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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
--- of 1934 (Fee required) for fiscal year ended December 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
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
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
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB X
-----
Revenues for the year ended December 31, 1996. $4,852,700.
As of March 1, 1997, the Corporation had 879,465 shares of common stock
outstanding. The aggregate market value of voting stock held by
non-affiliates of the Corporation was $1,398,500, based on the most recent
sale at $2.75 per share on February 3, 1997.
The following documents are incorporated by reference to the parts
indicated of this Form 10-KSB:
1. Portions of the Independent Auditor's Report for the fiscal year ended
December 31, 1996 are incorporated by reference in Part I Item 3 and Part II
Item 6.
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PART I
ITEM 1. BUSINESS
GENERAL
Northern California Bancorp, Inc. (the "Corporation") was incorporated
on August 29, 1995, as a for-profit corporation under the California
Corporate laws for the principal purpose of engaging in banking and
non-banking activities as allowed for a bank holding company. The
Corporation owns 100% of Monterey County Bank (the"Bank"). The Corporation's
sole sources of (unconsolidated) revenues at this time are potential
dividends, management fees and tax equalization payments, if any, from the
Bank. While these sources cannot be assured, and may be limited, the
Corporation has no direct cash needs other than limited expenses related to
corporate and regulatory compliance.
Compliance with environmental laws has not had a material impact on the
operations of the Bank or the Corporation, although the Bank faces potential
liability or losses if its borrowers fail to comply with such laws and the
Bank acquires contaminated properties in foreclosure.
BANK SUBSIDIARY
Monterey County Bank, an independent, California chartered commercial
banking corporation was chartered by the State of California on July 30,
1976. The Bank's customer base includes individuals, small and medium sized
businesses and a variety of government agencies with residences, offices or
other relationships located in or about the city and county of Monterey,
California, including the city of Carmel. The Bank offers its customers a
wide variety of the normal personal, consumer and commercial services
expected of a locally owned, independently operated bank. Its deposits are
insured by the FDIC, and, as such, the Bank is subject to regulations by that
federal agency and to periodic audits of its operations and documentary
compliance by FDIC personnel. As a state chartered bank which is not a
member of the Federal Reserve System, it is also regulated and periodically
examined by the California State Banking Department.
The Bank's activities are conducted at its principal offices, 601 Munras
Ave., Monterey, California and at its sole branch in Carmel, California. The
Bank will open a branch office in Pacific Grove, California in the second
quarter 1997.
At December 31, 1996 the Bank's had total assets, deposits and
shareholders' equity of approximately $40,778,500, $36,207,000 and
$2,864,600, respectively.
EMPLOYEES
At December 31, 1996 the Northern California Bancorp, Inc. and its
subsidiary Monterey County Bank employed a total of 30 full time equivalent
persons.
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COMPETITION
All phases of the Bank's business have been, since inception, and will
continue to be subject to significant competitive forces. Although the Bank
has increasing recognition in its primary service area and Monterey County,
it nevertheless has to compete with other independent local banking
institutions, including commercial banks and savings and loan associations,
as well as branch offices of regional commercial banks, some of which have
assets, capital and lending limits substantially larger than the Bank, as
well as wider geographic markets, more support services and larger media
advertising capabilities. The Bank will also compete with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies , regulated small
loan companies and credit unions, as well as securities brokerage offices
which can issue commercial paper and other securities (such as shares in
money market funds).
Among the advantages such institutions have over the Bank are their
ability to finance wide ranging advertising campaigns and to allocate their
investment assets to regions of highest yields and demand. Many institutions
offer certain services, such as trust services and international banking,
which the Bank does not currently offer or plan to offer. By virtue of their
greater total capital, such institutions have substantially higher lending
limits than the Bank (legal lending limits to an individual customer being
limited to a percentage of a bank's total capital accounts). These
competitors may intensify their advertising and marketing activities to
counter any efforts by the Bank to further attract new business as a
commercial bank. In addition, as a result of legislation enacted earlier in
the decade, there is increased competition between banks, savings and loan
associations and credit unions for the deposit and loan business of
individuals. These activities may hinder the Bank's ability to capture a
significant market share.
To compete with the financial institutions in its primary service area,
the Bank intends to use the flexibility which its independent status will
permit. Its activities in this regard include an ability and intention to
respond quickly to changes in the interest rates paid on time and savings
deposits and charged on loans, and to charges imposed on depository accounts,
so as to remain competitive in the market place. It also will continue to
emphasize specialized services for the small business person and
professional, and personal contacts by the Bank's officers, directors and
employees. If there are customers whose loan demands exceed the Bank's
lending limits, the Bank has the ability to arrange for such loans on a
participation basis with other financial institutions. No assurance can be
given, however, that the Bank's efforts to compete with other financial
institutions in its primary service area will be successful.
The Bank provides a range of competitive retail and commercial banking
services. The deposit services offered include various types of personal and
business checking accounts, savings accounts, money market investment
accounts, certificates of deposit, and retirement accounts. Lending services
include consumer loans, various type of mortgage loans for residential and
commercial real estate, personal lines of credit, home equity loans, real
estate construction, accounts receivable financing, commercial loans to small
and medium size businesses and
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professionals. The Bank also provides drive-through facilities, at its
Monterey and Carmel offices, and night depository facilities for customer
convenience. The Bank offers safe deposit box facilities, cashiers' checks,
travelers checks, U.S. Savings Bonds, and wire transfers. The Bank does not
provide trust services.
While the Bank has the authority to engage in a wide range of banking
activities, and offers most of the types of banking services of a commercial
bank, over the past three years it has derived much of its profitability and
differentiated itself from its competitors through (i) commercial and real
estate loans guaranteed by the Small Business Administration ("SBA"); and
(ii) credit card depository services for merchants.
The Bank depends largely on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings, and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio,
comprise the major portion of the Bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly, the earnings and growth of the Bank are subject to the influence
of domestic and foreign economic conditions, including inflation, recession
and unemployment.
Monetary and fiscal policies of the federal government and the policies
of regulatory agencies, particularly the Federal Reserve Board, also impact
on the Bank's business. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in U.S. Government securities, by
adjusting the required level of reserves for financial intermediaries subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on
deposits. The nature and impact of any future changes in monetary policies
cannot be predicted.
SUPERVISION AND REGULATION
The Corporation
Future offers or sales of the stock of the Corporation will be subject
to the registration requirements of the Securities Act of 1933, and
qualification under the California Corporate Securities Act of 1968, and
possibly other state Blue Sky laws, (unless an exemption is available),
although the Bank's Common Stock is exempt from such requirements.
On December 29, 1995, after receipt of appropriate approvals, and/or
passage of notice periods without objection, from the California
Superintendent of Banks, the Federal Deposit Insurance Corporation, the Board
of Governors of the Federal Reserve System and the shareholders of the Bank,
the Corporation acquired the Bank through a reverse triangular merger (the
"Merger"). As a result, by operation of law, each outstanding share of
common stock of the
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Bank prior to the Merger was converted into a share of common stock of the
Corporation, while the Corporation became the sole owner of the newly issued
shares of common stock of the Bank.
The Bank Holding Company Act of 1956, as amended, places the Corporation
under the supervision of the Board of Governors of the Federal Reserve System
(the "FRB"). The Corporation must generally obtain the approval of the FRB
before acquiring all or substantially all of the assets of any bank, or
ownership or control of any voting securities of any bank if, after giving
effect to such acquisition, the Corporation would own or control more than 5%
of the voting shares of such bank. An application for such approval with
respect to the acquisition of the Bank has been prepared.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in non-banking activities unless the FRB, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
such determinations, the FRB considers whether the performance of such
activities by a bank holding company would offer advantages to the public
which outweigh possible adverse effects.
The FRB's Regulation "Y" sets out the non-banking activities which are
permissible for bank holding companies under the law, subject to the FRB's
approval in individual cases. Most of these activities are now permitted for
California banks that are well-capitalized. The Corporation and its
subsidiaries will also be subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of securities.
Bills have been introduced in Congress that may eliminate the barrier between
commercial banking and investment banking, commerce or insurance, or some
combination thereof. In many of the legislative proposals, in order to
protect the relevant deposit funds, certain activities within a holding
company system would only be permitted to be engaged in by non-bank
subsidiaries of the holding company. Management cannot predict whether any
such proposals or legislation will be adopted or what the effect, if adopted,
they will have on the Bank or Corporation.
The Corporation will be required to file reports with the FRB and
provide such additional information as the FRB may require. The FRB will also
have the authority to examine the Corporation and each of its subsidiaries
with the cost thereof to be borne by the Corporation. Under California
banking law, the Corporation and its subsidiaries are also subject to
examination by, and may be required to file reports with, the Superintendent.
The Corporation and any subsidiaries which it may acquire or organize
after the reorganization will be deemed affiliates of the Bank within the
meaning of the Federal Reserve Act. Pursuant thereto, loans by the Bank to
affiliates, investments by the Bank in affiliates' stock, and taking
affiliates' stock by the Bank as collateral for loans to any borrower will be
limited to 10% of the Bank's capital, in the case of any one affiliate, and
will be limited to 20% of the Bank's capital, in the case of all affiliates.
Federal and State law place other limitations on transactions between the
Bank and its affiliates designed to ensure that the Bank receives treatment
in such transactions comparable to that available from unaffiliated third
parties.
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The Corporation and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of services. For example, with certain
exceptions, the Bank may not condition an extension of credit on a customer's
obtaining other services provided by it, the Corporation or any other
subsidiary, or on a promise from its customer not to obtain other services
from a competitor.
SUBSIDIARY BANK
Both federal and state law provide extensive regulation of the banking
business. State and federal statutes and regulations apply to many aspects
of the Bank's operations, including minimum capital requirements, reserves
against deposits, interest rates payable on deposits, loans, investments,
mergers and acquisitions, borrowings, dividends and locations of branch
offices. The California Superintendent of Banks and the FDIC provide primary
supervision, periodic examination and regulation of the Bank.
The FDIC, through its Bank Insurance Fund (the "BIF") insures the Bank's
deposits, currently up to a maximum of $100,000 per depositor. For this
protection, the Bank, like all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the FDIC. Although
the Bank is not a member of the Federal Reserve System, certain regulations
of the Federal Reserve Board also apply to its operations.
California law restricts the amount available for cash dividends by
state-chartered banks to the lesser of retained earnings or the bank's net
income for its last three fiscal years (less any distributions to
stockholders made during such period). Cash dividends may also be paid in an
amount not exceeding the net income for such bank's last preceding fiscal
year after obtaining the prior approval of the Superintendent. The FDIC also
has authority to prohibit the Bank from engaging in unsafe or unsound
practices. The FDIC can use this power, under certain circumstances, to
restrict or prohibit a bank from paying dividends.
Federal law imposes restrictions on banks with regard to transactions
with affiliates, including any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, its affiliates, as well as the
purchase of or investments in stock or other securities thereof, or the
taking of such securities as collateral for loans, and the purchase of assets
of from affiliates. These restrictions have the effect of preventing
affiliates (such as the Corporation) from borrowing from the Bank unless the
loans are secured by marketable obligations of designated amounts. Secured
loans and investments by the Bank are limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) in the case of any one
affiliate, and 20% thereof in the case of all affiliates. California law
also imposes certain restrictions with respect to transactions involving
other controlling persons of the Bank.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made in Congress, in the
California legislature and before various
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bank regulatory and other professional agencies. The Bank cannot predict
what, if any legislation or regulations will be enacted, or the impact
thereof on its business and profitability.
CAPITAL STANDARDS
Government agencies have traditionally regulated bank capital through
explicit and implicit guidelines and rules. State law requires "adequate"
capital, without objective definition. Federal law and regulations require
minimum levels of risk-based and so-called "Leverage" capital.
FDIC guidelines implement the risk-based capital requirements. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles (using
the rough measures set forth therein) among banking organizations, take
certain off-balance sheet items into account in assessing capital adequacy
and minimize disincentives to holding liquid, low-risk assets. Under these
guidelines, assets and credit equivalent amounts of off-balance sheet items,
such as letters of credit and outstanding loan commitments, are assigned to
one of several risk categories, which range from 0% for risk-free assets,
such as cash and certain U.S. government securities, to 100% for relatively
high-risk assets, such as loans and investments in fixed assets, premises and
other real estate owned. The aggregate dollar amount of each category is then
multiplied by the risk-weight associated with that category. The resulting
weighted values from each of the risk categories are then added together to
determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier I
capital. Higher risk-based ratios are required to be considered "well
capitalized" under prompt corrective action provisions.
A banking organization's qualifying total capital consists of two
components: Tier I capital (core capital) and Tier 2 capital (supplementary
capital). Tier I capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchased credit card
relationships may be included, subject to certain limitations. At least 50%
of the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock and related surplus;
(iii) hybrid capital instruments (instruments with characteristics of both
debt and equity), perpetual debt and mandatory convertible debt securities;
and (iv) eligible term subordinated debt and intermediate-term preferred
stock with an original maturity of five years or more, including related
surplus, in an amount up to 50% of Tier 1 capital. The inclusion of the
foregoing elements of Tier 2 capital are subject to certain requirements and
limitations of the federal banking agencies.
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The FDIC imposes a minimum leverage ratio of Tier I capital to average
total assets of 3% for the highest rated banks, and 4% for all other banks.
Institutions experiencing or anticipating significant growth or those with
other than minimum risk profiles are expected to maintain capital at least
100-200 basis points above the minimum level.
In addition, the Federal Reserve Board and the FDIC have issued or
proposed rules to take account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities in calculating risk-based
capital.
For capital adequacy purposes, deferred tax assets that can be realized
from taxes paid in prior carry-back years, and from the future reversal of
temporary differences, are generally unlimited. However, deferred tax assets
that can only be realized through future taxable earnings, including the
implementation of a tax planning strategy, count toward regulatory capital
purposes only up to the lesser of (i) the amount that can be realized within
one year of the quarter-end report date or (ii) 10% of Tier I capital. The
amount of deferred taxes in excess of this limit, if any, would be deducted
from Tier I capital and total assets in regulatory capital calculations.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets, including
dollar equivalents for certain off-balance sheet assets.
Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the
concentration of credit and nontraditional activities. Institutions which
have significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these
risks, will be required to set aside capital in excess of the regulatory
minimums. The federal banking agencies have not imposed any quantitative
assessment for determining when these risks are significant, but have
identified these issues as important factors they will review in assessing an
individual bank's capital adequacy. Management of the Company does not
believe that the Bank's assets and activities, as currently structured, would
lead the FDIC to require additional capital under this rule.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses (the "ALLL")
which calls for the maintenance of the ALLL at a level at least equal to the
"estimated credit losses" in the bank's loan portfolio. "Estimated credit
losses" are defined as "an estimate of the current amount of the loan and
lease portfolio (net of unearned income) that is not likely to be collected;
that is, net charge-offs that are likely to be realized for a loan or pool of
loans given facts and circumstances as of the evaluation date." The policy
statement also suggests that a test of reasonableness be applied to the ALLL,
which test is satisfied if the ALLL equals or exceeds the sum of (a) assets
classified loss; (b) 50% of assets classified doubtful; (c) 15% of assets
classified substandard; and (d) estimated credit losses on other assets over
the upcoming twelve months. The Bank believes that its ALLL exceeds the
amounts that would be required under the terms of this policy statement and
under such test of reasonableness. However, this a very subjective matter,
and the Bank
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cannot assure that any bank examiner would agree with its evaluation, or that
losses ultimately incurred from the Bank's portfolio would not exceed the
amounts so provided.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency
is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall
generally be deemed to be: (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more
and is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that
is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0%
(3.0% under certain circumstances); (iv) "significantly undercapitalized" if
it has a total risk-based capital ratio that is less than 6.0%, a Tier I
risk-based capital ratio that is less than 3.0% or a Tier I leverage capital
ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has
a ratio of tangible equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. (The FDIC may not, however,
reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At December 31, 1996, the Bank met the tests to be categorized as "well
capitalized" under the prompt corrective action regulations of the FDIC.
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SAFETY AND SOUNDNESS STANDARDS
Federal law requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; (v) asset growth; and (vi) compensation, fees and
benefits. The federal banking agencies recently adopted final regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards required by the
FDIA. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. Under the final regulations, if the FDIC
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC adopted regulations implementing a risk-based premium system
required by federal law. Under the regulations which cover the assessment
periods commencing on and after January 1, 1994, insured depository
institutions are required to pay insurance premiums within a range of 23
cents per $100 of deposits to 31 cents per $100 of deposits depending on
their risk classification. The FDIC, effective September 30, 1995, lowered
assessments from their rates of $.23 to $.31 per $100 of insured deposits to
rates of $.04 to $.31, depending on the health of the bank, as a result of
the recapitalization of the BIF. On November 15, 1995, the FDIC voted to
drop its premiums for most well capitalized banks to zero (with a minimum
$2,000. per year paid in any event). The Bank has been eligible for the
minimum payment since January 1, 1996. Other banks will be charged
risk-based premiums up to $.27 per $100 of deposits. These adjusted rates
will terminate at the end of June, 1997.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain regulatory approval to acquire an existing bank located in another
state without regard to state law. A bank holding company would not be
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of
total deposits that
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may be held in that state by any one bank or bank holding company if
application of such limitation does not discriminate against out-of-state
banks. An out-of-state bank holding company may not acquire a state bank in
existence for less than a minimum length of time that may be prescribed by
state law except that a state may not impose more than a five year existence
requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of
the acquired bank into branches of the resulting bank. Each state may permit
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state or in other states
by that state's banks. The same concentration limits discussed in the
preceding paragraph apply. The Interstate Act also permits a national or
state bank to establish branches in a state other than its home state if
permitted by the laws of that state, subject to the same requirement and
conditions as for a merger transaction.
The Interstate Act is likely to increase competition in the Bank's
market areas especially from larger financial institutions and their holding
companies. It is difficult to asses the impact such likely increased
competition will have on the Bank' operations.
On October 2, 1995, the "California Interstate Banking and Branching Act
of 1995" (the "1995 Act") became effective. The 1995 Acts generally allows
out-of-state banks to enter California by merging with, or purchasing, a
California bank or industrial loan company which is at least five years old.
Also, the 1995 Act repeals the California Interstate (National) Banking Act
of 1986, which previously regulated the acquisition of California banks by
out-of-state bank holding companies. In addition, the 1995 Act permits
California state banks, with the approval of the Superintendent of Banks, to
establish agency relationships with FDIC-insured banks and savings
associations. Finally, the 1995 Act provides for regulatory relief,
including (i) authorization for the Superintendent to exempt banks from the
requirement of obtaining approval before establishing or relocating a branch
office or place of business, (ii) repeal of the requirement of directors'
oaths (Financial Code Section 682), and (iii) repeal of the aggregate limit
on real estate loans (Financial Code Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements, reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (the "CRA"). The CRA generally requires the federal banking
agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
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In May, 1995, the federal banking agencies issued final regulations
which change the manner in which they measure a bank's compliance with its
CRA obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institutions' actual lending service and
investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with
other procedural requirements. In March 1994, the Federal Interagency Task
Force on Fair Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal agencies will
use to prove discrimination: overt evidence of discrimination, evidence of
disparate treatment and evidence of disparate impact. Management of the Bank
believes that the Bank is in substantial compliance with all requirements
under these provisions. Following the Bank's most recent CRA examination,
the Bank's rating was "outstanding".
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement
Section 304 of FDICIA which requires federal banking agencies to adopt
uniform regulations prescribing standards for real estate lending. Each
insured depository institution must adopt and maintain a comprehensive
written real estate lending policy, developed in conformance with prescribed
guidelines, and each agency has specified loan-to-value limits in guidelines
concerning various categories of real estate loans.
Section 24 of the Federal Deposit Insurance Act (the "FDIA"), as amended
by the FDICIA, generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for
national banks. Under regulations dealing with equity investments, an
insured state bank generally may not directly or indirectly acquire or retain
any equity investment of a type, or in an amount, that is not permissible for
a national bank. An insured state bank is not prohibited from, among other
things, (i) acquiring or retaining a majority interest in a subsidiary, (ii)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets, (iii)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees' and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
FDIC regulations implementing Section 24 of the FDIA provide that an
insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for
a national bank unless the FDIC has determined that such activities would
pose no risk to the insurance fund of which it is a member and the bank is in
compliance with applicable regulatory capital requirements. Any insured
state-chartered bank directly or indirectly engaged in any activity that is
not permitted for a national bank must cease the impermissible activity.
PAGE 12
<PAGE>
REGULATORY ENFORCEMENT POWERS
Commercial banking organizations, such as the Bank, may be subject to
enforcement actions by the FDIC and the Superintendent for engaging in unsafe
or unsound practices in the conduct of their businesses or for violations of
any law, rule, regulation or any condition imposed in writing by the agency
or any written agreement with the agency. Enforcement actions may include
the imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits, the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the imposition of restrictions and
sanctions under the prompt corrective action provisions of the FDICIA.
CALIFORNIA AND FEDERAL BANKING LAW
The Federal Change in Bank Control Act of 1978 prohibits a person or
group of persons "acting in concert" from acquiring "control" of a bank or
holding company unless the appropriate federal regulatory agency has been
given 60 days' prior written notice of such proposed acquisition and, within
that time period, has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which
such a disapproval may be issued. An acquisition may be made prior to the
expiration of the disapproval period if the agency issues written notice of
its intent not to disapprove the action. The acquisition of more than 10% of
a class of voting stock of a bank (or holding company) with a class of
securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (such as the Common Stock), is generally presumed, subject
to rebuttal. to constitute the acquisition of control.
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Superintendent has approved such acquisition of control.
A person would be deemed to have acquired control of the Corporation under
this state law if such person, directly or indirectly, has the power (i) to
vote 25% or more of the voting power of the Corporation or (ii) to direct or
cause the direction of the management and policies of the Corporation. For
purposes of this law, a person who directly or indirectly owns or controls
10% or more of the Common Stock would be presumed to control the Corporation,
subject to rebuttal.
In addition, any "company" would be required to obtain the approval of
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), before acquiring 25% (5% in the case of an acquirer that is,
or is deemed to be, a bank holding company) or more of the outstanding Common
Stock of, or such lesser number of shares as constitute control over, the
Bank or the Corporation.
PAGE 13
<PAGE>
The Community Reinvestment Act of 1977 ("CRA") and the related
Regulations of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") are
intended to encourage regulated financial institutions to help meet the
credit needs of their local community or communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation
of such financial institutions. The CRA and such regulations provide that
the appropriate regulatory authority will assess the records of regulated
financial institutions in satisfying their continuing and affirmative
obligations to help meet the credit needs of their local communities as part
of their regulatory examination of the institution. The results of such
examinations are made public and are taken into account upon the filing of
any application to establish a domestic branch, to merge or to acquire the
assets or assume the liabilities of a bank. In the case of a bank holding
company, the CRA performance record of the subsidiary bank(s) involved in the
transaction is reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with
any other bank holding company. An unsatisfactory record can substantially
delay or block the transaction.
GAAP/RAP DIFFERENCES
This report and the Corporation's financial statements have been
presented under generally accepted accounting principles (GAAP), unless
otherwise noted. In some cases, the FDIC's rules and/or regulations require,
or have been interpreted to require, a different treatment of the accounting
for a specific issue. When this occurs, certain items on the Bank's
financial statements differ from the same items on the reports prepared under
regulatory accounting principles (RAP). The following four items are
GAAP/RAP differences that are being carried by the Bank and the Corporation.
- When the Monterey headquarters building was sold in 1985, the gain
of $496,500 was deferred over eight years. In addition, any leasehold
improvements made since then had also been depreciated over the same
eight year period. When the building sold again in 1988, a new two-year
lease was entered into which became effective May 1, 1988. At that
time, the remaining deferred gain and leasehold improvements were
amortized over two years. Although Management and the Bank's
accountants believed that this treatment was appropriate under GAAP, the
FDIC advised that it was not acceptable under RAP. The benefits of this
deferred gain ended in 1990 under GAAP. However, the deferred gain and
the associated leasehold improvements depreciation continued to accrue
under RAP through 1993. This had the affect of increasing earnings
under RAP starting in 1990.
- Expenses related to the computer conversion that took place in 1990
were deferred over the three-year term of the data processing contract
as provided by GAAP. FDIC examiners required certain conversion costs
be expensed for RAP. These costs were expensed in 1990 under RAP, and
were accrued through 1993 under GAAP. This had the affect of increasing
earnings under RAP starting in 1991.
PAGE 14
<PAGE>
- 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 agrees 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. According to FDIC examiners, 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 a 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 certain 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 Company has not recorded any excess servicing
for GAAP purposes since 1991.
PAGE 15
<PAGE>
The following reconciliation shows the difference between certain
financial data under GAAP and RAP:
GAAP RAP
(Dollars in thousands,
except per share amounts)
DECEMBER 31, 1996:
Assets $ 40,799 $ 40,508
Earnings for period 213 233
Earnings per share 0.21 0.23
Capital at end of period 2,898 2,592
Book Value per share 3.30 2.95
Risk-Based capital ratios
Tier 11.55% 10.36%
Total 12.56% 11.37%
Leverage capital ratio 7.10% 6.40%
DECEMBER 31, 1995:
Assets $36,698 $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 per share 3.16 2.77
Risk-Based capital ratios
Tier 1 12.64% 10.90%
Total 13.66% 11.90%
Leverage capital ratio 7.56% 6.66%
PAGE 16
<PAGE>
RESEARCH
Neither the Corporation nor the Bank makes any material
expenditures for research and development.
DEPENDENCE UPON A SINGLE CUSTOMER
Neither the Corporation nor the Bank is dependent upon a single
customer or very few customers. The Bank's business is concentrated in,
and largely dependent upon the strength of the local economy in, the
Monterey Peninsula area of Northern California. The local economy is
affected by both national trends and by local factors. Tourism and the
activities at the former Fort Ord military base are among the major
contributors to the local economy. The opening of the California State
University at Monterey Bay on the former Fort Ord military base may
lessen the impact of the base closure.
ITEM 2. PROPERTIES
The main office of the Bank, which also serves as the principal
office of the Corporation, is located at 601 Munras Ave., Monterey,
California 93940. This facility contains a lobby, executive and
customer service offices, teller stations, safe deposit boxes and
related non-vault area, vault, operations area, lounge and miscellaneous
areas. A drive-through facility and adequate paved parking are also on
the premises. Both the land and all improvements thereto are owned by
the Bank. The Bank currently operates one branch in Carmel, California,
approximately 10 miles from the Bank's main office, with another branch
office, in Pacific Grove, California, scheduled to open the beginning of
the second quarter of 1997. The land and improvements dedicated to the
Carmel and Pacific Grove branch offices are leased. The Bank closed its
Loan Production, located in Salinas, California, on November 30, 1996.
See Footnote 9 to the Corporation's financial statements included
herewith.
Generally, neither the Bank nor the Corporation may invest in
equity interests in real estate, except for the direct use of the Bank
or the Corporation in their business. The Bank makes and/or purchases
loans secured by real estate, subject to normal banking practices, its
own policies and the restrictions described above under Item 1.
ITEM 3. LEGAL PROCEEDINGS
In November of 1996 the Bank learned that Watsonville Federal
Savings and Loan Association (WFS) was changing its name to Monterey Bay
Bank. Because WFS has several branches in the bank's immediate market
area and the name "Monterey Bay Bank" appears to be confusingly similar
to Monterey County Bank's name, the Bank's management was concerned that
the Bank's marketing program would be jeopardized and that the public
would not relate the Bank's advertising and civic contributions to it.
Following discussions, WFS refused to abandon the "Monterey Bay Bank"
name and Monterey County Bank filed a civil law suit against WFS and its
holding company Monterey Bay Bancorp which seeks to enjoin the use of
the "Monterey Bay Bank" name on the grounds that the use of the name
unfairly infringes on the Bank's name and
PAGE 17
<PAGE>
will damage the Bank. Monterey County Bank's law suit also seeds
monetary damages arising from any use of the "Monterey Bay Bank" name.
While the full impact to Monterey County Bank from the use of the
"Monterey Bay Bank" name is not yet known, the Bank's suit seeks one
million dollars ($1,000,000.00) in compensatory damages. Monterey
County Bank's management is firmly committed to protecting its trade
name by prosecuting the suit to conclusion and has spent sixty thousand
dollars ($60,000.00) to date in pursuing the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders in 1996.
PAGE 18
<PAGE>
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
Neither the Corporation's, which is held by approximately 600
persons, nor the Bank's, stock has ever been actively traded. To the
Corporation's knowledge no brokers have handled trades in the Bank's
stock during the past four years, and there are no published "bid/asked"
quotes for such stock or the stock of the Corporation. During the same
period, no broker acted as a market maker for the Corporation or Bank's
Common Stock. Accordingly, the market price data contained herein does
not represent the value which would be assigned in an efficient market.
The Common Stock is not listed on any securities exchange or quoted on
the National Association of Securities Dealers Automated System.
The following table sets forth, according to information known to
the Corporation, the price paid per share in, and volume of,
transactions in the Bank's stock during the quarters ended March 31,
1994 to December 31, 1996.
<TABLE>
<CAPTION>
Quarter/Year Price Volume (1)
------------------- ----- ------------
<S> <C> <C>
1st quarter of 1994 --- 0
2nd quarter of 1994 --- 0
3rd quarter of 1994 --- 0
4th quarter of 1994 2.00 4,257
1st quarter of 1995 2.75 20,565
2nd quarter of 1995 2.75 2,592
3rd quarter of 1995 2.75 1,000
4th quarter of 1995 2.75 5,885
1st quarter of 1996 2.75 6,720
2nd quarter of 1996 2.50/2.75 1,285
3rd quarter of 1996 2.75 210
4th quarter of 1996 2.75 1,574
</TABLE>
(1) For the period presented, the information indicated may not include
information on shares which may have been traded directly by
shareholders or through dealers.
The principal source of cash flow of the Corporation, including
cash flow to pay dividends on its stock or principal and interest on
debt, is dividends from the Bank. There are statutory and regulatory
limitations on the payment of dividends by the Bank to the Corporation,
as well as by the Corporation to its shareholders.
PAGE 19
<PAGE>
If in the opinion of the applicable federal and/or state regulatory
authority, a depository institution or holding company is engaged in or
is about to engage in an unsafe or unsound practice (which, depending on
the financial condition of the depository institution or holding
company, could include the payment of dividends), such authority may
require, after notice and hear (except in the case of an emergency
proceeding where there in no notice or hearing), that such institution
or holding company cease and desist from such practice. Moreover, the
Federal Reserve and the FDIC have issued policy statements which provide
that bank holding companies and insured depository institutions
generally should only pay dividends out of current operating earnings.
Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), an FDIC insured depository institution may not pay any
dividend if payment would cause it to become undercapitalized or once it
is undercapitalized.
The Bank's payment of dividends, as a California chartered
commercial banking corporation, is regulated by the California Financial
Code. Under the California Financial Code, funds available for cash
dividend payments by the Bank are restricted to the lessor of: (I)
retained earnings; or (ii) the Bank's net income for its last three
fiscal years (less any distributions to the stockholders made during
such period). As of December 31, 1996, the Bank had $84,900 in retained
earnings. Cash dividends may also be paid out of net income for a
bank's last preceding fiscal year upon the prior approval of the
Superintendent in an amount not exceeding the greater of the: (I)
retained earnings of a bank; (ii) net income of a bank for its last
fiscal year; or (iii) net income of a bank for its current fiscal year.
If the Superintendent finds that the stockholder's equity of a bank is
not adequate, or that payment of a dividend would be unsafe or unsound,
the Superintendent may order the Bank not to pay a dividend to the
Bank's shareholders, even if it meets the standards set forth in the
California Financial Code. With the approval of the Superintendent, the
Bank could pay up to $233,300 in dividends to the Corporation as of the
date hereof. However, Management of the Corporation does not anticipate
that it will seek such approval during 1997.
In December 1994 the Bank sought and received approval from the
State Banking Department for the payment of a $.10 per share cash
dividend. This was the first cash dividend paid by the Bank since
December 1980, the last stock dividend was paid in December 1981.
In December 1995 the Bank paid a $.10 per share cash dividend.
During 1995, the Bank had positive retained earnings; therefore no
approval from the State Banking Department was necessary.
In December 1996 The Corporation paid an $.11 per share cash
dividend. The Bank paid dividends totaling $150,000.00 to the
Corporation during 1996.
PAGE 20
<PAGE>
ITEM 6. 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 had no
activities other than its organization during 1995.
Net income for each of the last three years was $256,700 in 1994,
$278,000 in 1995 and $213,400 in 1996. The earnings per share for each
of the last three years was $.25, $.27 and $.21 respectively. Return on
average shareholders' equity was 9.85%, 9.57% and 7.25% in 1994, 1995
and 1996, respectively. The Bank's return on average assets was .75%,
.79% and .56% in 1994, 1995 and 1996, respectively.
The decrease in earnings during 1996 was largely due to a $88,600
increase in total operating expenses, a $30,800 increase in provision
for income taxes and a $51,600 decrease in other operating income.
These factors were partially offset by a $38,500 increase in net
interest income and a $67,500 decrease in the provision for loan losses.
The following table provides a summary of the income statement,
balance sheet, and selected ratios for the last five years. A more
detailed analysis of each component of net income is included under the
appropriate captions which follows.
PAGE 21
<PAGE>
<TABLE>
<CAPTION>
As of and for the years Ended December 31,
--------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Total interest income 3,140 2,952 2,734 2,604 2,772
Total interest expense 1,334 1,183 933 920 1,108
----- ----- ----- ----- -----
Net interest income 1,807 1,768 1,801 1,684 1,664
Provision for possible loan
losses 53 120 30 122 134
----- ----- ----- ----- -----
Net interest income after
provision for loan loss 1,754 1,648 1,771 1,562 1,529
Total other income 983 1,035 1,036 1,216 917
Total other expense 2,444 2,356 2,570 2,637 2,261
----- ----- ----- ----- -----
Income (loss) before taxes 293 327 236 142 185
Provision for income tax 80 49 (21) (90) 8
----- ----- ----- ----- -----
Net income (loss) 213 278 257 232 177
Per Common Share Data:
Net income (1) 0.21 0.27 0.25 0.22 0.23
Primary net income (2) 0.21 0.27 0.25 0.22 0.19
Book value, end of period 3.30 3.16 2.94 2.75 2.49
Avg shares outstanding (3) 879,465 879,465 879,465 879,465 680,807
Balance Sheet Data:
Total loans, net of unearned
income (4) 25,310 22,494 23,918 25,042 24,150
Total assets 40,799 36,698 33,787 33,583 32,274
Total deposits 36,167 31,188 28,782 27,671 29,700
Stockholders' equity 2,898 2,776 2,584 2,423 2,190
</TABLE>
PAGE 22
<PAGE>
<TABLE>
<CAPTION>
As of and for the years Ended December 31,
--------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios (5):
Return on average assets 0.56% 0.79% 0.75% 0.72% 0.54%
Return on average stockholders'
equity 7.25% 9.57% 9.85% 9.69% 8.15%
Net interest spread 4.91% 5.24% 5.59% 5.34% 5.15%
Net interest margin 5.54% 5.86% 6.08% 5.85% 5.73%
Avg shareholders' equity
to average assets 7.72% 8.24% 7.57% 7.38% 6.68%
Primary capital to assets
at end of period 7.68% 8.14% 8.31% 7.91% 7.48%
Total loans to total deposits
at end of period 69.98% 72.12% 83.10% 91.42% 81.32%
Allowance to total loans
at end of period 1.00% 1.00% 1.01% 1.01% 1.00%
Nonperforming loans to total
loans at end of period 1.13% 0.14% 0.84% 0.80% 0.72%
Net charge-offs to
average loans 0.10% 0.59% 0.16% 0.44% 0.52%
</TABLE>
(1) Fully diluted earnings per share amounts were computed assuming the
preferred stock had been converted to common shares as of January 1, 1991,
resulting in weighted average number of shares of 1,022,402, 1,044,684,
1,012,773, 1,034,972, and 901,998 in 1996, 1995, 1994, 1993 and 1992,
respectively.
(2) Primary 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 included
employee stock options. For this computation, the net income for 1992 was
decreased by $21,000, the amount of preferred stock dividends earned but not
declared on the outstanding preferred stock in each year. The weighted
average number of shares used for this computation was 1,022,402, 1,044,684,
1,012,773, 1,034,972, and 757,203 in 1996, 1995, 1994, 1993, and 1992,
respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
PAGE 23
<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.
The following table summarizes the Bank's net interest income. It is
not presented on a tax equivalent basis, as the Bank 's tax-exempt interest
income is insignificant.
<TABLE>
<CAPTION>
Years Ended Increase(Decrease)
December 31, From Prior Year
1996 1995 1994 1996/95 1995/94
---------------------- ----------- -----------
Amt % Amt %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income 3,140 2,952 2,734 188 6.38 218 7.97
Interest Expense 1,334 1,183 933 151 12.73 250 26.80
---------------------- ----------- -----------
Net Interest Income 1,807 1,769 1,801 38 2.14 (32) (1.78)
</TABLE>
Net interest income decreased $32,000 (1.78%) from 1994 to 1995.
Average interest bearing assets increased 2.00%, while the average rate
earned increased 54 basis points, resulting in an increase of $217,500 in
total interest income. Interest expense increased $250,000 the result of a
1.8% increase in average interest bearing liabilities and an 89 basis points
increase in the average rate paid. Interest rates paid on deposits increased
at a faster rate, due to competitive pressures (and the delayed impact of
market rate changes on the deposit base) and an increase in the portion of
the Bank's assets funded with more costly certificates of deposit, rather
than less costly demand and savings deposits, than rates earned on most
categories of assets.
Net interest income increased $38,500 (2.14%) from 1995 to 1996.
Average interest bearing assets increased 8.32%, while the average rate
earned decreased 15 basis points, resulting in an increase of $188,800 in
total interest income. Partially offsetting the increase in interest income
was an increase of $150,300 in interest expense, the net result of a 8.45%
increase in average interest bearing liabilities and an 18 basis points
decrease in the average rate paid.
The following table shows the components of the Bank's net interest
income, setting forth, for each of the three years ended December 31, 1996,
1995 and 1994 (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.
PAGE 24
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ----------------------- -----------------------
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 71 5 7.67 240 24 10.00 326 23 7.06
Invest securities 1,519 90 5.91 1,189 76 6.39 1,592 81 5.09
Federal funds sold 6,460 341 5.27 5,094 279 5.48 3,045 133 4.37
---------------------- ----------------------- -----------------------
Total investments 7,979 436 5.46 6,523 379 5.81 4,963 237 4.78
Loans
Real estate 13,138 1,368 10.41 12,661 1,371 10.83 14,827 1,589 10.72
Installment 686 80 11.70 994 112 11.27 1,121 116 10.35
Commercial 10,823 1256.4 11.61 10,008 1090 10.89 8,683 792 9.12
---------------------- ----------------------- -----------------------
Total loans 24,647 2,704 10.97 23,663 2,573 10.87 24,631 2,497 10.14
Total Interest
earning assets 32,626 3,140 9.63 30,186 2,952 9.78 29,594 2,734 9.24
---------------------- ----------------------- -----------------------
---------------------- ----------------------- -----------------------
Interest Bearing Liabilities:
Int-bearing demand 4,534 64 1.40 4,538 61 1.34 4,985 63 1.26
Money market savings 1,911 45 2.34 1,864 42 2.25 2,230 51 2.29
Savings deposits 2,541 70 2.76 2,812 81 2.88 2,680 65 2.43
Time deposits greater than
$100M 5,698 338 5.92 5,019 302 6.02 4,284 177 4.13
Time deposits less than $100M 11,774 735 6.24 9,814 605 6.16 8,842 463 5.24
Other Borrowing 1,790 83 4.62 2,000 92 4.60 2,571 114 4.43
---------------------- ----------------------- -----------------------
Total interest
bearing liabilities 28,249 1,334 4.72 26,047 1,183 4.54 25,592 933 3.65
---------------------- ----------------------- -----------------------
---------------------- ----------------------- -----------------------
Net interest income 1,807 1,769 1,801
Net interest spread 4.91 5.24 5.59
Net yield on interest
earning assets 5.54 5.86 6.09
</TABLE>
PAGE 25
<PAGE>
INTEREST SPREAD ANALYSIS (Continued):
<TABLE>
<CAPTION>
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 (17) (2) (19) (6) 7 1
Invest securities 21 (7) 14 (21) 16 (5)
Federal funds sold 75 (13) 62 89 57 146
---------------------- -----------------------
Total investments 85 (28) 57 74 68 142
Loans
Real estate 52 (55) (3) (232) 14 (218)
Installment (35) 3 (32) (13) 9 (4)
Commercial 89 78 166 121 177 298
---------------------- -----------------------
Total loans 107 24 131 (98) 174 76
Total Interest Earning Assets 239 (49) 190 55 163 218
---------------------- -----------------------
---------------------- -----------------------
Interest Bearing Deposits:
Int-bearing demand (0) 3 3 (6) 4 (2)
Money market savings 1 2 3 (8) (1) (9)
Savings deposits (8) (3) (11) 3 13 16
Time deposits greater than
$100M 41 (5) 36 30 95 125
Time deposits less than $100M 121 9 130 51 91 142
Other Borrowing (10) 0 (10) (25) 3 (22)
---------------------- -----------------------
Total interest bearing 100 51 151 17 233 250
deposits
---------------------- -----------------------
---------------------- -----------------------
Net change in net interest 139 (100) 39 38 (70) (32)
</TABLE>
PAGE 26
<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 the end of 1996, 1995 and 1994, the Bank's
allowance stood at 1.01 percent, 1.00 percent and 1.01 percent of gross
loans, respectively. Provisions were made to the allowance for loan losses
in 1996, 1995 and 1994 of $52,500, $120,000, and $30,000, respectively.
Loans charged off totaled $44,400 in 1996, $159,600 in 1995, and $45,300 in
1994. Recoveries for these same periods were $20,700, $20,000 and $5,700,
respectively.
PAGE 27
<PAGE>
The Bank's non performing (delinquent 90 days or more and nonaccrual)
loans as a percentage of total loans was .84 percent and .14 percent and
1.13% as of the end of 1994, 1995 and 1996, respectively.
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
The following table presents a summary of the Bank's non-interest
income:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts 372 339 416
Other service charges, commissions
and fees 353 310 342
Income from sales and servicing
of SBA loans 259 386 290
Gain (Loss) on sale of other real estate 0 0 (12)
------ ------ ------
Total non-interest Income 983 1035 1036
</TABLE>
Total non-interest income for 1995 was at the same level as 1994, with
premium income from sales of guaranteed portion of SBA loans increasing
$96,000; while service charges on deposit accounts decreased $77,000; largely
due to closing accounts that paid fees for high volumes of non-sufficient
funds checks closing during the first quarter of 1995, and other service
charges, commissions and fees decreased $32,000. Merchant credit card
processing income increased by $10,000 during 1995 compared to 1994. Other
operating income for 1994 included a charge of $12,000 from the sale of Other
Real Estate Owned.
Total non-interest income decreased $51,600 (4.99%) in 1996 when
compared with 1995. Income from sales and servicing SBA Loans decreased
$127,100 (32.93%) in 1996 due to a decline in the average dollar amount of
loans funded and sold. This decrease was partially offset by increases in
service charges on deposit accounts of $32,700 (9.46%) and other operating
income of $42,800 (13.81%). The largest increase in other operating income
was a $39,000 (16.60%) increase in merchant credit card processing.
PAGE 28
<PAGE>
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 70 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.
The following table presents a summary of the activity in SBA loans for
the years ended 1996, 1995 and 1994:
1996 1995 1994
---------- ---------- ----------
SBA loans authorized $1,937,000 $3,170,000 $1,799,300
---------- ---------- ----------
---------- ---------- ----------
SBA loans sold $1,842,800 $2,582,000 $2,466,500
---------- ---------- ----------
---------- ---------- ----------
SUMMARY OF INCOME FROM SALES AND
SERVICING OF SBA LOANS
Income from premium $138,600 $230,100 $206,500
Income from servicing 165,000 190,700 138,100
Less loan origination expense (44,700) (34,500) (54,000)
---------- ---------- ----------
Total income from sales and
servicing of SBA loans $258,900 $386,300 $290,600
---------- ---------- ----------
---------- ---------- ----------
PAGE 29
<PAGE>
NON-INTEREST EXPENSE
The following table presents a summary of the Bank's other non-interest
expense:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1995 1994
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and benefits 1,362 1,237 1,181
Occupancy and equipment expense 256 263 561
Professional fees 121 115 67
Data Processing 149 141 145
Other expenses 556 600 616
------ ------ ------
Total other Expenses 2,444 2,356 2,570
</TABLE>
The increase in salary expense of $125,000 in 1996 was due to merit
increases, additions to staff for the planned opening of the Pacific Grove
branch and a severance payment to a former officer. Salary expense for 1995
increased $56,000, as a result of employee merit pay increases and an
addition to staff resulting from the opening of a Loan Production Office.
Occupancy and equipment expense decreased $41,900 in 1994 due primarily
to Bank subleasing a portion of the 665 Munras Avenue office. In 1995
occupancy expense decreased $298,000 as a result of the relocation of the
main office from a leased facility at 665 Munras Avenue to the Bank owned
facility at 601 Munras Avenue. Management negotiated the early termination
of the 665 Munras Avenue lease effective February 1, 1995. Early termination
of the lease, due to expire April 30, 1995, expedited decreased occupancy
expense beginning in February rather than May. In 1996 occupancy and
equipment expenses decreased $6,900 due to lower depreciation expense.
Data processing expenses have remained level over the past three years
as a result of continued cost control efforts.
The increase of $5,600 in professional fees in 1996 was the net affect
of audit/accounting fees decreasing $18,700; while legal fees increased
$24,300. The increase in legal fees was the result of the Bank incurring
approximately $60,000 in legal fees and other costs associated with the
Monterey Bay Bank trade name infringement lawsuit. Professional fees
increased $48,000 in 1995 primarily due to costs associated with a third
party compliance review and the formation of an Employee Stock Ownership Plan.
Other expenses for 1996 totaled $556,300 compared with $599,500 for 1995
and $616,000 for 1994. Significant changes occurred in the following
categories with decreases in FDIC and State assessments ($36,600),
miscellaneous expense ($14,700), travel ($18,400), operational losses
($5,800), shareholder expense ($4,800) and director fees ($3,800); increases
in business development ($36,200), advertising ($25,800) and
stationery/supplies ($8,900).
PAGE 30
<PAGE>
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (Statement 109). Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. Deferred assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards, and then a
valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
The Bank adopted Statement 109 and has applied the provisions of the
statement as of January 1, 1992.
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ 78,500 $ 50,700 $ 20,100
State 35,600 51,800 3,100
Deferred
Federal (34,000) (42,600) (35,100)
State (100) (10,700) (8,800)
-------- -------- --------
$ 80,000 $ 49,200 $(20,700)
-------- -------- --------
-------- -------- --------
</TABLE>
PAGE 31
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of net deferred tax assets at December 31, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax asset
Accrual to cash adjustments $144,100 $163,000
Investments:
Net unrealized (gain) loss on
securities available for sale -- 3,800
Charitable contribution carry forward 4,300 6,800
Allowance for loan losses 62,400 43,300
General business credit carry forward 18,800 45,200
Depreciation 19,400 17,000
-------- --------
Gross deferred tax asset 249,000 279,100
Less valuation allowance -- (25,300)
-------- --------
Deferred tax asset 249,000 253,800
-------- --------
-------- --------
Deferred tax Liability
Depreciation -- --
-------- --------
Net deferred tax asset $249,000 $253,800
-------- --------
-------- --------
</TABLE>
Management has evaluated the deferred tax asset recognized under
Statement 109. As of December 31, 1996 management expects all temporary
differences to be offset against future taxable income, and not valuation
allowance was deemed necessary. As of December 31, 1995 management did
establish a valuation allowance of $25,300 for the portion of the deferred
asset that did not meet the "more likely than not" recognition criteria. The
valuation allowance was established in 1995 to reduce the deferred tax asset
to the amount that is more likely than not to be realized.
A reconciliation of the statutory federal income tax rate and the
effective tax rate on (loss) income follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State franchise 11.3 11.3 11.5
Expiration of general business credits -- -- 3.7
Utilization of general business credits (10.8) (9.7) --
Utilization of net operating loss
carry forwards to reduce tax -- (14.0) (34.0)
Decrease in deferred tax asset
valuation allowance (7.2) (6.6) (24.0)
-------- -------- --------
Effective tax rates 27.3% 15.0% (8.8)%
-------- -------- --------
-------- -------- --------
</TABLE>
PAGE 32
<PAGE>
In addition, the Company has unused general business tax credit carry
forwards totaling approximately $18,800 for financial reporting and income
tax purposes, respectively, which expire in varying amounts through the year
2001.
LOANS
Loans, the largest component of earning assets, represented 75.38% of
average earning assets, and 64.62% of average total assets during 1996,
compared with 78.39% and 67.08%, respectively during 1995. In 1996, average
loans increased 4.16% from $23,663,000 in 1995 to $24,647,000. Average real
estate loans increased $477,000 (3.77%), average commercial loans increased
$815,000 (8.14%); while installment loans decreased $308,000 (30.99%).
Loan policies and procedures provide the overall direction to the
administration of the loan portfolio. The Bank's loan underwriting process
is intended to encourage sound and consistent credit decisions are made.
Emphasis is placed upon credit quality, the borrower's ability to repay
through cash flow, secondary, and (occasionally, tertiary) repayment sources,
and the value of collateral.
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 70 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.
PAGE 33
<PAGE>
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.
The following table presents the composition of the loan portfolio at
December 31 for the last five years.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial 9,705 9,269 8,799 8,466 7,084
Real estate, construction -- -- -- 791 895
Real estate, mortgage 14,336 11,246 13,528 13,761 14,400
Installment 583 888 1,241 1,133 1,203
Government guaranteed loans purchased 307 328 343 363 381
-------------------------------------------
24,932 21,731 23,911 24,514 23,963
Less:
Allowance for possible loan losses (254) (225) (245) (255) (242)
Deferred origination fees, net (37) (27) (32) (40) (41)
-------------------------------------------
24,642 21,479 23,634 24,220 23,681
-------------------------------------------
-------------------------------------------
</TABLE>
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.
PAGE 34
<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>
As of December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
ACCRUING, PAST DUE 90 DAYS OR MORE:
Real Estate 209 0 0 0 0
Commercial 14 0 0 0 38
Installment 0 0 0 0 0
Total accruing 223 0 0 0 38
NONACCRUAL LOANS:
Real Estate 0 0 0 0 0
Commercial 35 31 170 189 136
Installment 23 0 33 14 0
Total nonaccrual 58 31 203 203 136
Total nonperforming 281 31 203 203 174
Total loans end of period 24,932 21,731 23,911 24,514 23,963
Ratio of nonperforming loans
to total loans at end of period 1.13% 0.14% 0.85% 0.83% 0.73%
</TABLE>
The low level of nonperforming loans is the result of underwriting
criteria intended to be conservative, 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.
PAGE 35
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
For the Years ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average loans outstanding 24,647 26,663 24,631 24,867 23,404
Allowance, beginning of period 225 245 255 242 230
Loans charged off during period:
Commercial 39 147 41 47 91
Installment 5 12 4 18 36
Real Estate 0 0 0 62 0
Other 1 0 0 0 1
------- ------ ------ ------ ------
Total charge offs 45 159 45 127 128
Recoveries during period:
Commercial 8 13 2 9 4
Installment 13 6 4 9 2
Other 0 0 0 0 0
------- ------ ------ ------ ------
Total recoveries 21 19 6 18 6
Net Loans charged off
during the period 24 140 39 109 122
Additions to allowance for
possible loan losses 53 120 30 122 134
Allowance, end of period 254 225 246 255 242
Ratio of net loans charged
off to average Loans
outstanding during the period 0.10% 0.53% 0.16% 0.44% 0.52%
Ratio of allowance to total
at end of period 1.01% 1.00% 1.01% 1.01% 1.00%
</TABLE>
PAGE 36
<PAGE>
FUNDING SOURCES
Average deposits increased 9.81% to $32,848,000 in 1996 from $29,914,000
in 1995. In 1996 the mix of deposits changed as average certificates of
deposit increased 17.79%, average demand deposits increased 8.89%; while
average interest checking, money market and savings accounts as a group
decreased 2.47%. Average certificates of deposit represented 53.19% of
average deposits in 1996 compared with 49.59% in 1995. Average interest
checking, money market and savings accounts as a group were 27.36% of average
deposits in 1996 compared with 30.8% in 1995. Average demand deposits
represented 19.45% of average deposits in 1996 compared with 19.61% in 1995.
The Bank has a line of credit from the Federal Home Loan Bank of San
Francisco. The Bank had one advance ($1,000,000) from the Federal Home Loan
Bank with an initial maturity of more than one year at December 31, 1996.
The interest rate on the advance is 4.88% and the maturity is October 1998.
Management believes that this advance provides 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 Corporation 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 December 31,
1996, stockholders' equity was $2,898,200 versus $2,775,800 at December 31,
1995. The Corporation paid an $.11 per share cash dividend in 1996. The
Bank paid cash dividends totaling $150,000 to the Corporation in 1996, and
cash dividends of $0.10 per share in both 1995 and 1994.
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.
In general, the risk-based capital guidelines provide detailed
definitions of which obligations will be treated as capital, and assign
different weights to various assets and off-balance sheet items, depending
upon the perceived degree of credit risk associated with each asset. Each
asset is assigned to one of four risk-weighted categories. For example, 0
percent for cash and unconditionally guaranteed government securities; 20
percent for deposits with other banks and fed funds; 50 percent for state
bonds and certain residential real estate loans; and 100 percent for
commercial loans and other assets. Capital is categorized as either Tier 1
capital, consisting of common stock and retained earnings (or deficit), or
Tier 2 capital, which includes limited-life preferred stock and allowance for
loan losses (subject to certain limitations). The guidelines also
PAGE 37
<PAGE>
define and set minimum capital requirements (risk-based capital ratios) which
increased over a transition period ended December 31, 1992. Under the final
1992 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 Corporation
had a Tier 1 capital ratio of 10.36% and 10.92% at December 31, 1996 and
1995, respectively, and a total risk-based capital ratio of 11.37% and 11.92%
at December 31, 1996 and 1995, respectively, (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 Corporation
had a leverage capital ratio of 6.40% and 6.97% at December 31, 1996 and
1995, respectively (calculated under regulatory accounting principles).
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 $3,500,000 respectively 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 December 31, 1994,
1995 and 1996 was 21.23 percent, 30.82 percent, and 30.27 percent
respectively, while its average loan to deposit ratio for such years was
85.11 percent and 78.86 percent and 75.03 percent respectively.
Brokered deposits are deposit instruments, such as certificates of
deposit, deposit notes, bank investment contracts and certain municipal
investment contracts that are issued through brokers and dealers who then
offer and/or sell these deposit instruments to one or more investors.
Additionally, deposits on which a financial institution pays an interest rate
significantly higher than prevailing rates are considered to be brokered
deposits. Federal law and regulation restricts banks from soliciting or
accepting brokered deposits, unless the bank is well capitalized under
Federal guidelines. The Bank does not have any brokered deposits.
PAGE 38
<PAGE>
Management of interest rate sensitivity (asset/liability management)
involves matching and repricing rates of interest-earning assets with
interest-bearing liabilities in a manner designed to optimize net interest
income within the constraints imposed by regulatory authorities, liquidity
determinations and capital considerations. The Bank instituted formal
asset/liability policies at the end of 1989.
The purpose for asset/liability management is to provide stable net
interest income growth by protecting the Bank's earnings from undue interest
rate risk. The Bank expects to generate earnings from increasing loan
volume, appropriate loan pricing and expense control and not from trying to
accurately forecast interest rates. Another important function of
asset/liability management is managing the risk/return relationships between
interest rate risk, liquidity, market risk and capital adequacy. The Bank
gives priority to liquidity concerns followed by capital adequacy, then
interest rate risk and market risk in the investment portfolio. The policy
of the Bank will be to control the exposure of the Bank's earnings to
changing interest rates by generally maintaining a position within a narrow
range around an "earnings neutral position." An earnings neutral position is
defined as the mix of assets and liabilities that generate a net interest
margin that is not affected by interest rate changes. However, Management
does not believe that the Bank can maintain a totally earnings neutral
position. Further, the actual timing of repricing of assets and liabilities
does not always correspond to the timing assumed by the Bank for analytical
purposes. Therefore, changes in market rates of interest will generally
impact on the Bank's net interest income and net interest margin for long or
short periods of time.
The following table sets forth the interest rate sensitivity
distribution of the Bank's interest-earning assets and interest-bearing
liabilities as of December 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 a more favorable position
illustrated in the following table.
PAGE 39
<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:
Investment securities -- -- 500 2,001
Loans 11,966 2,502 6,495 4,326
------ ------ ------ ------
Total 11,966 2,502 6,995 6,327
INTEREST-BEARING LIABILITIES:
Savings deposits 4,578 -- -- --
Money Market accounts 4,813 -- -- --
Certificates over $100,000 2,361 2,424 2,064 --
Other time deposits 2,806 3,293 6,257 --
Other Borrowings -- -- 1,000 --
------ ------ ------ ------
Total 14,557 5,717 9,321 0
Interest rate sensitivity gap (2,591) (3,215) (2,326) 6,327
Cumulative interest sensitivity
gap (2,591) (5,806) (8,132) (1,805)
Interest rate sensitivity gap
ratio 82% 44% 75% N/A
Cumulative interest rate
sensitivity gap ratio 82% 71% 73% 94%
</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.
The Corporation has 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.
PAGE 40
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
(Dollars in thousands)
1996 1995 1994
---------------- ---------------- ---------------
Book Market Book Market Book Market
value value value value value value
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Bank Stock 300 300 241 241 434 434
Guaranteed SBA loan
pool certificates -- -- 633 624 846 832
------ ------ ------ ------ ------ ------
Total 300 300 874 865 1,280 1,266
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Held to maturity:
U.S. Treasury securities 500 500 196 196 196 195
U.S. Government Agencies 2,001 2,000 -- -- -- --
------ ------ ------ ------ ------ ------
Total 2,501 2,500 196 196 196 195
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at December 31, 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 Total
--------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities -- 500 -- -- 500
U.S. Government Agencies -- 1,000 501 500 2,001
Federal Home Loan Stock 300 -- -- -- 300
--------- --------- ---------- --------- -------
Total 300 1,500 501 500 2,801
</TABLE>
PAGE 41
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements included in the
Consolidated Financial Report issued by Hutchinson and Bloodgood, Certified
Public Accountants at the pages indicated are incorporated herein by
reference:
Independent Auditors' Report on the Financial Statements 1
Consolidated Balance Sheets at December 31, 1996 and 1995 2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1996 3
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1996 4
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1996 5
Notes to Consolidated Financial Statements 6-29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on any
matter of accounting principles, practices or financial statement disclosure
during 1996, 1995 or 1994.
PAGE 42
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The name, age, title and five-year business background of each director,
executive officer and significant employee of the Corporation (including the
Bank) as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Name & Position with Bank Age Principal Occupation During Past Five Years
- ------------------------- --- -----------------------------------------------------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 55 Chairman of the Board & Chief Executive Officer
Director since 1985, of Monterey County Bank since 3/87
Chairman of the Board,
President & Chief
Executive Officer
Sandra G. Chrietzberg 53 Formerly President and CEO Queen of Chardonnay, Inc.,
Director, 1988 to 1994 dba La Reina Winery 8/84-12/93
and since 1995
Peter J. Coniglio, Esq. 67 Partner - Hudson, Martin, Ferrante & Street, Monterey
Director since 1976
Carla S. Hudson, CPA 43 Partner - Huey and Hudson, Certified Public
Director since 1994 Accountants
John M. Lotz 55 President and Chief Executive Officer, of Couroc of
Director since 1991 Monterey since 1996. Real estate developer,
Chairman of the Board & Chief Executive Officer of
The Monterey Bay Company since 1991.
Kevin N. Quinn 55 Senior Vice President, Chief Lending Officer of
Senior Vice President, Monterey County Bank since 1994, Vice President,
Chief Lending Officer Lending of Monterey County Bank since 1/89.
Bruce N. Warner 49 Senior Vice President, Chief Financial Officer and
Senior Vice President, Chief Operating Officer of Monterey County Bank since
Chief Financial Officer 1993; Vice President and Cashier of Houston National
and Chief Operating Officer Bank, Houston, Texas, 1988 - 1992.
</TABLE>
PAGE 43
<PAGE>
<TABLE>
<S> <C> <C>
Andre G. Herrera 32 Vice President, Corporate Secretary of Monterey
Vice President, County Bank since 1/96; Vice President, Manager
Corporate Secretary Management Information Systems and Merchant Services
since 2/94, Assistant Vice Assistant Vice President,
Merchant Services 2/93, Merchant Services
Representative 1/92.
Mary Ellen Stanton 59 Vice President, Loan Administration, Monterey
Vice President County Bank since 1988.
</TABLE>
Directors of the Corporation serve in similar capacities with the Bank.
Executive officers of the Bank (except for Mr. Quinn and Mrs. Stanton) serve
in similar capacities with the Corporation, although the limited operations
of the Corporation do not require significant amounts of their time. There
are no family relationships among the persons listed above, except that Mr.
and Mrs. Chrietzberg are spouses and Mr. Herrera is Mr. and Mrs.
Chrietzberg's son-in-law.
Based solely upon a review of the relevant forms furnished to the Bank
and the Corporation, except as disclosed below, the Corporation believes that
all officers, directors and principal shareholders filed appropriate forms as
required by Section 16(a) of the Exchange Act, and related regulations,
during 1996.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding the
compensation paid to the only executive officer of the Corporation/Bank whose
salary and bonus exceeded $100,000 for 1996.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
---------------------------------- -----------------------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name & Principal Position Salary Bonus Compensation Award Options/SARs Compensation
<S> <C> <C> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. $154,039 $103,000 $3,972(1) None None $11,776(2)
Chairman, President & CEO
</TABLE>
(1) Represents personal use of company automobile and insurance premiums on
life insurance policy as described below.
(2) Represents the expense accrued in the Salary Continuation Plan as more
fully described in the Long Term Incentive Plan Table.
PAGE 44
<PAGE>
Until June 1, 1990 the Bank furnished certain executive officers with a
taxable car allowance. The Bank discontinued car allowances on June 1, 1990
and purchased a bank owned automobile for the use of its Chief Executive
Officer (the value of his personal use of the automobile is included above).
The Bank furnishes, on a non-discriminatory basis, to the employees: (i)
insurance benefits; and (ii) other benefits. The value of these benefits
(excluding non-discriminatory plan benefits) was less than the lesser of
$25,000 or ten percent of the compensation shown above for the respective
persons or group, and is not included in the table.
The Board of Directors authorized the Bank to enter into a three year
and seven month employment contract with Mr. Chrietzberg, effective June 1,
1993. It provides for a base salary of $150,000 per year, a Bank furnished
automobile or automobile allowance, and a bonus based on profits. The
minimum bonus, not to exceed $130,000 annually, will equal $10,000 for each
0.1 percent that the Bank's profits exceed 0.8 percent return on average
assets plus $10,000 for each 1 percent that the Bank's return on equity
exceeds 9.0 percent. Under the terms of the contract, if Mr. Chrietzberg is
terminated other than for cause (as defined in the contract), he is entitled
to severance compensation for his monthly salary plus a pro rated incentive
bonus for the lesser of 24 months or the remaining term of his contract
(which ends in December, 1996); however, if the termination follows within
six (6) months after a change in control transaction (as defined in the
contract), he is entitled to such severance compensation for the greater of
24 months or the remainder of the term of the contract. In addition, the
Bank provides Mr. Chrietzberg with insurance on his life, owned by the Bank
but payable to his beneficiary, in the amount of $1,000,000 in excess of the
amounts provided on a non-discriminatory basis to other employees. Mr.
Chrietzberg's beneficiary has agreed to reimburse the Bank out of the
proceeds of such policy an amount equal to the greater of the cash value of
such policy at the time of Mr. Chrietzberg's death, or the amount of premiums
paid by the Bank.
The following tables set forth certain information regarding the long
term incentive plans provided for Mr. Chrietzberg.
<TABLE>
<CAPTION>
Performance or Estimated Future Payouts under
Number of Other Period Non-Stock Price-Based Plans
Shares, Units Until ------------------------------
or Other Rights Maturation or Threshold Target Maximum
Name (#) Payment ($ or #) ($ or #) ($ or #)
- ---- --- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Charles T. Salary Retirement at age 65, subject None None 75,000/yr.
Chrietzberg, Jr Continuation to provisions for earlier payout 15 years
Agreement described below
</TABLE>
In December, 1993, the Board of Directors approved a Salary Continuation
Agreement for the Benefit of Mr. Chrietzberg that provided for payments of
$75,000 per year, for 15 years, if he remains with the Bank until normal
retirement, commencing age 65. After consideration of the impact of such an
agreement on the Bank's income, the Bank amended the Agreement to provide for
one half the original benefit amounts, but adopted Surviving Income
Agreements which
PAGE 45
<PAGE>
provide benefits upon the death of the executive to his beneficiary in a
single payment, in an amount equal to the retirement benefit. The Salary
Continuation Agreement provides for lesser payments in the event of early
retirement, generally designated to coincide with increases in the
anticipated surrender value for the life insurance policies described below.
The Bank's obligations under the Salary Continuation Agreement are not
secured by any segregated amounts, but are informally funded by the purchase
of single-premium life insurance policies. The salary continuation expense
accrued in 1996 was $11,776. Based upon the current projected earnings of
the insurance used to fund the Bank's obligations under the Agreement, and
the anticipated salary continuation expense to be booked, net of tax
benefits, the Bank anticipates (based upon current tax laws and assumptions
regarding the yield on alternative investment(s) that the cost of the
benefits to be provided under the agreement will not have a material adverse
impact on the Bank's net income after taxes in the future, although no
assurance can be given in this regard. Additionally, since the Surviving
Income Agreement has been adopted to provide part of the benefits upon the
death of the executive, the total amount of payout can not be precisely
determined. However, the information represents the best estimate of
Management based on the terms of the plan.
No options were granted to Mr. Chrietzberg during 1996, although the
Corporation substituted its options for options that he held to purchase
stock of the Bank when the Corporation acquired the Bank.
Aggregated Option/Sar Exercises in Last Fiscal Year
and FY-End Options/Sar Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexerised In-the-Money
Options/SARs at Options/SARs at
FY-End(#) FY-End ($)
Shares Exercisable Unexercisable Exercisable Unexercisable
Acquired on Value ----------- -------------- ----------- -------------
Name Exercise (#) Received ($)
---- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. None None None None None None
Kevin N. Quinn None None None None None None
Bruce N. Warner None None None None None None
Andre G. Herrera None None None None None None
Mary Ellen Stanton None None None None None None
</TABLE>
In 1996, each director received a standard fee of $300 per regular board
meeting attended and $150 for each committee meeting attended.
PAGE 46
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
To the knowledge of the management of the Company, the following
shareholders own more than five percent (5%) of the outstanding common stock
of the Company, its only class of voting securities.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Class
- ---------------- ---------------------- ----------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 412,102(1) 42.73
P.O. Box 1344
Carmel, CA 93921
David S. Lewis, Trust 110,000 12.51
30500 Aurora del Mar
Carmel, CA 93923
</TABLE>
(1) Includes 85,000 shares subject to employee stock options and 11,437
shares held beneficially for Mr. Chrietzberg and Mrs. Chrietzberg in
Individual Retirement Accounts where voting power is shared with the
custodian of the account. Also includes 350 shares held by Mrs.
Chrietzberg and included pursuant to California community property laws.
250,000 shares of the Common Stock owned by Mr. Chrietzberg are pledged
to secure a loan from an unaffiliated bank.
The following table sets forth similar information regarding the
beneficial ownership, both by numerical holding and percentage interest of
each of the Company's directors and all of its directors and executive
officers as a group. All addresses are in care of the Corporation at 601
Munras Ave. Monterey, CA 93940.
<TABLE>
<CAPTION>
Shares Subject Percent of
Amt. & Nature Percent of to Purchase Class w/o
Name and Address Ben. Ownership Class Option Option Shares
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 412,102(1)(2)(3) 42.73 85,000 37.19
Sandra G. Chrietzberg 412,102(2)(3) 42.73 85,000 37.19
Peter J. Coniglio 34,225(4)(5) 3.84 12,500 2.47
Carla S. Hudson 6,603(6) 0.75 2,500 0.47
John M. Lotz 10,000(7) 1.13 7,500 0.28
All directors & executive
officers as a Group 475,002(8) 47.64 40.65
</TABLE>
PAGE 47
<PAGE>
(1) Includes 85,000 shares subject to his employee stock options. 250,000
shares of the common Stock owned by Mr. Chrietzberg are pledged to secure a
loan from an unaffiliated bank.
(2) The shares include an aggregate of 11,437 shares held beneficially by
Mr. Chrietzberg and Mrs. Chrietzberg in Individual Retirement Accounts,
where voting power is also shared with the custodian of the account.
(3) Includes shares of spouse pursuant to California's community property
laws.
(4) Sole voting power.
(5) Includes 12,500 shares subject to the respective director's stock
options. Of the remaining shares 16,475 are held in a family trust
controlled by Mr. Coniglio, as to which he has sole voting and investment
power, while 5,250 shares are held by Hudson, Martin, Ferrante & Street, a
partnership of which Mr. Coniglio is the managing partner, with voting and
investment power.
(6) Includes 2,500 shares subject to the respective director's stock
options. The remaining shares are held jointly with family members, other
than 1,000 shares held in a corporate pension, as to which Ms. Hudson has
voting and investment power.
(7) Includes 7,500 shares subject to the respective director's stock
options. The remaining shares are held jointly with family members, with
shared voting and investment power.
(8) Includes all options included above, plus 10,000 shares subject to
options held by executive officers who are not also directors.
250,000 shares of the common stock owned by Mr. Chrietzberg are pledged
to secure a loan from an unaffiliated bank. Should he default under such
credit, the shares could be acquired by the lender, or sold pursuant to
applicable terms of the Uniform Commercial Code, in a transaction that could
result in a change of control of the Corporation. Such transaction may
require approval under provisions of Federal and California change in bank
control laws.
PAGE 48
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking
transactions in the ordinary course of its business with directors, officers,
principal shareholders and their associates. Management of the Bank believes
that these transactions have been (and those in the future are intended to
be) on substantially the same terms, including interest rates, collateral and
repayment terms on extensions of credit, as those prevailing at the same time
for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.
Management does not believe that any such loans are outside the ordinary
course of business. Loans to such borrowers as of December 31, 1996 amounted
to approximately $837,293 as makers and/or endorsers. The total of such
loans represents approximately 28.89% of the Bank's total capital accounts.
<TABLE>
<CAPTION>
Outstanding as of
Maximum December 31, 1996
------- -----------------
Percent of Percent of
Name Amount Equity Capital Amount Equity Capital
<S> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 33,087 1.19 16,800 0.58
Peter J. Coniglio 453,009 16.32 35,000 1.21
John M. Lotz 213,548 7.69 185,750 6.41
David Lewis 427,276 15.39 358,400 12.37
Directors, Principal 1,389,849 50.51 837,293 28.85
Shareholders, and Officers
as a Group (8 in number)
</TABLE>
A portion of the credit to Mr. Coniglio was participated with another
Bank and not included herein. The loan was paid in full during 1996.
During 1996, the law firm of Hudson, Martin, Ferrante & Street, of which
Mr. Peter J. Coniglio is a partner, performed legal services for the Bank,
for which the Bank paid $58,358. The Board of Directors has determined that
it obtained those legal services at no less favorable rates than could have
been obtained from a non-affiliated law firm.
PAGE 49
<PAGE>
Item 13. EXHIBITS AND REPORTS
A. EXHIBITS
Item Description
- ---- -----------
2 Plan of Merger and Meger Agreement, Monterey County Bank with
Monterey County Merger Corporation un the Charter of Monterey
County Bank under the Title of Monterey County Bank, joined in
by Northern California Bancorp, Inc. dated November 1, 1995.
Filed as exhibit to Form 10-KSB dated December 31, 1995.
3(i) Articles of Incorporation
Filed as exhibit to Form 10-KSB dated December 31, 1995.
3(ii) Bylaws
Filed as exhibit to Form 10-KSB dated December 31, 1995.
10(i)D Lease agreement Carmel Branch Office
Filed as exhibit to Form 10-KSB dated December 31, 1995.
10(ii)A (1) 1987 Amended Stock Option Plan and Stock Option Agreements
(2) Employment Contract of Charles T. Chrietzberg, Jr., dated
May 23, 1993
(3) Deferred Compensation Agreement, dated December 31, 1993.
Filed as exhibit to Form 10-KSB dated December 31, 1995.
11 Statement Reference Computation of Per Share Earnings
21 Subsidiaries
B. REPORTS
None
PAGE 50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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: 3/25/97 By: /s/ Charles T. Chrietzberg, Jr.
-------------- --------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: 3/25/97 By: /s/ Bruce N. Warner
-------------- --------------------------------------
Bruce N. Warner
Chief Financial Officer
and Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Position Date
- ---- -------- ----
/s/ Charles T. Chrietzberg, Jr. 3/25/97
- -------------------------------
Charles T. Chrietzberg, Jr.
Director
/s/ Sandra G. Chrietzberg 3/25/97
- -------------------------------
Sandra G. Chrietzberg
Director
/s/ Peter J. Coniglio 3/25/97
- -------------------------------
Peter J. Coniglio
Director
- ------------------------------- -------
Carla S. Hudson
Director
/s/ John M. Lotz 3/25/97
- -------------------------------
John M. Lotz
Director
PAGE 51
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996 AND 1995
<PAGE>
C 0 N T E N T S
INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL
STATEMENTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 29
<PAGE>
[LETTERHEAD]
Independent Auditors' Report
To the Board of Directors
Northern California Bancorp, Inc.
Monterey, California
We have audited the accompanying consolidated balance sheets of Northern
California Bancorp, Inc. and its wholly owned subsidiary, Monterey County Bank,
as of December 31, 1996 and 1995 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northern California Bancorp,
Inc. and its wholly owned subsidiary, Monterey County Bank as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ Hutchinson and Bloodgood LLP
Watsonville, California January 30, 1997
- 1 -
[LETTERHEAD]
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks (Note 2) $ 9,820,100 $10,328,900
Time deposits with other financial institutions -- 99,000
Investment securities, available for sale (Note 3) 299,800 864,300
Investment securities, held to maturity (Note 3) 2,500,200 195,900
Loans held for sale 414,500 790,400
Loans, net (Notes 5 and 13) 24,641,500 21,479,100
Bank premises and equipment, net (Note 6) 1,664,200 1,696,100
Interest receivable and other assets 1,458,800 1,244,100
------------ ------------
Total assets $40,799,100 $36,697,800
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 7,572,300 $ 5,509,100
Interest-bearing transaction 6,792,200 6,766,100
Savings 2,598,400 2,458,000
Time 12,355,000 11,176,100
Time in denominations of $100,000 or more 6,849,200 5,278,300
------------ ------------
Total deposits 36,167,100 31,187,600
Federal Home Loan Bank borrowed funds (Note 7) 1,000,000 2,000,000
Interest payable and other liabilities 733,800 734,400
------------ ------------
Total liabilities 37,900,900 33,922,000
------------ ------------
Commitments (Notes 9 and 10)
Shareholders' equity (Notes 11, 12, and 14)
Common stock, authorized 2,500,000 shares in
1996 and 1995, no par value; issued and
outstanding 879,465 shares in 1996 and 1995 2,779,600 2,779,600
Retained earnings 118,600 1,900
------------ ------------
2,898,200 2,781,500
Net unrealized loss on securities available
for sale, after tax effects -- (5,700)
------------ ------------
Total shareholders' equity 2,898,200 2,775,800
------------ ------------
Total liabilities and shareholders' equity $40,799,100 $36,697,800
------------ ------------
------------ ------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 2 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OP OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans $ 2,676,800 $ 2,546,400 $ 2,473,600
Time deposits with financial institutions 5,400 23,700 23,500
Investment securities 117,500 102,100 104,300
Federal funds sold 340,700 279,400 132,700
------------ ------------ ------------
Total interest income 3,140,400 2,951,600 2,734,100
------------ ------------ ------------
Interest expense:
Interest-bearing transaction accounts 108,300 103,400 114,300
Savings and time deposit accounts 810,800 700,200 539,500
Time deposits in denominations of $100,000 or more 331,800 288,000 165,500
Federal Home Loan Bank 82,700 91,700 114,000
------------ ------------ ------------
Total interest expense 1,333,600 1,183,300 933,300
------------ ------------ ------------
Net interest income 1,806,800 1,768,300 1,800,800
Provision for loan losses (Note 5) 52,500 120,000 30,000
------------ ------------ ------------
Net interest income after provision for
loan losses 1,754,300 1,648,300 1,770,800
------------ ------------ ------------
Other income:
Service charges on deposit accounts 371,700 338,500 415,700
Income from sales and servicing of SBA loans
(Note 4) 258,900 386,300 290,600
Loss on sale of other real estate owned -- -- (12,400)
Other income 352,700 309,700 341,700
------------ ------------ ------------
Total other income 983,300 1,034,500 1,035,600
------------ ------------ ------------
Operating expense:
Salaries and employee benefits 1,362,400 1,236,800 1,181,100
Occupancy and equipment expense (Note 6) 256,000 262,900 560,700
Professional fees 120,800 115,200 67,100
Data processing 148,700 141,200 145,100
Other general and administrative 556,300 599,500 616,400
------------ ------------ ------------
Total operating expenses 2,444,200 2,355,600 2,570,400
------------ ------------ ------------
Income before tax provision (benefit) 293,400 327,200 236,000
Income tax provision (benefit) (Note 8) 80,000 49,200 (20,700)
------------ ------------ ------------
Net income $ 213,400 $ 278,000 $ 256,700
------------ ------------ ------------
------------ ------------ ------------
Earnings per common share (Note 11)
Primary $0.21 $0.27 $0.25
Fully diluted $0.21 $0.27 $0.25
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-3-
<PAGE>
NORTHERN CALIFORNIA BANCORP,INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net Unrealized
Loss
Retained On Investment
Earnings Securities
Common stock (Accumulated Available
Shares Amount Deficit) For Sale Total
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 879,465 $ 2,779,600 $ (357,000) $ 2,422,600
Net income -- -- 256,700 256,700
Payment of common stock dividend -- -- (87,900) (87,900)
($.10 per share)
Change in method of accounting for
investment securities,
after tax effects -- -- -- $ (7,500) (7,500)
------- ----------- --------- ------- -----------
Balances, December 31, 1994 879,465 2,779,600 (188,200) (7,500) 2,583,900
Net income -- -- 278,000 -- 278,000
Payment of common stock dividend -- -- (87,900) (87,900)
($.10 per share)
Change in net unrealized loss on
securities available for sale,
after tax effects (Note 3) -- -- -- 1,800 1,800
------- ----------- --------- ------- -----------
Balances, December 31, 1995 879,465 2,779,600 1,900 (5,700) 2,775,800
------- ----------- --------- ------- -----------
Net income -- -- 213,400 -- 213,400
Payment of common stock dividend -- -- (96,700) -- (96,700)
($.11 per share)
Change in net unrealized loss on
securities available for sale,
after tax effects (Note 3) -- -- -- 5,700 5,700
------- ----------- --------- ------- -----------
Balances, December 31, 1996 879,465 $ 2,779,600 $ 118,600 $ 0 $ 2,898,200
------- ----------- --------- ------- -----------
------- ----------- --------- ------- -----------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 4 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 213,400 $ 278,000 $ 256,700
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization expense 118,400 106,800 73,900
Amortization of premiums on investment
securities 53,200 5,200 6,200
Loss on sale of other real estate owned -- -- 12,400
Provision for loan losses 52,500 120,000 30,000
Amortization of deferred servicing premium 31,700 24,700 57,300
Amortization of deferred gains on SBA loans (4,800) (4,500) (7,000)
Increase (decrease) in accrued expenses (65,900) 152,700 6,500
Increase in other assets (165,600) (144,500) (122,400)
(Increase) decrease in deferred tax asset (34,100) (53,300) (43,900)
Increase (decrease) in interest payable 58,300 119,700 (73,600)
(Increase) in interest receivable (38,600) (29,500) (3,000)
----------- ----------- ---------
Net cash provided by operating activities 218,500 577,300 193,100
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of time deposits 99,000 198,000 99,000
Proceeds from maturity of investment securities 697,100 593,200 600,000
Principal payments on investment securities 78,600 196,000 263,500
Purchase of investment securities (2,559,200) (629,700) (662,400)
Net (increase) decrease in loans (3,215,000) 2,314,100 (95,400)
(Increase) decrease in loans held for sale 375,900 (505,700) 1,189,400
Proceeds from sale of other real estate owned -- -- 17,900
Proceeds from sale of equipment 12,700 2,600 7,800
Additions to Bank premises and equipment (99,000) (280,200) (294,400)
----------- ----------- ---------
Net cash from (used by) investing activities (4,609,900) 1,888,300 1,125,400
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 4,979,300 2,406,100 1,110,300
Repayment of Federal Home Loan Bank advance (1,000,000) -- (1,000,000)
Cash dividends paid on common stock (96,700) (87,900) (87,500)
----------- ----------- ---------
Net cash provided by financing activities 3,882,600 2,318,200 22,400
----------- ----------- ---------
Net increase (decrease) in cash and cash equivalent (508,800) 4,783,800 1,340,900
Cash and cash equivalents, beginning of year 10,328,900 5,545,100 4,204,200
----------- ----------- ---------
Cash and cash equivalents, end of year $ 9,820,100 $10,328,900 $5,545,100
----------- ----------- ---------
----------- ----------- ---------
Other cash flow information:
Interest paid $ 1,281,100 $ 1,063,600 $1,006,900
----------- ----------- ---------
----------- ----------- ---------
Interest received $ 3,140,400 $ 2,922,100 $2,731,100
----------- ----------- ---------
----------- ----------- ---------
Income taxes paid $ 153,400 $ 43,300 $ 25,800
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 5 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Northern
California Bancorp, Inc. (the "Company") and its wholly-owned subsidiary,
Monterey County Bank (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses, the valuation of foreclosed real estate, and the
valuation of deferred tax assets.
BUSINESS
The Company provides a variety of financial services to individuals and small
businesses through its two offices on the Monterey Peninsula. Its primary
deposit products are demand and term certificate accounts. Its primary
lending products are residential, commercial, and SBA loans.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold on a daily basis.
INVESTMENT SECURITIES
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and are
reflected at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income. Other
marketable securities are classified as "available for sale" and are
reflected at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
income tax effects. Federal Home Loan Bank stock is reflected at cost.
Gains and losses on disposition are generally recognized on the trade date,
based on the net proceeds and the adjusted carrying amount of the securities
sold using the specific identification method.
- 6 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES . . . . CONTINUED
SALES AND SERVICING OF SBA LOANS
The Company originates loans to customers under the Small Business
Administration (SBA) program that generally provides for SBA guarantees of
70% to 80% of each loan. The Company generally sells the guaranteed portion
of each loan to a third party and retains only the unguaranteed portion in
its own portfolio. A gain is recognized on these loans through collection on
sale of a premium over the adjusted carrying value, or through retention of
an ongoing rate differential less a normal service fee between the rate paid
by the borrower to the Company and the rate paid by the Company to the
purchaser (excess servicing fee). In calculating the gain, the Company
assumes that the loans sold will be outstanding for one-half of their
contractual lives.
The Company's investment in a 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 value of each portion at the time of
loan origination, adjusted for payments and other activities. Because the
portion retained does not carry an SBA guarantee, part of the gain recognized
on the sold portion of the loan is deferred and amortized as a yield
enhancement on the retained portion of the loan. Excess servicing fees are
reflected as an asset which is amortized over an assumed half life; in the
event future prepayments are significant and future expected cash flows are
inadequate to cover the unamortized excess servicing asset, additional
amortization is recognized.
LOANS HELD FOR SALE
Loans held for sale consist of the portion of loans which are guaranteed by
the SBA and are carried at the lower of cost or market. Market value for
loans guaranteed by the SBA is generally determined based on the price at
which the loans were committed to be sold on the trade date. Direct loan
origination costs are recorded at settlement as an adjustment to gain or loss
on sale.
INTEREST INCOME
Interest on commercial, real estate, and installment loans is accrued daily
and credited to operations based upon the principal amount outstanding.
Accrual of interest income is generally discontinued whenever the payment of
principal or interest is delinquent for more than ninety days. Previously
accrued but uncollected interest is reversed and recognized subsequently only
when funds are received.
- 7 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES . . . . CONTINUED
LOANS AND LOAN FEES
The Company grants mortgage, commercial, and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans on
the Monterey Peninsula. The ability of the Bank's debtors to honor their
contracts is dependent upon the real estate and general economic sectors in
the area.
Loans, as reported, have been reduced by unadvanced loan funds, net deferred
loan fees, and the allowance for loan losses.
Loan fees net of direct origination costs are deferred on all loans and
recognized over the expected life of the related loans as an adjustment of
yield.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by management through a
provision for loan losses charged to earnings and is maintained at a level
considered adequate to provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular basis
by management and are based upon management's periodic review of the
collectibility of the loans in light of historical experience, known and
inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value
of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant change. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowance for losses on loans and other real estate owned. Such
agencies may require the Company to recognize additions to the allowance
based on their judgment of information available to them at the time of their
examination. Ultimately, losses may vary from current estimates and future
additions to the allowance may be necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if
any, are credited to the allowance.
- 8 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES . . . . CONTINUED
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosure." Under these
Statements, a loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the shortfall
in relation to the principal and interest owed. Impairment is measured on a
loan by loan basis by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent.
The Statements are not applicable to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, and loans
that are measured at fair value. Accordingly, the Company has not applied
SFAS No. 114 to its consumer loans which are collectively evaluated for
impairment. The Company does not presently have any loans that are measured
at fair value or the lower of cost or fair value.
The adoption of SOS No. 114 had no effect on the Company's assessment of the
overall adequacy of the allowance for loan losses. The restatement of
previously issued financial statements to conform with SFAS No. 114 is
expressly prohibited.
LOAN SERVICING
Effective January 1, 1995, the Company prospectively adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights" whereby rights to service mortgage
loans for others are capitalized as separate assets, whether acquired through
purchase or origination, if such loans are sold or securitized with servicing
rights retained. Accordingly, the total cost of the mortgage loan is to be
allocated to the related servicing right and to the loan based on the
relative fair values if it is practicable to estimate those fair values. The
Company estimates fair value based on the present value of estimated expected
future cash flows using prepayment speeds and discount rates commensurate
with the risks involved, and servicing costs determined on an incremental
cost basis.
- 9 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES . . . . CONTINUED
Prior to the adoption of SFAS No. 122, the capitalization of originated
mortgage servicing rights was not allowed under generally accepted accounting
principles.
Capitalized mortgage servicing rights are amortized to servicing revenue in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value
of those rights. For purposes of measuring impairment, the rights are
stratified based on the following predominant risk characteristics of the
underlying loans: loan type, size, note rate, date of origination, term, and
geographic location. Impairment is recognized through a valuation allowance
for an individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum. The effect of adopting SFAS No. 122 is
not significant.
FORECLOSED REAL ESTATE
Real estate acquired by foreclosure is carried at the lower of cost or its
fair value less estimated cost to sell. Upon foreclosure, the value of the
underlying loan is written down to the fair market value of the real estate,
if necessary, as a charge to the allowance for loan losses. Any subsequent
write-downs are charged against other operating expense. Operating expense
of such properties, net of related income, and gains and losses on their
disposition are included in other operating expense.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are carried at cost, less
accumulated depreciation computed on the straight-line method over the
estimated useful lives of the assets.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are capitalized
and depreciated.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes. The Company's base
amount of its federal income tax reserve for loan losses is a permanent
difference for which there is no recognition of a deferred tax liability.
However, the loan loss allowance maintained for financial reporting purposes
is a temporary difference with allowable recognition of a related deferred
tax asset, if it is deemed realizable.
- 10 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES . . . . CONTINUED
RECLASSIFICATION
Certain amounts in the prior year financial statements have been reclassified
to conform to the current year presentation.
STOCK COMPENSATION PLANS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement
encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees," whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock option plan have no
intrinsic value at the grant date, and under Opinion No. 25 no compensation
cost is recognized for them. Under the Company's stock plan, compensation
cost is recognized to the extent that the quoted market price of the stock on
the date of grant exceeds the amount that the employee is required to pay.
The Company has elected to remain with the accounting in Opinion No. 25 and,
as a result, must make pro forma disclosures of net income and earnings per
share, as if the fair value based method of accounting had been applied. The
disclosure requirements of this Statement are effective for the Company's
consolidated financial statements for the year ended December 31, 1996. The
pro forma disclosures include the effects of all awards granted on or after
January 1, 1995.
EARNINGS PER SHARE
Primary earnings per share computations include common stock and dilutive
common stock equivalents attributable to outstanding stock options. Fully
diluted earnings per share computations reflect the higher market price of
the Company's common stock at the end of the period and the assumed further
dilution applicable to outstanding stock options.
- 11 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES . . . . CONCLUDED
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
accounting and reporting of this Statement are based on a financial
components approach that focuses on control, whereby after a transfer of
financial assets, an entity recognizes only financial and servicing assets it
controls and liabilities it has incurred. Liabilities incurred will be
initially recognized at fair value, if practicable. Financial assets are
derecognized when control has been surrendered, and liabilities are
derecognized when extinguished. The determination of whether control over a
financial asset has been surrendered is based on meeting specific criteria as
defined in the Statement.
The Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings, and impacts
the accounting for various transactions including the servicing of financial
assets, securitizations, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan syndications and
participations, and transfers of receivables with recourse.
The Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is
to be applied on a prospective basis. In December 1996, the FASB voted to
defer for one year the provisions of the Statement that relate to secured
borrowings and collateral.
Management is currently evaluating the impacts of the Statement on its
secured borrowings such as repurchase agreements but does not expect, based
on the general terms of its current agreements, that the Statement will
significantly change its accounting for similar transactions in the future.
Other provisions of the Statement will not, in management's opinion, have a
significant impact on the consolidated financial statements, except that
certain loan participations that the Company will service for other investors
may be reflected on the balance sheet at their gross amount with a related
liability to the participant for the participant's portion. Such
transactions are currently reflected on a net basis in the Company's loan
portfolio.
NOTE 2. CASH AND DUE PROM BANKS
Aggregate reserves (in the form of cash and deposits with the Federal Reserve
Bank) of $600,000 were maintained to satisfy federal regulatory requirements at
December 31, 1996.
- 12 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities owned
as of December 31, were as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------ 1996 ----------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Bank $299,800 -- -- $299,800
Guaranteed loan pool
certificates -- -- -- --
---------- --------- ---------- ----------
$299,800 -- -- $299,800
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Held to maturity:
U.S. Treasury securities $499,600 -- -- $499,600
U.S. Government agencies 2,000,600 -- $700 1,999,900
---------- --------- ---------- ----------
$2,500,200 -- $700 $2,499,500
---------- --------- ---------- ----------
---------- --------- ---------- ----------
------------------------ 1995 ----------------------
Available for sale.
Federal Home Loan Bank $240,800 -- -- $240,800
Guaranteed loan pool
certificates 633,000 -- $9,500 623,500
---------- --------- ---------- ----------
$873,800 -- $9,500 $864,300
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Held to maturity:
U.S. Treasury securities $195,900 $300 -- $196,200
U.S. Government agencies -- -- -- --
---------- --------- ---------- ----------
$195,900 $300 -- $196,200
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The Company's investment in guaranteed loan pool certificates represents the
purchase of an undivided interest in pools of loans guaranteed by the SBA. The
Company's investment in Federal Home Loan Bank stock is required as part of a
borrowing agreement. The stock will be redeemed at par value.
- 13 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES . . . . CONCLUDED
The amortized cost and estimated market value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
Cost Market Value
Due in one year or less $299,800 $299,800
Due between one and five years 1,499,600 1,499,300
Due between five and ten years -- --
Due after ten years 1,000,600 1,000,200
---------- ----------
$2,800,000 $2,799,300
---------- ----------
---------- ----------
Proceeds from maturity of investment securities during 1996 were $200,000, with
no gain or loss realized. There was a gain realized from the sale of
investments in 1996 of $5,700 and there were no gains or losses realized on the
sale of investments for 1995 or 1994.
NOTE 4. SALES AND SERVICING OF SBA LOANS
A summary of the activity of SBA loans for the years December 31, 1996, 1995 and
1994 is as follows:
1996 1995 1994
SBA loans authorized $1,937,000 $3,170,000 $1,799,300
---------- ---------- ----------
---------- ---------- ----------
SBA loans sold $1,842,800 $2,582,000 $2,466,500
---------- ---------- ----------
---------- ---------- ----------
A summary of income from SBA loans sold is as follows:
1996 1995 1994
Income from premiums $138,600 $230,100 $206,500
Income from servicing 165,000 190,700 138,100
Less loan origination expense (44,700) (34,500) (54,000)
--------- --------- ---------
Total SBA sales and service income $258,900 $386,300 $290,600
--------- --------- ---------
--------- --------- ---------
- 14 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio as of December 31 follows:
1996 1995
Commercial and industrial $9,705,400 $9,268,800
Real estate, mortgage 14,335,900 11,246,100
Installment 583,200 887,800
Government guaranteed loans purchased 307,300 328,100
------------ ------------
24,931,800 21,730,800
Less allowance for loan losses (253,500) (224,800)
Less deferred origination fees, net (36,800) (26,900)
------------ ------------
$24,641,500 $21,479,100
------------ ------------
------------ ------------
The maturities of total loans at December 31 are as follows:
1996 1995
Loans with a fixed rate:
Due within one year $3,309,800 $2,664,800
Due one to five years 4,651,600 3,465,700
Due over five years 4,326,100 3,352,400
----------- -----------
12,287,500 9,482,900
Loans at a variable rate 12,644,300 12,247,900
----------- -----------
Total loans $24,931,800 $21,730,800
----------- -----------
----------- -----------
An analysis of the allowance for loan losses as of December 31 follows:
1996 1995 1994
Beginning balance $224,800 $244,900 $254,500
Recoveries 20,700 19,500 5,700
Loans charged off (44,500) (159,600) (45,300)
Provision for loan losses 52,500 120,000 30,000
-------- -------- --------
Ending balance $253,500 $224,800 $244,900
-------- -------- --------
-------- -------- --------
As of December 31, 1996 and 1995, the recorded investment in impaired loans
totaled $486,300 and $438,000 with corresponding valuation allowances of $39,200
and $41,700, respectively. No additional amounts are committed to be advanced
in connection with impaired loans.
- 15 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES . . . CONCLUDED
For the years ended December 31, 1996 and 1995, the average recorded investment
in impaired loans amounted to approximately $486,200 and $517,500, respectively.
Non-accrual loans totaled $58,100 and $30,600 at December 31, 1996 and 1995,
respectively. If interest on nonaccrual loans had been accrued, such income
would have approximated $8,500 and $4,600 for 1996 and 1995, respectively.
NOTE 6. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment and their estimated useful lives at December 31 follows:
Estimated
1996 1995 Useful Lives
Building and land $915,400 $915,400 40 years
Building improvements 341,700 341,300 40 years
Leasehold improvements 246,000 186,100 Lease term
Furniture and equipment 1,482,300 1,425,000 3-8 years
---------- ----------
2,985,400 2,867,800
Less accumulated depreciation (1,321,200) (1,171,700)
---------- ----------
$1,664,200 $1,696,100
---------- ----------
---------- ----------
Depreciation expense of $118,400, $108,800, and $73,900 was included in
occupancy and equipment expense for the years ended 1996, 1995, and 1994,
respectively.
NOTE 7. SHORT-TERM BORROWINGS
The Company entered into an advance and security agreement with the Federal Home
Loan Bank of San Francisco on January 21, 1993. At December 31, 1996 the
Company has a $1,000,000 advance which bears interest at 4.88%. The advance is
secured by pledged loan principal in the amount of $5,372,000. The advance
matures at $1,000,000 in October, 1998.
- 16 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
1996 1995 1994
Current tax provision
Federal $78,500 $51,800 $3,100
State 35,600 50,700 20,100
-------- -------- ---------
114,100 102,500 23,200
-------- -------- ---------
Deferred tax benefit
Federal (34,000) (42,600) (35,100)
State (100) (10,700) (8,800)
-------- -------- ---------
(34,100) (53,300) (43,900)
-------- -------- ---------
$80,000 $49,200 ($20,700)
-------- -------- ---------
-------- -------- ---------
The reasons for the differences between the statutory federal income tax rate
and the effective tax rate are summarized as follows:
1996 1995 1994
Statutory federal tax rate 34.0% 34.0% 34.0%
State franchise 11.3 11.3 11.5
Expiration of general business credits -- -- 3.7
Utilization of general business credits (10.8) (9.7) --
Utilization of net operating loss
carryforwards to reduce tax -- (14.0) (34.0)
Decrease in deferred tax asset valuation
allowance (7.2) (6.6) (24.0)
------ ------ -------
Effective tax rates 27.3% 15.0% (8.8%)
------ ------ -------
------ ------ -------
In addition, the Company has unused general business tax credit carryforwards
totaling approximately $18,800 for financial reporting and income tax purposes,
which expire in varying amounts through the year 2001.
- 17 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES . . . . CONCLUDED
The components of the net deferred tax asset, included in other assets, at
December 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax asset
Federal $183,300 $213,300
State 65,700 65,800
-------- ---------
249,000 279,100
Less valuation allowance -- (25,300)
-------- ---------
Net deferred tax asset $249,000 $253,800
-------- ---------
-------- ---------
The tax effects of each type of income and expense item that give rise to
deferred taxes at December 31, 1996 and 1995, are as follows:
1996 1995
Deferred tax asset
Accrual to cash adjustments $144,100 $163,000
Investments:
Net unrealized loss on securities
available for sale -- 3,800
Charitable contribution carryforward 4,300 6,800
Allowance for loan losses 62,400 43,300
General business credit carryforward 18,800 45,200
Depreciation 19,400 17,000
-------- --------
Gross deferred tax asset 249,000 279,100
Less valuation allowance -- (25,300)
-------- --------
Deferred tax asset $249,000 $253,800
-------- --------
-------- --------
Management has evaluated the deferred tax asset recognized under Statement 109.
As of December 31, 1996 management expects all temporary differences to be
offset against future taxable income, and no valuation allowance was deemed
neccessary. As of December 31, 1995 management did establish a valuation
allowance of $25,300 for the portion of the deferred asset that did not meet the
"more likely than not" recognition criteria. The valuation allowance was
established in 1995 to reduce the deferred tax asset to the amount that is more
likely than not to be realized.
- 18 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS
The Company leases its branch building in Carmel under a twenty-five year
operating lease which commenced in March 1981. The Carmel lease can be adjusted
annually for changes in the Consumer Price Index. The Company also leases
certain equipment used in the normal course of business.
Rent expense for operating leases is included in occupancy and equipment expense
and amounted to approximately $59,000, $103,500, and $434,900 in 1996, 1995, and
1994, respectively.
At December 31, 1996, approximate future minimum rental commitments for all
noncancelable operating leases are as follows:
1997 $91,100
1998 79,400
1999 79,400
2000 77,800
2001 77,800
Thereafter 330,700
--------
$736,200
--------
--------
NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, there are various commitments outstanding,
such as commitments to extend credit and financial guarantees, which are not
reflected in the financial statements. At December 31, 1996 and 1995, such
commitments to extend credit were approximately $4,568,000 and $3,042,300,
respectively of undisbursed lines of credit and undisbursed loans in process.
NOTE 11. STOCKHOLDERS' EQUITY
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgements
by the regulators about components, risk weightings, and other factors.
- 19 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCKHOLDERS' EQUITY . . . CONCLUDED
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996, that
the Bank meets all capital adequacy requirements to which they are subject.
As of January 7, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company and the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, they must maintain minimum total risk-based and Tier 1
leverage ratios as set forth in the following table. There are no conditions or
events since the notifications that management believes have changed the
Company's or Bank's category. The Bank's actual capital amounts and ratios as
of December 31, 1996 are also presented in the table.
<TABLE>
<CAPTION>
For Minimum Minimum To Be Well
Capital Capitalized Under
Adequecy Prompt Corrective
Actual Puposes Action Provisions
------------ ------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C>
(All data in thousands)
Total capital to risk-weighted assets:
Consolidated $2,845 11.4% $2,002 8.0% $2,503 10.0%
Monterey County Bank $2,822 11.3% $2,202 8.0% $2,502 10.0%
Tier 1 capital to risk-weighted assets:
Consolidated $2,592 10.4% $1,001 4.0% $1,502 6.0%
Monterey County Bank $2,568 10.3% $1,001 4.0% $1,501 6.0%
Tier 1 capital to average assets:
Consolidated $2,592 6.4% $1,491 4.0% $1,863 5.0%
Monterey County Bank $2,568 6.3% $1,489 4.0% $1,861 5.0%
</TABLE>
- 20 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. STOCK OPTIONS
On June 14, 1989, the amended 1987 Stock Option Plan was approved by the
shareholders. The Plan was approved by the State Banking Department and a
Stock Option Permit was issued on October 2, 1989. Under the Plan, options
may be granted to officers, key employees, and directors at prices not lower
than the fair market value of the common stock on the date of grant. The
Board of Directors is authorized to determine when options become exercisable
within a period extending from 90 days to 10 years from the date of grant.
The maximum number of shares available for issuance under the Plan is 30% of
the Bank's issued and outstanding shares, or 263,000 shares. The Bank may
not issue an option to any individual if the issuance, when added to the
aggregate outstanding amount of options previously issued to the individual,
would exceed 10% (87,900 shares) of the number of shares outstanding at the
time of the issuance of the option. The exercise price may not be less than
100% of the fair market value of the shares on the date of grant. However,
an incentive stock option granted to an individual owning 10% or more of the
Bank's stock after such grant must have an exercise price of at least 110% of
such fair market value and an exercise period of not more than five years.
At December 31, 1996, the Company has a stock-based compensation plan which
is described below. The Company applies APB Opinion 25 and related
interpretations in accounting for the plan. Accordingly, no compensation
cost has been recognized. Compensation costs for the Company's stock-based
compensation plan are to be determined based on the fair value at the grant
dates for awards under those plans consistent with the method prescribed by
SFAS No. 123. No stock options were granted during 1996 or 1995.
At December 31, 1996, options for the purchase of 142,500 shares of the
Holding Company's common stock were outstanding and exercisable at prices
ranging from $2.20 to $2.75. The status of all optioned shares is as
follows:
Weighted
Average
Remaining
Contractual
Shares Price Range Life
Outstanding at December 31, 1994 167,500 $2.00 - $2.75 5.5 years
Granted --- ---
Cancelled (5,000) $2.50
--------
Outstanding at December 31, 1995 162,500 $2.20 - $2.75 4.6 years
Granted --- ---
Cancelled (20,000) $2.50
--------
Outstanding at December 31, 1996 142,500 $2.20 - $2.75 3.0 years
--------
--------
- 21 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. RELATED PARTY TRANSACTIONS
The Company has, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, officers, principal
shareholders, and their associates. These transactions, including loans and
deposits, are granted on substantially the same terms, including interest rates
and collateral on loans, as those prevailing at the same time for comparable
transactions with others and do not involve more than the normal risk of
collectibility or present other unfavorable features.
Aggregate loan transactions with related parties are approximately as follows:
Balance as of December 31, 1994 $1,523,900
New loans 455,800
Repayments (527,500)
-----------
Balance as of December 31, 1995 $1,452,200
New loans 7,200
Repayments (622,100)
-----------
Balance as of December 31, 1996 $837,300
-----------
-----------
Related party deposits totaled approximately $78,400 and $223,700 at December
31, 1996 and 1995, respectively.
NOTE 14. EMPLOYEE BENEFIT PLANS
During 1995, the Bank established an employee stock ownership plan (ESOP) to
invest in the Bank's common stock for the benefit of eligible employees. The
Bank's contribution to the plan is determined by the Board of Directors. Shares
in the plan generally vest after seven years. The Bank did not make a
contribution to the ESOP trust in 1996 or 1995.
The Bank has a salary reduction plan under Section 401(K) of the Internal
Revenue Code. The plan covers substantially all full-time employees who have
completed one year of service with the Bank. Employees are allowed to defer up
to a maximum of 15% or $9,500 of their income. Under the provisions of the
plan, the Bank's contribution policy is discretionary. No contributions were
made by the Bank in 1996, 1995 or 1994.
- 22 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. REGULATORY MATTERS
The Company is subject to regulation by the Board of Governors of the Federal
Reserve System under the Bank Holding Company Act. The Bank is subject to
regulation, supervision, and regular examination by the Superintendent and the
FDIC. The regulations of these agencies affect most aspects of the Company's
business and prescribe permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the permissible scope of the
Company's activities and various other requirements. The Company is also
subject to certain regulations of the Federal Reserve Bank dealing primarily
with check clearing activities, establishment of banking reserves, Truth-in-
Lending (Regulation Z), and Equal Credit Opportunity (Regulation B).
These financial statements have been presented under generally accepted
accounting principles (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
principles (RAP). The following two items are GAAP/RAP differences that are
being carried by the Company:
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 Company agrees 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. According to FDIC examiners,
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. This affects other assets, previous year-end
capital, and noninterest income, as well as the related sub-schedules.
- 23 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Regulatory Matters . . . . concluded
The Company's investment in a 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. Since January of 1993, the Company has not recorded any excess
servicing for GAAP purposes. The following reconciliation shows the differences
between certain financial data under GAAP and RAP.
GAAP (Dollars
in thousands)
(Unaudited) RAP
December 31, 1996
Assets $40,799 $40,508
Earnings for period 213 233
Primary earnings per share 0.21 0.23
Capital at end of period 2,898 2,592
Book value per share 3.30 2.95
Risk-Based capital ratios
Tier I 11.55% 10.36%
Total 12.56% 11.37%
Leverage capital ratio 7.10% 6.40%
December 31, 1995
Assets $36,698 $36,343
Earnings for period 278 263
Primary earnings per share 0.27 0.25
Capital at end of period 2,776 2,433
Book value per share 3.16 2.77
Risk-Based capital ratios
Tier I 12.64% 10.92%
Total 13.66% 11.92%
Leverage capital ratio 7.56% 6.66%
- 24 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for the financial statements:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and short-term
instruments approximate fair values.
INVESTMENT SECURITIES: Fair values for investment securities, excluding
Federal Home Loan Bank stock, are based on quoted market prices. The
carrying value of Federal Home Loan Bank stock approximates fair value based
on the redemption provisions of the Federal Home Loan Bank of San Francisco.
LOANS: The variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair value of performing fixed rate loans is estimated by discounting
future cash flows using the Company's current offering rate for loans with
similar characteristics. The fair value of performing adjustable rate loans
is considered to be the same as book value. The fair value of nonperforming
loans is estimated at the fair value of the related collateral or, when, in
management's opinion, foreclosure upon the collateral is unlikely, by
discounting future cash flows using rates which take into account
management's estimate of credit risk.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The Company does
not generally enter into long-term fixed rate commitments or letters of
credit. These commitments are generally at prices which are currently
prevailing rates. These rates are generally variable and, therefore, there
is no interest rate exposure. Accordingly, the fair market value of these
instruments is equal to the carrying value amount of their net deferred fees.
The net deferred fees associated with these instruments are not material.
The Company has no unusual credit risk associated with these instruments.
- 25 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PAIR VALUE OF FINANCIAL STATEMENTS . . . . CONCLUDED
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). Fair values for fixed-
rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate fair
value.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
maturing within ninety days approximate their fair values. Fair values of
other short-term borrowings are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
The estimated fair values, and related carrying amounts, of the Company's
financial instruments as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $9,820,100 $9,820,100 $10,328,900 $10,328,900
Time deposits -- -- 99,000 99,000
Investment securities,
available for sale 299,800 299,800 864,300 864,300
Investment securities,
held to maturity 2,500,200 2,499,500 195,900 196,200
Loans, held for sale 414,500 414,500 790,400 790,400
Loans, net 24,641,500 24,771,600 21,479,100 2l,568,500
Accrued interest receivable 242,600 242,600 204,000 204,000
Financial Liabilities
Deposits 36,167,100 36,220,700 31,187,600 31,331,000
Long-term debt 1,000,000 998,100 2,000,000 1,986,500
Accrued interest payable 394,900 394,900 336,600 336,600
</TABLE>
-26-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. TRADE NAME INFRINGEMENT SUIT
In November of 1996 the Bank learned that Watsonville Federal Savings and
Loan Association (WFS) was changing its name to Monterey Bay Bank.
Because WFS has several branches in the bank's immediate market area and
the name "Monterey Bay Bank " is confusingly similar to Monterey
County Bank's name, the Bank's management was concerned that the Bank's
marketing program would be jeopardized and that the public would not
relate the Bank's advertising and civic contributions to it. Following
discussions, WFS refused to abandon the "Monterey Bay Bank" name and
Monterey County Bank filed a civil lawsuit against WFS and its holding
company Monterey Bay Bancorp which seeks to enjoin the use of the
"Monterey Bay Bank" name on the grounds that the use of that name
unfairly infringes on the Bank's name and will damage the Bank. Monterey
County Bank's lawsuit also seeks monetary damages arising from any use
of the "Monterey Bay Bank" name. While the full impact to Monterey
County Bank from the use of the "Monterey Bay Bank" name is not yet known,
the Bank's suit seeks one million dollars ($1,000,000) in compensatory
damages. Monterey County Bank's management is firmly committed to
protecting its trade name by prosecuting the suit to conclusion and has
spent sixty thousand dollars ($60,000) to date in pursuing the suit.
No trial date has been set and no estimate can be made of the amount of
damages that will actually be received.
NOTE 18. BUSINESS COMBINATION
On December 29, 1995, the Company acquired Monterey County Bank in a
business combination accounted for as a pooling of interests. Monterey
County Bank, which engages in commercial banking activities, became a wholly
owned subsidiary of the Company through the exchange of 879,465 shares of the
Company's common stock for all of the outstanding stock of Monterey County
Bank. The accompanying financial statements for 1995 are based on the
assumption that the companies were combined for the full year, and financial
statements of prior years have been restated to give effect to the
combination.
- 27 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. NORTHERN CALIFORNIA BANCORP, INC. (PARENT COMPANY ONLY)
The following are the financial statements of Northern California Bancorp,
Inc. (parent company only) as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
BALANCE SHEETS
1996 1995
<S> <C> <C>
Assets
Cash account and due from Banks $40,000 $ --
Organization costs 6,100 40,200
Prepaid expense 4,400 --
Investment in common stock of
Monterey County Bank 2,864,600 2,775,800
---------- ---------
$2,915,100 $2,816,000
---------- ---------
---------- ---------
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $700 $40,200
Dividend payable 16,500 --
Stockholders' Equity 2,897,900 2,775,800
---------- ---------
$2,915,100 $2,816,000
---------- ---------
---------- ---------
STATEMENTS OF INCOME
Equity in income of subsidiary $233,400 $278,000
Operating expenses 18,900 --
Applicable taxes 1,100 --
---------- ---------
Net income $213,400 $278,000
---------- ---------
---------- ---------
</TABLE>
- 28 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. NORTHERN CALIFORNIA BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
1996 1995
Cash flows from operating activities:
Net Income $213,400 $278,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income of
Monterey County Bank (233,400) (278,000)
Decrease in other assets 29,700 --
Increase in accrued expenses (39,500) --
Increase in other liabilities 16,500 --
--------- --------
(13,300) --
--------- --------
Cash flows from financing activities:
Cash dividends received from subsidiary 150,000 --
Cash dividends paid on common stock (96,700) --
--------- --------
53,300 --
--------- --------
Net increase in cash and cash
equivalents 40,000 --
Cash and cash equivalents, beginning of year -- --
--------- --------
Cash and cash equivalents, end of year $40,000 --
--------- --------
--------- --------
The ability of the Company to pay dividends will largely depend upon the
dividends paid to it by the Bank. There are legal limitations on the ability of
the Bank to provide funds to the Company in the form of loans, advances, or
dividends.
- 29 -
<PAGE>
EXHIBIT
ITEM 11
Statement Reference Computation of Per Share Earnings
Primary 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 included
employee stock options. For this computation, the net income for 1992 was
decreased by $21,000, the amount of preferred stock dividends earned but not
declared on the outstanding preferred stock. The weighted average number of
shares used for this computation was 1,022,402, 1,044,684, 1,012,773,
1,034,972, and 757,203 in 1996, 1995, 1994, 1993 and 1992, respectively.
Fully diluted earnings per share amounts were computed assuming the
preferred stock had been converted to common shares as of January 1,1991,
resulting in weighted average number of shares of 1,022,402, 1,044,684,
1,012,773, 1,034,972, and 901,998 in 1996, 1995, 1994, 1993, and 1992,
respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM THE
COMPANY FORM 10-KSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,820,100
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 299,800
<INVESTMENTS-CARRYING> 2,500,200
<INVESTMENTS-MARKET> 2,499,500
<LOANS> 25,309,500
<ALLOWANCE> 253,500
<TOTAL-ASSETS> 40,799,100
<DEPOSITS> 36,167,100
<SHORT-TERM> 0
<LIABILITIES-OTHER> 733,800
<LONG-TERM> 1,000,000
0
0
<COMMON> 2,779,600
<OTHER-SE> 118,600
<TOTAL-LIABILITIES-AND-EQUITY> 40,799,100
<INTEREST-LOAN> 2,676,800
<INTEREST-INVEST> 463,600
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,140,400
<INTEREST-DEPOSIT> 1,250,900
<INTEREST-EXPENSE> 1,333,600
<INTEREST-INCOME-NET> 1,806,800
<LOAN-LOSSES> 52,500
<SECURITIES-GAINS> 5,700
<EXPENSE-OTHER> 2,444,200
<INCOME-PRETAX> 293,400
<INCOME-PRE-EXTRAORDINARY> 293,400
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 213,400
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 9.63
<LOANS-NON> 58,000
<LOANS-PAST> 223,000
<LOANS-TROUBLED> 31,800
<LOANS-PROBLEM> 486,200
<ALLOWANCE-OPEN> 224,800
<CHARGE-OFFS> 44,500
<RECOVERIES> 20,700
<ALLOWANCE-CLOSE> 253,500
<ALLOWANCE-DOMESTIC> 39,200
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 214,300
</TABLE>
