg Avg Avg
Volume Rate Total Volume Rate Total
----------------------- -------------------
(Dollars in thousands)
Interest Earning Assets:
Int-bearing deposits
at other banks (15) (2) (17) (6) 7 1
Invest securities (7) (12) (19) (21) 16 (5)
Federal funds sold 115 (20) 95 89 57 146
---------------------- -------------------
Total investments 93 (34) 59 74 68 142
Loans
Real estate (29) 27 (2) (232) 14 (218)
Installment (23) 4 (19) (13) 9 (4)
Commercial 92 17 109 121 177 298
---------------------- -------------------
Total loans 20 39 88 (98) 174 76
Total Interest Earning Assets 200 (53) 147 55 163 218
---------------------- -------------------
---------------------- -------------------
Interest Bearing Deposits:
Int-bearing demand (1) 3 2 (6) 4 (2)
Money market savings 0 2 2 (8) (1) (9)
Savings deposits (7) 1 (7) 3 13 16
Time deposits GREATER
THAN $100M 35 10 45 30 95 125
Time deposits LESS THAN
$100M 60 42 101 51 91 142
Other Borrowing 0 (0) (0) (25) 3 (22)
---------------------- -------------------
Total interest bearing
deposits 57 86 143 17 233 250
---------------------- -------------------
---------------------- -------------------
Net change in net interest 143 (139) 4 38 (70) (32)
12
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan
losses represents amounts which have been set aside for the specific purpose of
absorbing losses which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation of
the risks inherent in the loan portfolio, both generally and with respect to
specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the State Banking Department and FDIC examinations, independent
accountants' observations, and the Bank 's internal review as additional
indicators to determine if the amount in the allowance for loan losses is
adequate to protect against estimated future losses. It is the Bank 's current
practice, which could change in accordance with the factors mentioned above, to
maintain an allowance which is at least equal to the sum of the following
percentage of loan balances by loan category.
Loan Category Reserve %
Classified Loans:
Loans classified loss 100.00%
Loans classified doubtful 50.00%
Loans classified substandard
Real Estate Secured 5.00%
Non Real Estate Secured 20.00%
Unclassified Loans:
Real Estate - Loan to value 80% or less 0.10%
Real Estate - Loan to value over 80% 0.50%
Loans to Individuals 1.50%
Commercial 1.50%
SBA Loans - Unguaranteed portion 2.00%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
Although no assurance can be given that actual losses will not exceed the
amount provided for in the allowance, Management believes that the allowance is
adequate to provide for all estimated credit losses in light of all known
relevant factors. At September 30, 1996 and 1995 the Bank's allowance stood at
1.01 percent and 1.11 percent of gross loans, respectively. A provision of
$45,000 was made to the allowance during the nine months ended September 30,
1996, compared to a provision of $90,000 in the same period in 1995. Charged
off loans during the nine months ended September 30, 1996 and
13
<PAGE>
1995 totaled $20,000 and $91,000 respectively. Recoveries for the same periods
were $13,000 and $18,000, respectively.
The Bank's non performing (delinquent 90 days or more and nonaccrual) loans
as a percentage of total loans was 1.19 percent at September 30, 1996 compared
with .31 percent at September 30, 1995 and .14 percent at December 31, 1995
Based upon statistics released by Federal and state banking
authorities regarding banks of similar size or otherwise located in California,
Management believes that the Bank 's ratios of delinquent and non performing
loans to total loans are far better than average. Prudent collection efforts,
and tighter lending controls, are responsible for the Bank's strong performance
on these measures of credit quality. However, no assurance can be given that
the Bank's loan portfolio will continue to measure well against its peers on
these ratios and quality measures, or that losses will not otherwise occur in
the future.
NON-INTEREST INCOME
Total non-interest income for the nine months ended September 30, 1996 was
$785,800, compared with $822,300 for the same period in 1995. The decrease of
$36,500 was the result of a $9,600 increase in service charges on deposit
accounts, while income from SBA loan sales and servicing decreased $90,400 and
income from other service charges, commissions and fees increased $44,300.
Merchant credit card processing accounted for $27,500 of the increase in other
service charges, commissions and fees.
The sale of Small Business Administration (SBA) guaranteed loans is a
significant contributor to the Bank's income. SBA guaranteed loans yield up to
3 3/4% over the New York prime rate, and the guaranteed portions can be sold at
premiums which vary with market conditions. SBA loans are guaranteed by the
full faith of the United States Government from 75 to 80 percent of the
principal amount. The guaranteed portion has risks comparable for an investor
to a U. S. Government security and can usually be sold in the secondary
financial market, either at a premium or at a yield which allows the Bank to
maintain a significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for the
Bank to continually expand its program in this area, and may limit the level of
premium that can be earned with regard thereto. Furthermore, the SBA recently
began requiring lenders to share a portion of premiums in excess of 10% earned
on the sale of the guaranteed portions, and to pay 50 basis points on the
outstanding quaranteed balance. Management cannot predict the impact these
changes will not have a significant impact on SBA income.
14
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the nine months ended September 30, 1996
increased $66,700 compared with the same period in 1995. These increases were
primarily due to employee merit pay increases and an addition to staff resulting
from the opening of a Loan Production Office.
For the nine months ended September 30, 1996 professional fees were
$35,400 less than the same period in 1995.
Other expenses for the nine months ended September 30, 1996 totaled
$613,900 compared with $610,300 for the same period in 1995. Significant
changes occurred in the following categories with decreases in FDIC and State
Assessments ($36,800), director fees ($3,700), miscellaneous expense ($21,200),
insurance expense ($1,300), SBA loan expense ($27,900), postage ($3,900) and
stockholder expense ($5,500); increases in business development ($32,800), loan
expense($5,500), advertising ($15.200), stationary and supplies ($14,800) and
income taxes ($38,700).
LOANS
Loans represented 75.55% of average earning assets, and 64.89% of average
total assets for the nine months ended September 30, 1996, compared with 81.23%
and 68.84%, respectively during 1995. For the nine months ended September 30,
1996 average loans increased 1.53% from $23,979,000 for the same period in 1995
to $24,346,000. Average real estate loans decreased $390,000 (3.0%),
installment loans decreased $281,000 (27.68%); while average commercial loans
increased $1,038,000 (10.43%).
The Bank's commercial and industrial loans are generally made for the
purpose of providing working capital, financing the purchase of equipment or
inventory, and other business purposes. Such loans generally have maturities
ranging from one year to several years. Short-term business loans are generally
intended to finance current transactions and typically provide for monthly
interest payments with principal being payable at maturity or at 90-day
intervals. Term loans (usually for a term of two to five years) normally provide
for monthly installments of principal and interest. The Bank from time to time
utilizes accounts receivable and inventory as security for loans.
The Bank is the recognized leader for Small Business Administration lending
in Monterey County, and holds SBA's coveted Preferred Lender Status. Generally,
SBA loans are guaranteed by the SBA for 75 to 80 percent of their principal
amount, which can be retained in portfolio or sold to investors. Such loans are
made at floating interest rates,
15
<PAGE>
but generally for longer terms (up to 25 years) than are available on a
conventional basis to small businesses. The unguaranteed portion of the
loans, although generally supported by collateral, is considered to be more
risky than conventional commercial loans because they may be based upon
credit standards the Bank would not otherwise apply, such as lower cash flow
coverage, or longer repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has also
developed a broker program for generating residential real estate loans. The
Bank does not make real estate development loans. Real estate construction
loans are made for a much shorter term, and often at higher interest rates, than
conventional single family residential real estate loans. The cost of
administering such loans is often higher than for other real estate loans, as
principal is drawn on periodically as construction progresses.
The Bank also makes real estate loans secured by a first deed of trust on
single family residential properties and commercial and industrial real estate.
California commercial banks are permitted, depending on the type and maturity of
the loan, to lend up to 90 percent of the fair market value of real property (or
more if the loan is insured either by private mortgage insurers or governmental
agencies). In certain instances, the appraised value may exceed the actual
amount which could be realized on foreclosure, or declines in market value
subsequent to making the loan can impair the Bank's security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's
consumer installment loans are generally secured by the personal property being
purchased. The Bank generally makes consumer loans to those customers with a
prior banking relationship with the Bank.
16
<PAGE>
NONPERFORMING AND NONACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which are
past due as to principal or interest 90 days or more, except for loans which are
well secured or when collection of interest and principal is deemed likely.
When a loan is placed on nonaccrual, previously accrued and unpaid interest is
generally reversed out of income unless adequate collateral from which to
collect the principal of, and interest on, the loan appears to be available.
The following table presents information with respect to loans which, as of
the dates indicated, were past due 90 days or more or were placed on nonaccrual
status (referred to collectively as "nonperforming loans"):
Nine Months Ended
September 30,
1996 1995
------- --------
(Dollars in thousands)
ACCRUING,
PAST DUE 90 DAYS OR MORE:
Commercial 262 0
Installment 0 0
Other 0 0
------ ------
Total accruing 262 0
NONACCRUAL LOANS:
Commercial 86 70
Installment 25 4
Other 0 0
------ ------
Total nonaccrual 111 74
Total nonperforming 373 74
Total loans end of period 25,915 23,542
Ratio of nonperforming loans
to total loans at end of period 1.44% 0.31%
Nonperforming loans have decreased significantly in recent years. These
decreases are the result of a strengthening of underwriting criteria, frequent
review of new and delinquent loans and a firm collection policy (with the
assistance of outside legal counsel). The Bank does not have any foreign loans
or loans for highly leveraged transactions.
17
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
(Dollars in thousands)
Average loans outstanding 24,345 23,979
Allowance, beginning of period 225 245
Loans charged off during period:
Commercial 14 81
Installment 5 10
Real Estate 0 0
Other 1 0
------ ------
Total charge offs 20 91
Recoveries during period:
Commercial 1 14
Installment 12 4
Other 0 0
------ ------
Total recoveries 13 18
Net Loans charged off
during the period 7 73
Additions to allowance for
possible loan losses 45 90
Allowance, end of period 263 262
Ratio of net loans charged off to
average Loans outstanding
during the period 0.03% 0.30%
Ratio of allowance to total
at end of period 1.01% 1.11%
18
<PAGE>
FUNDING SOURCES
Average deposits for the nine months ended September 30, 1996 were
$32,427,000 an increase of 8.95% compared with the average balance for 1995.
Average certificates of deposit represented 53.66% of average deposits for the
nine months ended September 30, 1996. Average interest checking, money market
and savings accounts as a group were 27.38% of average deposits. Average demand
deposits represented 18.97% of average deposits. The trend of deposits shifting
to certificates of deposit has continued, resulting in a increased cost of
funds.
The Bank has a line of credit with the Federal Home Loan Bank of San
Francisco. Two advances from the Federal Home Loan Bank with initial maturities
of more than one year totaled $2,000,000 at September 30, 1996. Each advance is
for $1,000,000 with interest rates of 4.29% and 4.88% and maturities of October
1996 and October 1998. Management believes that these advances provide funds of
medium duration at a lower cost than comparable deposits. The Bank did not
utilize any short term borrowings in 1996, 1995 or 1994.
CAPITAL RESOURCES
The Bank maintains capital to comply with legal requirements, to provide a
margin of safety for its depositors and stockholders, and to provide for future
growth and the ability to pay dividends. At September 30, 1996, stockholders'
equity was $3,088,800 versus $2,775,800 at December 31, 1995. The Bank paid
cash dividends of $0.10 per share in both 1995 and 1994; no dividend was paid in
1993.
The FDIC and Federal Reserve Board have adopted capital adequacy guidelines
for use in their examination and regulation of banks and bank holding companies.
If the capital of a bank or bank holding company falls below the minimum levels
established by these guidelines, it may be denied approval to acquire or
establish additional banks or non-bank businesses, or the FDIC or Federal
Reserve Board may take other administrative actions. The guidelines employ two
measures of capital: (1) risk-based capital and (2) leverage capital.
Under current rules, all banks were required to maintain Tier 1 capital of
at least 4 percent and total capital of 8.0% of risk-adjusted assets. The Bank
had a Tier 1 risk-based capital ratio of 10.24% and a total risk-based capital
ratio of 11.24% at September 30, 1996 (calculated under regulatory accounting
principles), well above the minimum regulatory requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 6.95% at September 30, 1996 (calculated under
regulatory accounting principles).
19
<PAGE>
LIQUIDITY
Liquidity represents a bank's ability to provide sufficient cash flows or
cash resources in a manner that enables it to meet obligations in a timely
fashion and adequately provides for anticipated future cash needs. For the
Bank, liquidity considerations involve the capacity to meet expected and
potential requirements of depositors seeking access to balances and to provide
for the credit demands of borrowing customers. In the ordinary course of the
Bank's business, funds are generated from the repayment of loans, maturities
within the investment securities portfolio and the acquisition of deposit
balances and short-term borrowings. In addition, the Bank has a line of credit
from the Federal Home Loan Bank of San Francisco of approximately $3,900,000 to
meet temporary liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid assets,
including marketable investment securities, equal to a least 15 percent of total
assets ("primary liquidity"), while maintaining sources of secondary liquidity
(borrowing lines from other institutions) equal to at least an additional 10
percent of assets. In addition, it seeks to generally limit loans to not more
than 90 percent of deposits. Within these ratios, the Bank generally has excess
funds available to sell as federal funds on a daily basis, and is able to fund
its own liquidity needs without the need of short-term borrowing. The Bank's
primary liquidity at September 30, 1996 was 26.12 percent, while its average
loan to deposit ratio for the nine months ended September 30, 1996 was 75.32
percent. The high level of liquidity has an adverse impact on interest income.
The following table sets forth the interest rate sensitivity distribution
of the Bank's interest-earning assets and interest-bearing liabilities as of
September 30, 1996, the Bank's interest rate sensitivity gap ratio (i.e., the
difference between interest rate sensitive assets and interest rate sensitive
liabilities divided by total assets) and the Bank's cumulative interest rate
sensitivity gap ratio. For purposes of the table, except for savings deposits
and money market, 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. More than all of the Bank's interest
rate sensitivity gap is offset by non-interest bearing sources of funds (demand
deposits and capital). Generally, a bank with a positive rate sensitivity gap
ratio can anticipate that increases in market rates of interest will have a
favorable impact on net interest income, while decreases will have unfavorable
impact. Banks with a negative interest rate sensitivity gap will experience
the reverse. The Bank's one year cummulative interest sensitivity gap of .23
percent, indicating assets and liabilities maturing or repricing within one year
are almost equal.
20
<PAGE>
After After
Three One
Months Year
But But
Within Within Within After
Three One Five Five
Months Year Years Years
-------- -------- --------- ----------
(Dollars in Thousands)
INTEREST EARNING ASSETS:
Investment securities -- -- 1,499 1,001
Federal Funds Sold 4,800 -- -- --
Loans 11,637 2,582 6,690 4,507
------ ------ ------ -----
Total 16,437 2,582 8,189 5,508
INTEREST-BEARING LIABILITIES:
Savings deposits 2,163 -- -- --
Money Market accounts 6,544 -- -- --
Certificates over $100,000 1,718 1,742 1,914 --
Other time deposits 1,735 4,026 6,567 --
Other Borrowings 1,000 -- 1,000 --
------ ------ ------ -----
Total 13,160 5,768 9,481 --
Total Assets 39,153
Interest rate sensitivity
gap 3,277 (3,186) (1,292) 5,508
Cumulative interest
sensitivity gap 3,277 91 (1,201) 4,307
Interest rate sensitivity
gap ratio 8.38% (8.14%) (3.30%) 14.08%
Cumulative interest rate
sensitivity gap ratio 8.38% 0.23% (3.07%) 11.01%
21
<PAGE>
Except as noted, the table above indicates the time periods in which
interest-earning assets and interest-bearing liabilities will theoretically
mature or are otherwise subject to repricing in accordance with their
contractual terms. However, this table does not necessarily indicate the
impact of general interest rate movements on the Bank's net interest yield
because the repricing of various categories or assets and liabilities is
discretionary and is subject to competitive and other pressures. As a
result, various assets and liabilities indicated as repricing within the same
period may, in fact, reprice at different times and at different interest
rate levels.
The Corporation has minimal cash on hand and no sources of
revenues or liquidity other than dividends, tax equalization payments or
management fees from the Bank. The ability of the Bank to pay such items to
the Corporation is subject to limitations under state and Federal law.
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities as of September 30, 1996:
INVESTMENT PORTFOLIO MIX
September 30, 1996
Book Market
value value
-------- --------
(Dollars in thousands)
Available for sale: 0 0
Held to maturity:
U. S. Treasury Securities 499 499
U. S. Government Agency Securities 2001 1984
Federal Home Loan Bank Stock 295 295
---- ----
Total 2795 2778
The following table summarizes the maturity of the Bank's investment
securities at September 30, 1996:
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
Over 1 Over 5
1 year through through Over 10
or less 5 years 10 years years
------- ------- -------- -------
U. S. Treasury Securities -- 499 -- --
U. S. Government Agency Securities 1000 501 500
Federal Home Loan Bank Stock 295 -- -- --
--- ---- --- ---
Total 295 1499 501 500
22
<PAGE>
The following reconciliation shows the difference between certain financial
data, pertaining to the Bank, under GAAP and RAP.
GAAP RAP
------------- -------------
(Dollars in 000's except per share data)
SEPTEMBER 30, 1995
Assets $ 36,088 $ 35,820
Earnings for period 391 245
Earnings per share 0.38 0.23
Capital at end of period 2,975 2,520
Book Value 3.38 2.87
Risked-Based capital ratios
Tier 1 12.89% 10.87%
Total 14.12% 11.99%
Leverage capital ratio 8.26% 7.00%
DECEMBER 31, 1995:
Assets $ 36,657 $ 36,343
Earnings for period 278 263
Earnings per share 0.27 0.25
Capital at end of period 2,776 2,433
Book Value 3.16 2.77
Risked-Based capital ratios
Tier 1 12.69% 10.92%
Total 13.71% 11.92%
Leverage capital ratio 7.59% 6.65%
SEPTEMBER 30, 1996
Assets $ 39,116 $ 35,820
Earnings for period 358 245
Earnings per share 0.35 0.23
Capital at end of period 3,090 2,520
Book Value 3.51 2.87
Risked-Based capital ratios
Tier 1 11.79% 10.24%
Total 12.79% 11.24%
Leverage capital ratio 7.90% 6.98%
23
<PAGE>
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.
NORTHERN CALIFORNIA BANCORP, INC.
Date: October 6, 1996 By: /s/ Charles T. Chrietzberg, Jr.
-----------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: October 6, 1996 By: /s/ Bruce N. Warner
-----------------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 2 AND 3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,028,300
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 2,795,300
<INVESTMENTS-MARKET> 2,778,000
<LOANS> 25,875,200
<ALLOWANCE> 262,500
<TOTAL-ASSETS> 39,153,700
<DEPOSITS> 33,560,600
<SHORT-TERM> 2,000,000
<LIABILITIES-OTHER> 468,600
<LONG-TERM> 0
0
0
<COMMON> 2,779,600
<OTHER-SE> 344,900
<TOTAL-LIABILITIES-AND-EQUITY> 39,153,700
<INTEREST-LOAN> 2,105,500
<INTEREST-INVEST> 312,900
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,328,400
<INTEREST-DEPOSIT> 930,500
<INTEREST-EXPENSE> 999,100
<INTEREST-INCOME-NET> 1,329,300
<LOAN-LOSSES> 45,000
<SECURITIES-GAINS> 5,700
<EXPENSE-OTHER> 1,662,900
<INCOME-PRETAX> 407,200
<INCOME-PRE-EXTRAORDINARY> 407,200
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 343,300
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 9.63
<LOANS-NON> 110,700
<LOANS-PAST> 262,100
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 442,600
<ALLOWANCE-OPEN> 224,800
<CHARGE-OFFS> 19,900
<RECOVERIES> 12,600
<ALLOWANCE-CLOSE> 262,500
<ALLOWANCE-DOMESTIC> 39,500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 223,000
</TABLE>
