<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 June 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 August 1, 1996, the Corporation had 879,465 shares of common stock
outstanding.
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
------------- ---------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 2,852,100 10,328,900
Time deposits with financial institutions 99,000 99,000
Investment Securities, available for sale (Note 1) 0 623,500
Investment Securities, held to maturity (Note 1) 790,300 436,700
Federal Funds Sold 6,300,000 0
Loans Held for Sale 853,000 790,400
Gross Loans (Note 2) 24,486,400 21,730,800
Allowance for Possible Loan Losses (Note 3) (256,200) (224,800)
Deferred Origination Fees (36,200) (26,900)
------------- ---------------
Net Loans 24,194,000 21,479,100
Bank Premises and Equipment, Net 1,644,900 1,696,100
Interest Receivable and Other Assets 1,171,300 1,243,800
------------- ---------------
Total Assets 37,904,600 36,697,500
------------- ---------------
------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 32,456,900 31,187,600
Interest Payable and Other Liabilities 2,482,500 2,734,400
------------- ---------------
Total Liabilities 34,939,400 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 185,600 1,600
Unrealized Gain (Loss) Available
for Sale Securities 0 (5,700)
------------- ---------------
Total Shareholders' Equity 2,965,200 2,775,500
------------- ---------------
Total Liabilities & Shareholders' Equity 37,904,600 36,697,500
------------- ---------------
------------- ---------------
</TABLE>
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 685,600 654,700 1,298,800 1,282,400
Interest on Time Deposits with
Financial Institutions 1,900 5,500 3,800 10,900
Interest on Investment Securities 8,800 7,000 15,700 16,100
Interest on Gov't Guar SBA Loan Pools 0 14,700 (400) 30,000
Interest on Federal Funds 92,700 52,300 185,600 95,500
Total Interest Income 789,000 734,200 1,503,500 1,434,900
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 25,700 24,800 52,000 50,200
Interest on Savings Accounts 18,600 20,800 36,600 42,300
Interest on Time Deposits 265,100 226,200 526,600 399,000
Interest on Other Borrowed Funds 22,800 22,600 45,600 45,500
Total Interest Expense 332,200 294,400 660,800 537,000
Net Interest Income 456,800 439,800 842,700 897,900
PROVISION FOR POSSIBLE LOAN LOSSES 25,000 30,000 25,000 40,000
Net Interest Income After
Provision for Possible Loan Losses 431,800 409,800 817,700 857,900
NONINTEREST INCOME:
Service Charges on Deposit Accounts 97,600 77,400 175,300 185,800
SBA Loan Sales & Servicing Income 111,900 98,300 179,800 164,200
Other Operating Income 89,400 83,500 164,500 140,100
Total Noninterest Income 298,900 259,200 519,600 490,100
NONINTEREST EXPENSE:
Salaries and Employee Benefits 285,300 258,400 577,400 535,400
Occupancy and Equipment Expense 67,600 67,600 130,700 120,700
Professional Fees 22,100 30,800 43,100 59,600
Data Processing 36,400 34,600 70,800 71,300
FDIC & State Assessments 2,800 18,400 5,700 38,700
Other Operating Expenses 158,700 160,900 325,600 322,300
Total Noninterest Expense 572,900 570,700 1,153,300 1,148,000
NET INCOME (LOSS) 157,800 98,300 184,000 200,000
INCOME (LOSS) PER COMMON SHARE 0.15 0.09 0.18 0.19
</TABLE>
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
NET INCOME 184,000 200,000
Adjustments to net income:
Depreciation and amortization expense 62,600 50,600
Amortization/Accretion on investments 53,200 (1,600)
(Gain) loss on sale of securities (5,700) 3,600
Provision for possible loan losses 25,000 40,000
Amortization of deferred servicing premium 6,100 12,400
Amortization of deferred income (1,100) (2,300)
Increase (decrease) in accrued expenses (201,700) (110,700)
(Increase) decrease in prepaid expenses 7,600 (127,800)
Increase (decrease) in interest payable (8,800) (54,900)
(Increase) decrease in interest receivable 10,700 (24,900)
(Increase) decrease in loans held for sale (11,000) (632,300)
------------ ------------
Total adjustments to net income (63,100) (847,900)
------------ ------------
------------ ------------
Net cash provided (used) by operations 120,900 (647,900)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investments 200,000 200,000
Proceeds from sale of investments 497,100 209,200
Principal payments on investments 78,600 98,900
Purchase of securities (549,500) (204,600)
Unrealized gain (loss) available for sale securities 5,600 (9,900)
Net (increase) decrease in loans (2,791,400) 859,600
Proceeds from sale of equipment 12,000 0
Capital expenditures (23,400) (238,800)
------------ ------------
Net cash provided (used) in investing activities (2,571,000) 914,400
------------ ------------
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 1,269,200 1,245,900
Net cash provided (used) by financing activities 1,269,200 1,245,900
------------ ------------
------------ ------------
Net increase (decrease) in cash & cash equivalents (1,180,900) 1,512,400
Cash & cash equivalents - beginning of year 10,328,900 5,545,100
------------ ------------
------------ ------------
Cash & cash equivalents - end of year 9,148,000 7,057,500
</TABLE>
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
------------ -----------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
SBA Guaranteed Loan Pool Certificates 0 623,500
---------- -----------
---------- -----------
Held to maturity:
US Treasury Securities 499,400 195,900
Other Securities 290,900 240,800
---------- -----------
790,300 436,700
---------- -----------
---------- -----------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 10,269,700 9,268,800
Real Estate - Construction 0 0
Real Estate - Mortgage 13,139,200 11,246,100
Installment 759,500 887,800
Government Guaranteed Loans Purchased 318,000 328,100
---------- -----------
Gross Loans 24,486,400 21,730,800
----------- -----------
----------- -----------
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 224,800 244,900
Recoveries 11,800 19,500
Provision for Possible Loan Losses 25,000 120,000
Loans Charged Off (5,400) (159,600)
---------- -----------
Balance at End of Period 256,200 224,800
---------- -----------
---------- -----------
(NOTE 4) DEPOSITS:
Demand 6,200,000 5,509,100
Interest-Bearing Transaction 5,721,300 6,766,100
Savings 2,780,100 2,458,000
Time Under $100,000 11,843,800 10,735,900
Time Equal to or Greater than $100,000 5,911,700 5,718,500
----------- -----------
32,456,900 31,187,600
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 6/30/96 6/30/95
---------- -----------
<S> <C> <C>
Interest 615,200 491,500
Income Taxes 37,400 15,300
</TABLE>
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 June
30, 1996, the Bank has under GAAP taken $140,500 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 six months ended June 30, 1996 net income was $184,000, a decrease
of $16,000 when compared to the same period in 1995. The decrease in earnings
during this period was the result of a $40,200 decrease in net interest income
after provision for loan losses and a $24,200 increase in net noninterest
income.
Competitive pressures, declines in loan demand during the first quarter and
repayment of outstanding loans have had an adverse impact on total interest
income and net interest income in the first half of 1996.
7
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at, and for the six months ended, June 30, 1996 and 1995.
For the six months For the six months
Ended June 30, 1996 Ended June 30, 1995
--------------------- --------------------
(Dollars in thousands except per share data)
Summary of Operating Results:
Total interest income 1,504 1,435
Total interest expense 661 537
-------- ------
Net interest income 843 898
Provision for possible
loan losses 25 40
-------- ------
Net interest income after
provision for loan loss 818 858
Total other income 519 490
Total other expense 1,116 1,133
-------- ------
Income (loss) before taxes 221 215
Provision for income tax 37 15
-------- ------
Net income (loss) 184 200
Per Common Share Data:
Net income (1) 0.18 0.19
Book value, end of period 3.37 3.15
Avg shares outstanding (2) 879,465 879,465
Balance Sheet Data:
Total loans, net of
unearned income (3) 25,303 23,925
Total assets 37,905 35,055
Total deposits 32,457 30,028
Stockholders' equity 2,965 2,774
8
<PAGE>
For the six months For the six months
Ended June 30, 1996 Ended June 30, 1995
------------------- -------------------
Selected Financial Ratios (4):
Return on average assets(5) 1.00% 1.17%
Return on average
stockholders' equity(5) 12.94% 14.16%
Net interest spread 5.22% 5.56%
Net interest margin 5.79% 6.19%
Avg shareholders' equity
to average assets 7.73% 8.30%
Risked-Based capital ratios
Tier 1 11.83% 12.85%
Total 12.85% 14.02%
Total loans to total deposits
at end of period 77.96% 79.68%
Allowance to total loans
at end of period 1.01% 1.02%
Nonperforming loans to total
loans at end of period .32% 0.37%
Net charge-offs to
average loans (0.03)% 0.17%
(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 1,023,723 and 1,044,465 for June 30, 1996 and 1995,
respectively.
(2) Weighted average common shares.
(3) Includes loans being held for sale.
(4) Averages are of daily balances.
(5) June 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 six month period ended June 30, 1996 was
$842,700 compared to $897,900 for the same period in 1995. The decrease of
$55,200 resulted from total interest expense increasing $123,800, while total
interest income increased $68,600. Average interest earning assets increased
$2,461,000 (8.47%), while the average rate earned decreased 31 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 $2,054,000 (7.96%), while the
average rate paid increased 43 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 six months ended June 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 Six Months The Twelve Months
Ended June 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 99 4 8.08 297 11 7.41 240 24 10.00
Invest securities 865 16 3.70 1,271 46 7.24 1,189 76 6.39
Federal funds sold 6,959 186 5.35 3,394 96 5.66 5,094 279 5.48
-------------- ---------------- --------------------------
Total investments 7,923 206 5.20 4,962 153 6.36 6,523 379 5.81
Loans
Real estate 12,092 606 10.02 13,510 709 10.50 12,661 1,371 10.83
Installment 725 46 12.69 1,030 57 11.07 994 112 11.27
Commercial 10,719 648 12.09 9,565 517 10.81 10,008 1090 10.89
-------------- ---------------- --------------------------
Total loans 23,536 1,300 11.05 24,105 1,283 10.65 23,663 2,573 10.87
Total Interest
earning assets 31,459 1,506 9.57 29,067 1,436 9.88 30,186 2,952 9.78
-------------- ---------------- --------------------------
-------------- ---------------- --------------------------
Interest Bearing Liabilities:
Int-bearing demand 4,417 31 1.40 4,371 28 1.28 4,538 61 1.34
Money market savings 1,824 21 2.30 1,969 22 2.23 1,864 42 2.25
Savings deposits 2,503 37 2.96 2,982 42 2.82 2,812 81 2.88
Time deposits more than $100M 5,453 171 6.27 4,717 128 5.43 5,019 302 6.02
Time deposits less than $100M 11,672 356 6.10 8,793 271 6.16 9,814 605 6.16
Other Borrowing 2,000 46 4.60 2,000 45 4.50 2,000 92 4.60
-------------- ---------------- --------------------------
Total interest
bearing liabilities 27,869 662 4.75 24,832 536 4.32 26,047 1,183 4.54
-------------- ---------------- --------------------------
-------------- ---------------- --------------------------
Net interest income 844 900 1,769
Net interest spread 4.82 5.56 5.24
Net yield on interest
earning assets 5.37 6.19 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>
<TABLE>
<CAPTION>
INTEREST SPREAD ANALYSIS (CONTINUED):
Six Months Twelve Months
Ended June 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)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks (7) 0 (7) (6) 7 1
Invest securities (15) (15) (30) (21) 16 (5)
Federal funds sold 101 (11) 90 89 57 146
--------------------------- --------------------------
Total investments 99 (46) 53 74 68 142
Loans
Real estate (44) (59) (103) (232) 14 (218)
Installment (17) 6 (11) (13) 9 (4)
Commercial 60 66 126 121 177 298
--------------------------- --------------------------
Total loans (30) 47 17 (98) 174 76
Total Interest Earning Assets 118 (48) 70 55 163 218
--------------------------- --------------------------
--------------------------- --------------------------
Interest Bearing Deposits:
Int-bearing demand 0 0 0 (6) 4 (2)
Money market savings 0 0 0 (8) (1) (9)
Savings deposits 0 3 3 3 13 16
Time deposits more than $100M (2) 1 (1) 30 95 125
Time deposits less than $100M (7) 2 (5) 51 91 142
Other Borrowing 20 23 43 (25) 3 (22)
--------------------------- --------------------------
Total interest bearing deposits 66 60 126 17 233 250
--------------------------- --------------------------
--------------------------- --------------------------
Net change in net interest 53 (109) (56) 38 (70) (32)
</TABLE>
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 June 30, 1996 and 1995 the Bank's allowance stood at 1.01
percent and 1.02 percent of gross loans, respectively. A provision of $25,000
was made to the allowance during the six months ended June 30, 1996, compared to
a provision of $40,000 in the same period in 1995. Charged off loans during
the six months ended June 30, 1996 and 1995 totaled
13
<PAGE>
$5,400 and $57,000 respectively. Recoveries for the same periods were $11,800
and $16,500, respectively.
The Bank's non performing (delinquent 90 days or more and nonaccrual) loans
as a percentage of total loans was .32 percent at June 30, 1996 compared with
.37 percent at June 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 six months ended June 30, 1996 was
$519,600, compared with $490,100 for the same period in 1995. The increase of
$29,500 was the result of a $10,500 decrease in service charges on deposit
accounts, while income from SBA loan sales and servicing increased $15,600 and
income from other service charges, commissions and fees increased $24,400.
Merchant credit card processing accounted for $12,000 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 six months ended June 30, 1996
increased $42,000 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.
Total occupancy and equipment expense for the six months ended June 30,
1996 was $130,700 compared to $120,700 for the same period in 1995. The
increase of $10,000 was due to the loss of the benefit ($5,400) of the
sub-lease of a portion of 665 Munras Avenue facility and an increase of $5,100
in utilities expense.
For the six months ended June 30, 1996 professional fees were $20,700 less
than the same period in 1995.
Other expenses for the six months ended June 30, 1996 totaled $331,400
compared with $361,100 for the same period in 1995. Significant changes
occurred in the following categories with decreases in FDIC and State
Assessments ($33,000), director fees ($3,800), miscellaneous expense ($20,100),
insurance expense ($9,200), SBA loan expense ($14,600), postage ($3,800), loan
expense($4,400) and stockholder expense ($4,400); increases in business
development ($15,300), collection expense ($19,000), advertising ($4,800),
stationary and supplies ($12,600) and income taxes ($22,100).
LOANS
Loans represented 74.87% of average earning assets, and 64.12% of average
total assets for the six months ended June 30, 1996, compared with 82.93% and
70.71%, respectively during 1995. For the six months ended June 30, 1996
average loans decreased 2.07% from $24,105,000 for the same period in 1995 to
$23,606,000. Average real estate loans decreased $1,418,000 (10.5%),
installment loans decreased $305,000 (29.61%); while average commercial loans
increased $1,224,000 (12.80).
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.
15
<PAGE>
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, 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.
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.
16
<PAGE>
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"):
Six Months Ended
June 30,
1996 1995
------ ------
(Dollars in thousands)
Accruing,
past due 90 days or more:
- -------------------------
Commercial 0 0
Installment 0 0
Other 0 0
------ ------
Total accruing 0 0
Nonaccrual Loans:
- ------------------
Commercial 82 65
Installment 0 23
Other 0 0
------ ------
Total nonaccrual 82 88
Total nonperforming 82 88
Total loans end of period 25,304 23,938
Ratio of nonperforming loans
to total loans at end of period 0.32% 0.37%
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
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
-------------- -------------
(Dollars in thousands)
Average loans outstanding 23,576 23,952
Allowance, beginning of period 225 245
Loans charged off during pperiod:
Commercial 1 49
Installment 4 8
Real Estate 0 0
Other 0 0
-------------- -------------
Total charge offs 5 57
Recoveries during period:
Commercial 1 13
Installment 11 3
Other 0 0
-------------- -------------
Total recoveries 12 16
Net Loans charged off
during the period (7) 41
Additions to allowance for
possible loan losses 25 40
Allowance, end of period 257 244
Ratio of net loans charged off to
average Loans outstanding
during the period -0.03% 0.17%
Ratio of allowance to total
at end of period 1.01% 1.02%
18
<PAGE>
FUNDING SOURCES
Average deposits for the six months ended June 30, 1996 were $31,474,000 an
increase of 9.52% compared with the average balance for 1995. Average
certificates of deposit represented 54.37% of average deposits for the six
months ended June 30, 1996. Average interest checking, money market and savings
accounts as a group were 27.74% of average deposits. Average demand deposits
represented 17.89% 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 June 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 June 30, 1996, stockholders' equity
was $2,965,200 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 10.13% and a total risk-based capital
ratio of 11.13% at June 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 6.98% at June 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 June 30, 1996 was 26.11 percent, while its average loan to
deposit ratio for the six months ended June 30, 1996 was 75.00 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
June 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 9.06
percent is slightly below the generally accepted guideline of 10 to 15 percent.
20
<PAGE>
<TABLE>
<CAPTION>
After After
Three One
Months Year
But But
Within Within Within After
Three One Five Five
Months Year Years Years
-------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest Earning Assets:
- ------------------------
Time depsits in financial institutions 99 --- --- ---
Investment securities --- --- 499 ---
Federal Funds Sold 6,300 --- --- ---
Loans 12,053 3,696 5,438 3,665
--------- -------- -------- --------
Total 18,452 3,696 5,937 3,665
Interest-Bearing Liabilities:
- -----------------------------
Savings deposits 2,780 --- --- ---
Money Market accounts 5,721 --- --- ---
Certificates over $100,000 2,088 1,833 1,871 120
Other time deposits 1,258 4,037 6,559 ---
Other Borrowings --- 1,000 1,000 ---
-----------------------------------------------------
Total 11,847 6,870 9,430 120
Total Assets 37,868
Interest rate sensitivity gap 6,605 (3,173) (3,494) 3,545
Cumulative interest sensitivity gap 6,605 3,432 (62) 3,483
Interest rate sensitivity gap ratio 17.44% -8.38% -9.23% 9.36%
Cumulative interest rate
sensitivity gap ratio 17.44% 9.06% -0.16% 9.20%
</TABLE>
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.
21
<PAGE>
The Corporation has no 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 June 30, 1996:
INVESTMENT PORTFOLIO MIX
June 30, 1996
Book Market
value value
------- ----------
(Dollars in thousands)
Available for sale: 0 0
Held to maturity:
U. S. Treasury Securities 499 498
Federal Home Loan Bank Stock 291 291
------- ---------
Total 790 789
The following table summarizes the maturity of the Bank's investment
securities at June 30, 1996:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 5
1 year through through over 10
or less 5 years 10 years years
---------- ------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities --- 499 --- ---
Federal Home Loan Stock 291 --- --- ---
--- --- --- ---
Total 291 499 0 0
</TABLE>
The following reconciliation shows the difference between certain financial
data under GAAP and RAP.
22
<PAGE>
GAAP RAP
--------- ---------
JUNE 30, 1995
Assets $ 35,055 $ 34,778
Earnings for period 200 154
Earnings per share 0.19 0.15
Capital at end of period 2,774 2,415
Book Value 3.15 2.75
Risked-Based capital ratios
Tier 1 12.89% 10.55%
Total 14.02% 11.61%
Leverage capital ratio 7.96% 7.60%
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%
JUNE 30, 1996
Assets $ 37,905 37,569
Earnings for period 184 123
Earnings per share 0.18 0.12
Capital at end of period 2,965 2,588
Book Value 3.37 2.94
Risked-Based capital ratios
Tier 1 11.83% 10.13%
Total 12.85% 11.13%
Leverage capital ratio 7.84% 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: August 5, 1996 By: /s/ Charles T. Chrietaberg, Jr.
-------------- ----------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: August 5, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,852,100
<INT-BEARING-DEPOSITS> 99,000
<FED-FUNDS-SOLD> 6,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 790,300
<INVESTMENTS-MARKET> 788,900
<LOANS> 25,339,400
<ALLOWANCE> 256,200
<TOTAL-ASSETS> 37,904,600
<DEPOSITS> 32,456,900
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 482,500
<LONG-TERM> 1,000,000
0
0
<COMMON> 2,779,600
<OTHER-SE> 185,600
<TOTAL-LIABILITIES-AND-EQUITY> 37,904,600
<INTEREST-LOAN> 1,298,000
<INTEREST-INVEST> 204,700
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,503,500
<INTEREST-DEPOSIT> 615,200
<INTEREST-EXPENSE> 660,800
<INTEREST-INCOME-NET> 842,700
<LOAN-LOSSES> 25,000
<SECURITIES-GAINS> 5,700
<EXPENSE-OTHER> 1,153,300
<INCOME-PRETAX> 221,400
<INCOME-PRE-EXTRAORDINARY> 221,400
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 184,000
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<YIELD-ACTUAL> 9.88
<LOANS-NON> 81,800
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 262,400
<ALLOWANCE-OPEN> 224,800
<CHARGE-OFFS> 5,400
<RECOVERIES> 11,800
<ALLOWANCE-CLOSE> 256,200
<ALLOWANCE-DOMESTIC> 39,300
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 216,900
</TABLE>
