<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the quarterly period ended
SEPTEMBER 30, 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 November 3, 1997, the Corporation had 858,526 shares of common
stock outstanding.
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 DECEMBER 31
1997 1996
------------ -----------
ASSETS:
Cash and Cash Equivalents 2,991,200 9,820,100
Investment Securities, available for sale (Note 1) 475,000 299,800
Investment Securities, held to maturity (Note 1) 3,993,200 2,500,200
Federal Funds Sold 6,800,000 0
Loans Held for Sale 614,600 414,500
Gross Loans (Note 2) 26,063,700 24,931,800
Allowance for Possible Loan Losses (Note 3) (273,100) (253,500)
Deferred Origination Fees (39,900) (36,800)
------------ -----------
Net Loans 25,750,700 24,641,500
Bank Premises and Equipment, Net 1,903,700 1,664,200
Interest Receivable and Other Assets 1,294,400 1,458,800
------------ -----------
Total Assets 43,822,800 40,799,100
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 37,223,600 36,167,100
Interest Payable and Other Liabilities 3,408,100 1,733,800
------------ -----------
Total Liabilities 40,631,700 37,900,900
------------ -----------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1997 and 1996
Outstanding:879,465 in 1996 and
858,526 in 1997 2,716,800 2,779,600
Accumulated Earnings 400,600 118,600
Unrealized Gain (Loss) Available
for Sale Securities 73,700 0
------------ -----------
Total Shareholders' Equity 3,191,100 2,898,200
------------ -----------
Total Liabilities & Shareholders' Equity 43,822,800 40,799,100
------------ -----------
------------ -----------
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ------------------------
1997 1996 1997 1996
------- ------- -------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 717,400 716,700 2,054,800 2,015,500
Interest on Time Deposits with
Financial Institutions 0 1,700 0 5,500
Interest on Investment Securities 89,000 25,000 239,000 40,700
Interest on Gov't Guar SBA Loan Pools 0 0 0 (400)
Interest on Federal Funds 76,800 81,500 197,600 267,100
------- ------- -------- ---------
Total Interest Income 883,200 824,900 2,491,400 2,328,400
------- ------- -------- ---------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 31,300 27,200 89,500 79,200
Interest on Savings Accounts 12,600 19,100 36,800 55,700
Interest on Time Deposits 292,400 269,000 845,300 795,600
Interest on Other Borrowed Funds 46,000 23,000 80,000 68,600
------- ------- -------- ---------
Total Interest Expense 382,300 338,300 1,051,600 999,100
------- ------- -------- ---------
Net Interest Income 500,900 486,600 1,439,800 1,329,300
PROVISION FOR POSSIBLE LOAN LOSSES 60,000 20,000 120,000 45,000
------- ------- -------- ---------
Net Interest Income After
Provision for Possible Loan Losses 440,900 466,600 1,319,800 1,284,300
------- ------- -------- ---------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 76,600 95,300 254,800 270,600
SBA Loan Sales & Servicing Income 107,100 70,800 224,700 250,600
Other Operating Income 122,700 100,100 308,900 264,600
------- ------- -------- ---------
Total Non-interest Income 306,400 266,200 788,400 785,800
------- ------- -------- ---------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 300,900 280,100 914,400 857,500
Occupancy and Equipment Expense 68,900 64,600 187,000 195,300
Professional Fees 11,100 17,000 66,300 60,100
Data Processing 40,800 36,700 129,200 107,500
FDIC & State Assessments 4,900 2,900 15,900 8,600
Other Operating Expenses 168,400 172,200 513,100 497,800
------- ------- -------- ---------
Total Non-interest Expense 595,000 573,500 1,825,900 1,726,800
------- ------- -------- ---------
NET INCOME (LOSS) 152,300 159,300 282,300 343,300
------- ------- -------- ---------
------- ------- -------- ---------
INCOME (LOSS) PER COMMON SHARE 0.15 0.16 0.27 0.34
------- ------- -------- ---------
</TABLE>
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
---------- ----------
NET INCOME 282,300 343,300
Adjustments to net income:
Depreciation and amortization expense 80,900 91,800
Amortization/Accretion on investments (500) 53,200
(Gain) loss on sale of securities 0 (5,700)
Provision for possible loan losses 120,000 45,000
Increase in deferred servicing premium (51,500) 0
Amortization of deferred servicing premium 15,100 6,100
Amortization of deferred income (3,300) (3,100)
Increase (decrease) in accrued expenses (184,400) (218,800)
(Increase) decrease in prepaid expenses 175,900 168,900
Increase (decrease) in interest payable (138,000) (3,700)
(Increase) decrease in interest receivable 24,900 (9,100)
(Increase) decrease in loans held for sale (200,100) 456,200
---------- ----------
Total adjustments to net income (161,000) 580,800
---------- ----------
---------- ----------
Net cash provided (used) by operations 121,300 924,100
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of due from time 0 99,000
Proceeds from maturity of investments 2,000,000 200,000
Proceeds from sale of investments 0 497,100
Principal payments on investments 0 78,600
Purchase of securities (3,667,700) (2,554,500)
Unrealized gain (loss) available for sale securities 73,700 5,600
Net (increase) decrease in loans (1,229,200) (4,106,900)
Proceeds from sale of equipment 0 12,000
Capital expenditures (320,400) (28,500)
Stock Repurchase (62,800) 0
---------- ----------
Net cash provided (used) in investing activities (3,206,400) (5,797,600)
---------- ----------
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 1,056,500 2,372,900
Net increase (decrease) in borrowed funds 2,000,000
Net cash provided (used) by financing activities 3,056,500 2,372,900
---------- ----------
---------- ----------
Net increase (decrease) in cash & cash equivalents (28,900) (2,500,600)
Cash & cash equivalents - beginning of year 9,820,100 10,328,900
---------- ----------
---------- ----------
Cash & cash equivalents - end of year 9,791,200 7,828,300
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30 DECEMBER 31
1997 1996
------------ ---------
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
Federal Home Loan Bank Stock 325,100 299,800
Pacific Coast Bankers Bank Stock 149,900 0
----------- -----------
----------- -----------
475,000 299,800
Held to maturity:
US Treasury Securities 499,800 499,600
US Agency Securities 3,493,400 2,000,600
----------- -----------
3,993,200 2,500,200
----------- -----------
----------- -----------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 10,217,100 9,705,400
Real Estate - Construction 0 0
Real Estate - Mortgage 15,098,700 14,335,900
Installment 457,100 583,200
Government Guaranteed Loans Purchased 290,800 307,300
----------- -----------
Gross Loans 26,063,700 24,931,800
----------- -----------
----------- -----------
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 253,500 224,800
Recoveries 1,800 20,700
Provision for Possible Loan Losses 120,000 52,500
Loans Charged Off (102,200) (44,500)
----------- -----------
Balance at End of Period 273,100 253,500
----------- -----------
----------- -----------
(NOTE 4) DEPOSITS:
Demand 7,828,700 7,572,300
Interest-Bearing Transaction 7,358,500 6,792,200
Savings 2,285,400 2,598,400
Time Under $100,000 12,350,600 12,355,000
Time Equal to or Greater than $100,000 7,400,400 6,849,200
----------- -----------
37,223,600 36,167,100
----------- -----------
----------- -----------
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 9/30/97 9/30/96
----------- -----------
Interest 971,700 999,100
Income Taxes 67,600 63,900
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 has had no activities
other than its organization.
For the nine months ended September 30, 1997 net income was $282,300, a
decrease of $61,000 when compared to the same period in 1996. The decrease
in earnings during this period was the result of a $35,500 increase in net
interest income after provision for loan losses, a $2,600 increase in net
non-interest income, and a $99,100 in increase in non-interest expense.
6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at, and for the nine months ended, September 30, 1997 and 1996.
For the nine months For the nine months
Ended September 30, 1997 Ended September 30, 1996
------------------------ ------------------------
(Dollars in thousands except per share data)
Summary of Operating Results:
Total interest income 2,491 2,328
Total interest expense 1,052 999
------- -------
Net interest income 1,440 1,329
Provision for possible
loan losses 120 45
------- -------
Net interest income after
provision for loan loss 1,320 1,284
Total other income 788 786
Total other expense 1,763 1,663
------- -------
Income (loss) before taxes 345 407
Provision for income tax 63 64
------- -------
Net income (loss) 282 343
Per Common Share Data:
Net income (1) 0.28 0.34
Book value, end of period 3.64 3.55
Avg. shares outstanding (2) 871,525 879,465
Balance Sheet Data:
Total loans, net of
unearned income (3) 26,638 25,875
Total assets 43,824 39,154
Total deposits 37,224 36,029
Stockholders' equity 3,191 3,125
7
<PAGE>
For the nine months For the nine months
Ended September 30, 1997 Ended September 30, 1996
------------------------ ------------------------
Selected Financial Ratios (4):
Return on average assets(5) 0.92% 1.22%
Return on average
stockholders' equity(5) 12.39% 15.74%
Net interest spread 4.80% 4.88%
Net interest margin 5.46% 5.50%
Avg. shareholders' equity
to average assets 7.82% 7.74%
Risked-Based capital ratios
Tier 1 11.73% 11.24%
Total 10.77% 10.24%
Total loans to total deposits
at end of period 71.56% 71.82%
Allowance to total loans
at end of period 1.03% 1.01%
Non-performing loans to total
loans at end of period 1.20% 1.44%
Net charge-offs to
average loans 0.39% 0.03%
(1) Earnings (loss) per share amounts were computed on the basis of the
weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents include
employee stock options. The weighted average number of shares used for this
computation was 1,036,243 and 1,021,965 for September 30, 1997 and 1996,
respectively.
(2) Weighted average common shares.
(3) Includes loans being held for sale.
(4) Averages are of daily balances.
(5) September 30, 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 nine month period ended September 30, 1997
was $1,439,800 compared to $1,329,300 for the same period in 1996. The
increase of $101,500 resulted from total interest income increasing $163,000,
while total interest expense increased $52,500. Average interest earning
assets increased $2,801,000 (8.69%), while the average rate earned decreased
17 basis points. The decrease in the average interest rate earned was due to
increased investment in instruments other than loans, which bear lower yields
than loans. Average interest bearing liabilities increased $2,147,000
(8.25%), while the average rate paid decreased 9 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 nine months ended September 30, 1997 and
1996, (i) average assets, liabilities and investments, (ii) interest income
earned on interest-earning assets and interest expense paid on
interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, (iv) the net
interest spread (i.e., the average yield earned on interest-earning assets
less the average rate paid on interest-bearing liabilities) and (v)the net
interest yield on average interest-earning assets (i. e., net interest income
divided by average interest-earning assets). Yields are not computed on a
tax-equivalent basis. 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>
The Nine Months The Twelve Months
Ended September 30, Ended December 31,
1997 1996 1996
------------------ ---------------- -------------------
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 0 0 0.00 94 5 7.09 71 5 7.04
Investment securities(1) 4,469 239 7.13 1,089 41 5.02 1,519 90 5.92
Federal funds sold 4,877 198 5.40 6,696 267 5.32 6,460 341 5.28
----- ----- ----- ----- ---------------------
Total investments 9,346 437 6.23 7,879 313 5.30 7,979 436 5.46
Loans
Real estate 14,426 1,108 10.24 12,619 961 10.15 13,138 1,368 10.41
Installment 556 47 11.27 734 66 11.90 686 80 11.66
Commercial 10,698 894 11.14 10,993 989 12.00 10,823 1256.4 11.61
------ ----- ------ ----- ----------------------
Total loans 25,680 2,049 10.64 24,345 2,016 11.04 24,647 2,704 10.97
Total Interest
earning assets 35,026 2,486 9.46 32,225 2,329 9.63 32,626 3,140 9.63
------ ----- ------ ----- ----------------------
------ ----- ------ ----- ----------------------
Interest Bearing Liabilities:
Int-bearing demand 5,171 55 1.41 4,407 46 1.39 4,534 64 1.41
Money market savings 1,944 35 2.38 1,860 33 2.37 1,911 45 2.35
Savings deposits 2,225 37 2.21 2,529 56 2.94 2,541 70 2.75
Time deposits > $100M 6,829 298 5.82 5,666 247 5.82 5,698 338 5.93
Time deposits < $100M 12,013 547 6.08 11,572 548 6.32 11,774 73 56.24
Other Borrowing 1,879 80 5.68 2,000 69 4.58 1,790 83 4.64
------ ----- ------ ----- ----------------------
Total interest
bearing liabilities 30,061 1,052 4.66 28,034 999 4.75 28,249 1,334 4.72
------ ----- ------ ----- ----------------------
------ ----- ------ ----- ----------------------
Net interest income 1,434 1,329 1,806
Net interest spread 4.80 4.88 4.91
Net yield on interest
earning assets 5.46 5.50 5.54
(1) Yield in 1996 negatively impacted by $9,800 write off of premium due to the early payoff of an SBA
Guaranteed Pool.
</TABLE>
10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended September 30, 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)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks (5) 0 (5) (17) (2) (19)
Invest securities 127 71 198 21 (7) 14
Federal funds sold (73) 3 (69) 75 (13) 62
-------------------------- --------------------------
Total investments 93 (34) 59 85 (28) 57
Loans
Real estate 138 10 147 52 (55) (3)
Installment (16) (3) (19) (35) 3 (32)
Commercial (27) (69) (95) 89 78 166
-------------------------- --------------------------
Total loans 111 (77) 33 107 24 131
Total Interest Earning Assets 202 (45) 147 239 (49) 190
-------------------------- --------------------------
-------------------------- --------------------------
Interest Bearing Deposits:
Int-bearing demand 8 1 2 (0) 3 3
Money market savings 1 0 2 1 2 3
Savings deposits (7) (12) (19) (8) (3) (11)
Time deposits >$100M 51 (0) 51 41 (5) 36
Time deposits < $100M 21 (22) (1) 121 9 130
Other Borrowing (4) 15 11 (10) 1 (9)
-------------------------- --------------------------
Total interest bearing deposits 72 (20) 53 100 51 151
-------------------------- --------------------------
-------------------------- --------------------------
Net change in net interest 130 (139) 94 139 (100) 39
</TABLE>
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 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 3.00%
Commercial 2.00%
SBA Loans - Unguaranteed portion 2.00%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
Although no assurance can be given that actual losses will not exceed
the amount provided for in the allowance, Management believes that the
allowance is adequate to provide for all estimated credit losses in light of
all known relevant factors. At September 30, 1997 and 1996 the Bank's
allowance stood at 1.02 percent and 1.01 percent of gross loans,
respectively. A provision of $120,000 was made to the allowance during the
nine months ended September 30, 1997, compared to a provision of $45,000 in
the same period in 1996. Charged off loans during the nine months ended
September 30, 1997 and
12
<PAGE>
1996 totaled $102,200 and $20,000 respectively. Recoveries for the same
periods were $1,800 and $13,000, respectively.
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was 1.19 percent at September 30, 1997
compared with 1.44 percent at September 30, 1996 and 1.13 percent at December
31, 1996.
Based upon statistics released by Federal and state banking authorities
regarding banks of similar size or otherwise located in California,
Management believes that the Bank's ratios of delinquent and non performing
loans to total loans are far better than average. Prudent collection
efforts, and tighter lending controls, are responsible for the Bank's strong
performance on these measures of credit quality. However, no assurance can
be given that the Bank's loan portfolio will continue to measure well against
its peers on these ratios and quality measures, or that losses will not
otherwise occur in the future.
NON-INTEREST INCOME
Total non-interest income for the nine months ended September 30, 1997
was $788,400, compared with $785,800 for the same period in 1996. The
increase of $2,600 was the result of a $15,800 decrease in service charges
on deposit accounts, while income from SBA loan sales and servicing decreased
$25,900 and income from other service charges, commissions and fees increased
$44,300. Merchant credit card processing accounted for $27,500 of the
increase in other service charges, commissions and fees.
The sale of Small Business Administration (SBA) guaranteed loans is a
significant contributor to the Bank's income. SBA guaranteed loans yield up
to 3 3/4% over the New York prime rate, and the guaranteed portions can be
sold at premiums which vary with market conditions. SBA loans are guaranteed
by the full faith of the United States Government from 75 to 80 percent of
the principal amount. The guaranteed portion has risks comparable for an
investor to a U. S. Government security and can usually be sold in the
secondary financial market, either at a premium or at a yield which allows
the Bank to maintain a significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for
the Bank to continually expand its program in this area, and may limit the
level of premium that can be earned with regard thereto. Furthermore, the
SBA recently began requiring lenders to share a portion of premiums in excess
of 10% earned on the sale of the guaranteed portions, and to pay 50 basis
points on the outstanding 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 nine months ended September 30, 1997
increased $56,900 compared with the same period in 1996. The increase was
primarily due to employee merit pay increases and additions to staff
resulting from the opening of the Pacific Grove Branch office.
Total occupancy and equipment expense for the nine months ended
September 30, 1997 was $187,000 compared to $195,300 for the same period in
1996. The decrease of $8,300 was due to decreases in equipment rental
($7,800), maintenance expense ($1,700) and net merchant terminal expense
($5,400) while depreciation expense increased ($6,300).
Data processing expense for the nine months ended September 30, 1997
increased $21,700 compared to the same period in 1996. The increase was due
to a 2.7% cost of living increase, effective April 1997 and increased numbers
of accounts and transactions.
For the nine months ended September 30, 1997 professional fees
increased $6,200 compared to the same period in 1996.
Other expenses for the nine months ended September 30, 1997 totaled
$513,100 compared with $497,800 for the same period in 1996. Significant
changes occurred in the following categories with increases in advertising
($23.600), FDIC and State Assessments ($7,300), bank security ($8,200),
postage ($4,300), subscriptions/publications ($3,600) and travel ($10,200);
decreases occurred in business development ($20,300), collection expense
($7,200), dues/memberships ($4,800), SBA loan expense ($12,200) and
stationary and supplies ($3,600).
LOANS
Loans represented 73.32% of average earning assets, and 62.91% of
average total assets for the nine months ended September 30, 1997, compared
with 75.55% and 64.89%, respectively during 1996. For the nine months ended
September 30, 1997 average loans increased 5.48% from $24,346,000 for the
same period in 1996 to $25,679,000. Average real estate loans increased
$1,807,000 (14.32%), installment loans decreased $178,000 (24.23%); while
average commercial loans decreased $295,000 (2.69%).
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
14
<PAGE>
at 90-day intervals. Term loans (usually for a term of two to five years)
normally provide for monthly installments of principal and interest. The
Bank from time to time utilizes accounts receivable and inventory as security
for loans.
The Bank is the recognized leader for Small Business Administration
lending in Monterey County, and holds SBA's coveted Preferred Lender Status.
Generally, SBA loans are guaranteed by the SBA for 75 to 80 percent of their
principal amount, which can be retained in portfolio or sold to investors.
Such loans are made at floating interest rates, 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.
15
<PAGE>
NONPERFORMING AND NONACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which
are past due as to principal or interest 90 days or more, except for loans
which are well secured or when collection of interest and principal is deemed
likely. When a loan is placed on 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.
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"):
Nine Months Ended
September 30,
1997 1996
---- ----
(Dollars in thousands)
Accruing,
past due 90 days or more:
-------------------------
Real Estate 195 0
Commercial 0 262
Installment 0 0
Other 0 0
---- ----
Total accruing 195 262
Nonaccrual Loans:
-----------------
Real Estate 67 0
Commercial 31 86
Installment 25 25
Other 0 0
---- ----
Total non-accrual 123 111
Total non-performing 318 373
Total loans end of period 26,678 25,915
Ratio of non-performing loans
to total loans at end of period 1.19% 1.44%
16
<PAGE>
The ratio of non-performing loans at September 30, 1997 was
significantly impacted by one loan that represented 61% of the total
non-performing. 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.
SUMMARY OF LOAN LOSS EXPERIENCE
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(Dollars in thousands)
Average loans outstanding 25,680 24,345
Allowance, beginning of period 254 225
Loans charged off during period:
Commercial 101 14
Installment 1 5
Real Estate 0 0
Other 0 1
---- ------
Total charged off 102 20
Recoveries during period:
Commercial 1 1
Installment 1 12
Other 0 0
---- ------
Total recoveries 2 13
Net Loans charged off
during the period 100 7
Additions to allowance for
possible loan losses 120 45
Allowance, end of period 273 263
Ratio of net loans charged off to
average Loans outstanding
during the period 0.39% 0.03%
Ratio of allowance to total
at end of period 1.01% 1.01%
17
<PAGE>
FUNDING SOURCES
Average deposits for the nine months ended September 30, 1997 were
$35,464,000 an increase of 10.38% compared with the average balance for 1996.
Average certificates of deposit represented 53.13% of average deposits for
the nine months ended September 30, 1997. Average interest checking account,
money market and savings accounts as a group were 26.33% of average deposits.
Average demand deposits represented 20.55% 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. Three advances from the Federal Home Loan Bank with initial
maturities of more than one year totaled $3,000,000 at September 30, 1997.
Each advance is for $1,000,000 with interest rates of 4.88%, 6.53 and 6.81%
and maturity dates of October 1998, June 2000 and June 2004. Management
believes that these advances provide funds of medium duration at a lower cost
than comparable deposits. The Bank did not utilize any short term borrowings
in 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 September 30,
1997, stockholders' equity was $3,191,100 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 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.
Under current rules, all banks were required to maintain Tier 1 capital
of at least 4 percent and total capital of 8.0% of risk-adjusted assets. The
Bank had a Tier 1 risk-based capital ratio of 10.77% and a total risk-based
capital ratio of 11.73% at September 30, 1997 (calculated under regulatory
accounting principles), well above the minimum regulatory requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 7.71% at September 30, 1997 (calculated under
regulatory accounting principles).
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 $5,000,000 and a $1,000,000 Federal Funds borrowing line with
the Pacific Coast Bankers' Bank, to meet temporary liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid
assets, including marketable investment securities, equal to a least 15
percent of total assets ("primary liquidity"), while maintaining sources of
secondary liquidity (borrowing lines from other institutions) equal to at
least an additional 10 percent of assets. In addition, it seeks to generally
limit loans to not more than 90 percent of deposits. Within these ratios,
the Bank generally has excess funds available to sell as federal funds on a
daily basis, and is able to fund its own liquidity needs without the need of
short-term borrowing. The Bank's primary liquidity at September 30, 1997 was
29.29 percent, while its average loan to deposit ratio for the nine months
ended September 30, 1997 was 72.41 percent. The high level of liquidity has
an adverse impact on interest income.
The following table sets forth the interest rate sensitivity
distribution of the Bank's interest-earning assets and interest-bearing
liabilities as of September 30, 1997, the Bank's interest rate sensitivity
gap ratio (i.e., the difference between interest rate sensitive assets and
interest rate sensitive liabilities divided by total assets) and the Bank's
cumulative interest rate sensitivity gap ratio. For purposes of the table,
except for savings deposits and money market, an asset or liability is
considered rate sensitive within a specified period when it matures or could
be repriced within such period in accordance with its contractual terms.
More than all of the Bank's interest rate sensitivity gap is offset by
non-interest bearing sources of funds (demand deposits and capital).
Generally, a bank with a positive rate sensitivity gap ratio can anticipate
that increases in market rates of interest will have a favorable impact on
net interest income, while decreases will have unfavorable impact. Banks
with a negative interest rate sensitivity gap will experience the reverse.
The Bank's one year cumulative interest sensitivity gap of 1.14 percent,
indicating assets and liabilities maturing or repricing within one year are
almost equal.
19
<PAGE>
<TABLE>
<CAPTION>
Over 3 mos. Over 1 year Over 3 Over 5
3 Months through through Through through Over 15
or less 1 Year 3 years 5 years 15 years years
-------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Investment Securities -- 500 -- -- 2,993 500
Federal Funds Sold 6,800 -- -- -- -- --
Loans 11,823 3,444 3,381 3,482 615 3,848
------- ------ ------ ----- ----- -----
18,623 3,944 3,381 3,482 3,608 4,348
INTEREST BEARING LIABILITIES:
Savings Deposits 2,285 -- -- -- -- --
Money Market Accounts 7,359 -- -- -- -- --
Certificates Over $100,000 3,044 1,999 2,118 240 -- --
Other Time Deposits 2,056 5,325 4,499 471 -- --
Other Borrowings -- -- 1,000 -- 1,000 --
------- ------ ------ ----- ----- -----
Total 14,744 7,324 7,617 710 1,000 --
Total Assets 43,823
Interest rate sensitivity gap 3,879 -3,380 -4,236 2,772 2,608 4,348
Cumulative interest sensitivity gap 3,879 499 -3,737 -965 1,643 5,991
Interest rate sensitivity ratio 8.85% -7.71% -9.67% 6.33% 5.95% 9.92%
Cumulative interest rate
sensitivity gap ratio 8.85% 1.14% -8.53% -2.20% 3.75% 13.67%
</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 minimal cash on hand and no sources of revenues or
liquidity other than dividends, tax equalization payments or management fees
from the Bank. The ability of the Bank to pay such items to the Corporation
is subject to limitations under state and Federal law.
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities as of September 30, 1997:
INVESTMENT PORTFOLIO MIX
September 30, 1997
Book Market
value value
----- ------
(Dollars in thousands)
Available for sale:
Pacific Coast Banker's Bank Stock 150 150
Federal Home Loan Bank Stock 325 325
---- ----
475 475
Held to maturity:
U. S. Treasury Securities 500 501
U. S. Government Agency Securities 3493 3502
---- ----
3993 4003
Total 4468 4478
---- ----
---- ----
The following table summarizes the maturity of the Bank's investment
securities at September 30, 1997:
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Over 3 mos. Over 1 year Over 3 Over 5
3 Months through through Through through Over 15
or less 1 Year 3 years 5 years 15 years years
-------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury Securities --- 500 --- --- --- ---
U. S. Agency Securities --- --- --- --- 2993 500
Other Securities 475 --- --- --- --- ---
-------- ------- ------- ------- -------- -------
Total 475 500 0 0 2993 500
</TABLE>
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: NOVEMBER 5, 1997 By: /s/ CHARLES T. CHRIETZBERG, JR.
-------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: NOVEMBER 5, 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 10QSB FOR THE YEAR TO DATE IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,991,200
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 475,000
<INVESTMENTS-CARRYING> 3,993,200
<INVESTMENTS-MARKET> 4,002,800
<LOANS> 26,678,300
<ALLOWANCE> 273,100
<TOTAL-ASSETS> 43,822,800
<DEPOSITS> 37,223,600
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 408,100
<LONG-TERM> 0
0
0
<COMMON> 2,716,800
<OTHER-SE> 474,300
<TOTAL-LIABILITIES-AND-EQUITY> 43,822,800
<INTEREST-LOAN> 2,054,800
<INTEREST-INVEST> 436,600
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,491,400
<INTEREST-DEPOSIT> 971,600
<INTEREST-EXPENSE> 1,051,600
<INTEREST-INCOME-NET> 1,439,800
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,825,900
<INCOME-PRETAX> 346,800
<INCOME-PRE-EXTRAORDINARY> 282,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282,300
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 9.46
<LOANS-NON> 122,900
<LOANS-PAST> 195,500
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 444,500
<ALLOWANCE-OPEN> 253,500
<CHARGE-OFFS> 102,200
<RECOVERIES> 1,700
<ALLOWANCE-CLOSE> 273,000
<ALLOWANCE-DOMESTIC> 34,800
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 238,200
</TABLE>
