<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,
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 November 3, 1998, the Corporation had 855,044 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>
SEPTEMBER 30 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 2,828,200 11,060,600
Due From Bank - Time Deposits 100,000 100,000
Investment Securities, available for sale (Note 1) 594,500 480,200
Investment Securities, held to maturity (Note 1) 7,265,600 5,495,300
Federal Funds Sold 6,690,000 0
Loans Held for Sale 1,097,500 543,400
Gross Loans (Note 2) 27,088,200 25,370,800
Allowance for Possible Loan Losses (Note 3) (288,200) (269,100)
Deferred Origination Fees (33,900) (39,600)
----------- -----------
Net Loans 26,766,100 25,062,100
Bank Premises and Equipment, Net 1,863,100 1,898,900
Interest Receivable and Other Assets 2,013,800 1,472,100
----------- -----------
Total Assets 49,218,800 46,112,600
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 41,265,800 39,205,600
Borrowed Funds 4,000,000 3,000,000
Interest Payable and Other Liabilities 643,000 876,800
----------- -----------
Total Liabilities 45,908,800 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 568,700 241,200
Unrealized Gain (Loss) Available
for Sale Securities 24,500 72,200
----------- -----------
Total Shareholders' Equity 3,310,000 3,030,200
----------- -----------
Total Liabilities & Shareholders' Equity 49,218,800 46,112,600
----------- -----------
----------- -----------
</TABLE>
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 753,500 717,400 2,197,700 2,054,800
Interest on Time Deposits with
Financial Institutions 1,500 0 4,600 0
Interest on Investment Securities 111,400 89,000 368,200 239,000
Interest on Federal Funds 80,600 76,800 218,000 197,600
------------ ----------- ------------ ------------
Total Interest Income 947,000 883,200 2,788,500 2,491,400
------------ ----------- ------------ ------------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 26,700 31,300 81,400 89,500
Interest on Savings Accounts 17,700 12,600 44,700 36,800
Interest on Time Deposits 295,500 292,400 892,900 845,300
Interest on Other Borrowed Funds 62,000 46,000 182,900 80,000
------------ ----------- ------------ ------------
Total Interest Expense 401,900 382,300 1,201,900 1,051,600
------------ ----------- ------------ ------------
Net Interest Income 545,100 500,900 1,586,600 1,439,800
------------ ----------- ------------ ------------
PROVISION FOR POSSIBLE LOAN LOSSES 0 60,000 80,000 120,000
------------ ----------- ------------ ------------
Net Interest Income After
Provision for Possible Loan Losses 545,100 440,900 1,506,600 1,319,800
------------ ----------- ------------ ------------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 100,300 76,600 271,000 254,800
SBA Loan Sales & Servicing Income 108,300 107,100 245,900 224,700
Other Operating Income 400,100 122,700 976,500 896,100
------------ ----------- ------------ ------------
Total Noninterest Income 608,700 306,400 1,493,400 1,375,600
------------ ----------- ------------ ------------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 355,600 300,900 1,087,800 914,400
Occupancy and Equipment Expense 77,400 68,900 213,200 187,000
Professional Fees 17,800 11,100 (23,000) 66,300
Data Processing 49,000 40,800 143,600 129,200
FDIC & State Assessments 3,300 4,900 10,900 15,900
Other Operating Expenses 421,500 148,800 1,108,100 1,032,700
Income Tax Expense 76,200 19,600 131,900 67,600
------------ ----------- ------------ ------------
Total Noninterest Expense 1,000,800 595,000 2,672,500 2,413,100
------------ ----------- ------------ ------------
NET INCOME (LOSS) 153,000 152,300 327,500 282,300
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Earnings Per Common Share
Primary 0.18 0.17 0.38 0.32
Diluted 0.15 0.15 0.33 0.27
</TABLE>
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
NET INCOME 327,500 282,300
Adjustments to net income:
Depreciation and amortization expense 101,800 80,900
Amortization/Accretion on investments 3,000 (500)
(Gain) loss on sale of securities 0 0
Provision for possible loan losses 80,000 120,000
Increase in deferred servicing premium 0 (51,500)
Amortization of deferred servicing premium 25,500 15,100
Amortization of deferred income (3,000) (3,300)
Increase (decrease) in accrued expenses (152,500) (184,400)
(Increase) decrease in prepaid expenses (505,200) 175,900
Increase (decrease) in interest payable (65,800) (138,000)
(Increase) decrease in interest receivable (53,400) 24,900
(Increase) decrease in loans held for sale (382,200) (200,100)
----------- ----------
Total adjustments to net income (951,800) (161,000)
----------- ----------
----------- ----------
Net cash provided (used) by operations (624,300) 121,300
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 2,000,000
Purchase of securities (4,882,600) (3,667,700)
Unrealized gain (loss) available for sale securities (48,100) 73,700
Net (increase) decrease in loans (1,955,800) (1,229,200)
Proceeds from sale of equipment 2,800 0
Capital expenditures (68,700) (320,400)
Stock Repurchase 0 (62,800)
----------- ----------
Net cash provided (used) in investing activities (3,957,400) (3,206,400)
----------- ----------
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 2,061,700 1,056,500
Net increase (decrease) in borrowed funds 1,000,000 2,000,000
----------- ----------
Net cash provided (used) by financing activities 3,061,700 3,056,500
----------- ----------
----------- ----------
Net increase (decrease) in cash & cash equivalents (1,542,400) (28,900)
Cash & cash equivalents - beginning of year 11,160,600 9,820,100
----------- ----------
----------- ----------
Cash & cash equivalents - end of period 9,618,200 9,791,200
</TABLE>
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
Other Securities 594,500 480,200
----------- -----------
----------- -----------
Held to maturity:
US Treasury Securities 0 499,900
US Government Securities 2,500,200 4,995,400
State and Local Agency Securities 4,765,400 ---
----------- -----------
7,265,600 5,495,300
----------- -----------
----------- -----------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 11,457,300 10,299,500
Construction 182,700 346,500
Real Estate - Mortgage 14,663,600 13,920,900
Installment 623,200 519,900
Government Guaranteed Loans Purchased 161,400 284,000
----------- -----------
Gross Loans 27,088,200 25,370,800
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 269,100 253,500
Recoveries 9,000 1,800
Provision for Possible Loan Losses 80,000 120,000
Loans Charged Off (69,900) (106,200)
----------- -----------
Balance at End of Period 288,200 269,100
(NOTE 4) DEPOSITS:
Demand 10,916,400 8,734,200
Interest-Bearing Transaction 7,303,200 7,483,900
Savings 3,356,000 2,145,300
Time Under $100,000 11,981,800 12,742,700
Time Equal to or Greater than $100,000 7,708,400 8,099,500
----------- -----------
41,265,800 39,205,600
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 9/30/98 9/30/97
----------- -----------
Interest 1,084,800 971,700
Income Taxes 140,500 67,600
</TABLE>
5
<PAGE>
ITEM 2. 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, 1998 net income was $327,500, an
increase of $45,200 when compared to the same period in 1997. The increase in
earnings during this period was the result of a $186,800 increase in net
interest income after provision for loan losses, a $117,800 increase in net
non-interest income, and a $259,400 increase in non-interest expense. Net income
for the period was significantly affected by two factors 1) the recovery of
approximately $117,000 in legal expenses associated with a trade name
infringement lawsuit and 2) a change in accounting whereby annual bonuses are
accrued quarterly rather than expensed at year end, $141,000 was accrued through
September 30, 1998.
6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at, and for the nine months ended, September 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the nine months For the nine months
Ended September 30, 1998 Ended September 30, 1997
------------------------ ------------------------
(Dollars in thousands except per share data)
<S> <C> <C>
Summary of Operating Results:
Total interest income 2,788 2,492
Total interest expense 1,202 1,052
-------- ---------
Net interest income 1,587 1,440
Provision for possible
loan losses 80 120
-------- ---------
Net interest income after
provision for loan loss 1,507 1,320
Total other income 1,493 788
Total other expense 2,541 1,763
-------- ---------
Income (loss) before taxes 459 345
Provision for income tax 132 63
-------- ---------
Net income (loss) 327 282
Per Common Share Data:
Net income - Primary (1) 0.38 0.32
Net income - Diluted (2) 0.33 0.27
Book value, end of period 3.86 3.64
Avg shares outstanding (3) 858,526 871,525
Balance Sheet Data:
Total loans, net of
unearned income (4) 28,152 25,875
Total assets 49,219 39,154
Total deposits 41,266 36,029
Stockholders' equity 3,310 3,125
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For the nine months For the nine months
Ended September 30, 1998 Ended September 30, 1997
------------------------ ------------------------
<S> <C> <C>
Selected Financial Ratios:
Return on average assets(5) 0.93% 0.92%
Return on average
stockholders' equity(6) 13.81% 12.39%
Net interest spread 4.50% 4.80%
Net interest margin 5.21% 5.46%
Avg shareholders' equity
to average assets 6.74% 7.82%
Risked-Based capital ratios
Tier 1 9.65% 11.73%
Total 10.50% 10.77%
Total loans to total deposits
at end of period 68.22% 71.56%
Allowance to total loans
at end of period 1.01% 1.03%
Non-performing loans to total
loans at end of period 0.95% 1.20%
Net charge-offs to
average loans 0.23% 0.39%
</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 871,525 for September 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 1,002,700 and 1,034,574 for September 30, 1998 and
1997, respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
(6) 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, 1998
was $1,586,600 compared to $1,439,800 for the same period in 1997. The
increase of $146,800 resulted from total interest income increasing $297,100,
while total interest expense increased $150,300. Average interest earning
assets increased $5,575,000 (15.92%), while the average rate earned decreased
30 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 $4,356,000
(14.49%), while the average rate paid was unchanged.
The following table shows the components of the Bank's net interest
income, setting forth, for each the nine months ended September 30, 1998 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>
The Nine Months The Twelve Months
Ended September 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 5 6.16 0 0 0.00 71 5 7.67
Invest securities 8,260 368 5.94 4,469 239 7.13 1,519 90 5.91
Federal funds sold 5,123 218 5.67 4,877 198 5.40 6,460 341 5.27
-------------- -------------- --------------
Total investments 13,483 591 5.84 9,346 437 6.23 8,050 436 5.42
Loans
Real estate 14,391 1,118 10.36 14,426 1,108 10.24 13,138 1,368 10.41
Installment 537 51 12.54 556 47 11.27 686 80 11.70
Commercial 12,189 1,029 11.25 10,698 894 11.14 10,823 1256 11.61
-------------- -------------- --------------
Total loans 27,117 2,198 10.81 25,680 2,049 10.64 24,647 2,704 10.97
Total Interest
earning assets 40,600 2,788 9.16 35,026 2,486 9.46 32,697 3,140 9.60
-------------- -------------- --------------
-------------- -------------- --------------
Interest Bearing
Liabilities:
Int-bearing demand 5,904 52 1.17 5,171 55 1.41 4,534 64 1.40
Money market savings 1,665 30 2.38 1,944 35 2.38 1,911 45 2.34
Savings deposits 2,698 45 2.21 2,225 37 2.21 2,541 70 2.76
Time deposits > $100M 8,198 360 5.86 6,829 298 5.82 5,698 338 5.92
Time deposits < $100M 11,969 533 5.93 12,013 547 6.08 11,774 735 6.24
Other Borrowing 3,982 183 6.12 1,879 80 5.68 1,790 83 4.62
-------------- -------------- --------------
Total interest
bearing liabilities 34,416 1,202 4.66 30,061 1,052 4.66 28,249 1,334 4.72
-------------- -------------- --------------
-------------- -------------- --------------
Net interest income 1,587 1,434 1,806
Net interest spread 4.50 4.80 4.88
Net yield on interest
earning assets 5.21 5.46 5.52
</TABLE>
10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended September 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 5 0 5 (22) (1) (23)
Invest securities 203 (74) 129 21 (7) 14
Federal funds sold 10 10 20 75 (13) 62
------------------------------ ------------------------------
Total investments 193 (39) 154 86 (33) 53
Loans
Real estate (3) 13 10 52 (55) (3)
Installment (2) 5 4 (35) 3 (32)
Commercial 125 10 135 89 78 166
------------------------------ ------------------------------
Total loans 115 34 149 107 24 131
Total Interest Earning Assets 308 (5) 303 241 (56) 185
------------------------------ ------------------------------
------------------------------ ------------------------------
Interest Bearing Deposits:
Int-bearing demand 8 (11) (3) (0) 3 3
Money market savings (5) 0 (5) 1 2 3
Savings deposits 8 0 8 41 (3) 38
Time deposits > $100M 60 3 62 41 (5) 36
Time deposits < $100M (2) (13) (15) 121 9 130
Other Borrowing 90 6 96 (10) 0 (9)
------------------------------ ------------------------------
Total interest bearing deposits 152 (2) 150 100 51 151
------------------------------
------------------------------
Net change in net interest 156 (3) 153 141 (106) 34
</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.
<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 September 30, 1998 and 1997 the Bank's allowance stood at
1.01 percent and 1.03 percent of gross loans, respectively. A provision of
$80,000 was made to the allowance during the nine months ended September 30,
1998, compared to a provision of $120,000 in the same
12
<PAGE>
period in 1997. Charged off loans during the nine months ended September 30,
1998 and 1997 totaled $69,900 and $102,200 respectively. Recoveries for the
same periods were $9,000 and $1,800, respectively.
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was 0.95 percent at September 30, 1998
compared with 1.19 percent at September 30, 1997 and 0.81 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 nine months ended September 30, 1998 was
$1,493,400, compared with $1,375,600 for the same period in 1997. The increase
of $117,800 was the result of a $16,200 increase in service charges on deposit
accounts, income from SBA loan sales and servicing increased $21,200 and income
from other service charges, commissions and fees increased $80,400. Merchant
credit card processing accounted for $68,900 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 that the impact of
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, 1998
increased $173,400 compared with the same period in 1997. The increase was
primarily due to employee merit pay increases and accrual of annual bonuses on a
quarterly basis in 1998 verses year end in 1997.
Total occupancy and equipment expense for the nine months ended September
30, 1998 was $213,200 compared to $187,000 for the same period in 1997. The
increase of $26,200 was due to increases in maintenance expense ($13,200),
depreciation expense increased ($5,700), premises rent ($3,200), utilities
($4,300), janitorial services ($4,700) and property taxes ($4,100) while net
merchant terminal expense decreased ($5,600).
Data processing expense for the nine months ended September 30, 1998
increased $14,400 compared to the same period in 1997. The increase was due to a
1.4% cost of living increase, effective July 1998 and increased numbers of
accounts and transactions.
For the nine months ended September 30, 1998 professional fees
decreased $89,300 compared to the same period in 1997. The decrease resulted
from the recovery of legal expenses associated with a trade name infringement
lawsuit.
Other expenses for the nine months ended September 30, 1998 totaled
$1,119,000 compared with $1,048,600 for the same period in 1997. Significant
changes occurred in the following categories with increases in merchant
processing expense ($78.300), Year 2000 expense ($19,200), loan expense
($12,200), messenger and freight ($4,400) and insurance ($3,900); decreases
occurred in business development ($15,100), telephone expense ($6,100),
donations ($5,900) and SBA loan expense ($17,000).
LOANS
Loans represented 66.79% of average earning assets, and 57.80% of average
total assets for the nine months ended September 30, 1998, compared with 73.32%
and 62.91%, respectively during 1997. For the nine months ended September 30,
1998 average loans increased 5.60% from $25,679,000 for the same period in 1997
to $27,117,000. Average commercial loans increased $1,492,000 (13.95%); while
average real estate loans decreased $35,000 (.24%) and average installment loans
decreased $19,000 (3.42%).
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
14
<PAGE>
years. Short-term business loans are generally intended to finance current
transactions and typically provide for monthly interest payments with
principal being payable at maturity or at 90-day intervals. Term loans
(usually for a term of two to five years) normally provide for monthly
installments of principal and interest. The Bank from time to time utilizes
accounts receivable and inventory as security for loans.
The Bank is the recognized leader for Small Business Administration lending
in Monterey County, and holds SBA's coveted Preferred Lender Status. Generally,
SBA loans are guaranteed by the SBA for 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"):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- ----------
(Dollars in thousands)
<S> <C> <C>
ACCRUING,
PAST DUE 90 DAYS OR MORE:
Real Estate 258 195
Commercial 0 0
Installment 0 0
Other 0 0
------------ -----------
Total accruing 258 195
NONACCRUAL LOANS:
Real Estate 2 67
Commercial 0 31
Installment 7 25
Other 0 0
------------ -----------
Total non-accrual 9 123
Total non-performing 267 318
Total loans end of period 28,186 26,678
Ratio of non-performing loans
to total loans at end of period 0.95% 1.19%
</TABLE>
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
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding 27,117 25,680
Allowance, beginning of period 269 253
Loans charged off during period:
Commercial 69 101
Installment 1 1
Real Estate 0 0
Other 0 0
---------- -----------
Total charge offs 70 102
Recoveries during period:
Commercial 8 1
Installment 1 1
Other 0 0
---------- -----------
Total recoveries 9 2
Net Loans charged off
during the period 61 100
Additions to allowance for
possible loan losses 80 120
Allowance, end of period 288 273
Ratio of net loans charged off to
average Loans outstanding
during the period 0.22% 0.39%
Ratio of allowance to total
loans at end of period 1.01% 1.03%
</TABLE>
17
<PAGE>
FUNDING SOURCES
Average deposits for the nine months ended September 30, 1998 were
$39,220,000 an increase of 10.59% compared with the average balance for 1997.
Average certificates of deposit represented 51.42% of average deposits for the
nine months ended September 30, 1998. Average interest checking account, money
market and savings accounts as a group were 26.18% of average deposits. Average
demand deposits represented 22.40% of average deposits.
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 $4,000,000 at September 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 at a lower cost than
comparable deposits. The Bank did not utilize any short term borrowings in 1998,
1997 or 1996.
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, 1998,
stockholders' equity was $3,310,000 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. The
Bank paid cash dividends totaling $20,000, $170,000 and $150,000 to the
Corporation in 1998, 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 9.65% and a total risk-based capital
ratio of 10.50% at September 30, 1998 (calculated under regulatory accounting
principles), well above the minimum regulatory requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 6.75% at September 30, 1998 (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 $5,500,000 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, 1998 was 35.02 percent, while its average
loan to deposit ratio for the nine months ended September 30, 1998 was 69.41
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
19
<PAGE>
on the income statement from a 100 basis-point change in National Prime. The
analysis 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 September 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 74% 74 74% 74
LOANS:
Fixed rate < 1 year 4,011 87% 3,496 87% 3,496
Floating rate < 1 year 12,731 91% 11,583 91% 11,583
SECURITIES:
Fed Funds Sold & Repos 6,690 100% 6,690 100% 6,690
Fixed Rate Securities - Callable < 1 year 1,500 74% 1,109 0% 0
-------- -------- ---------
Total Rate Sensitive Assets 25,032 22,951 21,843
RATE SENSITIVE LIABILITIES
Savings 3,356 30% 1,007 30% 1,007
Money Market Checking 5,875 16% 916 16% 939
Money Market Savings 1,429 28% 397 28% 397
CDs > $100,000 5,737 78% 4,495 78% 4,495
CDs < $100,000 8,109 79% 6,418 79% 6,418
FFP, Repos & Other Borrowing 1,000 69% 692 69% 692
-------- --------- ----------
Total Rate Sensitive Liabilities 25,505 13,925 13,949
Rate Sensitivity GAP (Assets-Liabilities) (473) 9,026 7,894
Total Assets 49,215 49,215 49,215
GAP as a Percentage of Total Assets (0.96)% 18.34% 16.04%
Estimated change in net interest margin if prime rate falls 1%: (90.26)
Estimated change in net interest margin if prime rate rises 1%: 78.94
</TABLE>
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 as of September 30, 1998:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
September 30, 1998
Book Market
value value
-------------- -------------
(Dollars in thousands)
<S> <C> <C>
Available for sale:
Equity Securities 595 595
Held to maturity:
U.S. Agency securities 2,500 2,534
State/Local Agency securities 4,766 4,824
---------- ----------
Total 7,861 7,953
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at September 30, 1998:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 3 over 5
1 year through through through over
or less 3 years 5 years 15 years 15 years
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
U.S. Agency securities --- --- --- 2,500 ---
State/Local Agencies --- --- --- --- 4,766
Equity Securities 595 --- --- --- ---
---------- ---------- ----------- ----------- -----------
Total 595 --- --- 2,500 4,766
</TABLE>
21
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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.
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.
<TABLE>
<CAPTION>
NORTHERN CALIFORNIA BANCORP, INC.
<S> <C>
Date: November 5, 1998 By: /s/ Charles T. Chrietzberg, Jr.
---------------- ---------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: November 5, 1998 By: /s/ Bruce N. Warner
---------------- ---------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
</TABLE>
22
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,828,200
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 6,690,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 594,500
<INVESTMENTS-CARRYING> 7,265,600
<INVESTMENTS-MARKET> 7,358,500
<LOANS> 28,185,700
<ALLOWANCE> 288,200
<TOTAL-ASSETS> 49,218,800
<DEPOSITS> 41,265,800
<SHORT-TERM> 0
<LIABILITIES-OTHER> 643,000
<LONG-TERM> 4,000,000
0
0
<COMMON> 2,716,800
<OTHER-SE> 593,200
<TOTAL-LIABILITIES-AND-EQUITY> 49,218,800
<INTEREST-LOAN> 2,197,700
<INTEREST-INVEST> 590,800
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,788,500
<INTEREST-DEPOSIT> 1,019,000
<INTEREST-EXPENSE> 1,201,900
<INTEREST-INCOME-NET> 1,586,600
<LOAN-LOSSES> 80,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,540,600
<INCOME-PRETAX> 459,400
<INCOME-PRE-EXTRAORDINARY> 459,400
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 327,500
<EPS-PRIMARY> .38
<EPS-DILUTED> .33
<YIELD-ACTUAL> 9.16
<LOANS-NON> 8,900
<LOANS-PAST> 258,207
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 320,599
<ALLOWANCE-OPEN> 269,100
<CHARGE-OFFS> 69,900
<RECOVERIES> 9,000
<ALLOWANCE-CLOSE> 288,200
<ALLOWANCE-DOMESTIC> 18,300
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 269,900
</TABLE>
