<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1997
/ / Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) for the period from to
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (408) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
As of May 8, 1997, the Corporation had 879,465 shares
of common stock outstanding.
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31 DECEMBER 31
1997 1996
-------- -----------
ASSETS:
Cash and Cash Equivalents 7,204,200 9,820,100
Investment Securities, available for sale (Note 1) 454,500 299,800
Investment Securities, held to maturity (Note 1) 4,492,800 2,500,200
Loans Held for Sale 337,100 414,500
Gross Loans (Note 2) 24,389,300 24,931,800
Allowance for Possible Loan Losses (Note 3) (249,700) (253,500)
Deferred Origination Fees (36,200) (36,800)
---------- ----------
Net Loans 24,103,400 24,641,500
Bank Premises and Equipment, Net 1,744,900 1,664,200
Interest Receivable and Other Assets 1,245,100 1,458,800
---------- ----------
Total Assets 39,582,000 40,799,100
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 35,177,500 36,167,100
Interest Payable and Other Liabilities 1,396,300 1,733,800
---------- ----------
Total Liabilities 36,573,800 37,900,900
---------- ----------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1997 and 1996
Outstanding: 879,465 in 1997 and 1996 2,779,600 2,779,600
Retained Earnings 173,100 118,600
Unrealized Gain (Loss) Available
for Sale Securities 55,500 0
---------- ----------
Total Shareholders' Equity 3,008,200 2,898,200
---------- ----------
Total Liabilities & Shareholders' Equity 39,582,000 40,799,100
---------- ----------
---------- ----------
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31
1997 1996
------- -------
INTEREST INCOME:
Interest and Fees on Loans 663,000 613,200
Interest on Time Deposits with
Financial Institutions 0 1,900
Interest on Investment Securities 60,100 6,900
Interest on Gov't Guar SBA Loan Pools 0 (400)
Interest on Federal Funds 72,100 92,900
------- -------
Total Interest Income 795,200 714,500
------- -------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 28,300 26,300
Interest on Savings Accounts 13,000 18,000
Interest on Time Deposits 280,000 261,500
Interest on Other Borrowed Funds 12,000 22,800
------- -------
Total Interest Expense 333,300 328,600
------- -------
Net Interest Income 461,900 385,900
------- -------
PROVISION FOR LOAN LOSSES 30,000 0
------- -------
Net Interest Income After
Provision for Possible Loan Losses 431,900 385,900
NONINTEREST INCOME:
Service Charges on Deposit Accounts 92,000 77,700
SBA Loan Sales & Servicing Income 52,500 67,900
Other Operating Income 260,500 75,100
------- -------
Total Noninterest Income 405,000 220,700
------- -------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 303,500 292,100
Occupancy and Equipment Expense 52,400 63,100
Professional Fees 30,800 21,000
Data Processing 42,900 34,400
FDIC & State Assessments 4,700 2,900
Other Operating Expenses 347,800 168,900
------- -------
Total Noninterest Expense 782,100 582,400
------- -------
NET INCOME (LOSS) 54,800 24,200
------- -------
------- -------
INCOME (LOSS) PER COMMON SHARE 0.05 0.02
------- -------
------- -------
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1997 1996
--------- ----------
NET INCOME 54,800 26,200
Adjustments to net income:
Depreciation and amortization expense 24,200 30,100
Amortization/Accretion on investments (100) 54,600
(Gain) loss on sale of securities 0 (5,700)
Provision for possible loan losses 30,000 0
Increase in deferred servicing premium (2,900) 0
Amortization of deferred servicing premium 4,700 6,100
Increase in deferred income 0 0
Amortization of deferred income (1,100) (1,100)
Increase (decrease) in accrued expenses (190,800) (226,000)
(Increase) decrease in prepaid expenses 146,600 230,200
Increase (decrease) in interest payable (139,900) (69,900)
(Increase) decrease in interest receivable 34,900 22,900
(Increase) decrease in loans held for sale 77,400 (11,000)
--------- ----------
Total adjustments to net income (17,000) 30,200
--------- ----------
--------- ----------
Net cash provided (used) by operations 37,800 56,400
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of due from time 0 0
Proceeds from maturity of investments 1,500,000 0
Proceeds from sale of investments 0 497,100
Principal payments on investments 0 78,600
Purchase of securities (3,647,200) (46,600)
Unrealized gain (loss) available for sale securities 55,500 5,700
Net (increase) decrease in loans 508,200 (315,600)
Proceeds from sale of equipment 0 12,300
Capital expenditures 104,900 (15,600)
--------- ----------
Net cash provided (used) in investing activities (1,478,600) 215,900
--------- ----------
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (964,900) 855,900
Net cash provided (used) by financing activities (964,900) 855,900
--------- ----------
--------- ----------
Net increase (decrease) in cash & cash equivalents (2,615,900) 1,128,200
Cash & cash equivalents - beginning of year 9,820,100 10,328,900
--------- ----------
--------- ----------
Cash & cash equivalents - end of period 7,204,200 11,457,100
See Note 5 for supplemental disclosures
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31 DECEMBER 31
1997 1996
---------- -----------
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
Other Securities 454,500 299,800
---------- ----------
---------- ----------
Held to maturity:
US Treasury Securities 499,700 499,600
US Government Securities 3,993,100 2,000,600
---------- ----------
4,492,800 2,500,200
---------- ----------
---------- ----------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 9,908,000 9,705,400
Real Estate - Mortgage 13,693,000 14,335,900
Installment 486,900 583,200
Government Guaranteed Loans Purchased 301,400 307,300
---------- ----------
Gross Loans 24,389,300 24,931,800
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 253,500 224,800
Recoveries 700 20,700
Provision for Possible Loan Losses 30,000 52,500
Loans Charged Off (34,500) (44,500)
---------- ----------
Balance at End of Period 249,700 253,500
(NOTE 4) DEPOSITS:
Demand 7,166,700 7,572,300
Interest-Bearing Transaction 7,153,500 6,792,200
Savings 2,266,600 2,598,400
Time Under $100,000 11,931,100 12,355,000
Time Equal to or Greater than $100,000 6,659,600 6,849,200
---------- ----------
35,177,500 36,167,100
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: March 31, 1996 March 31, 1995
-------------- --------------
Interest 333,300 328,600
Income Taxes 26,500 10,900
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be read
in conjunction with the financial statements and the other financial data
presented elsewhere herein. The Corporation had no activities other than its
organization.
For the three months ended March 31, 1997 net income was $54,800, an
increase of $30,600 when compared to the same period in 1996. The increase in
earnings during this period was the result of a $46,000 increase in net interest
income after provision for loan losses and a $11,900 increase in non-interest
income; partially offset by an increase of $27,300 in non-interest expense.
6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at and for the three months ended, March 31, 1997 and 1996.
The three months The three months
Ended March 31, 1997 Ended March 31, 1996
-------------------- --------------------
(Dollars in thousands except per share data)
Summary of Operating Results:
Total interest income 795 715
Total interest expense 333 329
------- -------
Net interest income 462 386
Provision for possible
loan losses 30 0
------- -------
Net interest income after
provision for loan loss 432 386
Total other income 405 220
Total other expense 756 569
------- -------
Income (loss) before taxes 81 37
Provision for income tax 26 11
------- -------
Net income (loss) 55 26
Per Common Share Data:
Net income (1) 0.05 0.03
Primary net income (1) 0.05 0.03
Book value, end of period 3.42 3.19
Avg. shares outstanding (2) 879,465 879,465
Balance Sheet Data:
Total loans, net of
unearned income (3) 24,690 22,596
Total assets 39,582 37,248
Total deposits 35,178 32,044
Stockholders' equity 3,008 2,807
7
<PAGE>
The three months The three months
Ended March 31, 1997 Ended March 31, 1996
-------------------- --------------------
Selected Financial Ratios (4):
Return on average assets (5) 0.60% 0.29%
Return on average
stockholders' equity (5) 7.52% 3.72%
Net interest spread 4.65% 4.42%
Net interest margin 5.37% 4.94%
Avg. shareholders' equity
to average assets 7.31% 7.67%
Risked-Based capital ratios
Tier 1 11.39% 11.95%
Total 12.37% 12.91%
Total loans to total deposits
at end of period 70.19% 70.52%
Allowance to total loans
at end of period 1.01% 1.00%
Non-performing loans to total
loans at end of period 1.05% 1.21%
Net charge-offs to
average loans 0.14% 0.00%
(1) Earnings (loss) per share amounts were computed on the basis of the
weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents include
director/employee stock options. The weighted average number of shares used
for this computation was 1,021,965 and 1,023,723 for March 31, 1997 and
1996, respectively.
(2) Weighted average common shares.
(3) Includes loans being held for sale.
(4) Averages are of daily balances.
(5) March 31, 1997 calculated on an annualized basis.
8
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned on
interest-earning assets and (b) interest paid on interest-bearing liabilities,
is the most significant component of the Bank's earnings. Changes in net
interest income from period to period result from increases or decreases in the
average balances of interest-earning assets portfolio, the availability of
particular sources of funds and changes in prevailing interest rates.
Net interest income for the three month period ended March 31, 1997 was
$461,900 compared to $385,900 for the same period in 1996. The increase of
$76,000 resulted from total interest income increasing $80,700, while total
interest expense increased $4,700. Average interest earning assets increased
$3,147,000 (10.06%), while the average rate earned increased 9 basis points.
The increase in the average interest rate earned was due to increased
investments in medium to long term securities and higher yields on commercial
loans. Average interest bearing liabilities increased $1,177,000 (4.23%), while
the average rate paid decreased 14 basis points, reflecting decreases in
certificate of deposit rates.
The following table shows the components of the Bank's net interest income,
setting forth, for each the three months ended March 31, 1996 and 1997, (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. Non-
accrual loans and overdrafts are included in average loan balances. Average
loans are presented net of unearned income.
9
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended December 31,
1997 1996 1996
----------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Int Avg Int Avg Int Avg
Avg Earn % Avg Earn % Avg Earn %
Bal Paid Rate Bal Paid Rate Bal Paid Rate
----------------------- ---------------------- ---------------------
(Dollars in thousands)
Interest Earning Assets:
Int-bearing deposits
at other banks 0 0 N/A 99 2 7.77 71 5 7.04
Invest securities (1) 3,522 60 6.83 999 7 2.62 1,519 90 5.92
Federal funds sold 5,785 72 4.99 7,530 93 4.94 6,460 341 5.28
----------------------- ---------------------- ---------------------
Total investments 9,307 132 5.68 8,628 101 4.68 7,979 436 5.46
Loans
Real estate 13,977 351 10.03 11,504 309 10.74 13,138 1,368 10.41
Installment 516 14 11.16 726 23 12.67 686 80 11.66
Commercial 10,611 298 11.23 10,406 282 10.84 10,823 1,256 11.61
----------------------- ---------------------- ---------------------
Total loans 25,104 663 10.56 22,636 614 10.85 24,647 2,704 10.97
Total Interest
earning assets 34,411 795 9.24 31,264 715 9.15 32,626 3,140 9.63
----------------------- ---------------------- ---------------------
----------------------- ---------------------- ---------------------
Interest Bearing Liabilities:
Int-bearing demand 5,201 16 1.27 4,448 15 1.35 4,534 64 1.41
Money market savings 1,953 12 2.43 1,954 11 2.25 1,911 45 2.35
Savings deposits 2,267 13 2.29 2,478 18 2.91 2,541 70 2.75
Time deposits
-greater than- $100M 6,660 98 5.86 5,521 85 6.16 5,698 338 5.93
Time deposits
-less than- $100M 11,931 182 6.12 11,433 177 6.18 11,774 735 6.24
Other Borrowing 1,000 12 4.81 2,000 23 4.60 1,790 83 4.64
----------------------- ---------------------- ---------------------
Total interest
bearing liabilities 29,012 333 4.59 27,834 329 4.73 28,249 1,334 4.72
----------------------- ---------------------- ---------------------
----------------------- ---------------------- ---------------------
Net interest income 462 386 1,806
Net interest spread 4.65 4.42 4.91
Net yield on interest
earning assets 5.37 4.94 5.54
</TABLE>
(1) Yield in 1996 negatively impacted by $9,800 write off of premium due to the
early payoff of an SBA Guaranteed Pool.
10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
Three Months Twelve Months
Ended March 31, Ended December 31,
1997 vs 1996 1996 vs 1995
------------ ------------
Increase (Decrease) Increase (Decrease)
Due to changes Due to Changes
--------------------- ---------------------
Avg Avg Avg Avg
Volume Rate Total Volume Rate Total
--------------------- ---------------------
(Dollars in thousands)
Interest Earning Assets:
Int-bearing deposits
at other banks (2) 0 (2) (17) (2) (19)
Invest securities 17 37 54 21 (7) 14
Federal funds sold (22) 1 (21) 75 (13) 62
--------------------- ---------------------
Total investments 8 23 31 85 (28) 57
Loans
Real estate 66 (25) 42 52 (55) (3)
Installment (7) (2) (9) (35) 3 (32)
Commercial 6 10 16 89 78 166
--------------------- ---------------------
Total loans 67 (18) 49 107 24 131
Total Interest Earning Assets 72 8 80 239 (49) 190
--------------------- ---------------------
--------------------- ---------------------
Interest Bearing Deposits:
Int-bearing demand 3 (1) 1 (0) 3 3
Money market savings (0) 1 1 1 2 3
Savings deposits (2) (4) (5) (8) (3) (11)
Time deposits
-greater than- $100M 18 (5) 13 41 (5) 36
Time deposits
-less than- $100M 8 (2) 6 121 9 130
Other Borrowing (12) 1 (11) (10) 1 (9)
--------------------- ---------------------
Total interest bearing deposits 14 (10) 4 100 51 151
--------------------- ---------------------
--------------------- ---------------------
Net change in net interest 58 18 76 139 (100) 39
11
<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 set aside for the specific purpose of absorbing
losses which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation
of the risks inherent in the loan portfolio, both generally and with respect
to specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the State Banking Department and FDIC examinations, independent
accountants' observations, and the Bank's internal review as additional
indicators to determine if the amount in the allowance for loan losses is
adequate to protect against estimated future losses. It is the Bank 's
current practice, which could change in accordance with the factors mentioned
above, to maintain an allowance which is at least equal to the sum of the
following percentage of loan balances by loan category.
Loan Category Reserve %
Classified Loans:
Loans classified loss 100.00%
Loans classified doubtful 50.00%
Loans classified substandard
Real Estate Secured 5.00%
Non Real Estate Secured 20.00%
Unclassified Loans:
Real Estate - Loan to value 80% or less 0.10%
Real Estate - Loan to value over 80% 0.50%
Loans to Individuals 1.50%
Commercial 1.50%
SBA Loans - Unguaranteed portion 2.00%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
Although no assurance can be given that actual losses will not exceed the
amount provided for in the allowance, Management believes that the allowance
is adequate to provide for all estimated credit losses in light of all known
relevant factors. At March 31, 1997 and 1996 the Bank's allowance stood at
1.01 percent and 1.00 percent of gross loans, respectively. A provision of
$30,000 was made to the allowance during the three months ended March 31,
1997, compared to no provision being made in the same period in 1996. Loans
charged off during the three months ended March 31, 1997, totaled $34,500, no
loans were charged off in the same period of 1996. Recoveries for the same
periods were $600 and $1,400, respectively.
12
<PAGE>
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was 1.05% at March 31, 1997 compared with
1.13 percent and .14 percent as of the end of 1996 and 1995, respectively.
The ratios at March 31, 1997 and December 31, 1996 were significantly impacted
by one non-performing loan which represented 72.62% and 69.40%, respectively,
of the total non-performing loans.
Based upon statistics released by Federal and state banking
authorities regarding banks of similar size or otherwise located in
California, Management believes that the Bank's ratios of delinquent and non
performing loans to total loans are far better than average. Prudent
collection efforts, and tighter lending controls, are responsible for the
Bank's strong performance on these measures of credit quality. However, no
assurance can be given that the Bank's loan portfolio will continue to measure
well against its peers on these ratios and quality measures, or that losses
will not otherwise occur in the future.
NON-INTEREST INCOME
Total non-interest income for the three months ended March 31, 1997 was
$232,600, compared with $220,700 for the same period in 1996. The increase of
$11,900 was the result of service charges on deposit accounts increasing
$14,300 and income from other service charges, commissions and fees increasing
$13,000, while income from SBA loan sales and servicing decreased $15,400.
Merchant credit card processing accounted for all of the increase in other
service charges, commissions and fees.
The sale, of Small Business Administration (SBA) guaranteed loans, is a
significant contributor to the Bank's income. SBA guaranteed loans yield up
to 3 3/4% over the New York prime rate, and the guaranteed portions can be
sold at premiums, which vary with market conditions. SBA loans are guaranteed
by the full faith of the United States Government from 75 to 80 percent of the
principal amount. The guaranteed portion has risks comparable for an investor
to a U. S. Government security and can usually be sold in the secondary
financial market, either at a premium or at a yield which allows the Bank to
maintain a significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for
the Bank to continually expand its program in this area, and may limit the
level of premium that can be earned with regard thereto. Furthermore, the SBA
recently began requiring lenders to share a portion of premiums in excess of
10% earned on the sale of the guaranteed portions, and to pay 50 basis points
on the outstanding guaranteed balance. Management cannot predict the impact
these changes will not have a significant impact on SBA income.
13
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the three months ended March 31, 1997
increased $11,400 compared with the same period in 1996. These increases were
primarily due to employee merit pay increases.
Total occupancy and equipment expense for the three months ended
March 31, 1997 was $52,400 compared to $63,100 for the same period in 1996.
For the three months ended March 31, 1997 professional fees increased
$9,800 compared to the same period in 1996.
Data processing expenses for the three months ended March 31, 1997
increased $8,500 compared to the same period in 1996. The increase was due to
a 2.9% cost of living increase, effective April 1996, and increased numbers of
accounts and transactions.
Other expenses for the three months ended March 31, 1997 totaled $180,100
compared with $171,800 for the same period in 1996. Significant changes
occurred in the following categories with increases in advertising ($6,200),
donations ($5,700), subscriptions/publications ($2,600), telephone ($2,600),
taxes ($15,600) travel ($2,500) and decreases in collection expense ($16,900),
SBA loan expense ($10,200).
LOANS
Loans represented 72.95% of average earning assets, and 62.98% of average
total assets for the three months ended March 31, 1997, compared with 72.45%
and 62.31%, respectively during 1996. For the three months ended March 31,
1997, average loans increased 10.65% from $22,688,000 for the same period in
1996 to $25,104,000. Average real estate loans increased $2,473,000 (21.50%),
installment loans decreased $263,000 (33.76%); while average commercial loans
increased $207,000 (1.99).
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.
14
<PAGE>
The Bank is a recognized leader for Small Business Administration lending
in Monterey County, and holds SBA's coveted Preferred Lender Status.
Generally, SBA loans are guaranteed, by the SBA, for 75 to 80 percent of their
principal amount, which can be retained in portfolio or sold to investors.
Such loans are made at floating interest rates, but generally for longer terms
(up to 25 years) than are available on a conventional basis to small
businesses. The unguaranteed portion of the loans, although generally
supported by collateral, is considered to be more risky than conventional
commercial loans because they may be based upon credit standards the Bank
would not otherwise apply, such as lower cash flow coverage, or longer
repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has
also developed a broker program for generating residential real estate loans.
The Bank does not make real estate development loans. Real estate
construction loans are made for a much shorter term, and often at higher
interest rates, than conventional single-family residential real estate loans.
The cost of administering such loans is often higher than for other real
estate loans, as principal is drawn on periodically as construction progresses.
The Bank also makes real estate loans secured by a first deed of trust on
single family residential properties and commercial and industrial real
estate. California commercial banks are permitted, depending on the type and
maturity of the loan, to lend up to 90 percent of the fair market value of
real property (or more if the loan is insured either by private mortgage
insurers or governmental agencies). In certain instances, the appraised value
may exceed the actual amount that 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.
NON-PERFORMING AND NON-ACCRUAL 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 non-accrual, 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.
15
<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
non-accrual status (referred to collectively as "non-performing loans"):
Three Months Ended
March 31,
1997 1996
------ ------
(Dollars in thousands)
ACCRUING,
PAST DUE 90 DAYS OR MORE:
Commercial 204 199
Installment 0 0
Other 0 0
------ ------
Total accruing 204 199
NON-ACCRUAL LOANS:
Commercial 35 75
Installment 21 0
Other 0 0
------ ------
Total non-accrual 56 75
Total non-performing 260 274
Total loans end of period 24,726 22,624
Ratio of non-performing loans
to total loans at end of period 1.05% 1.21%
The ratio of non-performing loans at March 31, 1996 and 1997 was
significantly impacted by one loan that represented 72.62% and 75.00% of the
total non-performing loans, respectively. These ratios have been maintained
as a result of a strengthening of underwriting criteria, frequent review of
new and delinquent loans and a firm collection policy (with the assistance of
outside legal counsel). The Bank does not have any foreign loans or loans for
highly leveraged transactions.
16
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
Three Months Ended Three Months Ended
March 31, March 31,
1997 1996
------ ------
(Dollars in thousands)
Average loans outstanding 25,104 22,688
Allowance, beginning of period 254 225
Loans charged off during pperiod:
Commercial 35 0
Installment 0 0
Real Estate 0 0
Other 0 0
------ ------
Total charge offs 35 0
Recoveries during period:
Commercial 0 0
Installment 1 1
Other 0 0
------ ------
Total recoveries 1 1
Net Loans charged off
during the period 34 (1)
Additions to allowance for
possible loan losses 30 0
Allowance, end of period 250 226
Ratio of net loans charged off to
average Loans outstanding
during the period 0.14% 0.00%
Ratio of allowance to total
loans at end of period 1.01% 1.00%
17
<PAGE>
FUNDING SOURCES
Average deposits for the three months ended March 31, 1997 were
$35,408,000 an increase of 14.04% compared with the same period in 1996.
Average certificates of deposit represented 52.50% of average deposits for the
three months ended March 31, 1997. Average interest bearing checking, money
market and savings accounts as a group were 26.60% of average deposits.
Average demand deposits represented 20.32% of average deposits. The trend of
deposits shifting to certificates of deposit has continued, resulting in a
increased cost of funds.
The Bank has a line of credit with the Federal Home Loan Bank of San
Francisco. At March 31, 1997 the Bank had one outstanding advance for
$1,000,000 with an interest rate of 4.88% and a maturity date of October 1998.
Management believes this advance provides funds of medium duration at a lower
cost than comparable deposits. The Bank did not utilize any short-term
borrowings in 1997, 1996 or 1995.
CAPITAL RESOURCES
The Company maintains capital to comply with legal requirements, to
provide a margin of safety for its depositors and stockholders, and to provide
for future growth and the ability to pay dividends. At March 31, 1997,
stockholders' equity was $3,008,200 versus $2,898,200 at December 31, 1996.
The Company paid a cash dividend of $0.11 per share in 1996. The Bank paid
cash dividends of $0.10 per share in 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.
Under current rules, all banks are required to maintain Tier 1 capital of
at least 4 percent and total capital of 8.0% of risk-adjusted assets. The Bank
had a Tier 1 risk-based capital ratio of 11.39% and a total risk-based capital
ratio of 12.37% at March 31, 1997, well above the minimum regulatory
requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 7.29% March 31, 1997.
18
<PAGE>
LIQUIDITY
Liquidity represents a bank's ability to provide sufficient cash flows or
cash resources in a manner that enables it to meet obligations in a timely
fashion and adequately provides for anticipated future cash needs. For the
Bank, liquidity considerations involve the capacity to meet expected and
potential requirements of depositors seeking access to balances and to provide
for the credit demands of borrowing customers. In the ordinary course of the
Bank's business, funds are generated from the repayment of loans, maturities
within the investment securities portfolio and the acquisition of deposit
balances and short-term borrowings. In addition, the Bank has a line of credit
from the Federal Home Loan Bank of San Francisco of approximately $3,200,000 to
meet temporary liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid assets,
including marketable investment securities, equal to a least 15 percent of total
assets ("primary liquidity"), while maintaining sources of secondary liquidity
(borrowing lines from other institutions) equal to at least an additional 10
percent of assets. In addition, it seeks to generally limit loans to not more
than 90 percent of deposits. Within these ratios, the Bank generally has excess
funds available to sell as federal funds on a daily basis, and is able to fund
its own liquidity needs without the need of short-term borrowing. The Bank's
primary liquidity at March 31, 1997 was 29.30, while its average loan to deposit
ratio for the three months ended March 31, 1997 was 70.90 percent. The high
level of liquidity has an adverse impact on interest income.
INTEREST RATE RISK
Interest rate risk is the exposure the Bank's earnings have to changes in
interest rates. The goal is to manage the miss-match between rate-sensitive
assets and rate-sensitive liabilities, to reduce interest rate risk to an
acceptable level. Rate sensitive is defined as anything maturing or repricing
within the next twelve months. Twelve months is considered an appropriate time
frame for several reasons. Forecasting is required in order to ascertain the
volume and mix of rate-sensitive assets and liabilities for the twelve month
period. Forecasting involves making assumptions about multiple variables in the
future; interest rates, loan demand, deposit mix, bank growth, regulatory
changes, etc. As most of these variables are outside of the control of bank
management, forecasting beyond twelve months would sacrifice accuracy and
reliability and will therefore not be done. Additionally, we feel that an
analysis of twelve months gives us adequate time to recognize and adjust to any
relevant trends.
The primary tool of management for quantifying our interest rate exposure
is or Earnings Change Ratio (ECR) analysis. The ECR analysis provides a display
of the balance sheet gap, weighted by the appropriate rate sensitivity factor,
to define the impact on the income statement from a 100 basis-point change in
National Prime. The analysis
19
<PAGE>
assumes an immediate and parallel change in all rates, and calculates the
effect of the change for the next twelve-month period.
The Bank's maximum exposure to interest rate risk, defined as the
difference in one-year rate-sensitive assets and one-year rate-sensitive
liabilities as a percentage of total assets is 25% when asset sensitive
(positive gap) and 15% when liability sensitive (negative gap). The following
table sets forth the Bank's interest rate risk analysis as of March 31, 1997.
<TABLE>
<CAPTION>
Falling Rates Rising Rates
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
One Year One Year One Year
Balance Earnings Income Earnings Income
Sheet Change Statement Change Statement
Gap Ratio* Gap Ratio* Gap
RATE SENSITIVE ASSETS
LOANS:
Fixed rate < 1 year 2,369 100% 2,369 100% 2,369
Floating rate < 1 year 12,966 100% 12,966 100% 12,966
SECURITIES:
Fed Funds Sold & Repos 0 108% 0 108% 0
Interest Bearing Balances 0 94% 0 94% 0
Other Adjustable Rate Securities 0 100% 0 100% 0
Equities 0 67% 0 67% 0
------ ------ ------
Total Rate Sensitive Assets 15,335 15,335 15,335
RATE SENSITIVE LIABILITIES
Savings 2,267 30% 680 20% 453
Money Market Checking 5,201 30% 1,560 20% 1,040
Money Market Savings 1,953 40% 781 20% 391
CDs > $100,000 4,546 98% 4,455 98% 4,455
CDs < $100,000 6,672 94% 6,271 94% 6,271
FFP, Repos & Other Borrowing 0 108% 0 108% 0
------ ------ ------
Total Rate Sensitive Liabilities 20,638 13,748 12,610
RATE SENSITIVITY GAP
(ASSETS - LIABILITIES) (5,302) 1,588 2,725
TOTAL ASSETS 39,574 39,574 39,574
GAP AS A PERCENTAGE OF
TOTAL ASSETS (13.40)% 4.01% 6.89%
Estimated change in net interest
margin if prime rate falls 1% (16)
Estimated change in net interest
margin if prime rate rises 1% 27
</TABLE>
20
<PAGE>
Except as noted, the table above indicates the time periods in which
interest-earning assets and interest-bearing liabilities will theoretically
mature or are otherwise subject to repricing in accordance with their
contractual terms. However, this table does not necessarily indicate the
impact of general interest rate movements on the Bank's net interest yield
because the repricing of various categories or assets and liabilities is
discretionary and is subject to competitive and other pressures. As a
result, various assets and liabilities indicated as repricing within the same
period may, in fact, reprice at different times and at different interest
rate levels.
The Corporation has no cash on hand and no sources of revenues or
liquidity other than dividends, tax equalization payments or management fees
from the Bank. The ability of the Bank to pay such items to the Corporation
is subject to limitations under state and Federal law.
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities at March 31, 1997:
INVESTMENT PORTFOLIO MIX
March 31, 1997
Book Market
value value
----- -----
(Dollars in thousands)
Available for sale:
Equity Securities 455 455
Held to maturity:
U.S. Treasury securities 500 498
U.S. Government agency securities 3,993 3,894
----- -----
Total 4,948 4,847
The following table summarizes the maturity of the Bank's investment
securities at March 31, 1997:
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 5
1 year through through over 10
or less 5 years 10 years years
------- ------- -------- -------
U.S. Treasury securities --- 500 --- ---
U.S. Government agency securities --- --- 1,495 2,498
Federal Home Loan Stock 455 --- --- ---
------- ------- -------- -------
Total 455 500 1,495 2,498
21
<PAGE>
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTHERN CALIFORNIA BANCORP, INC.
Date: May 8, 1997 By: /s/ Charles T. Chrietzberg, Jr.
--------------- --------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: May 8, 1997 By: /s/ Bruce N. Warner
--------------- --------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
22
<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 YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,204,200
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 454,500
<INVESTMENTS-CARRYING> 4,492,800
<INVESTMENTS-MARKET> 4,392,300
<LOANS> 24,726,400
<ALLOWANCE> 249,700
<TOTAL-ASSETS> 39,582,000
<DEPOSITS> 35,177,500
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 396,300
<LONG-TERM> 0
0
0
<COMMON> 2,779,600
<OTHER-SE> 228,600
<TOTAL-LIABILITIES-AND-EQUITY> 39,582,000
<INTEREST-LOAN> 663,000
<INTEREST-INVEST> 132,200
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 795,200
<INTEREST-DEPOSIT> 321,300
<INTEREST-EXPENSE> 333,300
<INTEREST-INCOME-NET> 461,900
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 755,600
<INCOME-PRETAX> 81,300
<INCOME-PRE-EXTRAORDINARY> 81,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,800
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<YIELD-ACTUAL> 9.24
<LOANS-NON> 55,900
<LOANS-PAST> 204,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 474,100
<ALLOWANCE-OPEN> 253,500
<CHARGE-OFFS> 34,500
<RECOVERIES> 600
<ALLOWANCE-CLOSE> 249,600
<ALLOWANCE-DOMESTIC> 40,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 209,600
</TABLE>
