<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the quarterly period ended
June 30, 1998
--- Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) for the period from
_____________ to _______________
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (408) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---
As of August 3, 1998, the Corporation had 858,526 shares of common stock
outstanding.
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
---------- -----------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 3,087,600 11,060,600
Due From Bank - Time Deposits 100,000 100,000
Investment Securities, available for sale (Note 1) 588,100 480,200
Investment Securities, held to maturity (Note 1) 7,266,300 5,495,300
Federal Funds Sold 5,255,000 0
Loans Held for Sale 873,700 543,400
Gross Loans (Note 2) 26,629,700 25,370,800
Allowance for Possible Loan Losses (Note 3) (287,100) (269,100)
Deferred Origination Fees (35,100) (39,600)
---------- -----------
Net Loans 26,307,500 25,062,100
Bank Premises and Equipment, Net 1,871,900 1,898,900
Interest Receivable and Other Assets 1,687,600 1,472,100
---------- -----------
Total Assets 47,037,700 46,112,600
---------- -----------
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 39,411,600 39,205,600
Borrowed Funds 4,000,000 3,000,000
Interest Payable and Other Liabilities 475,600 876,800
---------- -----------
Total Liabilities 43,887,200 43,082,400
---------- -----------
---------- -----------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1998 and 1997
Outstanding:858,526 in 1998 and 1997 2,716,800 2,716,800
Retained Earnings 415,800 241,200
Unrealized Gain (Loss) Available
for Sale Securities 17,900 72,200
---------- -----------
Total Shareholders' Equity 3,150,500 3,030,200
---------- -----------
Total Liabilities & Shareholders' Equity 47,037,700 46,112,600
---------- -----------
---------- -----------
</TABLE>
Page 2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------- -----------------------
1998 1997 1998 1997
------- -------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 747,700 685,600 1,444,200 1,337,400
Interest on Time Deposits with
Financial Institutions 1,600 0 3,100 0
Interest on Investment Securities 113,600 8,800 256,800 150,000
Interest on Federal Funds 74,500 92,700 137,400 120,800
------- -------- --------- ---------
Total Interest Income 937,400 787,100 1,841,500 1,608,200
------- -------- --------- ---------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 27,500 25,700 54,700 58,200
Interest on Savings Accounts 15,000 18,600 27,000 24,200
Interest on Time Deposits 293,900 265,100 597,400 552,900
Interest on Other Borrowed Funds 61,300 22,800 120,900 34,000
------- -------- --------- ---------
Total Interest Expense 397,700 332,200 800,000 669,300
------- -------- --------- ---------
Net Interest Income 539,700 454,900 1,041,500 938,900
------- -------- --------- ---------
PROVISION FOR POSSIBLE LOAN LOSSES 70,000 25,000 80,000 60,000
------- -------- --------- ---------
Net Interest Income After
Provision for Possible Loan Losses 469,700 429,900 961,500 878,900
------- -------- --------- ---------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 92,100 97,600 170,700 178,200
SBA Loan Sales & Servicing Income 76,100 111,900 137,600 117,600
Other Operating Income 306,200 261,800 576,400 550,000
------- -------- --------- ---------
Total Noninterest Income 474,400 471,300 884,700 845,800
------- -------- --------- ---------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 400,300 285,300 732,200 613,500
Occupancy and Equipment Expense 68,200 67,600 135,800 118,100
Professional Fees (66,000) 22,100 (40,800) 51,300
Data Processing 45,100 36,400 94,600 88,400
FDIC & State Assessments 3,900 2,800 7,600 11,000
Other Operating Expenses 356,100 331,100 678,000 664,800
Income Tax Expense 38,600 20,400 64,300 46,900
------- -------- --------- ---------
Total Non-interest Expense 846,200 765,700 1,671,700 1,594,000
------- -------- --------- ---------
NET INCOME (LOSS) 97,900 135,500 174,500 130,700
------- -------- --------- ---------
------- -------- --------- ---------
Earnings Per Common Share
Primary 0.11 0.15 0.20 0.15
Diluted 0.10 0.13 0.17 0.13
</TABLE>
Page 3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET INCOME 174,500 130,700
Adjustments to net income:
Depreciation and amortization expense 71,500 45,000
Amortization/Accretion on investments 3,800 (300)
(Gain) loss on sale of securities 0 0
Provision for possible loan losses 80,000 60,000
Amortization of deferred servicing premium 6,600 6,600
Amortization of deferred income (1,900) (2,200)
Increase (decrease) in accrued expenses (332,100) (179,300)
(Increase) decrease in prepaid expenses (207,200) 178,600
Increase (decrease) in interest payable (73,800) (170,400)
(Increase) decrease in interest receivable (43,100) (41,300)
(Increase) decrease in loans held for sale (158,400) (30,900)
----------- -----------
Total adjustments to net income (654,600) (134,200)
----------- -----------
----------- -----------
Net cash provided (used) by operations (480,100) (3,500)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investments 0 0
Proceeds from sale of investments 0 0
Principal payments on investments 2,995,000 1,500,000
Purchase of securities (4,877,700) (3,663,000)
Unrealized gain (loss) available for sale securities (54,700) 55,900
Net (increase) decrease in loans (1,497,300) (519,400)
Proceeds from sale of equipment 1,400 0
Capital expenditures (45,800) (272,400)
----------- -----------
Net cash provided (used) in investing activities (3,479,100) (2,898,900)
----------- -----------
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 241,200 (1,362,200)
Net increase (decrease) in borrowed funds 1,000,000 2,000,000
----------- -----------
Net cash provided (used) by financing activities 1,241,200 637,800
----------- -----------
----------- -----------
Net increase (decrease) in cash & cash equivalents (2,718,000) (2,264,600)
Cash & cash equivalents - beginning of year 11,160,600 9,820,100
----------- -----------
Cash & cash equivalents - end of period 8,442,600 7,555,500
</TABLE>
See Note 5 for supplemental disclosures
Page 4
<PAGE>
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
JUNE 30 DECEMBER 31
1998 1997
----------- ----------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
Other Securities 588,100 480,200
----------- ----------
----------- ----------
Held to maturity:
US Treasury Securities 0 499,900
US Government Securities 2,500,100 4,995,400
State and Local Agency Securities 4,766,200 ---
----------- ----------
7,266,300 5,495,300
----------- ----------
----------- ----------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 11,386,600 10,299,500
Construction 335,800 346,500
Real Estate - Mortgage 14,124,300 13,920,900
Installment 617,000 519,900
Government Guaranteed Loans Purchased 166,000 284,000
----------- ----------
Gross Loans 26,629,700 25,370,800
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 269,100 253,500
Recoveries 5,800 1,800
Provision for Possible Loan Losses 80,000 (106,200)
Loans Charged Off (67,800) 120,000
----------- ----------
Balance at End of Period 287,100 269,100
(NOTE 4) DEPOSITS:
Demand 9,219,900 8,734,200
Interest-Bearing Transaction 7,225,400 7,483,900
Savings 3,166,700 2,145,300
Time Under $100,000 11,692,600 12,742,700
Time Equal to or Greater than $100,000 8,107,000 8,099,500
----------- ----------
39,411,600 39,205,600
</TABLE>
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Payments during the period ending: 6/30/98 6/30/97
----------- ----------
<S> <C> <C>
Interest 679,100 635,300
Income Taxes 64,300 44,900
</TABLE>
Page 5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be
read in conjunction with the financial statements and the other financial
data presented elsewhere herein. The Corporation has had no activities other
than its organization.
For the six months, ended June 30, 1998 net income was $174,500, an
increase of $43,800 when compared to the same period in 1997. The increase
in earnings during this period was the result of a $82,600 increase in net
interest income after provision for loan losses and a $38,900 increase in
non-interest income, partially offset by a $77,700 increase in non-interest
expense.
Page 6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at and for the six months ended, June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the six months For the six months
Ended June 30, 1998 Ended June 30, 1997
------------------- -------------------
(Dollars in thousands except per share data)
<S> <C> <C>
Summary of Operating Results:
Total interest income 1,841 1,608
Total interest expense 800 669
----- -----
Net interest income 1,041 939
Provision for possible
loan losses 80 60
----- -----
Net interest income after
provision for loan loss 961 879
Total other income 885 846
Total other expense 1,616 1,547
----- -----
Income (loss) before taxes 230 178
Provision for income tax 56 47
----- -----
Net income (loss) 175 131
Per Common Share Data:
Net income - Primary (1) 0.20 0.15
Net income - Diluted (2) 0.17 0.13
Book value, end of period 3.68 3.51
Avg shares outstanding (3) 858,526 879,465
Balance Sheet Data:
Total loans, net of
unearned income (4) 27,468 25,809
Total assets 47,038 41,272
Total deposits 39,412 34,805
Stockholders' equity 3,150 3,085
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
For the six months For the six months
Ended June 30, 1998 Ended June 30, 1997
------------------- -------------------
<S> <C> <C>
Selected Financial Ratios (4):
Return on average assets (5) 0.84% 0.66%
Return on average
stockholders' equity (6) 11.18% 8.69%
Net interest spread 4.52% 4.88%
Net interest margin 5.19% 5.54%
Avg shareholders' equity
to average assets 7.47% 7.59%
Risked-Based capital ratios
Tier 1 9.49% 10.64%
Total 10.37% 11.59%
Total loans to total deposits
at end of period 69.70% 74.15%
Allowance to total loans
at end of period 1.04% 1.02%
Non-performing loans to total
loans at end of period 0.31% 1.45%
Net charge-offs to
average loans 0.23% 0.20%
</TABLE>
(1) Primary earnings per share amounts were computed on the basis of the
weighted average number of shares of common stock outstanding during the
year. The weighted average number of common shares used for this
computation was 858,526 and 879,465 for June 30, 1998 and 1997,
respectively.
(2) Diluted 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 1,004,567 and 1,029,893 for June 30,
1998 and 1997, respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
(6) June 30, 1998 calculated on an annualized basis.
Page 8
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned
on interest-earning assets and (b) inte rest paid on interest-bearing
liabilities, is the most significant component of the Bank's earnings.
Changes in net interest income from period to period result from increases or
decreases in the average balances of interest earning assets portfolio, the
availability of particular sources of funds and changes in prevailing
interest rates.
Net interest income for the six-month period ended June 30, 1998 was
$1,041,500 compared to $938,900 for the same period in 1997. The increase of
$102,600 resulted from total interest income increasing $233,300, while total
interest expense increased $130,700. Average interest earning assets
increased $6,001,000 (17.65%) with average loans increasing $1,316,000 and
investments increasing $4,685,000, while the average rate earned decreased 25
basis points. The decrease in the average interest rate earned was due to a
28 basis points decrease in the interest rate earned on investments,
partially off set by a 28 basis points increase in the interest rate earned
on loans. Average interest bearing liabilities increased $5,210,000
(17.90%), while the average rate paid increased 6 basis points.
The following table shows the components of the Bank's net interest
income, setting forth, for each the six months ended June 30, 1998 and 1997
and for the twelve months ended December 31, 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.
Page 9
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
The Six Months The Twelve Months
Ended June 30, Ended December 31,
1998 1997 1997
---------------------------- ----------------------------- -------------------------
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 100 3 6.13 0 0 0 71 5 7.67
Invest securities 8,465 257 6.07 4,242 150 7.07 1,519 90 5.91
Federal funds sold 4,897 137 5.61 4,535 121 5.34 6,460 341 5.27
-------------- --------------- ---------------
Total investments 13,462 397 5.90 8,777 271 6.18 8,050 436 5.42
Loans
Real estate 14,171 742 10.48 14,129 721 10.21 13,138 1,368 10.41
Installment 529 35 13.07 537 33 12.29 686 80 11.70
Commercial 11,840 667 11.27 10,558 583 11.04 10,823 1256 11.61
-------------- --------------- ---------------
Total loans 26,540 1,444 10.88 25,224 1,337 10.60 24,647 2,704 10.97
Total Interest
earning assets 40,002 1,841 9.21 34,001 1,608 9.46 32,697 3,140 9.60
-------------- --------------- ---------------
-------------- --------------- ---------------
Interest Bearing Liabilities:
Int-bearing demand 5,862 34 1.16 4,999 35 1.40 4,534 64 1.40
Money market savings 1,747 21 2.36 1,946 23 2.36 1,911 45 2.34
Savings deposits 2,452 27 2.20 2,208 24 2.17 2,541 70 2.76
Time deposits -greater than-$100M 8,155 238 5.84 6,752 194 5.75 5,698 338 5.92
Time deposits -less than-$100M 12,125 359 5.93 11,889 359 6.04 11,774 735 6.24
Other Borrowing 3,972 121 6.09 1,309 34 5.19 1,790 83 4.62
-------------- --------------- ---------------
Total interest
bearing liabilities 34,313 800 4.66 29,103 669 4.60 28,249 1,334 4.72
-------------- --------------- ---------------
-------------- --------------- ---------------
Net interest income 1,041 939 1,806
Net interest spread 4.54 4.86 4.88
Net yield on interest
Earning assets 5.21 5.52 5.52
</TABLE>
Page 10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Six Months Twelve Months
Ended June 30, Ended December 31,
1998 vs 1997 1997 vs 1996
--------------- ---------------
Increase(Decrease) Increase(Decrease)
Due to changes Due to Changes
------------------ -----------------
Avg Avg Avg Avg
Volume Rate Total Volume Rate Total
--------------------------------- ---------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 3 0 3 (17) (2) (19)
Invest securities 100 (43) 57 21 (7) 14
Federal funds sold 10 7 16 75 (13) 62
----------------------------------- -----------------------------------
Total investments 145 (18) 126 89 (32) 57
Loans
Real estate 2 19 21 52 (55) (3)
Installment (0) 2 2 (35) 3 (32)
Commercial 71 14 84 89 78 166
----------------------------------- -----------------------------------
Total loans 35 19 54 107 24 131
Total Interest Earning Assets 284 (50) 233 246 (59) 187
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
Interest Bearing Deposits:
Int-bearing demand 6 (7) (1) 1 2 3
Money market savings (2) 0 (2) (8) (3) (11)
Savings deposits 3 0 3 41 (5) 36
Time deposits -greater than-$100M 40 4 44 121 9 130
Time deposits -less than-$100M 7 (7) 0 (10) 0 (9)
Other Borrowing 69 18 87 0 0 0
----------------------------------- -----------------------------------
Total interest bearing deposits 120 11 131 100 51 151
----------------------------------- -----------------------------------
----------------------------------- -----------------------------------
Net change in net interest 164 (62) 102 146 (110) 36
</TABLE>
Page 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.
<TABLE>
<CAPTION>
Loan Category Reserve %
<S> <C>
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 3.00%
SBA Loans - Unguaranteed portion 2.00%
Unfunded Loan Commitments .25%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
</TABLE>
Although no assurance can be given that actual losses will not exceed
the amount provided for in the allowance, Management believes that the
allowance is adequate to provide for all estimated credit losses in light of
all known relevant factors. At June 30, 1998 and 1997 the Bank's allowance
stood at 1.05 and 1.02 percent, respectively. A provision of $80,000 was
made to the allowance during the six months ended June 30,
Page 12
<PAGE>
1998, compared to a provision of $60,000 in the same period in 1997.
Charged off loans during the six months ended June 30, 1998 and 1997 totaled
$67,800 and $52,400 respectively. Recoveries for the same periods were $5,800
and $1,200, respectively.
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .31 percent at June 30, 1998
compared with 1.45 percent at June 30, 1997 and .81 percent at December 31,
1997.
Based upon statistics released by Federal and state banking authorities
regarding banks of similar size or otherwise located in California,
Management believes that the Bank 's ratios of delinquent and non performing
loans to total loans are far better than average. Prudent collection
efforts, and tighter lending controls, are responsible for the Bank's strong
performance on these measures of credit quality. However, no assurance can
be given that the Bank's loan portfolio will continue to measure well against
its peers on these ratios and quality measures, or that losses will not
otherwise occur in the future.
NON-INTEREST INCOME
Total non-interest income for the six months ended June 30, 1998 was
$884,700, compared with $845,800 for the same period in 1997. The increase
of $38,900 was the result of a $20,000 increase in income from SBA loan sales
and servicing and income from other service charges, commissions and fees
increased $26,400, while service charges on deposit accounts decreased
$7,500. Merchant credit card discount fees increased $22,500 the primary
factor in 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.
Page 13
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the six months ended June 30, 1998
increased $118,700 compared with the same period in 1997. The increase was
due primarily to employee merit pay increases, bonus accruals, and an
increase of two full time equivalent staff positions.
Total occupancy and equipment expense for the six months ended June 30,
1998 was $135,800 compared to $118,100 for the same period in 1997. The
increase of $17,700 was due primarily to a $6,500 increase in depreciation
expense, a $2,500 increase in net merchant terminal expense, $3,800 increase
in maintenance and repair expense and an increase of $3,100 in utilities
expense.
For the six months ended June 30, 1998 professional fees decreased
$92,100 compared with the same period in 1997. The decrease resulted from
the recovery of legal expenses associated with a trade name infringement
lawsuit.
Data processing for the six months ended June 30, 1998 increased $6,200
compared to the same period in 1997. The increase was due to increased
numbers of accounts and transactions.
Other expenses for the six months ended June 30, 1998 totaled $686,600
compared with $664,800 for the same period in 1997. Significant changes
occurred in the following categories with increases in merchant expense of
$36,800, collection expense $10,100, loan expense $7,400, due & memberships
$2,900, messenger & freight $2,800 and advertising $2,200, and decreases in
business development and promotion of $15,300, SBA loan expense $10,100,
donation expense $7,200, telephone expense $7,000, stationary & supply
expense $5,700 and travel expense $4,200.
Other expenses for the six months ended June 30, 1998 include $9,600 in
expense accrual related to the Year 2000 date change problem.
LOANS
Loans represented 66.35% of average earning assets, and 57.28% of
average total assets for the six months ended June 30, 1998, compared with
74.19% and 63.64%, respectively during 1997. For the six months ended June
30, 1998 average loans increased 5.22% from $25,224,000 for the same period
in 1997 to $26,540,000. Average
Page 14
<PAGE>
commercial loans increased $1,281,000 (12.14%), average real estate loans
increased $43,000 (.30%); while installment loans decreased $8,000 (1.55%).
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 terms
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 a recognized leader for Small Business Administration
lending in Monterey County, and holds SBA's coveted Preferred Lender Status.
Generally, the SBA guarantees SBA loans for 75 to 80 percent of their
principal amount, which can be retained in portfolio or sold to investors.
Such loans are made at floating interest rates, but generally for longer
terms (up to 25 years) than are available on a conventional basis to small
businesses. The unguaranteed portion of the loans, although generally
supported by collateral, is considered to be more risky than conventional
commercial loans because they may be based upon credit standards the Bank
would not otherwise apply, such as lower cash flow coverage, or longer
repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has
also developed a broker program for generating residential real estate loans.
The Bank does not make real estate development loans. Real estate
construction loans are made for a much shorter term, and often at higher
interest rates, than conventional single-family residential real estate
loans. The cost of administering such loans is often higher than for other
real estate loans, as principal is drawn on periodically as construction
progresses.
The Bank also makes real estate loans secured by a first deed of trust
on single family residential properties and commercial and industrial real
estate. California commercial banks are permitted, depending on the type and
maturity of the loan, to lend up to 90 percent of the fair market value of
real property (or more if the loan is insured either by private mortgage
insurers or governmental agencies). In certain instances, the appraised
value may exceed the actual amount, which could be realized on foreclosure,
or declines in market value subsequent to making the loan can impair the
Bank's security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's
consumer installment loans are generally secured by the personal property
being purchased. The Bank generally makes consumer loans to those customers
with a prior banking relationship with the Bank.
Page 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"):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------ ------
(Dollars in thousands)
<S> <C> <C>
Accruing,
PAST DUE 90 DAYS OR MORE:
- -------------------------
Real Estate 71 195
Commercial 0 0
Installment 0 0
Other 0 0
---- ----
Total accruing 71 195
NONACCRUAL LOANS:
- -----------------
Real Estate 0 63
Commercial 2 87
Installment 11 28
Other 0 0
---- ----
Total non-accrual 14 178
Total non-performing 84 373
Total loans end of period 27,468 25,809
Ratio of non-performing loans
to total loans at end of period 0.31% 1.45%
</TABLE>
Page 16
<PAGE>
The ratio of non-performing loans at June 30, 1997 was significantly
impacted by one loan that represented 52.28% of the total non-performing
loans. 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
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
----------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding 26,540 25,186
Allowance, beginning of period 269 253
Loans charged off during period:
Commercial 67 51
Installment 1 1
Real Estate 0 0
Other 0 0
----- -------
Total charge offs 68 52
Recoveries during period:
Commercial 5 0
Installment 1 1
Other 0 0
----- -------
Total recoveries 6 1
Net Loans charged off
during the period 62 51
Additions to allowance for
possible loan losses 80 60
Allowance, end of period 287 262
Ratio of net loans charged off to
average Loans outstanding
during the period 0.23% 0.20%
Ratio of allowance to total
loans at end of period 1.04% 1.01%
</TABLE>
Page 17
<PAGE>
FUNDING SOURCES
Average deposits for the six months ended June 30, 1998 were $38,656,000
an increase of 10.84% compared with the average balance for 1997. Average
certificates of deposit represented 52.46% of average deposits for the six
months ended June 30, 1998. Average interest bearing checking, money market
and savings accounts as a group were 26.03% of average deposits. Average
demand deposits represented 21.51% of average deposits.
The Bank has a line of credit with the Federal Home Loan Bank of San
Francisco. Four advances from the Federal Home Loan Bank with initial terms
of more than one year totaled $4,000,000 at June 30, 1998. Each advance is
for $1,000,000 with interest rates of 4.88%, 6.53%, 6.81% and 6.36% and
maturity dates of October 1998, June 2000, June 2004 and January 2028.
Management believes that these advances provide funds of medium and long
duration at a lower cost than comparable deposits. The Bank did not utilize
any short-term borrowings in 1998, 1997 or 1996.
CAPITAL RESOURCES
The Bank maintains capital to comply with legal requirements, to provide
a margin of safety for its depositors and stockholders, and to provide for
future growth and the ability to pay dividends. At June 30, 1998,
stockholders' equity was $3,150,500 versus $3,030,200 at December 31, 1997.
The Company paid cash dividends of $0.12 and $0.11 per share in 1997 and
1996, respectively. The Bank paid cash dividends totaling $170,000 and
$150,000 to the Corporation in 1997 and 1996.
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 9.49% and a total risk-based
capital ratio of 10.37% at June 30, 1998 well above the minimum regulatory
requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 6.64% at June 30, 1998.
Page 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 $5,070,000 to meet temporary liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid
assets, including marketable investment securities, equal to a least 15
percent of total assets ("primary liquidity"), while maintaining sources of
secondary liquidity (borrowing lines from other institutions) equal to at
least an additional 10 percent of assets. In addition, it seeks to generally
limit loans to not more than 90 percent of deposits. Within these ratios,
the Bank generally has excess funds available to sell as federal funds on a
daily basis, and is able to fund its own liquidity needs without the need of
short-term borrowing. The Bank's primary liquidity at June 30, 1998 was
33.99 percent, while its average loan to deposit ratio for the six months
ended June 30, 1998 was 68.66 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
Page 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 june 30, 1998.
<TABLE>
<CAPTION>
Falling Rates Rising Rates
---------------------- --------------------
One Year One Year One Year
Balance Earnings Income Earnings Income
Sheet Change Statement Change Statement
Gap Ratio* Gap Ratio* Gap
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
DUE FROM BANKS- TIME 100 70% 70 70% 70
LOANS:
Fixed rate -less than- 1 year 2,684 86% 2,311 86% 2,311
Floating rate -less than- 1 year 13,281 90% 11,985 90% 11,985
SECURITIES:
Fed Funds Sold & Repos 5,255 100% 5,255 100% 5,255
Fixed Rate Securities - Callable -less than- 1 year 1,000 66% 658 0% 0
------ ------ ------
Total Rate Sensitive Assets 22,320 20,278 19,621
RATE SENSITIVE LIABILITIES
Savings 3,167 30% 960 30% 960
Money Market Checking 5,790 16% 910 16% 926
Money Market Savings 1,435 28% 398 28% 398
CDs -greater than- $100,000 6,157 79% 4,845 79% 4,845
CDs -less than- $100,000 7,407 79% 5,854 79% 5,854
FFP, Repos & Other Borrowing 1,000 65% 648 65% 648
------ ------ ------
Total Rate Sensitive Liabilities 24,956 13,615 13,631
RATE SENSITIVITY GAP (ASSETS-LIABILITIES) (2,636) 6,663 5,990
TOTAL ASSETS 47,231 47,231 47,231
GAP AS A PERCENTAGE OF TOTAL ASSETS (5.58%) 14.11% 12.68%
Estimated change in net interest margin if prime rate falls 1%: (66.63)
Estimated change in net interest margin if prime rate rises 1%: 59.90
</TABLE>
Page 20
<PAGE>
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.
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities at June 30, 1998:
INVESTMENT PORTFOLIO MIX
<TABLE>
<CAPTION>
Book Market
Value value
--------- --------
(Dollars in thousands)
<S> <C> <C>
Available for sale:
Equity Securities 588 588
Held to maturity:
U.S. Agency securities 2,500 2,513
State/Local Agency securities 4,766 4,685
------- -------
Total 7,854 7,786
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at June 30, 1998:
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
over 1 over 3 over 5
1 year through through through over
for less 3 years 5 years 15 years 15 years
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Agency securities --- --- --- 1,500 1,000
State/Local Agencies --- --- --- --- 4,766
Equity Securities 588 --- --- --- ---
------- ------- ------ ------- --------
Total 588 --- --- 1,500 5,766
</TABLE>
Page 21
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In May 1998 Monterey County Bank entered into a settlement agreement
with Monterey Bay Bank, whereby Monterey County Bank agreed to terminate its
trade name infringement litigation against Monterey Bay Bank. Under the
terms of the agreement Monterey County Bank received a one-time payment in
the amount of $117,131.48.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following proposals were presented to shareholders at the
Corporation's annual shareholders' meeting held on June 12, 1998.
Proposal Number 1: Election of Directors
<TABLE>
<CAPTION>
Number of Number of
Affirmative Votes Votes Withheld
----------------- --------------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 636,026 10,572
Sandra G. Chrietzberg 523,666 122,932
Peter J. Coniglio 636,698 9,900
Carla S. Hudson 634,411 12,187
John M. Lotz 634,411 12,187
</TABLE>
Proposal Number 2: Approval of the Northern California Bancorp, Inc. 1998
Stock Option Plan.
<TABLE>
<CAPTION>
Number of Number of Number of
Affirmative Votes Votes Against Abstentions
----------------- ------------- -----------
<S> <C> <C>
497,977 151,058 11,830
</TABLE>
Item 5. Other Information.
As we approach the year 2000 we are addressing a critical issue
concerning computer systems, both hardware operating systems and software
programs. The issue involves the ability of systems to recognize date values
on and after January 1, 2000. Many operating systems and software programs
were written to recognize two digit year date values, i.e. 98 in the year
field represents 1998. As a result these systems and programs may recognize
00 in a date field as the year 1900 rather than 2000. This issue affects all
users of computer systems, not just financial institutions.
Page 22
<PAGE>
The Company has established a plan of action designed to ascertain the
actions necessary to address the "Year 2000" issue. The Company has received
information from each of its service providers and software vendors regarding
their Year 2000 compliance. The Company's hardware operating systems have
been tested for Year 2000 compliance, two older personal computers failed the
tests and will be replaced. All current and prospective borrowers, who may
be impacted by the Year 2000 problem, have been/will be asked to complete a
questionnaire regarding their Year 2000 readiness. In addition, efforts are
being made to increase the awareness level of all customers through direct
mailings and messages printed on bank statements and notice forms. The
Company has budgeted $28,800 for 1998 Year 2000 expense. Projections for
1999 Year 2000 expense will be dependant in large part on the evaluation of
responses received from service providers, software vendors and borrowers.
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORTHERN CALIFORNIA BANCORP, INC.
Date: August 6, 1998 By: /s/ Charles T. Chrietzberg, Jr.
----------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: August 6, 1998 By: /s/ Bruce N. Warner
-----------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
Page 23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FROM
THE COMPANY FORM 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,087,600
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 5,255,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 588,100
<INVESTMENTS-CARRYING> 7,266,200
<INVESTMENTS-MARKET> 7,197,900
<LOANS> 27,468,300
<ALLOWANCE> 287,100
<TOTAL-ASSETS> 47,037,700
<DEPOSITS> 39,411,600
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 475,600
<LONG-TERM> 1,000,000
0
0
<COMMON> 2,716,800
<OTHER-SE> 433,700
<TOTAL-LIABILITIES-AND-EQUITY> 47,037,700
<INTEREST-LOAN> 1,444,200
<INTEREST-INVEST> 397,300
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,841,500
<INTEREST-DEPOSIT> 697,100
<INTEREST-EXPENSE> 800,000
<INTEREST-INCOME-NET> 1,041,500
<LOAN-LOSSES> 80,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,671,700
<INCOME-PRETAX> 238,800
<INCOME-PRE-EXTRAORDINARY> 238,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174,500
<EPS-PRIMARY> .20
<EPS-DILUTED> .17
<YIELD-ACTUAL> 9.21
<LOANS-NON> 13,600
<LOANS-PAST> 70,500
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 133,100
<ALLOWANCE-OPEN> 269,100
<CHARGE-OFFS> 67,800
<RECOVERIES> 5,900
<ALLOWANCE-CLOSE> 287,100
<ALLOWANCE-DOMESTIC> 287,100
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 278,400
</TABLE>
