<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 March 31, 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 May 8, 1996, the Corporation had 879,465 shares of common stock
outstanding.
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31 DECEMBER 31
1996 1995
-------- -----------
ASSETS:
Cash and Cash Equivalents 2,457,000 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) 486,000 436,700
Federal Funds Sold 9,000,000 0
Loans Held for Sale 801,400 790,400
Gross Loans (Note 2) 21,822,500 21,730,800
Allowance for Possible Loan Losses (Note 3) (226,200) (224,800)
Deferred Origination Fees (27,800) (26,900)
---------- ----------
Net Loans 21,568,500 21,479,100
Bank Premises and Equipment, Net 1,669,400 1,696,100
Interest Receivable and Other Assets 1,205,100 1,244,100
---------- ----------
Total Assets 37,286,400 36,697,800
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 32,043,600 31,187,600
Interest Payable and Other Liabilities 2,437,400 2,734,400
---------- ----------
Total Liabilities 34,481,000 33,922,000
---------- ----------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1995 and 1994
Outstanding: 879,465 in 1995 and 1994 2,779,600 2,779,600
Retained Earnings 25,800 1,900
Unrealized Gain (Loss) Available
for Sale Securities 0 (5,700)
---------- ----------
Total Shareholders' Equity 2,805,400 2,775,800
---------- ----------
Total Liabilities & Shareholders' Equity 37,286,400 36,697,800
========== ==========
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31
-------------------------
1996 1995
-------- ---------
INTEREST INCOME:
Interest and Fees on Loans 613,200 627,700
Interest on Time Deposits with
Financial Institutions 1,900 5,400
Interest on Investment Securities 6,900 9,100
Interest on Gov't Guar SBA Loan Pools (400) 15,300
Interest on Federal Funds 92,900 43,200
------- -------
Total Interest Income 714,500 700,700
------- -------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 26,300 25,400
Interest on Savings Accounts 18,000 21,500
Interest on Time Deposits 261,500 172,800
Interest on Other Borrowed Funds 22,800 22,900
------- -------
Total Interest Expense 328,600 242,600
------- -------
Net Interest Income 385,900 458,100
PROVISION FOR LOAN LOSSES 0 10,000
------- -------
Net Interest Income After
Provision for Possible Loan Losses 385,900 448,100
------- -------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 77,700 108,400
SBA Loan Sales & Servicing Income 67,900 65,900
Other Operating Income 75,100 56,600
------- -------
Total Noninterest Income 220,700 230,900
------- -------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 292,100 277,000
Occupancy and Equipment Expense 63,100 53,100
Professional Fees 21,000 28,800
Data Processing 34,400 36,700
FDIC & State Assessments 2,900 20,300
Other Operating Expenses 166,900 161,400
------- -------
Total Noninterest Expense 580,400 577,300
------- -------
NET INCOME (LOSS) 26,200 101,700
======= =======
INCOME (LOSS) PER COMMON SHARE 0.03 0.10
======= =======
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1996 1995
---------- --------
NET INCOME 26,200 101,700
Adjustments to net income:
Depreciation and amortization expense 30,100 22,900
Amortization/Accretion on investments 54,600 (700)
Gain on sale of other real estate 0 0
(Gain) loss on sale of securities (5,700) 1,100
Provision for possible loan losses 0 10,000
Increase in deferred servicing premium 0 0
Amortization of deferred servicing premium 6,100 6,200
Increase in deferred income 0 0
Amortization of deferred income (1,100) (1,200)
Increase (decrease) in accrued expenses (226,000) (140,500)
(Increase) decrease in prepaid expenses 230,200 52,000
Increase (decrease) in interest payable (69,900) (11,100)
(Increase) decrease in interest receivable 22,900 (9,400)
(Increase) decrease in loans held for sale (11,000) (338,100)
-------- --------
Total adjustments to net income 30,200 (408,800)
======== =========
Net cash provided (used) by operations 56,400 (307,100)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of due from time 0 0
Proceeds from maturity of investments 0 0
Proceeds from sale of investments 497,100 209,200
Principal payments on investments 78,600 36,000
Purchase of securities (46,600) (6,200)
Unrealized gain (loss) available for
sale securities 5,700 (7,600)
Net (increase) decrease in loans (315,600) 275,000
Proceeds from sale of equipment 12,300 0
Capital expenditures (15,600) (186,000)
-------- --------
Net cash provided (used) in investing activities 215,900 320,400
========== =========
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 855,900 1,563,700
Net cash provided (used) by financing activities 855,900 1,563,700
========== =========
Net increase (decrease) in cash & cash equivalents 1,128,200 1,577,000
Cash & cash equivalents - beginning of period 10,328,900 5,545,100
========== =========
Cash & cash equivalents - end of period 11,457,100 7,122,100
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31 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 198,600 195,900
Other Securities 287,400 240,800
---------- ----------
486,000 436,700
========== ==========
(NOTE 2) GROSS LOANS:
Commercial and Industrial 9,236,900 9,268,800
Real Estate - Construction 0 0
Real Estate - Mortgage 11,556,900 11,246,100
Installment 705,500 887,800
Government Guaranteed Loans Purchased 323,200 328,100
---------- ----------
Gross Loans 21,822,500 21,730,800
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 224,800 244,900
Recoveries 1,400 19,500
Provision for Possible Loan Losses 0 120,000
Loans Charged Off 0 (159,600)
---------- ----------
Balance at End of Period 226,200 224,800
(NOTE 4) DEPOSITS:
Demand 5,642,000 5,509,100
Interest-Bearing Transaction 6,497,400 6,766,100
Savings 2,590,500 2,458,000
Time Under $100,000 11,778,100 10,735,900
Time Equal to or Greater than $100,000 5,535,600 5,718,500
----------- ----------
32,043,600 31,187,600
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 3/31/96 3/31/95
----------- ----------
Interest 328,600 219,700
Income Taxes 10,900 7,300
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 March 31, 1996, the Bank has
under GAAP taken $146,600 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 three months ended March 31, 1996 net income was $26,200, a
decrease of $75,500 when compared to the same period in 1995. The decrease
in earnings during this period was the result of a $62,200 decrease in net
interest income after provision for loan losses and a $10,200 decrease in
other operating income.
Competitive pressures, declines in loan demand and repayment of
outstanding loans have had an adverse impact on total interest income and net
interest income in the first quarter of 1996. If this trend continues
throughout 1996, the net income, if any, of the Corporation for 1996 will be
significantly less than that of 1995.
7
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at, and for the three months ended, March 31, 1996 and 1995.
For the three months For the three months
Ended March 31, 1996 Ended March 31, 1996
-------------------- --------------------
(Dollars in thousands except per share data)
Summary of Operating Results:
Total interest income 715 701
Total interest expense 329 243
------ -----
Net interest income 386 458
Provision for possible
loan losses 0 10
------ -----
Net interest income after
provision for loan loss 386 448
Total other income 220 231
Total other expense 569 585
------ -----
Income (loss) before taxes 37 109
Provision for income tax 11 7
------ -----
Net income (loss) 26 102
Per Common Share Data:
Net income (1) 0.03 0.10
Book value, end of period 3.19 3.16
Avg shares outstanding (2) 879,465 879,465
Balance Sheet Data:
Total loans, net of
unearned income (3) 22,596 24,229
Total assets 37,248 35,292
Total deposits 32,044 30,345
Stockholders' equity 2,807 2,269
8
<PAGE>
For the three months For the three months
Ended March 31, 1996 Ended March 31, 1995
-------------------- --------------------
Selected Financial Ratios (4):
Return on average assets(5) 0.29% 1.23%
Return on average
stockholders' equity(5) 3.72% 14.35%
Net interest spread 4.42% 5.91%
Net interest margin 4.948% 5.86%
Avg shareholders' equity
to average assets 7.67% 8.24%
Risked-Based capital ratios:
Tier 1 11.95% 11.51%
Total 12.91% 12.61%
Total loans to total deposits
at end of period 70.52% 79.85%
Allowance to total loans
at end of period 1.00% 1.06%
Nonperforming loans to total
loans at end of period 1.21% 0.83%
Net charge-offs to
average loans 0.00% 0.00%
(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 1,046,965 for March
31, 1996 and 1995, respectively.
(2) Weighted average common shares.
(3) Includes loans being held for sale.
(4) Averages are of daily balances.
(5) March 31, 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 three month period ended March 31, 1996 was
$385,900 compared to $458,100 for the same period in 1995. The decrease of
$72,200 resulted from total interest expense increasing $86,000, while total
interest income increased $13,800. Average interest earning assets increased
$2,436,000 (8.45%), while the average rate earned decreased 54 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 $2,744,000 (10.69%),
while the average rate paid increased 87 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 three months ended March 31, 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 Three Months The Twelve Months
Ended March 31, 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 2 7.77 297 5 6.73 240 24 10.00
Invest securities (1) 999 7 2.62 1,406 24 6.83 1,189 76 6.39
Federal funds sold 7,530 93 4.94 3,110 43 5.53 5,094 279 5.48
------ --- ----- --- ------ ------
Total investments 8,628 101 4.68 4,813 72 5.98 6,523 379 5.81
Loans
Real estate 11,504 309 10.74 14,023 361 10.30 12,661 1,371 10.83
Installment 726 23 12.67 1,086 28 10.31 994 112 11.27
Commercial 10,406 282 10.84 8,894 238 10.70 10,008 1,090 10.89
------ --- ------ --- ------ ----- -----
Total loans 22,636 613 10.85 24,003 627 10.45 23,663 2,573 10.87
Total Interest
earning assets 31,264 714 9.15 28,816 699 9.70 30,186 2,952 9.78
====== === ====== === ====== ===== =====
Interest Bearing Liabilities:
Int-bearing demand 4,448 18 1.35 4,412 14 1.27 4,538 61 1.34
Money market savings 1,954 11 2.25 2,041 12 2.35 1,864 42 2.25
Savings deposits 2,478 18 2.91 3,070 21 2.74 2,812 81 2.88
Time deposits > $100M 5,521 85 6.16 4,723 59 5.00 5,019 302 6.02
Time deposits < $100M 11,433 176 6.16 9,412 114 4.84 9,814 605 6.16
Other Borrowing 2,000 23 4.60 2,000 23 4.60 2,000 92 4.60
------ --- ------ --- ------ ----- ----
Total interest
bearing liabilities 27,834 331 4.73 25,658 243 3.79 26,047 1,183 4.54
====== === ====== === ====== ===== ====
Net interest income 386 456 1,769
Net interest spread 4.42 5.91 5.24
Net yield on interest
earning assets 4.94 6.33 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):
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, 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 (3) 0 (3) (6) 7 1
Invest securities (7) (4) (11) (21) 16 (5)
Federal funds sold 61 (11) 50 89 57 146
------- ----- ----- ------ ----- -----
Total investments 57 (28) 29 74 68 142
Loans
Real estate (65) 13 (52) (232) 14 (218)
Installment (9) 4 (5) (13) 9 (4)
Commercial 40 2 42 121 177 298
------- ----- ----- ------ ----- -----
Total loans (36) 21 (15) (98) 174 76
Total Interest Earning
Assets 59 (45) 14 55 163 218
======= ===== ===== ====== ===== =====
Interest Bearing Deposits:
Int-bearing demand 0 1 1 (6) 4 (2)
Money market savings (1) (0) (1) (8) (1) (9)
Savings deposits (4) 1 (3) 3 13 16
Time deposits > $100M 10 16 26 30 5 125
Time deposits < $100M 24 38 62 51 91 142
Other Borrowing 0 0 0 (25) 3 (22)
------- ----- ----- ------ ----- -----
Total interest
bearing deposits 21 65 86 17 233 250
======= ===== ===== ====== ===== =====
Net change in net interest 39 (111) (72) 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 March 31, 1996 and 1995 the Bank's allowance
stood at 1.00 percent and 1.06 percent of gross loans, respectively. No
provisions were made to the allowance during the three months ended March 31,
1996, compared to a provision of $10,000 in the same period in 1995. No
loans were charged off during the three months ended March 31, 1996 or 1995.
Recoveries for the same periods were $1,400 and $1,900, respectively.
13
<PAGE>
The Bank's non performing (delinquent 90 days or more and nonaccrual)
loans as a percentage of total loans was 1.21% at March 31, 1996 compared
with .14 percent and .84 percent as of the end of 1995 and 1994,
respectively. The significant increase in the ratio from December 31, 1995
to March 31, 1996 was primarily due to one past due loan, which has
subsequently been paid current.
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 three months ended March 31, 1996 was
$220,700, compared with $230,900 for the same period in 1995. The decrease
of $10,200 was the result of a $30,700 decrease in service charges on
deposit accounts; largely due to closing accounts that paid fees for high
volumes of non-sufficient funds checks, while income from other service
charges, commissions and fees increased $18,500. Merchant credit card
processing accounted for $17,300 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 three months ended March 31, 1996
increased $15,100 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 three months ended March
31, 1996 was $63,100 compared to $53,100 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
$4,600 in furniture and equipment depreciation expense.
For the three months ended March 31, 1996 professional fees were $7,800
less than the same period in 1995.
Other expenses for the three months ended March 31, 1996 totaled
$169,800 compared with $181,700 for the same period in 1995. Significant
changes occurred in the following categories with decreases in FDIC and State
Assessments ($17,400), director fees ($3,500), miscellaneous expense
($20,000) and stockholder expense ($3,100); increases in business development
($3,600), collection expense ($6,300), entertainment and meals ($4,700),
insurance ($3,500), loan expense ($2,800), stationary and supplies ($9,000)
and income taxes ($3,600).
LOANS
Loans represented 72.45% of average earning assets, and 62.31% of
average total assets for the three months ended March 31, 1996, compared with
83.30% and 71.60%, respectively during 1995. For the three months ended
March, 1996, average loans decreased 5.53% from $24,015,000 for the same
period in 1995 to $22,688,000. Average real estate loans decreased
$2,519,000 (17.96%), installment loans decreased $350,000 (31.02%); while
average commercial loans increased $1,542,000 (17.40).
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"):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
-------- ------
(Dollars in thousands)
<S> <C> <C>
Accruing,
PAST DUE 90 DAYS OR MORE:
Commercial 199 0
Installment 0 0
Other 0 0
----- -----
Total accruing 199 0
NONACCRUAL LOANS:
Commercial 75 169
Installment 0 32
Other 0 0
----- -----
Total nonaccrual 75 201
Total nonperforming 274 201
Total loans end of period 22,624 24,229
Ratio of nonperforming loans
to total loans at end of period 1.21% 0.83%
</TABLE>
The ratio of nonperforming loans at March 31, 1996 was significantly
impacted by one loan on which all of past due principal and interest has been
paid. Nonperforming loans 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
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
------------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding 22,688 24,015
Allowance, beginning of period 225 245
Loans charged off during period:
Commercial 0 0
Installment 0 0
Real Estate 0 0
Other 0 0
------ -----
Total charge offs 0 0
Recoveries during period:
Commercial 0 0
Installment 1 2
Other 0 0
------ -----
Total recoveries 1 2
Net Loans charged off
during the period (1) (2)
Additions to allowance for
possible loan losses 0 10
Allowance, end of period 226 257
Ratio of net loans charged off to
average Loans outstanding
during the period 0.00% 0.00%
Ratio of allowance to total
at end of period 1.00% 1.06%
</TABLE>
18
<PAGE>
FUNDING SOURCES
Average deposits for the three months ended March 31, 1996 were
$31,049,000 an increase of 3.79% compared with the average balance for 1995.
Average certificates of deposit represented 54.60% of average deposits for
the three months ended March 31, 1996. Average interest checking, money
market and savings accounts as a group were 38.60% of average deposits.
Average demand deposits represented 16.80% 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 March 31, 1996. Each
advance is for $1,000,000 with interest rates 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 utilizes 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 March 31, 1996,
stockholders' equity was $2,807,400 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 10.44% and a total risk-based
capital ratio of 11.39% at March 31, 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 6.73% March 31, 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 $3,000,000 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 March 31, 1996 was
31.99, while its average loan to deposit ratio for the three months ended
March 31, 1996 was 73.07 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 March 31, 1996, the Bank's interest rate sensitivity gap
ratio (i.e., interest rate sensitive assets divided by interest rate
sensitive liabilities) 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 high interest rate
sensitivity gap ratio over 100 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 low interest rate
sensitivity gap will experience the reverse. Regulators usually look at an
interest rate sensitivity gap ratio around 100 as being favorable, which
would allow a bank to adjust to either direction interest rates might take.
In the past, the Bank has had a high interest rate sensitivity gap, but
management has worked this year to obtain the very favorable position
illustrated in the following table.
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 thousands)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Time deposits in financial 99 --- --- ---
Federal funds sold 9,000 --- --- ---
Investment securities 198 --- --- ---
Loans 11,356 3,706 3,925 3,331
------ ------ ----- -----
Total 21,150 3,706 3,925 3,331
INTEREST-BEARING LIABILITIES:
Savings deposits 4,567 --- --- ---
Money Market accounts 4,523 --- --- ---
Certificates over $100,000 1,432 2,046 1,971 120
Other time deposits 1,837 3,001 6,939 1
Other Borrowings --- 1,000 1,000 ---
------ ------ ----- -----
Total 12,358 6,047 9,910 121
Interest rate sensitivity gap 8,792 (2,341) (5,984) 3,210
Cumulative interest sensitivity gap 8,792 6,451 466 3,676
Interest rate sensitivity gap ratio 171% 61% 40% 2749%
Cumulative interest rate sensitivity
gap ratio 171% 135% 102% 113%
</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
21
<PAGE>
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 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 March 31, 1996:
INVESTMENT PORTFOLIO MIX
March 31, 1996
Book Market
value value
------- --------
(Dollars in thousands)
Available for sale:
Guaranteed SBA loan
pool certificates 0 0
Held to maturity:
U.S. Treasury securities 199 199
Federal Home Loan Bank Stock 287 287
---- ----
Total 486 486
The following table summarizes the maturity of the Bank's investment
securities at March 31, 1996:
INVESTMENT PORTFOLIO MATURITIES
<TABLE>
<CAPTION>
(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 199 --- --- ---
Federal Home Loan Stock 287 --- --- ---
---- ---- ---- ----
Total 486 0 0 0
---- ---- ---- ----
</TABLE>
22
<PAGE>
The following reconciliation shows the difference between certain financial
data under GAAP and RAP.
GAAP RAP
-------- ---------
MARCH 31, 1995
Assets $ 35,292 $ 35,008
Earnings for period 102 92
Earnings per share 0.10 0.09
Capital at end of period 2,678 2,357
Book Value 3.05 2.68
Risked-Based capital ratios
Tier 1 11.51% 10.18%
Total 12.61% 11.29%
Leverage capital ratio 7.63% 6.73%
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%
MARCH 31, 1996
Assets $ 37,249 36,940
Earnings for period 28 21
Earnings per share 0.03 0.02
Capital at end of period 2,807 2,486
Book Value 3.19 2.83
Risked-Based capital ratios
Tier 1 11.95% 10.44%
Total 12.91% 11.39%
Leverage capital ratio 7.54% 6.73%
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: May 9, 1996 By: /s/ CHARLES T. CHRIETZBERG, JR.
------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: May 9, 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-Q FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,457,000
<INT-BEARING-DEPOSITS> 99,000
<FED-FUNDS-SOLD> 9,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 486,000
<INVESTMENTS-MARKET> 486,000
<LOANS> 22,596,100
<ALLOWANCE> 226,200
<TOTAL-ASSETS> 37,286,400
<DEPOSITS> 34,481,000
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 437,400
<LONG-TERM> 1,000,000
0
0
<COMMON> 2,779,600
<OTHER-SE> 25,800
<TOTAL-LIABILITIES-AND-EQUITY> 37,286,400
<INTEREST-LOAN> 613,200
<INTEREST-INVEST> 101,300
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 714,500
<INTEREST-DEPOSIT> 305,800
<INTEREST-EXPENSE> 328,600
<INTEREST-INCOME-NET> 385,900
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5,700
<EXPENSE-OTHER> 580,400
<INCOME-PRETAX> 37,100
<INCOME-PRE-EXTRAORDINARY> 37,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,200
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<YIELD-ACTUAL> 9.15
<LOANS-NON> 74,500
<LOANS-PAST> 199,200
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 246,000
<ALLOWANCE-OPEN> 224,900
<CHARGE-OFFS> 0
<RECOVERIES> 1,400
<ALLOWANCE-CLOSE> 226,200
<ALLOWANCE-DOMESTIC> 56,400
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 169,800
</TABLE>
