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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
X Annual report under Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 (Fee required) for fiscal year ended December
31, 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.
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(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (408) 649-4600
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB X
---
Revenues for the year ended December 31, 1997. $ 5,266,200.
As of March 1, 1998, the Corporation had 858,526 shares of common stock
outstanding. The aggregate market value of voting stock held by
non-affiliates of the Corporation was $1,320,000, based on the most recent
sale at $2.75 per share on February 2, 1998.
The following documents are incorporated by reference to the parts
indicated of this Form 10-KSB:
1. Portions of the Independent Auditor's Report for the fiscal year
ended December 31, 1997 are incorporated by reference in Part I Item 3 and
Part II Item 6.
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FORM 10-KSB CROSS REFERENCE INDEX
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PAGE
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PART I
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ITEM 1 Business 3
ITEM 2 Properties 15
ITEM 3 Legal Proceedings 16
ITEM 4 Submission of Matters to a Vote of Security Holders 16
PART II
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ITEM 5 Market for the Corporation's Common Stock and
Related Stockholder Matters 17
ITEM 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
ITEM 7 Financial Statements and Supplementary Data 40
Independent Auditors' Report on the Financial
Statements FS 1
Consolidated Balance Sheets at December 31, 1997
and 1996 FS 2
Consolidated Statements of Operations for each of
the three years in the period ended
December 31, 1997 FS 3
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period
ended December 31, 1997 FS 4
Consolidated Statements of Cash Flows for each of
the three years in the period ended
December 31, 1997 FS 5-6
Notes to Consolidated Financial Statements FS 7-30
ITEM 8 Changes in and Disagreements with Accountants and
Financial Disclosure 40
PART III
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ITEM 9 Directors, Executive Officers, Promoters and
Control Persons: Compliance with Section 16(a) of
the Exchange Act 41
ITEM 10 Executive Compensation 42
ITEM 11 Security Ownership of Certain Beneficial Owners
and Management 45
ITEM 12 Certain Relationships and Related Transactions 47
ITEM 13 Exhibits and Reports 48
Signatures 49
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PART I
ITEM 1. BUSINESS
GENERAL
Northern California Bancorp, Inc. (the "Corporation") was incorporated
on August 29, 1995, as a for-profit corporation under the California
Corporate laws for the principal purpose of engaging in banking and
non-banking activities as allowed for a bank holding company. The
Corporation owns 100% of Monterey County Bank (the "Bank"). The
Corporation's sole sources of (unconsolidated) revenues at this time are
potential dividends, management fees and tax equalization payments, if any,
from the Bank. While these sources cannot be assured, and may be limited,
the Corporation has no direct cash needs other than limited expenses related
to corporate and regulatory compliance.
Compliance with environmental laws has not had a material impact on the
operations of the Bank or the Corporation, although the Bank faces potential
liability or losses if its borrowers fail to comply with such laws and the
Bank acquires contaminated properties in foreclosure.
BANK SUBSIDIARY
Monterey County Bank, an independent, California chartered commercial
banking corporation was chartered by the State of California on July 30,
1976. The Bank's customer base includes individuals, small and medium sized
businesses and a variety of government agencies with residences, offices or
other relationships located in or about the city and county of Monterey,
California, including the cities of Carmel and Pacific Grove. The Bank
offers its customers a wide variety of the normal personal, consumer and
commercial services expected of a locally owned, independently operated bank.
Its deposits are insured by the FDIC, and, as such, the Bank is subject to
regulations by that federal agency and to periodic audits of its operations
and documentary compliance by FDIC personnel. As a state chartered bank
which is not a member of the Federal Reserve System, it is also regulated and
periodically examined by the California State Banking Department.
The Bank's activities are conducted at its principal offices, 601 Munras
Ave., Monterey, California and at its two branch offices in Carmel and
Pacific Grove, California.
At December 31, 1997 the Bank's had total assets, deposits and
shareholders' equity of approximately $46,108,000, $39,239,300 and
$3,004,400, respectively.
EMPLOYEES
At December 31, 1997 the Northern California Bancorp, Inc. and its
subsidiary Monterey County Bank employed a total of 31 full time equivalent
persons.
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COMPETITION
All phases of the Bank's business have been, since inception, and will
continue to be subject to significant competitive forces. Although the Bank
has increasing recognition in its primary service area and Monterey County,
it nevertheless has to compete with other independent local banking
institutions, including commercial banks and savings and loan associations,
as well as branch offices of regional commercial banks, some of which have
assets, capital and lending limits substantially larger than the Bank, as
well as wider geographic markets, more support services and larger media
advertising capabilities. The Bank will also compete with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies , regulated small
loan companies and credit unions, as well as securities brokerage offices
which can issue commercial paper and other securities (such as shares in
money market funds).
Among the advantages such institutions have over the Bank are their
ability to finance wide ranging advertising campaigns and to allocate their
investment assets to regions of highest yields and demand. Many institutions
offer certain services, such as trust services and international banking,
which the Bank does not currently offer or plan to offer. By virtue of their
greater total capital, such institutions have substantially higher lending
limits than the Bank (legal lending limits to an individual customer being
limited to a percentage of a bank's total capital accounts). These
competitors may intensify their advertising and marketing activities to
counter any efforts by the Bank to further attract new business as a
commercial bank. In addition, as a result of legislation enacted earlier in
the decade, there is increased competition between banks, savings and loan
associations and credit unions for the deposit and loan business of
individuals. These activities may hinder the Bank's ability to capture a
significant market share.
To compete with the financial institutions in its primary service area,
the Bank intends to use the flexibility which its independent status will
permit. Its activities in this regard include an ability and intention to
respond quickly to changes in the interest rates paid on time and savings
deposits and charged on loans, and to charges imposed on depository accounts,
so as to remain competitive in the market place. It also will continue to
emphasize specialized services for the small business person and
professional, and personal contacts by the Bank's officers, directors and
employees. If there are customers whose loan demands exceed the Bank's
lending limits, the Bank has the ability to arrange for such loans on a
participation basis with other financial institutions. No assurance can be
given, however, that the Bank's efforts to compete with other financial
institutions in its primary service area will be successful.
The Bank provides a range of competitive retail and commercial banking
services. The deposit services offered include various types of personal and
business checking accounts, savings accounts, money market investment
accounts, certificates of deposit, and retirement accounts. Lending services
include consumer loans, various type of mortgage loans for residential and
commercial real estate, personal lines of credit, home equity loans, real
estate construction, accounts receivable financing, commercial loans to small
and medium size businesses and professionals. The Bank also provides
drive-through facilities, at its Monterey and Carmel
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offices, and night depository facilities for customer convenience. The Bank
offers safe deposit box facilities, cashiers' checks, travelers checks, U.S.
Savings Bonds, and wire transfers. The Bank does not provide trust services.
While the Bank has the authority to engage in a wide range of banking
activities, and offers most of the types of banking services of a commercial
bank, over the past three years it has derived much of its profitability and
differentiated itself from its competitors through (i) commercial and real
estate loans guaranteed by the Small Business Administration ("SBA"); and
(ii) credit card depository services for merchants.
The Bank depends largely on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings, and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio,
comprise the major portion of the Bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly, the earnings and growth of the Bank are subject to the influence
of domestic and foreign economic conditions, including inflation, recession
and unemployment.
Monetary and fiscal policies of the federal government and the policies
of regulatory agencies, particularly the Federal Reserve Board, also impact
on the Bank's business. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in U.S. Government securities, by
adjusting the required level of reserves for financial intermediaries subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on
deposits. The nature and impact of any future changes in monetary policies
cannot be predicted.
SUPERVISION AND REGULATION
THE CORPORATION
Future offers or sales of the stock of the Corporation will be subject
to the registration requirements of the Securities Act of 1933, and
qualification under the California Corporate Securities Act of 1968, and
possibly other state Blue Sky laws, (unless an exemption is available),
although the Bank's Common Stock is exempt from such requirements.
On December 29, 1995, after receipt of appropriate approvals, and/or
passage of notice periods without objection, from the California
Superintendent of Banks, the Federal Deposit Insurance Corporation, the Board
of Governors of the Federal Reserve System and the shareholders of the Bank,
the Corporation acquired the Bank through a reverse triangular merger (the
"Merger"). As a result, by operation of law, each outstanding share of
common stock of the Bank prior to the Merger was converted into a share of
common stock of the Corporation, while the Corporation became the sole owner
of the newly issued shares of common stock of the Bank.
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The Bank Holding Company Act of 1956, as amended, places the Corporation
under the supervision of the Board of Governors of the Federal Reserve System
(the "FRB"). The Corporation must generally obtain the approval of the FRB
before acquiring all or substantially all of the assets of any bank, or
ownership or control of any voting securities of any bank if, after giving
effect to such acquisition, the Corporation would own or control more than 5%
of the voting shares of such bank. An application for such approval with
respect to the acquisition of the Bank has been prepared.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in non-banking activities unless the FRB, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
such determinations, the FRB considers whether the performance of such
activities by a bank holding company would offer advantages to the public
which outweigh possible adverse effects.
The FRB's Regulation "Y" sets out the non-banking activities which are
permissible for bank holding companies under the law, subject to the FRB's
approval in individual cases. Most of these activities are now permitted for
California banks that are well-capitalized. The Corporation and its
subsidiaries will also be subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of securities.
Bills have been introduced in Congress that may eliminate the barrier between
commercial banking and investment banking, commerce or insurance, or some
combination thereof. In many of the legislative proposals, in order to
protect the relevant deposit funds, certain activities within a holding
company system would only be permitted to be engaged in by non-bank
subsidiaries of the holding company. Management cannot predict whether any
such proposals or legislation will be adopted or what the effect, if adopted,
they will have on the Bank or Corporation.
The Corporation will be required to file reports with the FRB and
provide such additional information as the FRB may require. The FRB will also
have the authority to examine the Corporation and each of its subsidiaries
with the cost thereof to be borne by the Corporation. Under California
banking law, the Corporation and its subsidiaries are also subject to
examination by, and may be required to file reports with, the Superintendent.
The Corporation and any subsidiaries which it may acquire or organize
after the reorganization will be deemed affiliates of the Bank within the
meaning of the Federal Reserve Act. Pursuant thereto, loans by the Bank to
affiliates, investments by the Bank in affiliates' stock, and taking
affiliates' stock by the Bank as collateral for loans to any borrower will be
limited to 10% of the Bank's capital, in the case of any one affiliate, and
will be limited to 20% of the Bank's capital, in the case of all affiliates.
Federal and State law place other limitations on transactions between the
Bank and its affiliates designed to ensure that the Bank receives treatment
in such transactions comparable to that available from unaffiliated third
parties.
The Corporation and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of
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services. For example, with certain exceptions, the Bank may not condition
an extension of credit on a customer's obtaining other services provided by
it, the Corporation or any other subsidiary, or on a promise from its
customer not to obtain other services from a competitor.
SUBSIDIARY BANK
Both federal and state law provide extensive regulation of the banking
business. State and federal statutes and regulations apply to many aspects
of the Bank's operations, including minimum capital requirements, reserves
against deposits, interest rates payable on deposits, loans, investments,
mergers and acquisitions, borrowings, dividends and locations of branch
offices. The California Superintendent of Banks and the FDIC provide primary
supervision, periodic examination and regulation of the Bank.
The FDIC, through its Bank Insurance Fund (the "BIF") insures the
Bank's deposits, currently up to a maximum of $100,000 per depositor. For
this protection, the Bank, like all insured banks, pays a semi-annual
statutory assessment and is subject to the rules and regulations of the FDIC.
Although the Bank is not a member of the Federal Reserve System, certain
regulations of the Federal Reserve Board also apply to its operations.
California law restricts the amount available for cash dividends by
state-chartered banks to the lesser of retained earnings or the bank's net
income for its last three fiscal years (less any distributions to
stockholders made during such period). Cash dividends may also be paid in an
amount not exceeding the net income for such bank's last preceding fiscal
year after obtaining the prior approval of the Superintendent. The FDIC also
has authority to prohibit the Bank from engaging in unsafe or unsound
practices. The FDIC can use this power, under certain circumstances, to
restrict or prohibit a bank from paying dividends.
Federal law imposes restrictions on banks with regard to transactions
with affiliates, including any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, its affiliates, as well as the
purchase of or investments in stock or other securities thereof, or the
taking of such securities as collateral for loans, and the purchase of assets
of from affiliates. These restrictions have the effect of preventing
affiliates (such as the Corporation) from borrowing from the Bank unless the
loans are secured by marketable obligations of designated amounts. Secured
loans and investments by the Bank are limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) in the case of any one
affiliate, and 20% thereof in the case of all affiliates. California law
also imposes certain restrictions with respect to transactions involving
other controlling persons of the Bank.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made in Congress, in the
California legislature and before various bank regulatory and other
professional agencies. The Bank cannot predict what, if any legislation or
regulations will be enacted, or the impact thereof on its business and
profitability.
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CAPITAL STANDARDS
Government agencies have traditionally regulated bank capital through
explicit and implicit guidelines and rules. State law requires "adequate"
capital, without objective definition. Federal law and regulations require
minimum levels of risk-based and so-called "Leverage" capital.
FDIC guidelines implement the risk-based capital requirements. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles (using
the rough measures set forth therein) among banking organizations, take
certain off-balance sheet items into account in assessing capital adequacy
and minimize disincentives to holding liquid, low-risk assets. Under these
guidelines, assets and credit equivalent amounts of off-balance sheet items,
such as letters of credit and outstanding loan commitments, are assigned to
one of several risk categories, which range from 0% for risk-free assets,
such as cash and certain U.S. government securities, to 100% for relatively
high-risk assets, such as loans and investments in fixed assets, premises and
other real estate owned. The aggregate dollar amount of each category is then
multiplied by the risk-weight associated with that category. The resulting
weighted values from each of the risk categories are then added together to
determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier I
capital. Higher risk-based ratios are required to be considered "well
capitalized" under prompt corrective action provisions.
A banking organization's qualifying total capital consists of two
components: Tier I capital (core capital) and Tier 2 capital (supplementary
capital). Tier I capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchased credit card
relationships may be included, subject to certain limitations. At least 50%
of the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock and related surplus;
(iii) hybrid capital instruments (instruments with characteristics of both
debt and equity), perpetual debt and mandatory convertible debt securities;
and (iv) eligible term subordinated debt and intermediate-term preferred
stock with an original maturity of five years or more, including related
surplus, in an amount up to 50% of Tier 1 capital. The inclusion of the
foregoing elements of Tier 2 capital are subject to certain requirements and
limitations of the federal banking agencies.
The FDIC imposes a minimum leverage ratio of Tier I capital to average
total assets of 3% for the highest rated banks, and 4% for all other banks.
Institutions experiencing or
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anticipating significant growth or those with other than minimum risk
profiles are expected to maintain capital at least 100-200 basis points above
the minimum level.
In addition, the Federal Reserve Board and the FDIC have issued or
proposed rules to take account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities in calculating risk-based
capital.
For capital adequacy purposes, deferred tax assets that can be realized
from taxes paid in prior carry-back years, and from the future reversal of
temporary differences, are generally unlimited. However, deferred tax assets
that can only be realized through future taxable earnings, including the
implementation of a tax planning strategy, count toward regulatory capital
purposes only up to the lesser of (i) the amount that can be realized within
one year of the quarter-end report date or (ii) 10% of Tier I capital. The
amount of deferred taxes in excess of this limit, if any, would be deducted
from Tier I capital and total assets in regulatory capital calculations.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets, including
dollar equivalents for certain off-balance sheet assets.
Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the
concentration of credit and nontraditional activities. Institutions which
have significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these
risks, will be required to set aside capital in excess of the regulatory
minimums. The federal banking agencies have not imposed any quantitative
assessment for determining when these risks are significant, but have
identified these issues as important factors they will review in assessing an
individual bank's capital adequacy. Management of the Company does not
believe that the Bank's assets and activities, as currently structured, would
lead the FDIC to require additional capital under this rule.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses (the "ALLL")
which calls for the maintenance of the ALLL at a level at least equal to the
"estimated credit losses" in the bank's loan portfolio. "Estimated credit
losses" are defined as "an estimate of the current amount of the loan and
lease portfolio (net of unearned income) that is not likely to be collected;
that is, net charge-offs that are likely to be realized for a loan or pool of
loans given facts and circumstances as of the evaluation date." The policy
statement also suggests that a test of reasonableness be applied to the ALLL,
which test is satisfied if the ALLL equals or exceeds the sum of (a) assets
classified loss; (b) 50% of assets classified doubtful; (c) 15% of assets
classified substandard; and (d) estimated credit losses on other assets over
the upcoming twelve months. The Bank believes that its ALLL exceeds the
amounts that would be required under the terms of this policy statement and
under such test of reasonableness. However, this a very subjective matter,
and the Bank cannot assure that any bank examiner would agree with its
evaluation, or that losses ultimately incurred from the Bank's portfolio
would not exceed the amounts so provided.
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Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency
is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall
generally be deemed to be: (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more
and is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that
is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0%
(3.0% under certain circumstances); (iv) "significantly undercapitalized"
if it has a total risk-based capital ratio that is less than 6.0%, a Tier I
risk-based capital ratio that is less than 3.0% or a Tier I leverage capital
ratio that is less than 3.0%; and (v) "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. (The FDIC may not, however,
reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At December 31, 1997, the Bank met the tests to be categorized as "well
capitalized" under the prompt corrective action regulations of the FDIC.
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SAFETY AND SOUNDNESS STANDARDS
Federal law requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; (v) asset growth; and (vi) compensation, fees and
benefits. The federal banking agencies recently adopted final regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards required by the
FDIA. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. Under the final regulations, if the FDIC
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC adopted regulations implementing a risk-based premium system
required by federal law. Under the regulations which cover the assessment
periods commencing on and after January 1, 1994, insured depository
institutions are required to pay insurance premiums within a range of 23
cents per $100 of deposits to 31 cents per $100 of deposits depending on
their risk classification. The FDIC, effective September 30, 1995, lowered
assessments from their rates of $.23 to $.31 per $100 of insured deposits to
rates of $.04 to $.31, depending on the health of the bank, as a result of
the recapitalization of the BIF. On November 15, 1995, the FDIC voted to
drop its premiums for most well capitalized banks to zero (with a minimum
$2,000. per year paid in any event). The Bank has been eligible for the
minimum payment since January 1, 1996. Other banks will be charged
risk-based premiums up to $.27 per $100 of deposits. On May 6, 1997, the
FDIC voted to retain the existing risk-based premiums for the second
semiannual period of 1997.
The FDIC Board of Directors voted, on May 20, 1997, to collect on behalf
of the Financing Corporation (FICO) assessments sufficient to meet the
funding requirements of the FICO for the remainder of 1997. The FICO rate on
BIF-assessable deposits will be 1.26 basis points, on an annual basis.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain regulatory approval to acquire an existing bank located in another
state without regard to state law. A bank holding company would not be
permitted to make such an
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acquisition if, upon consummation, it would control (a) more than 10% of the
total amount of deposits of insured depository institutions in the United
States or (b) 30% or more of the deposits in the state in which the bank is
located. A state may limit the percentage of total deposits that may be held
in that state by any one bank or bank holding company if application of such
limitation does not discriminate against out-of-state banks. An out-of-state
bank holding company may not acquire a state bank in existence for less than
a minimum length of time that may be prescribed by state law except that a
state may not impose more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of
the acquired bank into branches of the resulting bank. Each state may permit
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state or in other states
by that state's banks. The same concentration limits discussed in the
preceding paragraph apply. The Interstate Act also permits a national or
state bank to establish branches in a state other than its home state if
permitted by the laws of that state, subject to the same requirement and
conditions as for a merger transaction.
The Interstate Act is likely to increase competition in the Bank's
market areas especially from larger financial institutions and their holding
companies. It is difficult to asses the impact such likely increased
competition will have on the Bank' operations.
On October 2, 1995, the "California Interstate Banking and Branching
Act of 1995" (the "1995 Act") became effective. The 1995 Acts generally
allows out-of-state banks to enter California by merging with, or purchasing,
a California bank or industrial loan company which is at least five years
old. Also, the 1995 Act repeals the California Interstate (National) Banking
Act of 1986, which previously regulated the acquisition of California banks
by out-of-state bank holding companies. In addition, the 1995 Act permits
California state banks, with the approval of the Superintendent of Banks, to
establish agency relationships with FDIC-insured banks and savings
associations. Finally, the 1995 Act provides for regulatory relief,
including (i) authorization for the Superintendent to exempt banks from the
requirement of obtaining approval before establishing or relocating a branch
office or place of business, (ii) repeal of the requirement of directors'
oaths (Financial Code Section 682), and (iii) repeal of the aggregate limit
on real estate loans (Financial Code Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements, reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (the "CRA"). The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting
the credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
PAGE 12
<PAGE>
In May, 1995, the federal banking agencies issued final regulations
which change the manner in which they measure a bank's compliance with its
CRA obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institutions' actual lending service and
investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with
other procedural requirements. In March 1994, the Federal Interagency Task
Force on Fair Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal agencies will
use to prove discrimination: overt evidence of discrimination, evidence of
disparate treatment and evidence of disparate impact. Management of the Bank
believes that the Bank is in substantial compliance with all requirements
under these provisions. Following the Bank's most recent CRA examination, the
Bank's rating was "satisfactory".
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement
Section 304 of FDICIA which requires federal banking agencies to adopt
uniform regulations prescribing standards for real estate lending. Each
insured depository institution must adopt and maintain a comprehensive
written real estate lending policy, developed in conformance with prescribed
guidelines, and each agency has specified loan-to-value limits in guidelines
concerning various categories of real estate loans.
Section 24 of the Federal Deposit Insurance Act (the "FDIA"), as
amended by the FDICIA, generally limits the activities and equity investments
of FDIC-insured, state-chartered banks to those that are permissible for
national banks. Under regulations dealing with equity investments, an insured
state bank generally may not directly or indirectly acquire or retain any
equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank is not prohibited from, among other
things, (i) acquiring or retaining a majority interest in a subsidiary, (ii)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets, (iii)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees' and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
FDIC regulations implementing Section 24 of the FDIA provide that an
insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible
for a national bank unless the FDIC has determined that such activities would
pose no risk to the insurance fund of which it is a member and the bank is in
compliance with applicable regulatory capital requirements. Any insured
state-chartered bank
PAGE 13
<PAGE>
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
REGULATORY ENFORCEMENT POWERS
Commercial banking organizations, such as the Bank, may be subject to
enforcement actions by the FDIC and the Superintendent for engaging in unsafe
or unsound practices in the conduct of their businesses or for violations of
any law, rule, regulation or any condition imposed in writing by the agency
or any written agreement with the agency. Enforcement actions may include
the imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits, the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the imposition of restrictions and
sanctions under the prompt corrective action provisions of the FDICIA.
CALIFORNIA AND FEDERAL BANKING LAW
The Federal Change in Bank Control Act of 1978 prohibits a person or
group of persons "acting in concert" from acquiring "control" of a bank
or holding company unless the appropriate federal regulatory agency has been
given 60 days' prior written notice of such proposed acquisition and, within
that time period, has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which
such a disapproval may be issued. An acquisition may be made prior to the
expiration of the disapproval period if the agency issues written notice of
its intent not to disapprove the action. The acquisition of more than 10% of
a class of voting stock of a bank (or holding company) with a class of
securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (such as the Common Stock), is generally presumed, subject
to rebuttal. to constitute the acquisition of control.
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Superintendent has approved such acquisition of control.
A person would be deemed to have acquired control of the Corporation under
this state law if such person, directly or indirectly, has the power (i) to
vote 25% or more of the voting power of the Corporation or (ii) to direct or
cause the direction of the management and policies of the Corporation. For
purposes of this law, a person who directly or indirectly owns or controls
10% or more of the Common Stock would be presumed to control the Corporation,
subject to rebuttal.
In addition, any "company" would be required to obtain the approval of
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), before acquiring 25% (5% in the case of an acquirer that
is, or is deemed to be, a bank holding company)
PAGE 14
<PAGE>
or more of the outstanding Common Stock of, or such lesser number of shares
as constitute control over, the Bank or the Corporation.
The Community Reinvestment Act of 1977 ("CRA") and the related
Regulations of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") are
intended to encourage regulated financial institutions to help meet the
credit needs of their local community or communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation
of such financial institutions. The CRA and such regulations provide that
the appropriate regulatory authority will assess the records of regulated
financial institutions in satisfying their continuing and affirmative
obligations to help meet the credit needs of their local communities as part
of their regulatory examination of the institution. The results of such
examinations are made public and are taken into account upon the filing of
any application to establish a domestic branch, to merge or to acquire the
assets or assume the liabilities of a bank. In the case of a bank holding
company, the CRA performance record of the subsidiary bank(s) involved in the
transaction is reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with
any other bank holding company. An unsatisfactory record can substantially
delay or block the transaction.
RESEARCH
Neither the Corporation nor the Bank makes any material expenditures for
research and development.
DEPENDENCE UPON A SINGLE CUSTOMER
Neither the Corporation nor the Bank is dependent upon a single customer
or very few customers. The Bank's business is concentrated in, and largely
dependent upon the strength of the local economy in, the Monterey Peninsula
area of Northern California. The local economy is affected by both national
trends and by local factors. Tourism and the activities at the former Fort
Ord military base are among the major contributors to the local economy. The
opening of the California State University at Monterey Bay on the former Fort
Ord military base may lessen the impact of the base closure.
ITEM 2. PROPERTIES
The main office of the Bank, which also serves as the principal office
of the Corporation, is located at 601 Munras Ave., Monterey, California
93940. This facility contains a lobby, executive and customer service
offices, teller stations, safe deposit boxes and related non-vault area,
vault, operations area, lounge and miscellaneous areas. A drive-through
facility and adequate paved parking are also on the premises. Both the land
and all improvements thereto are owned by the Bank. The Bank currently
operates two branch offices in Carmel and Pacific Grove, California, both
within approximately 10 miles from the Bank's main office. The land and
PAGE 15
<PAGE>
improvements dedicated to the Carmel and Pacific Grove branch offices are
leased. See Footnote 9 to the Corporation's financial statements included
herewith.
Generally, neither the Bank nor the Corporation may invest in equity
interests in real estate, except for the direct use of the Bank or the
Corporation in their business. The Bank makes and/or purchases loans secured
by real estate, subject to normal banking practices, its own policies and the
restrictions described above under Item 1.
ITEM 3. LEGAL PROCEEDINGS
In November of 1996 the Bank learned that Watsonville Federal Savings
and Loan Association (WFS) was changing its name to Monterey Bay Bank.
Because WFS has several branches in the bank's immediate market area and the
name "Monterey Bay Bank" appears to be confusingly similar to Monterey
County Bank's name, the Bank's management was concerned that the Bank's
marketing program would be jeopardized and that the public would not relate
the Bank's advertising and civic contributions to it. Following discussions,
WFS refused to abandon the "Monterey Bay Bank" name and Monterey County
Bank filed a civil law suit against WFS and its holding company Monterey Bay
Bancorp which seeks to enjoin the use of the "Monterey Bay Bank" name on
the grounds that the use of the name unfairly infringes on the Bank's name
and will damage the Bank. Monterey County Bank's law suit also seeks
monetary damages arising from any use of the "Monterey Bay Bank" name.
While the full impact to Monterey County Bank from the use of the "Monterey
Bay Bank" name is not yet known, the Bank's suit seeks one million dollars
($1,000,000.00) in compensatory damages. Monterey County Bank's management
is firmly committed to protecting its trade name by prosecuting the suit to
conclusion and has spent seventy-five thousand dollars ($75,000.00) to date
in pursuing the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposal was present to shareholders at the Corporations
annual shareholders' meeting held May 16, 1997.
Proposal Number 1: Election of Directors
<TABLE>
<CAPTION>
Number of Number of
Affirmative Votes
Votes Withheld
----------- ----------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 588,768 32,942
Sandra G. Chrietzberg 586,984 34,726
Peter J. Coniglio 619,175 2,535
Carla S. Hudson 619,175 2,535
John M. Lotz 619,175 2,535
</TABLE>
PAGE 16
<PAGE>
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Neither the Corporation's, which is held by approximately 600 persons,
nor the Bank's, stock has ever been actively traded. To the Corporation's
knowledge no brokers have handled trades in the Bank's stock during the past
four years, and there are no published "bid/asked" quotes for such stock or
the stock of the Corporation. During the same period, no broker acted as a
market maker for the Corporation or Bank's Common Stock. Accordingly, the
market price data contained herein does not represent the value which would
be assigned in an efficient market. The Common Stock is not listed on any
securities exchange or quoted on the National Association of Securities
Dealers Automated System.
The Corporation, at the request of three shareholders, repurchased
20,939 shares of common stock at $3.00 per share. These transactions
occurred during the third quarter of 1997.
The following table sets forth, according to information known to the
Corporation, the price paid per share in, and volume of, transactions in the
Bank's stock during the quarters ended March 31, 1995 to December 31, 1997.
<TABLE>
<CAPTION>
Quarter/Year Price Volume(1)
- ------------------------ ------------- ---------
<S> <C> <C>
1st quarter of 1995 2.75 20,565
2nd quarter of 1995 2.75 2,592
3rd quarter of 1995 2.75 1,000
4th quarter of 1995 2.75 5,885
1st quarter of 1996 2.75 6,720
2nd quarter of 1996 2.50/2.75 1,285
3rd quarter of 1996 2.75 210
4th quarter of 1996 2.75 1,574
1st quarter of 1997 2.50/2.75 1,772
2nd quarter of 1997 2.75 210
3rd quarter of 1997 2.75/3.00 22,144
4th quarter of 1997 2.75 762
</TABLE>
(1) For the period presented, the information indicated may not include
information on shares which may have been traded directly by shareholders
or through dealers.
PAGE 17
<PAGE>
The principal source of cash flow of the Corporation, including cash
flow to pay dividends on its stock or principal and interest on debt, is
dividends from the Bank. There are statutory and regulatory limitations on
the payment of dividends by the Bank to the Corporation, as well as by the
Corporation to its shareholders.
If in the opinion of the applicable federal and/or state regulatory
authority, a depository institution or holding company is engaged in or is
about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the depository institution or holding company, could
include the payment of dividends), such authority may require, after notice
and hear (except in the case of an emergency proceeding where there in no
notice or hearing), that such institution or holding company cease and desist
from such practice. Moreover, the Federal Reserve and the FDIC have issued
policy statements which provide that bank holding companies and insured
depository institutions generally should only pay dividends out of current
operating earnings.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), an FDIC insured depository institution may not pay any dividend
if payment would cause it to become undercapitalized or once it is
undercapitalized.
The Bank's payment of dividends, as a California chartered commercial
banking corporation, is regulated by the California Financial Code. Under
the California Financial Code, funds available for cash dividend payments by
the Bank are restricted to the lessor of: (I) retained earnings; or (ii) the
Bank's net income for its last three fiscal years (less any distributions to
the stockholders made during such period). As of December 31, 1997, the Bank
had $152,600 in retained earnings. Cash dividends may also be paid out of
net income for a bank's last preceding fiscal year upon the prior approval of
the Superintendent in an amount not exceeding the greater of the: (I)
retained earnings of a bank; (ii) net income of a bank for its last fiscal
year; or (iii) net income of a bank for its current fiscal year. If the
Superintendent finds that the stockholder's equity of a bank is not adequate,
or that payment of a dividend would be unsafe or unsound, the Superintendent
may order the Bank not to pay a dividend to the Bank's shareholders, even if
it meets the standards set forth in the California Financial Code. With the
approval of the Superintendent, the Bank could pay up to $237,600 in
dividends to the Corporation as of the date hereof. However, Management of
the Corporation does not anticipate that it will seek such approval during
1998.
In December 1997 and 1996 The Corporation paid cash dividends of $.12
and $.11 per share, respectively. The Bank paid dividends totaling
$170,000.00 and $150,000.00 to the Corporation during 1997 and 1996.
In December 1995 the Bank paid a $.10 per share cash dividend.
PAGE 18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be
read in conjunction with the financial statements and the other financial
data presented elsewhere herein. The Corporation had no activities other
than its organization during 1995.
Net income for each of the last three years was $225,900 in 1997,
$213,400 in 1996 and $278,000 in 1995. The basic earnings per share for each
of the last three years was $.26, $.24 and $.32 respectively. The diluted
earnings per share for the same time periods were $.22, $.21 and $.27,
respectively. Return on average shareholders' equity was 7.34%, 7.25% and
9.57% in 1997, 1996 and 1995, respectively. The Bank's return on average
assets was .54%, .56% and .79% in 1997, 1996 and 1995, respectively.
The increase in earnings for 1997 was due to an increase of $77,600 in
net interest income after provision for loan losses, an increase of $90,800
in other income; partially offset by a $60,300 increase in operating expenses
and an increase of $95,600 in income taxes.
The decrease in earnings during 1996 was largely due to a $88,600
increase in total operating expenses, a $30,800 increase in provision for
income taxes and a $51,600 decrease in other operating income. These factors
were partially offset by a $38,500 increase in net interest income and a
$67,500 decrease in the provision for loan losses.
The following table provides a summary of the income statement, balance
sheet, and selected ratios for the last five years. A more detailed analysis
of each component of net income is included under the appropriate captions,
which follows.
PAGE 19
<PAGE>
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands except per share data)
Summary of Operating Results:
Total interest income 3,399 3,140 2,952 2,734 2,604
Total interest expense 1,447 1,334 1,183 933 920
--------- --------- --------- --------- ---------
Net interest income 1,952 1,807 1,768 1,801 1,684
Provision for possible
loan losses 120 53 120 30 122
--------- --------- --------- --------- ---------
Net interest income after
provision for loan loss 1,832 1,754 1,648 1,771 1,562
Total other income 1,074 983 1,035 1,036 1,216
Total other expense 2,505 2,444 2,356 2,570 2,637
--------- --------- --------- --------- ---------
Income (loss) before taxes 402 293 327 236 142
Provision for income tax 176 80 49 (21) (90)
--------- --------- --------- --------- ---------
Net income (loss) 226 213 278 257 232
Per Common Share Data:
Net income (1) 0.26 0.24 0.32 0.29 0.26
Primary net income(2) 0.22 0.21 0.27 0.25 0.22
Book value, end of period 3.53 3.30 3.16 2.94 2.75
Avg shares outstanding (3) 868,248 879,465 879,465 879,465 879,465
Balance Sheet Data:
Total loans, net of unearned income(4) 25,606 25,310 22,494 23,918 25,042
Total assets 46,113 40,799 36,658 33,787 33,583
Total deposits 39,206 36,167 31,188 28,782 27,671
Stockholders' equity 3,031 2,898 2,776 2,584 2,423
</TABLE>
PAGE 20
<PAGE>
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios (5):
Return on average assets 0.54% 0.56% 0.79% 0.75% 0.72%
Return on average
stockholders' equity 7.34% 7.25% 9.57% 9.85% 9.69%
Net interest spread 4.74% 4.91% 5.24% 5.59% 5.34%
Net interest margin 5.42% 5.54% 5.86% 6.08% 5.85%
Avg shareholders' equity
to average assets 7.37% 7.72% 8.24% 7.57% 7.38%
Primary capital to assets
at end of period 7.85% 7.68% 8.14% 8.31% 7.91%
Total loans to total deposits
at end of period 65.31% 69.98% 72.12% 83.10% 91.42%
Allowance to total loans
at end of period 1.00% 1.00% 1.00% 1.01% 1.01%
Nonperforming loans to total
loans at end of period 0.81% 1.13% 0.14% 0.84% 0.80%
Net charge-offs to average loans 0.40% 0.10% 0.59% 0.16% 0.44%
</TABLE>
(1) Fully 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 employee stock options. The weighted average
number of shares used for this computation was 1,034,574, 1,022,402,
1,044,684, 1,012,773 and 1,034,972, in 1997, 1996, 1995, 1994, and
1993, respectively.
(2) Primary earnings (loss) per share amounts were computed on the basis of
the weighted average number of shares of common stock during the year.
The weighted average number of shares used for this computation was
868,248 for 1997 and 879,465 for 1996, 1995, 1994 and 1993.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
PAGE 21
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned on
interest-earning assets and (b) interest paid on interest-bearing liabilities,
is the most significant component of the Bank's earnings. Changes in net
interest income from period to period result from increases or decreases in the
average balances of interest earning assets portfolio, the availability of
particular sources of funds and changes in prevailing interest rates.
The following table summarizes the Bank's net interest income. It is not
presented on a tax equivalent basis, as the Bank's tax-exempt interest income
is insignificant.
<TABLE>
<CAPTION>
Years Ended Increase (Decrease)
December 31, From Prior Year
1997 1996 1995 1997/96 1996/95
-------------------------------- ----------- ----------
Amt % Amt %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income 3,399 3,140 2,952 259 8.25 188 6.37
Interest Expense 1,447 1,334 1,183 113 8.49 151 12.76
------- ------- ------- ---------------- --------------
Net Interest Income 1,952 1,806 1,769 146 8.08 37 2.09
</TABLE>
Net interest income increased $146,000 (8.08%) from 1996 to 1997. Average
interest bearing assets increased 10.09%, while the average rate earned
decreased 16 basis points, resulting in an increase of $258,700 in total
interest income. Interest expense increased $113,600 the result of a 8.96%
increase in average interest bearing liabilities and an 2 basis points decrease
in the average rate paid. Average interest rates on loans decreased 39 basis
points, due primarily to competitive pressures. Over half (57.7%) of the
$3,300,000 increase in earning assets was in investment securities which provide
a lower yield, average yield on investments was 6.46 percent, lower than loans
which had an average yield of 10.58 percent in 1997.
Net interest income increased $38,500 (2.14%) from 1995 to 1996. Average
interest bearing assets increased 8.32%, while the average rate earned decreased
15 basis points, resulting in an increase of $188,800 in total interest income.
Partially offsetting the increase in interest income was an increase of
$150,300 in interest expense, the net result of a 8.45% increase in average
interest bearing liabilities and an 18 basis points decrease in the average rate
paid.
The following table shows the components of the Bank's net interest income,
setting forth, for each of the three years ended December 31, 1997, 1996 and
1995 (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
PAGE 22
<PAGE>
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.
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
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 24 1 4.36 71 5 7.67 240 24 10.00
Invest securities 4,498 347 7.70 1,51 9 5.91 1,189 76 6.39
Federal funds sold 5,432 296 5.45 6,46 341 5.27 5,094 279 5.48
------------------------- ------------------------- -------------------------
Total investments 9,953 643 6.46 8,050 436 5.42 6,523 379 5.81
Loans
Real estate 14,648 1,503 10.26 13,138 1,368 10.41 12,661 1,371 10.83
Installment 491 601 2.16 686 80 11.70 994 112 11.27
Commercial 10,902 1,193 10.95 10,823 1,256 11.61 10,008 1,090 10.89
------------------------- ------------------------- -------------------------
Total loans 26,042 2,756 10.58 24,647 2,704 10.97 23,663 2,573 10.87
Total Interest
earning assets 35,995 3,399 9.44 32,697 3,140 9.60 30,186 2,952 9.78
------------------------- ------------------------- -------------------------
Interest Bearing
Liabilities:
Int-bearing demand 5,308 74 1.39 4,534 64 1.40 4,538 61 1.34
Money market savings 1,958 47 2.39 1,911 45 2.34 1,864 42 2.25
Savings deposits 2,184 48 2.21 2,541 70 2.76 2,812 81 2.88
Time deposits > $100M 7,056 408 5.78 5,693 38 5.92 5,019 30 6.02
Time deposits < $100M 12,112 744 6.15 11,774 735 6.24 9,814 605 6.16
Other Borrowing 2,162 126 5.82 1,790 83 4.62 2,000 92 4.60
------------------------- ------------------------- -------------------------
Total interest
bearing liabilities 30,779 1,447 4.70 28,249 1,334 4.72 26,047 1,183 4.54
-------------------------- ------------------------- -------------------------
Net interest income 1,952 1,807 1,769
Net interest spread 4.74 4.88 5.24
Net yield on interest
earning assets 5.42 5.53 5.86
</TABLE>
PAGE 23
<PAGE>
INTEREST SPREAD ANALYSIS (Continued):
<TABLE>
<CAPTION>
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 (4) (1) (4) (17) (2) (19)
Invest securities 176 81 257 21 (7) 14
Federal funds sold (54) 9 (45) 75 (13) 62
----------------------- ----------------------
Total investments 103 104 208 89 (32) 57
Loans
Real estate 157 (23) 135 52 (55) (3)
Installment (23) 2 (21) (35) 3 (32)
Commercial 9 (72) (63) 89 78 166
----------------------- ----------------------
Total loans 153 (102) 51 107 24 131
Total Interest Earning Assets 317 (58) 259 246 (59) 187
Interest Bearing
Deposits:
Int-bearing demand 11 (1) 10 (0) 3 3
Money market savings 1 1 2 1 2 3
Savings deposits (10) (12) (22) (8) (3) (11)
Time deposits GREATER THAN $100M 80 (10) 70 41 (5) 36
Time deposits LESS THAN $100M 21 (12) 10 121 9 130
Other Borrowing 17 26 43 (10) 0 (9)
----------------------- ----------------------
Total interest bearing deposits 119 (6) 114 100 51 151
----------------------- ----------------------
----------------------- ----------------------
Net change in net interest 197 (52) 146 146 (109) 36
</TABLE>
PAGE 24
<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 the end of 1997, 1996 and 1995, the Bank's
allowance stood at 1.04 percent, 1.01 percent and 1.00 percent of gross
loans, respectively. Provisions were made to the allowance for loan losses in
1997, 1996 and 1995 of $120,000, $52,500, and $120,000, respectively. Loans
charged off totaled $106,200 in 1997, $44,400 in 1996 and $159,600 in 1995.
Recoveries for these same periods were $1,800, $20,700 and $20,000.
PAGE 25
<PAGE>
The Bank's non performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .81 percent and 1.13 percent and .14
percent as of the end of 1997, 1996 and 1995, respectively.
Based upon statistics released by Federal and state banking authorities
regarding banks of similar size or otherwise located in California,
Management believes that the Bank's ratios of delinquent and non performing
loans to total loans are far better than average. Prudent collection
efforts, and tighter lending controls, are responsible for the Bank's strong
performance on these measures of credit quality. However, no assurance can
be given that the Bank's loan portfolio will continue to measure well against
its peers on these ratios and quality measures, or that losses will not
otherwise occur in the future.
NON-INTEREST INCOME
The following table presents a summary of the Bank's non-interest
income:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts 328 372 339
Other service charges, commissions
commissions and fees 421 353 310
Income from sales and servicing of
SBA loans 324 259 386
Gain (Loss) on sale of other
real estate 0 0 0
----- ------ ------
Total non-interest Income 1074 983 1035
</TABLE>
Total non-interest income increased $90,700 (9.22%) in 1997 when
compared with 1996. Income from sales and servicing of SBA loans increased
$65,500 and other service chanrges, commissions and fees increased $32,000;
while service charges on deposit accounts decreased $43,300. Merchant credit
card processing income increased by $70,700 during 1997 compared to 1996.
Total non-interest income decreased $51,600 (4.99%) in 1996 when
compared with 1995. Income from sales and servicing SBA Loans decreased
$127,100 (32.93%) in 1996 due to a decline in the average dollar amount of
loans funded and sold. This decrease was partially offset by increases in
service charges on deposit accounts of $32,700 (9.46%) and other operating
PAGE 26
<PAGE>
income of $42,800 (13.81%). The largest increase in other operating income
was a $39,000 (16.60%) increase in merchant credit card processing.
The sale of Small Business Administration (SBA) guaranteed loans is a
significant contributor to the Bank's income. SBA guaranteed loans yield up
to 3 3/4% over the New York prime rate, and the guaranteed portions can be
sold at premiums which vary with market conditions. SBA loans are guaranteed
by the full faith of the United States Government from 70 to 80 percent of
the principal amount. The guaranteed portion has risks comparable for an
investor to a U. S. Government security and can usually be sold in the
secondary financial market, either at a premium or at a yield which allows
the Bank to maintain a significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for
the Bank to continually expand its program in this area, and may limit the
level of premium that can be earned with regard thereto. Furthermore, the
SBA recently began requiring lenders to share a portion of premiums in excess
of 10% earned on the sale of the guaranteed portions.
The following table presents a summary of the activity in SBA loans for
the years ended 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
SBA loans authorized $3,551,800 $1,937,000 $3,170,000
------------ ------------ ------------
------------ ------------ ------------
SBA loans sold $2,524,100 $1,842,800 $2,582,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SUMMARY OF INCOME FROM SALES AND
SERVICING OF SBA LOANS
- --------------------------------
<TABLE>
<S> <C> <C> <C>
Income from premium $ 178,400 $ 138,600 $ 230,100
Income from servicing 170,000 165,000 190,700
Less origination expense (24,000) (44,700) (34,500)
------------ ------------ ------------
Total income from sales and
servicing of SBA loans $ 324,400 $ 258,900 $ 386,300
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
PAGE 27
<PAGE>
NON-INTEREST EXPENSE
The following table presents a summary of the Bank's other non-interest
expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and benefits 1,405 1,362 1,237
Occupancy and equipment expense 251 256 263
Professional fees 85 121 115
Data Processing 172 149 141
Other expenses 591 556 600
----- ----- -----
Total other Expenses 2,505 2,444 2,356
</TABLE>
Salary expense increased $42,700 in 1997 as a result of opening in April
of the Pacific Grove branch office and employee merit increases. The increase
in salary expense of $125,000 in 1996 was due to merit increases, additions
to staff for the planned opening of the Pacific Grove branch and a severance
payment to a former officer. Salary expense for 1995 increased $56,000, as a
result of employee merit pay increases and an addition to staff resulting
from the opening of a Loan Production Office.
In 1997 occupancy and equipment expenses decreased $5,000 compared with a
decrease of $6,900 in 1996. These nominal decreases were due to lower
depreciation expense. In 1995 occupancy expense decreased $298,000 as a
result of the relocation of the main office from a leased facility at 665
Munras Avenue to the Bank owned facility at 601 Munras Avenue. Management
negotiated the early termination of the 665 Munras Avenue lease effective
February 1, 1995. Early termination of the lease, due to expire April 30,
1995, expedited decreased occupancy expense beginning in February rather than
May.
Data processing expenses increased $23,600 in 1997, due to increased
number of accounts, increased activity, upgraded data communications and a
2.7% cost of living increase. Data processing expenses had remained level
over the preceding two years.
Professional fees decreased $35,400 in 1997 due to a $42,800 decrease in
legal fees. The increase of $5,600 in professional fees in 1996 was the net
affect of audit/accounting fees decreasing $18,700; while legal fees
increased $24,300. The increase in legal fees was the result of the Bank
incurring approximately $60,000 in legal fees and other costs associated with
the Monterey Bay Bank trade name infringement lawsuit. Professional fees
increased $48,000 in 1995 primarily due to costs associated with a third
party compliance review and the formation of an Employee Stock Ownership Plan.
PAGE 28
<PAGE>
Other expenses for 1997 totaled $590,700 compared with $556,300 for 1996.
Significant changes occurred in the following categories with increases in
advertising ($25,500), director fees ($7,100), FDIC and State assessments
($7,500), security expense ($11,000), loan expense ($3,700), messenger and
freight ($4,300), postage ($3,600), subscriptions/publications ($5,300) and
travel expense ($11,800); while decreases occurred in business development
($24,500), collection expense ($8,800), SBA loan expense ($20,700),
stationery and supplies expense ($4,800), operating losses ($4,300)
Other expenses for 1996 totaled $556,300 compared with $599,500 for 1995.
Significant changes occurred in the following categories with decreases in
FDIC and State assessments ($36,600), miscellaneous expense ($14,700), travel
($18,400), operational losses ($5,800), shareholder expense ($4,800) and
director fees ($3,800); increases in business development ($36,200),
advertising ($25,800) and stationery/supplies ($8,900).
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (Statement 109). Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. Deferred assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards, and then a
valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
The Bank adopted Statement 109 and has applied the provisions of the
statement as of January 1, 1992.
Allocation of federal and state income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Current
State $171,300 $78,500 $50,700
Federal 57,400 35,600 51,800
Deferred
Federal (31,400) (34,000) (42,600)
State (21,700) (100) (10,700)
-------- ------- -------
$175,600 $80,000 $49,200
-------- ------- -------
-------- ------- -------
</TABLE>
PAGE 29
<PAGE>
A reconciliation of the statutory federal income tax rate and the
effective tax rate on (loss) income follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State franchise 10.8 11.3 11.3
Expiration of general business credits -- -- 3.7
Utilization of general business credits (1.1) (10.8) (9.7)
Utilization of net operating loss
carry forwards to reduce tax -- -- (14.0)
Decrease in deferred tax asset
valuation allowance -- (7.2) (6.6)
----- ----- -----
Effective tax rates 43.7% 27.3% (15.0)%
----- ----- -----
----- ----- -----
</TABLE>
The Corporation has applied all unused general business tax credit
carryforwards for financial reporting and income tax purposes.
The components of the net deferred tax asset, included in other assets,
are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax asset
Federal $161,600 $183,300
State 66,700 65,700
-------- --------
Net deferred tax asset $228,300 $249,000
</TABLE>
The components of the net deferred tax asset, included in other assets,
are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Deferred tax asset
Accrual to cash adjustments 193,900 $144,100
Investments:
Net urealized (gain) loss on
securities available for sale (59,800) --
Charitable contribution carry forward -- 4,300
Allowance for loan losses 74,900 62,400
General business credit carry forward -- 18,800
Depreciation 19,300 19,400
-------- --------
Net deferred tax asset $228,300 $249,000
</TABLE>
PAGE 30
<PAGE>
Management has evaluated the deferred tax asset recognized under
Statement 109. As of December 31, 1997 and 1996 management expects all
temporary differences to be offset against future taxable income, and no
valuation allowance was deemed necessary.
LOANS
Loans, the largest component of earning assets, represented 72.35% of
average earning assets, and 62.32% of average total assets during 1997,
compared with 75.38% and 64.62%, respectively during 1996. In 1997, average
loans increased 5.66% from $24,647,000 in 1996 to $26,042,000. Average real
estate loans increased $1,510,000 (11.50%), average commercial loans
increased $79,000 (.73%); while installment loans decreased $195,000 (28.37%).
Loan policies and procedures provide the overall direction to the
administration of the loan portfolio. The Bank's loan underwriting process
is intended to encourage sound and consistent credit decisions are made.
Emphasis is placed upon credit quality, the borrower's ability to repay
through cash flow, secondary, and (occasionally, tertiary) repayment sources,
and the value of collateral.
The Bank's commercial and industrial loans are generally made for the
purpose of providing working capital, financing the purchase of equipment or
inventory, and other business purposes. Such loans generally have maturities
ranging from one year to several years. Short-term business loans are
generally intended to finance current transactions and typically provide for
monthly interest payments with principal being payable at maturity or at
90-day intervals. Term loans (usually for a term of two to five years)
normally provide for monthly installments of principal and interest. The
Bank from time to time utilizes accounts receivable and inventory as security
for loans.
The Bank is the recognized leader for Small Business Administration
lending in Monterey County, and holds SBA's coveted Preferred Lender Status.
Generally, SBA loans are guaranteed by the SBA for 70 to 80 percent of their
principal amount, which can be retained in portfolio or sold to investors.
Such loans are made at floating interest rates, but generally for longer
terms (up to 25 years) than are available on a conventional basis to small
businesses. The unguaranteed portion of the loans, although generally
supported by collateral, is considered to be more risky than conventional
commercial loans because they may be based upon credit standards the Bank
would not otherwise apply, such as lower cash flow coverage, or longer
repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has
also developed a broker program for generating residential real estate loans.
The Bank does not make real estate development loans. Real estate
construction loans are made for a much shorter term, and often at higher
interest rates, than conventional single-family residential real estate
loans. The cost of administering such loans is often higher than for other
real estate loans, as principal is drawn on periodically as construction
progresses.
PAGE 31
<PAGE>
The Bank also makes real estate loans secured by a first deed of trust on
single family residential properties and commercial and industrial real
estate. California commercial banks are permitted, depending on the type and
maturity of the loan, to lend up to 90 percent of the fair market value of
real property (or more if the loan is insured either by private mortgage
insurers or governmental agencies). In certain instances, the appraised
value may exceed the actual amount which could be realized on foreclosure, or
declines in market value subsequent to making the loan can impair the Bank's
security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's
consumer installment loans are generally secured by the personal property
being purchased. The Bank generally makes consumer loans to those customers
with a prior banking relationship with the Bank.
The following table presents the composition of the loan portfolio,
including loans held for sale, at December 31 for the last five years.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial 10,843 10,120 10,059 9,083 9,289
Real estate, construction 347 -- -- -- 791
Real estate, mortgage 13,921 14,336 11,246 13,528 13,761
Installment 520 583 888 1,241 1,133
Government guaranteed loans purchased 284 307 328 343 363
------------------------------------------------------
25,914 25,346 22,521 24,195 25,336
Less:
Allowance for possible loan losses (269) (254) (225) (245) (255)
Deferred origination fees, net (40) (37) (27) (32) (40)
------------------------------------------------------
25,606 25,056 22,270 23,918 25,042
------------------------------------------------------
------------------------------------------------------
</TABLE>
PAGE 32
<PAGE>
NON-PERFORMING AND NON-ACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which
are past due as to principal or interest 90 days or more, except for loans
which are well secured or when collection of interest and principal is deemed
likely. When a loan is placed on non-accrual, previously accrued and unpaid
interest is generally reversed out of income unless adequate collateral from
which to collect the principal of, and interest on, the loan appears to be
available.
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>
As of December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing,
PAST DUE 90 DAYS OR MORE:
Real Estate 134 209 0 0 0
Commercial 0 14 0 0 0
Installment 0 0 0 0 0
---- ---- ---- ---- ----
Total accruing 134 223 0 0 0
NON-ACCRUAL LOANS:
Real Estate 0 0 0 0 0
Commercial 55 35 31 170 189
Installment 21 23 0 33 14
---- ---- ---- ---- ----
Total non-accrual 76 58 31 203 203
Total non-performing 210 281 31 203 203
Total loans end of period 25,914 25,346 22,521 24,195 25,336
Ratio of non-performing
loans to total loans at
end of period 0.81% 1.11% 0.14% 0.84% 0.80%
</TABLE>
The low level of non-performing loans is the result of underwriting
criteria intended to be conservative, frequent review of new and delinquent
loans and a firm collection policy (with the assistance of outside legal
counsel). The Bank does not have any foreign loans or loans for highly
leveraged transactions.
PAGE 33
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
For the Years ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Average loans outstanding 26,042 24,647 26,663 24,631 24,867
Allowance, beginning
of period 254 225 245 255 242
Loans charged off during
period:
Commercial 101 39 147 41 47
Installment 5 5 12 4 18
Real Estate 0 0 0 0 62
Other 0 1 0 0 0
------ ------ ------ ----- ------
Total charge offs 106 45 159 45 127
Recoveries during period:
Commercial 1 8 13 2 9
Installment 1 13 6 4 9
Other 0 0 0 0 0
------ ------ ------ ----- ------
Total recoveries 2 21 19 6 18
Net Loans charged off
during the period 104 24 140 39 109
Additions to allowance for
possible loan losses 120 53 120 30 122
Allowance, end of period 269 254 225 246 255
Ratio of net loans charged
off to average Loans
outstanding during the period 0.40% 0.10% 0.53% 0.16% 0.44%
Ratio of allowance to total
at end of period 1.04% 1.01% 1.00% 1.01% 1.01%
</TABLE>
PAGE 34
<PAGE>
FUNDING SOURCES
Average deposits increased 9.86% to $36,085,000 in 1997 from $32,848,000 in
1996. In 1997 the mix of deposits changed as average certificates of deposit
increased 9.70%, average demand deposits increased 16.89%; while average
interest checking, money market and savings accounts as a group decreased 5.16%.
Average certificates of deposit represented 53.12% of average deposits in 1997
compared with 53.19% in 1996. Average interest checking, money market and
savings accounts as a group were 26.19% of average deposits in 1997 compared
with 27.36% in 1996. Average demand deposits represented 20.69% of average
deposits in 1997 compared with 19.45% in 1996.
The Bank has a line of credit from the Federal Home Loan Bank of San
Francisco with a maximum borrowing limit on December 31, 1997 of $4,565,000.
The line of credit is secured by certain of the Bank's real estate secured
loans. At December 31, 1997 the Bank had three $1,000,000 advances which bear
interest at 4.88%, 6.53% and 6.81%, respectively. The advances mature in
October 1998, June 2000 and June 2004, respectively. 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 Corporation maintains capital to comply with legal requirements, to
provide a margin of safety for its depositors and stockholders, and to provide
for future growth and the ability to pay dividends. At December 31, 1997,
stockholders' equity was $3,030,200 versus $2,898,200 at December 31, 1996.
The Corporation paid cash dividends of $.12 and $.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, and a cash dividend of $0.10 per share in
1995.
The FDIC and Federal Reserve Board have adopted capital adequacy guidelines
for use in their examination and regulation of banks and bank holding companies.
If the capital of a bank or bank holding company falls below the minimum levels
established by these guidelines, it may be denied approval to acquire or
establish additional banks or non-bank businesses, or the FDIC or Federal
Reserve Board may take other administrative actions. The guidelines employ two
measures of capital: (1) risk-based capital and (2) leverage capital.
In general, the risk-based capital guidelines provide detailed definitions
of which obligations will be treated as capital, and assign different weights to
various assets and off-balance sheet items, depending upon the perceived degree
of credit risk associated with each asset. Each asset is assigned to one of
four risk-weighted categories. For example, 0 percent for cash and
unconditionally guaranteed government securities; 20 percent for deposits with
other banks and fed funds; 50 percent for state bonds and certain residential
real estate loans; and 100 percent for commercial loans and other assets.
Capital is categorized as either Tier 1 capital, consisting of common stock and
retained earnings (or deficit), or Tier 2 capital, which includes limited-life
PAGE 35
<PAGE>
preferred stock and allowance for loan losses (subject to certain limitations).
The guidelines also define and set minimum capital requirements (risk-based
capital ratios) which increased over a transition period ended December 31,
1992. Under the final 1992 rules, all banks were required to maintain Tier 1
capital of at least 4 percent and total capital of 8.0% of risk-adjusted assets.
The Corporation had a Tier 1 capital ratio of 10.26% and 10.36% at December 31,
1997 and 1996, respectively, and a total risk-based capital ratio of 11.20% and
11.37% at December 31, 1997 and 1996, respectively.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Corporation
had a leverage capital ratio of 6.63% and 6.40% at December 31, 1997 and 1996,
respectively (calculated under regulatory accounting principles).
LIQUIDITY
Liquidity represents a bank's ability to provide sufficient cash flows or
cash resources in a manner that enables it to meet obligations in a timely
fashion and adequately provides for anticipated future cash needs. For the
Bank, liquidity considerations involve the capacity to meet expected and
potential requirements of depositors seeking access to balances and to provide
for the credit demands of borrowing customers. In the ordinary course of the
Bank's business, funds are generated from the repayment of loans, maturities
within the investment securities portfolio and the acquisition of deposit
balances and short-term borrowings. In addition, the Bank has a line of credit
from the Federal Home Loan Bank of San Francisco of approximately $4,565,000
respectively to meet temporary liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid assets,
including marketable investment securities, equal to a least 15 percent of total
assets ("primary liquidity"), while maintaining sources of secondary liquidity
(borrowing lines from other institutions) equal to at least an additional 10
percent of assets. In addition, it seeks to generally limit loans to not more
than 90 percent of deposits. Within these ratios, the Bank generally has excess
funds available to sell as federal funds on a daily basis, and is able to fund
its own liquidity needs without the need of short-term borrowing. The Bank's
primary liquidity at December 31, 1997, 1996 and 1995 was 23.46 percent, 30.27
percent, and 30.82 percent respectively, while its average loan to deposit ratio
for such years was 72.17 percent and 75.03 percent and 78.86 percent
respectively.
Brokered deposits are deposit instruments, such as certificates of deposit,
deposit notes, bank investment contracts and certain municipal investment
contracts that are issued through brokers and dealers who then offer and/or sell
these deposit instruments to one or more investors. Additionally, deposits on
which a financial institution pays an interest rate significantly higher than
prevailing rates are considered to be brokered deposits. Federal law and
regulation restricts banks from soliciting or accepting brokered deposits,
unless the bank is well capitalized under Federal guidelines. The Bank does not
have any brokered deposits.
PAGE 36
<PAGE>
Management of interest rate sensitivity (asset/liability management)
involves matching and repricing rates of interest-earning assets with interest-
bearing liabilities in a manner designed to optimize net interest income within
the constraints imposed by regulatory authorities, liquidity determinations and
capital considerations. The Bank instituted formal asset/liability policies at
the end of 1989.
The purpose for asset/liability management is to provide stable net
interest income growth by protecting the Bank's earnings from undue interest
rate risk. The Bank expects to generate earnings from increasing loan volume,
appropriate loan pricing and expense control and not from trying to accurately
forecast interest rates. Another important function of asset/liability
management is managing the risk/return relationships between interest rate risk,
liquidity, market risk and capital adequacy. The Bank gives priority to
liquidity concerns followed by capital adequacy, then interest rate risk and
market risk in the investment portfolio. The policy of the Bank will be to
control the exposure of the Bank's earnings to changing interest rates by
generally maintaining a position within a narrow range around an "earnings
neutral position." An earnings neutral position is defined as the mix of assets
and liabilities that generate a net interest margin that is not affected by
interest rate changes. However, Management does not believe that the Bank can
maintain a totally earnings neutral position. Further, the actual timing of
repricing of assets and liabilities does not always correspond to the timing
assumed by the Bank for analytical purposes. Therefore, changes in market rates
of interest will generally impact on the Bank's net interest income and net
interest margin for long or short periods of time.
The Bank monitors its interest rate risk on a monthly basis through the use
of a model which calculates the effect on earnings of changes in rates. The
primary tool of management for quantifying interest rate exposure is an 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 the National
Prime rate. 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 ECR for each rate sensitive asset and liability is developed based on
the relationship of the average yield on the product to the average national
prime rate, and average balances subject to repricing in the next twelve month.
The balance sheet gap is adjusted by weighting each line item based on its
anticipated rate sensitivity (ECR). The model provides an indication of the
effect on income over the next twelve months, for both an increase or decrease
of 100 basis points in the national prime rate.
PAGE 37
<PAGE>
The following table sets forth the results of the interest rate risk
analysis at December 31, 1997.
<TABLE>
<CAPTION>
One Year One Year One Year
Balance Earnings Income Earnings Income
Sheet Change Statement Change Statement
Gap Ratio Gap Ratio Gap
---------- ----------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
DUE FROM BANKS-TIME 100 49% 49 49% 49
LOANS:
Fixed rate less than 1 year 2,846 82% 2,345 82% 2,345
Floating rate less than 1 year 11,546 91% 10,492 91% 10,492
SECURITIES:
Fed Funds Sold & Repos 7,290 100% 7,290 100% 7,290
Fixed Rate Securities
Maturities less than 1 year 500 68% 342 68% 342
Fixed Rate Securities
Callable less than 1 year 2,500 91% 2,277 0% 0
-------- ------- --------
Total Rate Sensitive Assets 24,781 22,795 20,518
RATE SENSITIVE LIABILITIES
Savings 2,145 10% 215 15% 322
Money Market Checking 5,779 10% 578 15% 867
Money Market Savings 1,705 10% 170 15% 256
CDs greater than $100,000 6,018 79% 4,741 79% 4,741
CDs less than $100,000 7,787 80% 6,215 80% 6,215
Other Borrowing 1,000 43% 427 43% 427
-------- -------- --------
Total Rate Sensitive
Liabilities 24,434 12,345 12,827
RATE SENSITIVITY GAP 348 10,449 7,691
TOTAL ASSETS 46,156 46,156 46,156
GAP AS A PERCENTAGE
OF TOTAL ASSETS 0.75% 22.64% 16.66%
Estimated change in income (104.49) 79.61
</TABLE>
The Corporation has no sources of revenues or liquidity other than
dividends, tax equalization payments or management fees from the Bank. The
ability of the Bank to pay such items to the Corporation is subject to
limitations under state and Federal law.
PAGE 38
<PAGE>
INVESTMENT SECURITIES
- ---------------------
The following table sets forth the book and market value of the Bank's
investment securities as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
(Dollars in thousands)
1997 1996
----------------- ------------------
Book Market Book Market
value value value value
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Bank Stock 330 330 300 300
Pacific Coast Bankers'
Bank Stock 150 150 --- ---
----- ----- ----- -----
Total 480 480 300 300
----- ----- ----- -----
----- ----- ----- -----
Held to maturity:
U.S. Treasury securities 500 501 500 500
U.S. Government Agencies 4,995 5,000 2,001 2,000
----- ----- ----- -----
Total 5,495 5,501 2,501 2,500
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at December 31, 1997:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
Over 1 Over 5
1 year Thru Thru Over 10
or less 5 years 10 years Years Total
------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities 500 --- --- --- 500
U.S. Government Agencies --- 0 1,495 3,500 4,995
Federal Home Loan Stock 330 --- --- --- 330
Pacific Coast Bankers' Bank 150 --- --- --- 150
------- ------- -------- ------- -----
Total 980 0 1,495 3,500 5,976
------- ------- -------- ------- -----
------- ------- -------- ------- -----
</TABLE>
PAGE 39
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements included in the
Consolidated Financial Report issued by Hutchinson and Bloodgood, Certified
Public Accountants at the pages indicated are incorporated herein by
reference:
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report on the Financial Statements 1
Consolidated Balance Sheets at December 31, 1997 and 1996 2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997 3
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1997 4
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1997 5-6
Notes to Consolidated Financial Statements 7-30
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on any
matter of accounting principles, practices or financial statement disclosure
during 1997, 1996 or 1995.
PART III
PAGE 40
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The name, age, title and five-year business background of each director,
executive officer and significant employee of the Corporation (including the
Bank) as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Name & Position With Bank Age Principal Occupation During Past Five Years
- ------------------------- --- -------------------------------------------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 56 Chairman of the Board & Chief Executive Officer of
Director since 1985, Monterey County Bank since 3/87
Chairman of the Board, President &
Chief Executive Officer
Sandra G. Chrietzberg 54 Formerly President and CEO Queen of Chardonnay, Inc.,
Director, 1988 to 1994 and dba La Reina Winery 8/84-12/93
since 1995
Peter J. Coniglio, Esq. 68 Partner - Hudson, Martin, Ferrante & Street, Monterey
Director since 1976
Carla S. Hudson, CPA 44 Partner - Huey and Hudson, Certified Public Accountants
Director since 1994
John M. Lotz 56 President and Chief Executive Officer, of Couroc of Monterey
Director since 1991 since 1996. Real estate developer, Chairman of the Board &
Chief Executive Officer of The Monterey Bay Company since 1991.
Kevin N. Quinn 56 Senior Vice President, Chief Lending Officer of Monterey
Senior Vice President, County Bank since 1994, Vice President, Lending of
Chief Lending Officer Monterey County Bank since 1/89.
Bruce N. Warner 50 Senior Vice President, Chief Financial Officer and Chief
Senior Vice President, Operating Officer of Monterey County Bank since 1993;
Chief Financial Officer Vice President and Cashier of Houston National Bank,
and Chief Operating Officer Houston, Texas, 1988 - 1992.
</TABLE>
PAGE 41
<PAGE>
<TABLE>
<S> <C> <C>
Andre G. Herrera 33 Vice President, Corporate Secretary of Monterey County
Vice President, Bank since 1/96; Vice President, Manager Management
Corporate Secretary Information Systems and Merchant Services since 2/94,
Assistant Vice President, Merchant Services 2/93,
Merchant Services Representative 1/92.
Mary Ellen Stanton 60 Vice President, Loan Administration, Monterey County
Vice President Bank since 1988.
</TABLE>
Directors of the Corporation serve in similar capacities with the Bank.
Executive officers of the Bank (except for Mr. Quinn and Mrs. Stanton) serve
in similar capacities with the Corporation, although the limited operations
of the Corporation do not require significant amounts of their time. There
are no family relationships among the persons listed above, except that Mr.
and Mrs. Chrietzberg are spouses and Mr. Herrera is Mr. and Mrs.
Chrietzberg's son-in-law.
Based solely upon a review of the relevant forms furnished to the Bank
and the Corporation, except as disclosed below, the Corporation believes that
all officers, directors and principal shareholders filed appropriate forms as
required by Section 16(a) of the Exchange Act, and related regulations,
during 1997.
ITEM 10. EXECUTIVE COMPENSATION
The following tables sets forth certain information regarding the
compensation paid to the only executive officer of the Corporation/Bank whose
salary and bonus exceeded $100,000 for 1997.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Other Restricted Securities All
Annual Stock Underlying Other
Name & Principal Position Year Salary Bonus Compensation Award Options/SARs Compensation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 1997 $150,938 $160,000 $5,197 (1) None None $7,530 (2)
Chairman, President & CEO 1996 154,039 103,000 3,972 (1) None None 11,776 (2)
1995 164,360 130,000 3,555 (1) None None 16,088 (2)
</TABLE>
(1) Represents personal use of company automobile and insurance premiums on
life insurance policy as described below.
(2) Represents the expense accrued in the Salary Continuation Plan as more
fully described in the Long Term Incentive Plan Table.
PAGE 42
<PAGE>
Until June 1, 1990 the Bank furnished certain executive officers with a
taxable car allowance. The Bank discontinued car allowances on June 1, 1990
and purchased a bank owned automobile for the use of its Chief Executive
Officer (the value of his personal use of the automobile is included above).
The Bank furnishes, on a non-discriminatory basis, to the employees: (i)
insurance benefits; and (ii) other benefits. The value of these benefits
(excluding non-discriminatory plan benefits) was less than the lesser of
$25,000 or ten percent of the compensation shown above for the respective
persons or group, and is not included in the table.
The Board of Directors authorized the Bank to enter into a three year
employment contract with Mr. Chrietzberg, effective January 1, 1997. It
provides for a base salary of $150,000 per year, a Bank furnished automobile
or automobile allowance, and a bonus based on profits. The minimum bonus,
not to exceed $160,000 annually, will equal $10,000 for each 0.1 percent that
the Bank's profits exceed 0.8 percent return on average assets plus $10,000
for each 1 percent that the Bank's return on equity exceeds 9.0 percent.
Under the terms of the contract, if Mr. Chrietzberg is terminated other than
for cause (as defined in the contract), he is entitled to severance
compensation for his monthly salary plus a pro rated incentive bonus for the
lesser of 24 months or the remaining term of his contract (which ends in
December, 1999); however, if the termination follows within six (6) months
after a change in control transaction (as defined in the contract), he is
entitled to such severance compensation for the greater of 24 months or the
remainder of the term of the contract. In addition, the Bank provides Mr.
Chrietzberg with insurance on his life, owned by the Bank but payable to his
beneficiary, in the amount of $1,000,000 in excess of the amounts provided on
a non-discriminatory basis to other employees. Mr. Chrietzberg's beneficiary
has agreed to reimburse the Bank out of the proceeds of such policy an amount
equal to the greater of the cash value of such policy at the time of Mr.
Chrietzberg's death, or the amount of premiums paid by the Bank.
The following tables set forth certain information regarding the long
term incentive plans provided for Mr. Chrietzberg.
<TABLE>
<CAPTION>
Performance or Estimated Future Payouts under
Number of Other Period Non-Stock Price-Based Plans
Shares, Units Until ---------------------------
or Other Rights Maturation or Threshold Target Maximum
Name (#) Payment ($ or #) ($ or #) ($ or #)
- ---- --- ------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
Charles T. Salary Retirement at age 65, subject None None 75,000/yr.
Chrietzberg, Jr. Continuation to provisions for earlier payout 15 years
Agreement described below
</TABLE>
In December, 1993, the Board of Directors approved a Salary Continuation
Agreement for the Benefit of Mr. Chrietzberg that provided for payments of
$75,000 per year, for 15 years, if he remains with the Bank until normal
retirement, commencing age 65. After consideration of the impact of such an
agreement on the Bank's income, the Bank amended the Agreement to provide for
one half the original benefit amounts, but adopted Surviving Income
Agreements which provide benefits upon the death of the executive to his
beneficiary in a single payment, in an amount equal to the retirement
benefit. The Salary Continuation Agreement provides for lesser
PAGE 43
<PAGE>
payments in the event of early retirement, generally designated to coincide
with increases in the anticipated surrender value for the life insurance
policies described below. The Bank's obligations under the Salary
Continuation Agreement are not secured by any segregated amounts, but are
informally funded by the purchase of single-premium life insurance policies.
The salary continuation expense accrued in 1997, 1996 and 1995 was $7,530,
$11,776 and $16,088, respectively. Based upon the current projected earnings
of the insurance used to fund the Bank's obligations under the Agreement, and
the anticipated salary continuation expense to be booked, net of tax
benefits, the Bank anticipates (based upon current tax laws and assumptions
regarding the yield on alternative investment(s) that the cost of the
benefits to be provided under the agreement will not have a material adverse
impact on the Bank's net income after taxes in the future, although no
assurance can be given in this regard. Additionally, since the Surviving
Income Agreement has been adopted to provide part of the benefits upon the
death of the executive, the total amount of payout can not be precisely
determined. However, the information represents the best estimate of
Management based on the terms of the plan.
The following table sets forth certain information concerning the grant of
stock options under the Corporation's' 1987 Amended Stock Option Plan to the
named executive officer during the year ended December 31, 1997.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of
Securities total options/
Underlying SARs granted Exercise or
Options/Sars to employees base price Expiration
Name granted (#) in fiscal year ($/Sh) date
- ---------------- ---------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C>
Kevin N. Quinn 2,000 6.67% 2.75 5/1/02
Bruce N. Warner 10,000 33.33% 2.75 5/1/02
Andre G. Herrera 5,000 16.67% 2.75 5/1/02
Mary Ellen Stanton 5,000 16.67% 2.75 5/1/02
</TABLE>
PAGE 44
<PAGE>
The following table sets forth the number of shares of Common Stock
acquired by each of the named executive officers upon exercise of stock
options during 1997, the net value realized upon exercise, the number of
shares of common Stock represented by outstanding stock options held by each
of the named executive officers as of December 31, 1997 and the value of
such options based on the last transaction in 1997, which the Corporation has
knowledge of, and certain information concerning unexercised options under
the 11987 Amended Stock Option Plan.
Aggregated Option/Sar Exercises in Last Fiscal Year
and FY-End Options/Sar Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised in-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End ($)
Name Exercise(#) Received($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. None None 60,000 None 33,000 None
Kevin N. Quinn None None 7,000 None 1,250 None
Bruce N. Warner None None 15,000 None 1,250 None
Andre G. Herrera None None 10,000 None 1,250 None
Mary Ellen Stanton None None 15,000 None 2,500 None
</TABLE>
In 1997, each director received a standard fee of $500 per regular board
meeting attended and $150 for each committee meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the management of the Company, the following
shareholders own more than five percent (5%) of the outstanding common stock
of the Company, its only class of voting securities.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Class
- -------------------------- -------------------- ----------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 387,102(1) 42.14
P.O. Box 1344
Carmel, CA 93921
David S. Lewis, Trust 110,000 12.81
30500 Aurora del Mar
Carmel, CA 93923
</TABLE>
(1) Includes 60,000 shares subject to employee stock options and 11,437
shares held beneficially for Mr. Chrietzberg and Mrs. Chrietzberg in
Individual Retirement Accounts where voting power is shared with the
custodian of the account. Also includes 350 shares held by Mrs.
Chrietzberg and included pursuant to California community property laws.
250,000 shares of the Common Stock owned by Mr. Chrietzberg are pledged
to secure a loan from an unaffiliated bank.
PAGE 45
<PAGE>
The following table sets forth similar information regarding the
beneficial ownership, both by numerical holding and percentage interest of
each of the Company's directors and all of its directors and executive
officers as a group. All addresses are in care of the Corporation at 601
Munras Ave. Monterey, CA 93940.
<TABLE>
<CAPTION>
Shares Subject Percent of
Amt. & Nature Percent of to Purchase Class w/o
Name and Address Ben. Ownership Class Option Option Shares
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 387,102(1)(2)(3) 42.14% 60,000 38.10%
Sandra G. Chrietzberg 387,102(2)(3) 42.14% 60,000 38.10%
Peter J. Coniglio 36,725(4)(5) 4.20% 15,000 2.47%
Carla S. Hudson 11,603(6) 1.34% 7,500 0.48%
John M. Lotz 12,500(7) 1.44% 10,000 0.29%
All directors & executive
officers as a Group 517,023(8) 51.80% 43.97%
</TABLE>
(1) Includes 60,000 shares subject to his employee stock options. 250,000
shares of the common Stock owned by Mr. Chrietzberg are pledged to
secure a loan from an unaffiliated bank.
(2) The shares include an aggregate of 11,437 shares held beneficially by Mr.
Chrietzberg and Mrs. Chrietzberg in Individual Retirement Accounts,
where voting power is also shared with the custodian of the account.
(3) Includes shares of spouse pursuant to California's community property
laws.
(4) Sole voting power.
(5) Includes 15,000 shares subject to the respective director's stock options.
Of the remaining shares 16,475 are held in a family trust controlled by
Mr. Coniglio, as to which he has sole voting and investment power, while
5,250 shares are held by Hudson, Martin, Ferrante & Street, a
partnership of which Mr. Coniglio is the managing partner, with voting
and investment power.
(6) Includes 7,500 shares subject to the respective director's stock options.
The remaining shares are held jointly with family members, other than
1,000 shares held in a corporate pension, as to which Ms. Hudson has
voting and investment power.
PAGE 46
<PAGE>
(7) Includes 10,000 shares subject to the respective director's stock options.
The remaining shares are held jointly with family members, with shared
voting and investment power.
(8) Includes all options included above, plus 47,000 shares subject to
options held by executive officers who are not also directors.
250,000 shares of the common stock owned by Mr. Chrietzberg are pledged
to secure a loan from an unaffiliated bank. Should he default under such
credit, the shares could be acquired by the lender, or sold pursuant to
applicable terms of the Uniform Commercial Code, in a transaction that could
result in a change of control of the Corporation. Such transaction may
require approval under provisions of Federal and California change in bank
control laws.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of its business with directors, officers, principal
shareholders and their associates. Management of the Bank believes that
these transactions have been (and those in the future are intended to be) on
substantially the same terms, including interest rates, collateral and
repayment terms on extensions of credit, as those prevailing at the same time
for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.
Management does not believe that any such loans are outside the ordinary
course of business. Loans to such borrowers as of December 31, 1997 amounted
to approximately $254,036 as makers and/or endorsers. The total of such
loans represents approximately 8.38% of the Bank's total capital accounts.
Outstanding as of MaximumDecember 31, 1997
<TABLE>
<CAPTION>
Outstanding as of
Maximum December 31, 1997
------------------------ -----------------------
Percent of Percent of
Equity Equity
Name Amount Capital Amount Capital
- --------------------------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 11,363 0.39% 0 --
Peter J. Coniglio 95,750 3.16% 85,750 2.83%
Carla S. Hudson 48,896 1.44% 38,983 1.29%
John M. Lotz 185,760 6.41% 123,270 4.07%
David Lewis 362,185 12.04% 0 --
Directors, Principal 962,164 33.20% 254,036 8.38%
Shareholder, and
Officers as a Group
(8 in number)
</TABLE>
During 1997, the law firm of Hudson, Martin, Ferrante & Street, of which
Mr. Peter J. Coniglio is a partner, performed legal services for the Bank,
for which the Bank paid $33,102. The Board of Directors has determined that
it obtained those legal services at no less favorable rates than could have
been obtained from a non-affiliated law firm.
PAGE 47
<PAGE>
Item 13. EXHIBITS AND REPORTS
A. EXHIBITS
Item Description
- ---- -----------
2 Plan of Merger and Meger Agreement, Monterey County Bank with
Monterey County Merger Corporation un the Charter of Monterey
County Bank under the Title of Monterey County Bank, joined in
by Northern California Bancorp, Inc. dated November 1, 1995.
Filed as exhibit to Form 10-KSB dated December 31, 1995.
3 (i) Articles of Incorporation
Filed as exhibit to Form 10-KSB dated December 31, 1995.
3 (ii) Bylaws
Filed as exhibit to Form 10-KSB dated December 31, 1995.
10 (i) D Lease agreement Carmel Branch Office
Filed as exhibit to Form 10-KSB dated December 31, 1995.
10 (ii)A (1)1987 Amended Stock Option Plan and Stock Option Agreements
Filed as exhibit to form 10-KSB dated December 31, 1995
(2)Employment Contract of Charles T. Chrietzberg,
Jr., dated May 14, 1997
(3)Deferred Compensation Agreement, dated December 31, 1993.
Filed as exhibit to Form 10-KSB dated December 31, 1995.
11 Statement Reference Computation of Per Share Earnings
21 Subsidiaries
B. REPORTS
None
PAGE 48
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORTHERN CALIFORNIA BANCORP, INC.
Date: 3-19-98 By:/s/ Charles T. Chrietzberg, Jr.
------- --------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: 3/19/98 By:/s/ Bruce N. Warner
------- --------------------------------
Bruce N. Warner
Chief Financial Officer
and Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Position Date
- ---- -------- ----
<S> <C> <C>
/s/ Charles T. Chrietzberg, Jr. 3/19/98
- ------------------------------- -------
Charles T. Chrietzberg, Jr.
Director
/s/ Sandra G. Chrietzberg 3/19/98
- ------------------------------- -------
Sandra G. Chrietzberg
Director
/s/ Peter J. Coniglio 3/19/98
- ------------------------------- -------
Peter J. Coniglio
Director
/s/ Carla S. Hudson 3/13/98
- ------------------------------- -------
Carla S. Hudson
Director
/s/ John M. Lotz 3/19/98
- ------------------------------- -------
John M. Lotz
Director
</TABLE>
PAGE 49
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL
STATEMENTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-30
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Northern California Bancorp, Inc.
Monterey, California
We have audited the accompanying consolidated balance sheets of Northern
California Bancorp, Inc. and its wholly owned subsidiary, as of December 31,
1997 and 1996 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are
the representation of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northern California
Bancorp, Inc. and its wholly owned subsidiary, as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ HUTCHINSON AND BLOODGOOD LLP
January 29, 1998
-1-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks (Note 2) $ 11,060,600 $ 9,820,100
Time deposits with other financial institutions 100,000 -
Investment securities, available for sale (Note 3) 480,200 299,800
Investment securities, held to maturity (Note 3) 5,495,300 2,500,200
Loans, held for sale 543,400 414,500
Loans, net (Note 5) 25,062,100 24,641,500
Bank premises and equipment, net (Note 6) 1,898,900 1,664,200
Interest receivable and other assets 1,472,100 1,458,800
------------- -------------
Total assets $ 46,112,600 $ 40,799,100
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 8,734,200 $ 7,572,300
Interest-bearing transaction 7,483,900 6,792,200
Savings 2,145,300 2,598,700
Time 12,742,700 12,723,200
Time in denominations of $100,000 or more 8,099,500 6,480,700
------------- -------------
Total deposits 39,205,600 36,167,100
Federal Home Loan Bank borrowed funds (Note 7) 3,000,000 1,000,000
Interest payable and other liabilities 876,800 734,100
------------- -------------
Total liabilities 43,082,400 37,901,200
------------- -------------
Commitments (Note 9)
Stockholders' equity (Notes 10, 11, and 12)
Common stock, no stated par value, authorized:
2,500,000 shares issued and outstanding: 858,526
in 1997 and 879,465 in 1996 2,716,800 2,779,600
------------- -------------
Retained earnings 313,400 118,300
Total stockholders' equity 3,030,200 2,897,900
------------- -------------
Total liabilities and stockholders' equity $ 46,112,600 $ 40,799,100
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income
Loans $ 2,755,700 $ 2,676,800 $ 2,546,400
Time deposits with financial institutions 1,000 5,400 23,700
Investment securities 346,500 117,500 102,100
Federal funds sold 295,900 340,700 279,400
------------ ------------ ------------
Total interest income 3,399,100 3,140,400 2,951,600
------------ ------------ ------------
Interest expense
Interest-bearing transaction accounts 120,500 108,300 103,400
Savings and time deposit accounts 797,900 810,800 700,200
Time deposits in denominations of $100,00 or more 402,900 331,800 288,000
Federal Home Loan Bank 125,900 82,700 91,700
------------ ------------ ------------
Total interest expense 1,447,200 1,333,600 1,183,300
------------ ------------ ------------
Net interest income 1,951,900 1,806,800 1,768,300
Provision for loan losses (Note 5) 120,000 52,500 120,000
Net interest income after provision for loan losses 1,831,900 1,754,300 1,648,300
Other income
Service charges on deposit accounts 328,400 371,700 338,500
Income from sales and servicing of SBA loans (Note 4) 324,400 258,900 386,300
Other income 421,300 352,700 309,700
------------ ------------ ------------
Total other income 1,074,100 983,300 1,034,500
------------ ------------ ------------
Operating expense
Salaries and employee benefits 1,405,100 1,362,400 1,236,800
Occupancy and equipment expense 251,000 256,000 262,900
Professional fees 85,400 120,800 115,200
Data processing 172,300 148,700 141,200
Other general and administrative 590,700 556,300 599,500
------------ ------------ ------------
Total operating expenses 2,504,500 2,444,200 2,355,600
------------ ------------ ------------
Income before tax provision 401,500 293,400 327,200
Income tax provision (Note 8) 175,600 80,000 49,200
------------ ------------ ------------
Net Income $ 225,900 $ 213,400 $ 278,000
------------ ------------ ------------
------------ ------------ ------------
Earnings per common share
Basic $ 0.26 $ 0.24 $ 0.32
Diluted $ 0.22 $ 0.21 $ 0.27
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
Caption
Net Unrealized
Retained Gain (Loss) on
Earnings Investment Securities
Common stock (Accumulated Available for Sale
Shares Amount Deficit) and Other Assets Total
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 879,465 $ 2,779,600 $ (188,500) $ (7,500) $ 2,583,600
Net income - - 278,000 - 278,000
Payment of common stock dividend ($.10 per share) - - (87,900) - (87,900)
Change in net unrealized loss on securities
available for sale, after tax effects (Note 3) - - - 1,800 1,800
------- --------- ---------- --------- -----------
Balances, December 31, 1995 879,465 2,779,600 1,600 (5,700) 2,775,500
------- --------- ---------- --------- -----------
Net income - - 213,400 - 213,400
Payment of common stock dividend ($.11 per share) - - (96,700) - (96,700)
Change in net unrealized loss on securities
available for sale, after tax effects (Note 3) - - - 5,700 5,700
------- --------- ---------- --------- -----------
Balances, December 31, 1996 879,465 2,779,600 118,300 - 2,897,900
------- --------- ---------- --------- -----------
Net income - - 225,900 - 225,900
------- --------- ---------- --------- -----------
Payment of common stock dividend ($.12 per share) - - (103,000) - (103,000)
Repurchase of common stock (20,939) (62,800) - - (62,800)
Change in net unrealized gain on other assets
-Servicing financial asset, after tax effects - - - 16,700 16,700
Cumulative effect of change in accounting
principle, after tax effects (Note 12) - - - 55,500 55,500
------- --------- ---------- --------- -----------
Balances, December 31, 1997 858,526 2,716,800 $ 241,200 $ 72,200 $ 3,030,200
------- --------- ---------- --------- -----------
------- --------- ---------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 225,900 $ 213,400 $ 278,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 135,200 118,400 108,800
Amortization of premiums on investment securities (2,500) 53,200 5,200
Provision for loan losses 120,000 52,500 120,000
Amortization of deferred servicing premium 19,100 31,700 24,700
Amortization of deferred gains on SBA loans (4,400) (4,800) (4,500)
Increase (decrease) in accrued expenses 173,900 (65,900) 152,700
(Increase) decrease in other assets 124,500 (165,600) (144,500)
Increase in deferred tax asset (53,100) (34,100) (53,300)
Increase (decrease) in interest payable (39,000) 58,300 119,700
Increase in interest receivable (16,900) (38,600) (29,500)
----------- ---------- ----------
Net cash provided by operating activities 682,700 218,500 577,300
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of time deposits -- 99,000 198,000
Purchase of time deposits (100,000) -- --
Proceeds from maturity of investment securities 2,500,000 697,100 593,200
Principal payments on investment securities -- 78,600 196,000
Purchase of investment securities (5,675,500) (2,559,200) (629,700)
Net (increase) decrease in loans (540,600) (3,215,000) 2,314,100
(Increase) decrease in loans held for sale (128,900) 375,900 (505,700)
Proceeds from sale of equipment -- 12,700 2,600
Additions to Bank premises and equipment (369,900) (99,000) (280,200)
---------- ----------- ----------
Net cash from (used by) investing activities (4,314,900) (4,609,900) 1,888,300
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,038,500 4,979,300 2,406,100
Advance (repayment) of Federal Home Loan Bank
advance 2,000,000 (1,000,000) --
Repurchase of common stock (62,800) -- --
Cash dividends paid on common stock (103,000) (96,700) (87,900)
---------- ---------- ----------
Net cash provided by financing activities 4,872,700 3,882,600 2,318,200
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 1,240,500 (508,800) 4,783,800
CASH AND CASH EQUIVALENTS, BEGINNING 9,820,100 10,328,900 5,545,100
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, ENDING $ 11,060,600 $ 9,820,100 $ 10,328,900
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
OTHER CASH FLOW INFORMATION
Interest paid $ 1,360,300 $ 1,281,100 $ 1,063,600
------------ ------------ -----------
Interest received $ 3,202,600 $ 3,140,400 $ 2,922,100
------------ ------------ ------------
Income taxes paid $ 175,600 $ 153,400 $ 43,300
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of
Northern California Bancorp, Inc. (the "Corporation") and its
wholly-owned subsidiary, Monterey County Bank (the "Bank"). All
significant intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for
loan losses, the valuation of foreclosed real estate, and the
valuation of deferred tax assets.
BUSINESS
The Corporation provides a variety of financial services to
individuals and small businesses through its three offices on the
Monterey Peninsula. Its primary deposit products are demand and
term certificate accounts. Its primary lending products are
residential, commercial, and SBA loans.
RECLASSIFICATION
Certain amounts have been reclassified in the 1996 and 1995
consolidated financial statements to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks and
federal funds sold on a daily basis.
INTEREST-BEARING DEPOSITS IN BANKS
Interest-bearing deposits in banks mature within one year and are
carried at cost.
-7-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Investments in debt securities that management has the positive
intent and ability to hold to maturity are classified as "held to
maturity" and reflected at cost, adjusted for amortization of
premiums and accretion of discounts, which are recognized as
adjustments to interest income. Other marketable securities are
classified as "available for sale" and are reflected at fair value,
with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of
income tax effects. Federal Home Loan Bank and Pacific Coast
Bankers' Bank stocks are reflected at cost. Gains and losses on
disposition are generally recognized on the trade date, based on
the net proceeds and the adjusted carrying amount of the securities
sold using the specific identification method.
SALES AND SERVICING OF SBA LOANS
The Corporation originates loans to customers under the Small
Business Administration (SBA) program that generally provides for
SBA guarantees of 70% to 80% of each loan. The Corporation
generally sells the guaranteed portion of each loan to a third
party and retains only the unguaranteed portion in its own
portfolio. A gain is recognized on these loans through collection
on sale of a premium over the adjusted carrying value, or through
retention of an ongoing rate differential less a normal service fee
between the rate paid by the borrower to the Corporation and the
rate paid by the Corporation to the purchaser (excess servicing
fee). In calculating the gain, the Corporation assumes that the
loans sold will be outstanding for one-half of their contractual
lives.
The Corporation's investment in an SBA loan is allocated among the
retained portion of the loan, excess servicing retained, and the
sold portion of the loan, based on the relative fair market value
of each portion at the time of loan origination, adjusted for
payments and other activities. Because the portion retained does
not carry an SBA guarantee, part of the gain recognized on the sold
portion of the loan is deferred and amortized as a yield
enhancement on the retained portion of the loan. Excess servicing
fees are reflected as an asset which is amortized over an assumed
half life; in the event future prepayments are significant and
future expected cash flows are inadequate to cover the unamortized
excess servicing asset, additional amortization is recognized.
-8-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS HELD FOR SALE
Loans held for sale consist of the portion of loans which are
guaranteed by the SBA and are carried at the lower of cost or
market. Market value for loans guaranteed by the SBA is generally
determined based on the price at which the loans were committed to
be sold on the trade date. Direct loan origination costs are
recorded at settlement as an adjustment to gain or loss on sale.
LOANS AND LOAN FEES
The Corporation grants mortgage, commercial, and consumer loans to
customers. A substantial portion of the loan portfolio is
represented by mortgage loans on the Monterey Peninsula. The
ability of the Bank's debtors to honor their contracts is dependent
upon the real estate and general economic sectors in the area.
Loans, as reported, have been reduced by unadvanced loan funds, net
deferred loan fees, and the allowance for loan losses.
Loan fees, net of direct origination costs, are deferred on all
loans and recognized over the expected life of the related loans as
an adjustment of yield.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision
for loan losses charged to earnings and is maintained at a level
considered adequate to provide for reasonably foreseeable loan
losses.
The provision and the level of the allowance are evaluated on a
regular basis by management and are based upon management's
periodic review of the collectibility of the loans in light of
historical experience, known and inherent risks in the nature and
volume of the loan portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible
to significant change. In addition, various regulatory agencies,
as an integral part of their examination process, periodically
review the Corporation's allowance for losses on loans and other
real estate owned.
-9-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
Such agencies may require the Corporation to recognize additions to
the allowance based on their judgment of information available to
them at the time of their examination. Ultimately, losses may vary
from current estimates and future additions to the allowance may be
necessary.
Loan losses are charged against the allowance when management
believes the collectibility of the loan balance is unlikely.
Subsequent recoveries, if any, are credited to the allowance.
A loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment
status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation
to the principal and interest owed. Impairment is measured on a
loan by loan basis by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral
if the loan is collateral dependent. Substantially all of the
Bank's loans which have been identified as impaired have been
measured by the fair value of existing collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not
separately identify individual consumer loans for impairment
disclosure.
LOAN SERVICING
Effective January 1, 1995, the Corporation prospectively adopted
Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights," as superseded by SFAS
No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," whereby rights to
service mortgage loans for others are capitalized as separate
assets, whether acquired through purchase or origination, if such
loans are sold or securitized with servicing rights retained.
Accordingly, the total cost of the mortgage loan is allocated to
the related servicing right and to the loan based on the relative
fair values if it is practicable to estimate those fair values
-10-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOAN SERVICING (CONCLUDED)
The Corporation estimates fair value based on the present value of
estimated expected future cash flows using prepayment speeds and
discount rates commensurate with the risks involved, and servicing
costs determined on an incremental cost basis. Prior to the
adoption of SFAS No. 122, the capitalization of originated mortgage
servicing rights was not allowed under generally accepted
accounting principles. The effect of adopting SFAS No. 122 is not
significant.
Capitalized mortgage servicing rights are amortized to servicing
revenue in proportion to, and over the period of, estimated net
servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. For purposes of
measuring impairment, the rights are stratified based on the
following predominant risk characteristics of the underlying loans:
loan type, size, note rate, date of origination, term, and
geographic location. Impairment is recognized through a valuation
allowance for an individual stratum, to the extent that fair value
is less than the capitalized amount for the stratum.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are carried at
cost, less accumulated depreciation computed on the straight-line
method over the estimated useful lives of the assets.
It is general practice to charge the cost of maintenance and
repairs to earnings when incurred; major expenditures for
betterments are capitalized and depreciated.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted accordingly through the
provision for income taxes. The Bank's base amount of its federal
income tax reserve for loan losses is a permanent difference for
which there is no recognition of a deferred tax liability.
However, the loan loss allowance maintained for financial reporting
purposes is a temporary difference with allowable recognition of a
related deferred tax asset, if it is deemed realizable.
-11-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation."
This Statement encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is
usually the vesting period. However, it also allows an entity to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price
of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options
issued under the Corporation's stock option plan have no intrinsic
value at the grant date, and under Opinion No. 25 no compensation
cost is recognized for them. Under the Corporation's employee
stock purchase plan, compensation cost is recognized to the extent
that the quoted market price of the stock on the date of grant
exceeds the amount that the employee is required to pay. The
Corporation has elected to continue with the accounting methodology
in Opinion No. 25 and, as a result, must make pro forma disclosures
of net income, earnings per share, and other disclosures, as if the
fair value based method of accounting had been applied. The pro
forma disclosures include the effects of all awards granted on or
after January 1, 1995.
EARNINGS PER SHARE
In February 1997, FASB issued SFAS No. 128, "Earnings per Share"
which requires that earnings per share be calculated on a basic and
a dilutive basis. Basic earnings per share represents income
available to common stock divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed
conversion. Potential common shares that may be issued by the
Corporation relate solely to outstanding stock options, and are
determined using the treasury stock method. The assumed conversion
of outstanding dilutive stock options would increase the shares
outstanding but would not require an adjustment to income as a
result of the conversion. The Statement is effective for interim
and annual periods ending after December 15, 1997, and requires the
restatement of all prior-period earnings per share data presented.
Accordingly, the Corporation has restated all earnings per share
data presented herein.
-12-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net
income. Certain FASB statements, however, require entities to
report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, as a
separate component of the equity section of the balance sheet.
Such items, along with net income, are components of comprehensive
income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Additionally,
SFAS No. 130 requires that the accumulated balance of other
comprehensive income be displayed separately in from the retained
earnings and additional paid-in capital in the equity section of
the balance sheet. The Corporation will adopt these disclosure
requirements beginning in the first quarter of 1998.
NOTE 2. CASH AND DUE FROM BANKS
Aggregate reserves (in the form of cash and deposits with the
Federal Reserve Bank) of $219,000 were maintained to satisfy
federal regulatory requirements at December 31, 1997.
-13-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses, follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
DECEMBER 31, 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
- -----------------------------
Federal Home Loan Bank $ 330,300 $ - $ - $ 330,300
Pacific Coast Banker's
Bank Stock 149,900 - - 149,900
---------- ---------- ---------- ----------
Total securities available
for sale $ 480,200 $ - $ - $ 480,200
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Securities Held to Maturity
- -----------------------------
U.S. Treasury securities $ 499,900 $ 700 $ - $ 500,600
U.S. Government agencies 4,995,400 4,700 - 5,000,100
---------- ---------- ---------- ----------
Total securities held to
maturity $5,495,300 $ 5,400 $ - $5,500,700
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
- -----------------------------
Federal Home Loan Bank $ 299,800 $ - $ - $ 299,800
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Securities Held to Maturity
- ----------------------------
U.S. Treasury securities $ 499,600 $ - $ - $ 499,600
U.S. Government agencies 2,000,600 - 700 1,999,900
---------- ---------- ---------- ----------
Total securities held to
maturity $2,500,200 $ - $ 700 $2,499,500
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The Corporation's investment in Federal Home Loan Bank stock is required as part
of a borrowing agreement. The stock will be redeemed at par value.
</TABLE>
-14-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of debt securities by contractual
maturity at December 31, 1997 are shown below. Expected maturities
will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 499,900 $ 500,600
Due between one and five years - -
Due between five and ten years 1,500,500 1,510,900
Due after ten years 3,494,900 3,489,200
---------- ----------
$5,495,300 $5,500,700
---------- ----------
---------- ----------
</TABLE>
Proceeds from maturity of investment securities during 1997 were
$2,500,000, with no gain or loss realized. There was a gain
realized from the sale of investments in 1996 of $5,700.
NOTE 4. SALES AND SERVICING OF SBA LOANS
A summary of the activity of SBA loans follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
SBA loans authorized $3,551,800 $1,937,000 $3,170,000
---------- ---------- ----------
---------- ---------- ----------
SBA loans sold $2,524,100 $1,842,800 $2,582,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A summary of income from SBA loans sold is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Income from premiums $ 178,400 $ 138,600 $ 230,100
Income from servicing 170,000 165,000 190,700
Less loan origination expense (24,000) (44,700) (34,500)
---------- ---------- ----------
Total SBA sales and service income $ 324,400 $ 258,900 $ 386,300
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
-15-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Commercial and industrial $10,299,500 $9,705,400
Construction 346,500 -
Real estate, mortgage 13,920,900 14,335,900
Installment 519,900 583,200
Government guaranteed loans purchased 284,000 307,300
---------- ----------
25,370,800 24,931,800
Less allowance for loan losses (269,100) (253,500)
Less deferred origination fees, net (39,600) (36,800)
---------- ----------
$25,062,100 $24,641,500
----------- -----------
</TABLE>
The maturities of total loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Loans with a fixed rate:
Due within one year $ 2,907,400 $ 3,309,800
Due one to five years 5,909,400 4,651,600
Due over five years 3,667,900 4,326,100
----------- -----------
12,484,700 12,287,500
Loans with a variable rate 12,886,100 12,644,300
----------- -----------
Total loans $25,370,800 $24,931,800
----------- -----------
----------- -----------
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Begining balance $ 253,500 $ 224,800 $ 244,900
Recoveries 1,800 20,700 19,500
Loans charged off (106,200) (44,500) (159,600)
Provision for loan losses 120,000 52,500 120,000
---------- ---------- ----------
Ending balance $ 269,100 $ 253,500 $ 224,800
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
-16-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
As of December 31, 1997 and 1996, the recorded investment in
impaired loans totaled $283,000 and $486,300 with corresponding
valuation allowances of $32,200 and $39,200, respectively. No
additional amounts are committed to be advanced in connection with
impaired loans.
For the years ended December 31, 1997 and 1996, the average
recorded investment in impaired loans amounted to approximately
$463,500 and $486,200, respectively. Non-accrual loans totaled
$75,900 and $58,100 at December 31, 1997 and 1996, respectively.
If interest on non-accrual loans had been accrued, such income
would have approximated $11,000 and $8,500 for 1997 and 1996,
respectively.
NOTE 6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking
premises and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
1997 1996 USEFUL LIVES
<S> <C> <C> <C>
Building and land $ 915,400 $ 915,400 40 years
Building improvements 338,600 341,700 40 years
Leasehold improvements 479,700 246,000 Lease term
Furniture and equipment 1,620,800 1,482,300 3-8 years
----------- -----------
3,354,500 2,985,400
Accumulated depreciation (1,455,600) (1,321,200)
----------- -----------
$ 1,898,900 $ 1,664,200
----------- -----------
----------- -----------
</TABLE>
Depreciation expense of $135,200, $118,400, and $108,800 was
included in occupancy and equipment expense for the years ended
1997, 1996, and 1995, respectively.
NOTE 7. SHORT-TERM BORROWINGS
The Corporation entered into an advance and security agreement with
the Federal Home Loan Bank of San Francisco on January 21, 1993.
At December 31, 1997 the Corporation has three $1,000,000 advances
which bear interest at 4.88%, 6.53%, and 6.81%, respectively. The
advances are secured by pledged loan principal in the amount of
$5,240,000. The advances mature in October 1998, June 2000, and
June 2004, respectively.
-17-
<PAGE>
NOTE 8. INCOME TAXES
Allocation of federal and state income taxes between current and
deferred portions is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Current tax provision:
Federal $ 171,300 $ 78,500 $ 51,800
State 57,400 35,600 50,700
--------- --------- ---------
228,700 114,100 102,500
--------- --------- ---------
Deferred tax benefit:
Federal (31,400) (34,000) (42,600)
State (21,700) (100) (10,700)
--------- --------- ---------
(53,100) (34,100) (53,300)
--------- --------- ---------
$ 175,600 $ 80,000 $ 49,200
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reasons for the differences between the statutory federal
income tax rate and the effective tax rates are summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State franchise 10.8 11.3 11.3
Utilization of general business credits (1.1) (10.8) (9.7)
Utilization of net operating loss carryforwards
to reduce tax - - (14.0)
Decrease in deferred tax asset valuation
allowance - (7.2) (6.6)
---- ---- ----
Effective tax rates 43.7% 27.3% 15.0%
---- ---- ----
---- ---- ----
</TABLE>
In addition, the Corporation has applied all unused general
business tax credit carryforwards for financial reporting and
income tax purposes.
-18-
<PAGE>
NOTE 8. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset, included in other
assets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Deferred tax asset
Federal $ 161,600 $ 183,300
State 66,700 65,700
--------- ---------
Net deferred tax asset $ 228,300 $ 249,000
--------- ---------
--------- ---------
</TABLE>
The tax effects of each type of income and expense item that give
rise to deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Deferred tax asset
Accrual to cash adjustments $ 193,900 $ 144,100
Investments:
Net unrealized gain on securities
available for sale (59,800) -
Charitable contribution carryforward - 4,300
Allowance for loan losses 74,900 62,400
General business credit carryforward - 18,800
Depreciation 19,300 19,400
--------- ---------
Net deferred tax asset $ 228,300 $ 249,000
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1997 and 1996 management expects all temporary
differences to be offset against future taxable income, and no
valuation reserve was deemed necessary.
-19-
<PAGE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments
and contingencies which are not reflected in the consolidated
financial statements.
OPERATING LEASE COMMITMENTS
The Corporation leases its branch buildings in Carmel and Pacific
Grove. The Carmel building has a twenty-five year lease which
commenced in March 1981 and may be adjusted annually for changes in
the Consumer Price Index. The Pacific Grove building has a five
year lease with five, five year options and commenced in April
1997. The Corporation also leases certain equipment used in the
normal course of business.
Rent expense for operating leases is included in occupancy and
equipment expense and amounted to approximately $75,000, $59,000,
and $103,500 in 1997, 1996, and 1995, respectively.
At December 31, 1997, approximate future minimum rental
commitments for all noncancelable operating leases are as follows:
1998 $ 104,200
1999 107,200
2000 97,000
2001 101,700
2002 87,100
Thereafter 252,800
---------
$ 750,000
---------
---------
LOAN COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Bank's exposure to credit loss is represented by the
contractual amount of these commitments. The Bank uses the same
credit policies in making commitments as it does for
on-balance-sheet instruments.
At December 31, 1997 and 1996, such commitments to extend credit
were approximately $5,093,000 and $4,568,000, respectively of
undisbursed lines of credit and undisbursed loans in process.
-20-
<PAGE>
NOTE 10. STOCKHOLDERS' EQUITY
MINIMUM REGULATORY REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are subject
to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the
Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also
subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total and
Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1997 and 1996, that the
Corporation and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Corporation
and the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized,
they must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the following tables. There
are no conditions or events since the notifications that management
believes have changed the Corporation's or Bank's category. The
Corporation's and the Bank's actual capital amounts and ratios as
of December 31, 1997 and 1996 are also presented in the tables.
-21-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Minimum To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
-------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
(All data in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $ 3,228 11.2% $ 2,307 8.0% $ 2,883 10.0%
Monterey County Bank 3,147 10.9% 2,306 8.0% 2,883 10.0%
Tier 1 Capital to Risk Weighted Assets:
Consolidated 2,958 10.3% 1,153 4.0% 1,730 6.0%
Monterey County Bank 2,877 10.0% 1,153 4.0% 1,730 6.0%
Tier 1 Capital to Average Assets:
Consolidated 2,958 6.6% 1,784 4.0% 2,230 5.0%
Monterey County Bank 2,877 6.5% 1,784 4.0% 2,230 5.0%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
Minimum To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
-------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
(All data in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $ 2,845 11.4% $ 2,002 8.0% $ 2,503 10.0%
Monterey County Bank 2,822 11.3% 2,202 8.0% 2,502 10.0%
Tier 1 Capital to Risk Weighted Assets:
Consolidated 2,592 10.4% 1,001 4.0% 1,502 6.0%
Monterey County Bank 2,568 10.3% 1,001 4.0% 1,502 6.0%
Tier 1 Capital to Average Assets:
Consolidated 2,592 6.4% 1,491 4.0% 1,863 5.0%
Monterey County Bank 2,568 6.3% 1,489 4.0% 1,861 5.0%
</TABLE>
-22-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11. STOCK OPTIONS
On June 14, 1989, the amended 1987 Stock Option Plan was approved
by the shareholders. The Plan was approved by the State Banking
Department and a Stock Option Permit was issued on October 2, 1989.
Under the Plan, options may be granted to officers, key employees,
and directors at prices not lower than the fair market value of the
common stock on the date of grant. The Board of Directors is
authorized to determine when options become exercisable within a
period extending from 90 days to 10 years from the date of grant.
The maximum number of shares available for issuance under the Plan
is 30% of the Corporation's issued and outstanding shares, or
257,600 shares. The Corporation may not issue an option to any
individual if the issuance, when added to the aggregate outstanding
amount of options previously issued to the individual, would exceed
10% (85,800 shares) of the number of shares outstanding at the time
of the issuance of the option. The exercise price may not be less
than 100% of the fair market value of the shares on the date of
grant. However, an incentive stock option granted to an individual
owning 10% or more of the Corporation's stock after such grant
must have an exercise price of at least 110% of such fair market
value and an exercise period of not more than five years.
At December 31, 1997, the Corporation has a stock-based
compensation plan which is described below. The Corporation
applies APB Opinion 25 and related interpretations in accounting
for the plan. Accordingly, no compensation cost has been
recognized. Compensation costs for the Corporation's stock-based
compensation plan are to be determined based on the fair value at
the grant dates for awards under those plans consistent with the
method prescribed by SFAS No. 123. Had compensation cost for the
Corporation's stock-based compensation plan been determined based
on the fair value at the grant date for awards under the plan
consistent with the method prescribed by SFAS No. 123, the
Corporation's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Net income:
As reported $ 225,900 $ 213,400
Pro forma 208,000 213,400
Earnings per share
As reported $ 0.26 $ 0.24
Pro forma 0.23 0.24
Earnings per share, assuming dilution for
stock options:
As reported $ 0.22 $ 0.21
Pro forma 0.20 0.21
</TABLE>
-23-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 11. STOCK OPTIONS (CONTINUED)
The fair value of these options was estimated at grant date using a
Black-Scholes option pricing model with the following
weighed-average assumptions for 1997 and 1996, respectively:
risk-free interest rates of 6.21 and 6.29 percent; dividend yield
of 4.0 percent; expected option life of 6 years; and volatility of
30 percent.
At December 31, 1997, options for the purchase of 157,500 shares of
the Holding Corporation's common stock were outstanding and
exercisable at prices ranging from $2.20 to $2.75. The status of
all optioned shares is as follows:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Shares Price Range Contractual Life
<S> <C> <C> <C>
Outstanding at December 31, 1995 162,500 $2.00 - $2.75 4.6 Years
Granted -
Cancelled (20,000) $2.50
--------
Outstanding at December 31, 1996 142,500 $2.20 - $2.75 3.0 Years
Granted 40,000 $2.75
Cancelled (25,000) $2.20
--------
Outstanding at December 31, 1997 157,500 $2.20 - $2.75 3.2 Years
--------
--------
</TABLE>
NOTE 12. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1997 accounting pronouncement SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities of Liabilities," changed the
accounting treatment of U.S. Small Business Administration (SBA)
loans sold in the secondary market. Financial statements for 1996
or 1995 have not been restated, and the cumulative effect of the
change of $55,500 is shown as a one time credit to equity in the
1997 financial statement, with no effect on net income.
-24-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 13. RELATED PARTY TRANSACTIONS
The Corporation has, and expects to have in the future, banking
transactions in the ordinary course of its business with directors,
officers, principal shareholders, and their associates. These
transactions, including loans and deposits, are granted on
substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for
comparable transactions with others and do not involve more than
the normal risk of collectibility or present other unfavorable
features.
Aggregate loan transactions with related parties are approximately
as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance as of December 31, 1995 $ 1,452,200
New loans 7,200
Repayments (622,100)
-----------
Balance as of December 31, 1996 $ 837,300
New loans 232,100
Repayments (815,400)
-----------
Balance as of December 31, 1997 $ 254,000
-----------
-----------
</TABLE>
Related party deposits totaled approximately $155,100 and $78,400
at December 31, 1997 and 1996, respectively.
NOTE 14. EMPLOYEE BENEFIT PLANS
During 1995, the Corporation established an employee stock
ownership plan (ESOP) to invest in the Corporation's common stock
for the benefit of eligible employees. The Corporation's
contribution to the plan is determined by the Board of Directors.
Shares in the plan generally vest after seven years. The
Corporation did not make a contribution to the ESOP trust in 1997,
1996, or 1995.
The Bank has a salary reduction plan under Section 401(K) of the
Internal Revenue Code. The plan covers substantially all full-time
employees who have completed one year of service with the Bank.
Employees are allowed to defer up to a maximum of 15% or $9,500 of
their income. Under the provisions of the plan, the Bank's
contribution policy is discretionary. No contributions were made
by the Bank in 1997, 1996, or 1995.
-25-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 15. REGULATORY MATTERS
The Corporation is subject to regulation by the Board of Governors
of the Federal Reserve System under the Bank Holding Corporation
Act. The Bank is subject to regulation, supervision, and regular
examination by the Superintendent and the FDIC. The regulations of
these agencies affect most aspects of the Corporation's business
and prescribe permissible types of loans and investments, the
amount of required reserves, requirements for branch offices, the
permissible scope of the Corporation's activities and various other
requirements. The Corporation is also subject to certain
regulations of the Federal Reserve Bank dealing primarily with
check clearing activities, establishment of banking reserves,
Truth-in-Lending (Regulation Z) , and Equal Credit opportunity
(Regulation B).
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" requires disclosure of estimated fair values of all
financial instruments where it is practicable to estimate such
values. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates
of future cash flows. Accordingly, the derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Corporation.
The following methods and assumptions were used by the Corporation
in estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and
short-term instruments approximate fair values.
INVESTMENT SECURITIES: Fair values for investment securities,
excluding Federal Home Loan Bank stock, are based on quoted
market prices. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions
of the Federal Home Loan Bank of San Francisco.
-26-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based
on carrying values. The fair value of performing fixed rate loans
is estimated by discounting future cash flows using the
Corporation's current offering rate for loans with similar
characteristics. The fair value of performing adjustable rate
loans is considered to be the same as book value. The fair value
of nonperforming loans is estimated at the fair value of the
related collateral or, when, in management's opinion, foreclosure
upon the collateral is unlikely, by discounting future cash flows
using rates which take into account management's estimate of
credit risk.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The
Corporation does not generally enter into long-term fixed rate
commitments or letters of credit. These commitments are
generally at prices which are currently prevailing rates. These
rates are generally variable and, therefore, there is no interest
rate exposure. Accordingly, the fair market value of these
instruments is equal to the carrying value amount of their net
deferred fees. The net deferred fees associated with these
instruments are not material. The Corporation has no unusual
credit risk associated with these instruments.
DEPOSIT LIABILITIES: The fair values disclosed for demand
deposits (e.g., interest and non-interest checking, savings, and
certain types of money market accounts) are, by definition, equal
to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly
maturities on time deposits.
ACCRUED INTEREST: The carrying amounts of accrued interest
approximate fair value.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other
short-term borrowings maturing within ninety days approximate
their fair values. Fair values of other short-term borrowings
are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar
types of borrowing arrangements.
-27-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 16. FAIR VALUE OF FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values, and related carrying amounts, of the
Corporation's financial instruments as of December 31, 1997 and
1996 are as follows:
<TABLE>
Caption>
DECEMBER 31,
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------ ------------
<S> <C> <S> <S> <C>
Financial Assets
Cash and cash equivalents $11,060,600 $11,060,600 $ 9,820,100 $ 9,820,100
Time deposits 100,000 100,000 - -
Investment securities,
available for sale 480,200 480,200 299,800 299,800
Investment securities,
held to maturity 5,495,300 5,500,700 2,500,200 2,499,500
Loans, held for sale 543,400 543,400 414,500 414,500
Loans, net 25,062,100 25,028,000 24,641,500 24,771,600
Accrued interest receivable 259,500 259,500 242,600 242,600
Financial Liabilities
Deposits 39,205,600 38,902,600 36,167,100 36,220,700
Long-term debt 3,000,000 2,718,200 1,000,000 998,100
Accrued interest payable 355,900 355,900 394,900 394,900
</TABLE>
NOTE 17. TRADE NAME INFRINGEMENT SUIT
In November of 1996 the Bank learned that Watsonville Federal
Savings and Loan Association (WFS) was changing its name to
Monterey Bay Bank. Because WFS has several branches in the bank's
immediate market area and the name "Monterey Bay Bank" is
confusingly similar to Monterey County Bank's name, the Bank's
management was concerned that the Bank's marketing program would be
jeopardized and that the public would not relate the Bank's
advertising and civic contributions to it. Following discussions,
WFS refused to abandon the "Monterey Bay Bank" name and Monterey
County Bank filed a civil lawsuit against WFS and its holding
Corporation Monterey Bay Bancorp which seeks to enjoin the use of
the "Monterey Bay Bank" name on the grounds that the use of that
name unfairly infringes on the Bank's name and will damage the
Bank. Monterey County Bank's lawsuit also seeks monetary damages
arising from any use of the "Monterey Bay Bank" name.
- 28 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 17. TRADE NAME INFRINGEMENT SUIT (CONTINUED)
While the full impact to Monterey County Bank from the use of the
"Monterey Bay Bank" name is not yet known, the Bank's suit seeks
one million dollars ($1,000,000) in compensatory damages. Monterey
County Bank's management is firmly committed to protecting its
trade name by prosecuting the suit to conclusion and has spent
seventy-five thousand dollars ($75,000) to date in pursuing the
suit. A trial date has been set for August 1998, however, no
estimate can be made of the amount of damages that will actually be
received.
NOTE 18. BUSINESS COMBINATION
On December 29, 1995, the Corporation acquired Monterey County Bank
in a business combination accounted for as a pooling of interests.
Monterey County Bank, which engages in commercial banking
activities, became a wholly owned subsidiary of the Corporation
through the exchange of 879,465 shares of the Corporation's common
stock for all of the outstanding stock of Monterey County Bank.
The Corporations financial statements for 1995 are based on the
assumption that the companies were combined for the full year, and
financial statements of prior years have been restated to give
effect to the combination.
NOTE 18. NORTHERN CALIFORNIA BANCORP, INC. (PARENT CORPORATION ONLY)
The following are the financial statements of Northern California
Bancorp, Inc. (parent Corporation only) as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
BALANCE SHEETS
1997 1996
<S> <C> <C>
Assets
Cash account and due from Banks $ 35,200 $ 40,000
Organization costs 4,600 6,100
Prepaid expense - 4,400
Investment in common stock of
Monterey County Bank 3,004,400 2,864,600
---------- ----------
$3,044,200 $2,915,100
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 1,500 $ 700
Dividend payable 12,500 16,500
Stockholders' Equity 3,030,200 2,897,900
---------- ----------
$ 3,044,200 $ 2,915,100
---------- ----------
---------- ----------
</TABLE>
- 29 -
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 19. NORTHERN CALIFORNIA BANCORP, INC. (PARENT CORPORATION ONLY)
<TABLE>
<CAPTION>
Statements of Income
1997 1996
<S> <C> <C>
Equity in income of subsidiary $ 237,600 $ 233,400
Operating expenses 16,100 18,900
Applicable taxes (benefit) (4,400) 1,100
---------- ----------
Net income $ 225,900 $ 213,400
---------- ----------
---------- ----------
Statements of Cash Flows
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 225,900 $ 213,400
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of
Monterey County Bank (237,600) (233,400)
Decrease in other assets 5,900 29,700
Increase in accrued expenses 700 (39,500)
Increase in other liabilities (3,900) 16,500
---------- ----------
(9,000) (13,300)
---------- ----------
Cash flows from financing activities:
Cash dividends received from subsidiary 170,000 150,000
Cash dividends paid on common stock (103,000) (96,700)
Stock repurchase (62,800) -
---------- ----------
4,200 53,300
---------- ----------
Net increase in cash and cash equivalents (4,800) 40,000
Cash and cash equivalents, beginning of year 40,000 -
---------- ----------
Cash and cash equivalents, end of year $ 35,200 $ 40,000
---------- ----------
---------- ----------
</TABLE>
The ability of the Corporation to pay dividends will largely depend upon
the dividends paid to it by the Bank. There are legal limitations on
the ability of the Bank to provide funds to the Corporation in the form
of loans, advances, or dividends.
- 30 -
<PAGE>
EXHIBIT 10.IIA2
EXHIBIT
ITEM 10(II)A(2)
Employment Contract of Charles T. Chrietzberg, Jr., Dated May 14, 1997
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 14 day of
May, 1997, between MONTEREY COUNTY BANK, a California corporation ("Bank"),
and CHARLES T. CHRIETZBERG, JR. ("Executive").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Executive has served as the Chairman and Chief Executive Officer
of Bank since 1987 with distinction, leading the Bank to a "Premier
Performing" rating in 1992, reducing the level of non-performing loans from
one far in excess of state averages to one which is far below state averages,
and becoming the only Chief Executive Officer in the Bank's history whose
tenure generated net profits; and
WHEREAS, the latest Employment Agreement between Executive and Bank
expired as of December 31, 1996; and
WHEREAS, Bank desires that Executive continue to be employed as Bank's
Chairman, President and Chief Executive Officer, and to document the terms of
such employment; and
WHEREAS, Executive is willing to be employed as Bank's Chairman,
President and Chief Executive Officer under the terms and conditions herein
stated.
WHEREAS, Executive is willing to be employed as Bank's Chairman,
President and Chief Executive Officer under the terms and conditions herein
stated.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, and other good and valuable consideration, it is
hereby agreed by and between the parties hereto as follows:
A. TERM OF EMPLOYMENT
1. TERM. bank hereby agrees to continue to employ Executive, and
Executive hereby accepts employment with Bank, for the period of three (3)
years, commencing on January 1, 1997, subject however, to prior termination
of this Agreement as hereinafter provided (the "Term"). When used herein,
"Term" shall refer to the entire period of employment of Executive by Bank
hereunder commencing January 1, 1997 (the "Effective Date"), whether for the
period provided above, or whether terminated earlier as hereinafter provided.
B. DUTIES OF EXECUTIVE
1. DUTIES. Executive shall perform the duties of Chairman of the
Board and Chief Executive Officer of Bank, subject to the powers by law
vested in the Board of Directors of Bank and in Bank's shareholders, and
shall serve as a Director of Bank if elected by the shareholders. During the
Term, Executive shall perform exclusively the services herein, contemplated
to be performed by Executive with due care, faithfully, diligently, to the
best of Executive's ability and in compliance with all applicable laws,
policies adopted by the Board of Directors, and Bank's Articles of
Incorporation and Bylaws.
2. EXCLUSIVELY. Executive shall devote Executive's entire productive
time, ability and attention to the business of Bank during the term.
Executive shall not directly or indirectly render any services of a business,
commercial or professional nature to any other person, firm or corporation,
whether for compensation or otherwise, without prior consent evidenced by a
resolution duly adopted by the Board of Directors of the Bank, or the
Executive Committee thereof. Notwithstanding the foregoing, Executive may
make investments of a passive nature in any business or venture, provided
however, that such business or venture is neither in competition or conflict,
<PAGE>
directly or indirectly, in any manner with Bank.
3. UNIQUENESS OF EXECUTIVE'S SERVICES. The Executive hereby
represents that the services to be performed by him under the terms of this
contract are of a special, unique, unusual, extraordinary, and intellectual
character, which give them a peculiar value, the loss of which cannot be
reasonably or adequately compensated in damages in an action at law. The
Executive therefore expressly agrees that the Bank, in addition to other
rights or remedies which the Bank may possess, shall be entitled to
injunctive and other equitable relief to prevent a breach of this contract by
the Executive.
4. PHYSICAL EXAMINATION. Executive shall take an annual physical
examination during each year during the Term of this contract. Said physical
examination(s) shall be conducted at the expense of the Bank.
C. COMPENSATION
1. SALARY. For Executive's services hereunder, Bank shall pay or
cause to be paid as annual gross base salary to Executive the amount of not
less than $150,000 during each of the years of the Term, beginning with the
Effective Date. Executive shall also, so long as he serves on the Board of
Directors, be entitled to directors fees on the same basis as paid to outside
directors, if the Board of Directors does not exclude him from such directors
fees. The Board of Directors shall also, from time to time, and at least once
each calendar year grant such additional "merit" increases, if any, in the
base salary as are determined after review to be appropriate in the
discretion of the Board of Directors. Executive's salary shall be payable in
equal installments in conformity with Bank's normal payroll periods as in
effect from time to time.
D. EXECUTIVE BENEFITS
1. VACATION. Executive shall be entitled to a vacation leave of
four (4) weeks during each year of the Term, of which two (2) weeks must be
taken consecutively in each calendar year. Executive shall also be entitled
to vacation pay, in lieu of up to two (2) weeks of vacation during each
calendar year, with the consent of the Board of Directors.
2. AUTOMOBILE ALLOWANCE. During the term hereunder, Bank shall
provide Executive, for Executive's sole use, a suitable full-size automobile,
or, if the Executive desires to use his own automobile, Bank shall pay
Executive a comparable auto allowance (not less than $600 per month) as
determined by the Board of Directors. Bank shall pay all operating expenses
of any nature whatsoever with regard to such automobile. Executive shall use
reasonable efforts to furnish to Bank substantially adequate records
and other documentary evidence required by federal and state statutes and
regulations issued by appropriate taxing authorities substantiating the
extent to which such payments are deductible business expenses of Bank
and not deductible additional compensation to Executive. Bank shall also
procure, pay for and maintain in force adequate insurance coverage for such
automobile. Bank and Executive agree that the value of Executive's personal
use of the automobile is twenty (20%) of the annual cost of the automobile
lease, repairs, and gasoline which shall be treated for tax purposes as
additional compensation to Executive, subject to appropriate withholding.
3. GROUP MEDICAL AND LIFE INSURANCE BENEFITS. Bank shall provide
for Executive, at Bank's expense to the extent permitted by Bank policy,
participation in a comprehensive major medical, dental, and optical plan,
with accident benefits, equivalent to either (i) the maximum available from
time to time under the California Bankers Association Group Insurance Program
for an employee of Executive's salary level; or (ii) the benefits
-2-
<PAGE>
under an insurance program adopted on a non-discriminatory basis for the
employees of the Bank generally. Life insurance benefits shall be provided to
Executive, at Bank's expense to the extent not prohibited by Bank policy
during the term hereof in an amount not less than $200,000, with Executive to
designate beneficiary thereunder.
4. BONUS. For the calendar year 1997, and for each full calendar
year of the Term completed by Executive pursuant to this Agreement, he shall
be entitled to an Incentive Bonus determined in accordance with this
paragraph. The Incentive Bonus shall equal lesser of (i) $160,000, or (ii)
the sum of the ROA Bonus and the ROE Bonus, determined in accordance with the
Exhibit D-4. This bonus shall be payable in January of the year following
completion of the year on which it is based, or as soon thereafter as is
practical after the Bank's certified public accountants have delivered their
report on the Bank's condition and results of operations for the year.
5. SICK LEAVE. Executive shall be entitled to days of paid sick
leave in accordance with Bank policy.
E. BUSINESS EXPENSES AND REIMBURSEMENT.
1. BUSINESS EXPENSES. Executive shall be entitled to reimbursement
by Bank for any ordinary and necessary business expenses incurred by
Executive in the performance of Executive's duties and in acting for Bank
during the Term. Types of expenses qualifying for such reimbursement shall be
determined by the Board of Directors. Executive shall furnish to Bank
adequate records and other documentary evidence required by federal and state
statutes and regulations issued by the appropriate taxing authorities for the
substantiation of such payments as deductible business expenses of Bank and
not as deductible compensation to Executive; provided, however, that
reimbursement of such expenses shall not be dependent on proving
deductibility of such expenses for tax purposes if such expenses are
otherwise determined by the Board of Directors, in its sole discretion, to be
appropriate.
F. TERMINATION.
1. TERMINATION WITH CAUSE. Except as otherwise provided herein,
this Agreement may be terminated by Bank, at Bank's option with notice to
Executive, upon the occurrence of any of the following events:
(a) A material breach by Executive of any of the terms or
provisions of this Agreement;
(b) Executive is convicted of illegal activity by a court of
competent jurisdiction or pleads guilty to or nolo contendere to, illegal
activity, which activity materially adversely affects Bank's reputation in
the community or which evidences the lack of Executive's fitness or ability
to perform Executive's duties, as determined by the Board of Directors in
good faith; or
(c) Executive has committed any illegal or dishonest act which
would cause termination of coverage under Bank's Bankers Blanket Bond as to
Employee, as distinguished from termination of coverage as to Bank as a
whole; or
(d) Executive materially fails to perform or habitually
neglects Executive's duties or commits a material act of malfeasance or
misfeasance in connection therewith; or
(e) Executive becomes permanently disabled as such is defined
in his or Bank's disability insurance policy and such disability makes
Executive eligible for benefits thereunder (or if no such definition, as
-3-
<PAGE>
defined by federal law or regulation pursuant to the Social Security Act or a
related statute). Any controversy concerning Executive's disability shall be
settled by arbitration in accordance with the rules of the American
Arbitration Association. Any termination pursuant to this subsection (d)
shall not affect the continued operation of any disability income
continuation plan, which may be established for the benefit of Executive;
(f) An order under 12 U.S.C. 1818(b) or (e) or any similar statute
is issued against Executive or Bank which calls for his suspension or removal
from office; or
(g) The Superintendent of Banks, or other supervisory or regulatory
authority having jurisdiction takes possession of the property and business
of Bank pursuant to applicable statute or regulation.
2. TERMINATION WITHOUT CAUSE.
(a) During the Term, this Agreement may be terminated by Bank
without cause upon written notice to Executive.
(b) During the Term, this Agreement may be terminated by Executive
without cause upon sixty (60) days' prior written notice to Bank. Executive
and Bank agree that it would be impractical or extremely difficult to fix the
actual damage caused by Executive's breach of this Section F.2(b).
Accordingly, the amount of damage suffered and recoverable by Bank in the
event of Executive's breach of this provision shall be equal to the amount of
Base Salary for Executive for two months. Bank and Executive agree such sum
is a reasonable estimate of damage under the circumstances at the date
this Agreement is made.
3. COMPENSATION UPON TERMINATION. (a) If Executive's employment with
Bank is terminated by Bank pursuant to Section F.1. hereof or by Executive
pursuant to Section F.2. hereof, Executive shall then only be entitled to
receive salary through the effective date of such termination (without
proration of the Incentive Bonus described in Section D.4 above) and shall
receive any incurred but not reimbursed business expenses (subject to the
provisions of Section E.1. hereof).
(b) If Executive's employment is terminated by Bank pursuant to
Section F.2. hereof, Executive shall be entitled to receive Executive's
salary through the effective date of such termination; any incurred but not
reimbursed business expenses (subject to the provisions of Section E.1.
hereof); plus Executive's salary (as in effect immediately prior to
termination) for the "Severance Period", which shall be the lesser of two
years from the effective date of termination or the remainder of the Term to
be paid in equal installments in conformity with Bank's normal payroll
periods as in effect from time to time. However, if Executive's employment is
terminated by the Bank pursuant to Section F.2 within six months (6) after
the announcement or consummation, or during the pendency, of a Change in
Control Transaction, the Severance Period shall be the greater of 24 months
from the effective date of termination, or the remainder of the Term. A
"Change in Control Transaction" shall be limited to an acquisition by a
person, or group of persons acting in concert, of shares having the power to
elect a majority of the directors of the Bank, or a merger or other
acquisition of the Bank or its assets and business, in which the power to
elect a majority of the directors of the surviving corporation is in the
hands of persons who were not shareholders of the Bank as of one of the date
hereof or a date two years prior to such merger or other acquisition. In
addition to compensation for the Severance Period, Executive shall be
entitled to a lump sum payment of his Incentive Bonus (when calculated in
accordance with the timing set forth in Section D.4) for any calendar year in
which his employment is terminated by
-4-
<PAGE>
the Bank pursuant to Section F.2 in an amount equal to a pro-rated portion of
the Incentive Bonus provided in Section D.4 above (calculated as though the
period from the beginning of the year until the end of the month prior to the
termination were a full year).
G. GENERAL PROVISIONS.
1. Ownership of Books and Records; Confidentiality. (a) All records
or copies thereof of the accounts of customers, and any other records and
books relating in any manner whatsoever to the customers of Bank, and all
other files, books and records and other materials owned by Bank or used by
it in connection with the conduct of its business, whether prepared by
Executive or otherwise coming into his possession, shall be the exclusive
property of Bank regardless of who actually prepared the original material,
book or record. All such books and records and other materials, together with
all copies thereof, shall be immediately returned to Bank by Executive on
any termination of his employment.
(b) During the Term, Executive will have access to and become
acquainted with what Executive and Bank acknowledge are trade secrets, to
wit, knowledge or data concerning Bank, including its operations and
business, and the identity of customers of Bank, including knowledge of their
financial condition, their financial needs, as well as their methods of doing
business. Executive shall not disclose any of the aforesaid trade secrets,
directly or indirectly, or use them in any way, whether during the Term or
thereafter, except as required in the course of Executive's employment with
Bank. Executive shall not solicit any employee or customer of Bank to become
an employee or customer of another institution until the later of six (6)
months following the end of the Term or the end of the Severance Period.
2. ASSIGNMENT AND MODIFICATION. This Agreement, and the rights and
duties hereunder, may not be assigned by either party hereto without the prior
written consent of the other, and the parties expressly agree that any
attempt to assign the rights of any party hereunder without such consent
will be null and void; provided, however, that Bank's rights and obligations
hereunder shall be assignable without consent by operation of law in the
event of a merger or similar transaction involving the Bank.
3. FURTHER ASSURANCE. From time to time each party will execute and
deliver such further instruments and will take such other action as the other
party reasonably may request in order to discharge and perform the
obligations and agreements hereunder.
4. ARBITRATION. If the Parties hereto shall be unable to reach an
agreement on material provisions of this Agreement or on other issues then
such disputes shall be submitted to the the American Arbitration Association
("AAA") of closest to Monterey, California for resolution, in accordance with
the Commercial Arbitration Rules of the AAA (or by some other arbitrator
mutually agreed to by the parties). Such arbitration shall be conducted in
the following manner:
a. The Party desiring to resolve the dispute through arbitration
shall serve upon the Party a written notice of intent to exercise rights under
this arbitration provision. One arbitrator shall be required, and that
arbitrator shall be selected by the arbitration service, in a manner
determined by the AAA. The arbitrator shall be furnished with a statement of
issues in dispute and a summary of each party's position.
b. The arbitrator shall set a date for a hearing which shall be no
less than thirty (30) days and no more than one hundred twenty (120) days
after the arbitrator is selected. At the arbitration, each
-5-
<PAGE>
party shall present to the arbitrator the reasons why the respective
positions of the parties should be upheld. In considering such arguments, the
arbitrator may consider any evidence reasonably believed by him to be
credible and relevant to the determination which he is called upon to make.
The arbitrator may consider such hearsay and opinions of the parties as he
desires and may consider copies of any writings. The best evidence rule will
not apply nor any formal prerequisites required by the California Evidence
Code for the introduction of documents. Nothing contained herein shall
prevent either party from arguing about the weight to be given any evidence
under the Evidence Code or otherwise. The arbitrator shall not be bound by
either the Evidence Code, or the Code of Civil Procedure in determining the
evidence to be presented, admitted by him, or the method by which evidence
and arguments may be presented. All methods of discovery permitted by the
Code of Civil Procedure shall be permitted except use of requests for
admissions. Furthermore, a party shall only have fifteen (15) days from
receipt of interrogatories, or request for production to respond to the
propounding party. Each party shall have the right to take the deposition of
the other on twenty (20) days notice. The arbitrator shall determine a
method for resolution of any discovery dispute, which may include selecting
one arbitrator to resolve disputes by telephone conference. The arbitrator
may establish such rules as he deems reasonable for the conduct of the
arbitration, including requirements for the filing of memoranda supporting
the parties' positions.
c. The decision of the arbitrator shall be binding upon the Parties
and shall constituted a complete determination of the issues considered by
the arbitrator. The provisions this Section shall constitute a binding
arbitration agreement between the Parties pursuant to Code of Civil Procedure
Section 1321 et seq.
d. Each party shall be responsible for one-half of all costs of the
arbitration. Each party shall deposit with the AAA, one-half (1/2) of all
required deposits. The failure of either party to make such deposit within
thirty (30) days of notice of such cost shall automatically entitle the other
party to an arbitration determination favorable to the party making the
required deposit. Each party shall pay their own fees and attorney's fees and
costs for the arbitration.
e. No arbitrator shall have ever been employed by either party or
their successors in interest or any of their Shareholders, officer,
directors, partners nor shall they be related to any of such individuals by
any relationship closer than consanguinity in the third degree.
NOTICE. BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE
ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF
DISPUTES" PROVISIONS DECIDED BY NEUTRAL ARBITRATION, AS PROVIDED HEREIN AND
BY CALIFORNIA LAW, AND YOU HEREBY AGREE TO WAIVE ANY RIGHTS YOU MAY POSSESS TO
HAVE SUCH DISPUTE LITIGATED AND RESOLVED IN A COURT OR JURY TRIAL.
BY INITIALING IN THE SPACE BELOW YOU HEREBY WAIVE YOUR JUDICIAL
RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE INCLUDED IN THIS
ARBITRATION OF DISPUTES PROVISION.
IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS
PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE
CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR EXECUTION OF THIS AGREEMENT AND YOUR
APPROVAL, SPECIFICALLY OF THIS PARAGRAPH 16, ACKNOWLEDGES THAT YOUR EXECUTION
OF THIS PROVISION IS VOLUNTARY AND THAT PRIOR TO SUCH EXECUTION YOU HAVE
CONSULTED WITH INDEPENDENT COUNSEL CONCERNING THE EFFECTS OF SUCH PROVISION
TO THE EXTENT YOU HAVE DEEMED NECESSARY, PRIOR TO YOUR EXECUTION OF THIS
PROVISION.
-6-
<PAGE>
THE PARTIES HEREBY ACKNOWLEDGE, UNDERSTAND AND AGREE TO, THE TERMS
HEREOF AND TO THE SUBMISSION OF ANY DISPUTES TO ARBITRATION BY THE AAA, AS
SET FORTH HEREIN.
BW CTC
- ------------------------- ------------------------------
Bank's Initials Executive's Initials
4. NOTICES. All notices required or permitted hereunder shall be in
writing and shall be delivered in person or sent by certified or registered
mail, return receipt requested, postage prepaid as follows:
To Bank: Monterey County Bank
601 Munras Ave
Monterey, California 93940
Attn: Board of Directors
To Executive: Charles T. Chrietzberg, Jr.
P.O. Box 1344
Carmel, CA 93921
or to such other party or address as either of the parties may designate in a
written notice served upon the other party in the manner provided herein. All
notices required or permitted hereunder shall be deemed duly given and
received on the date of delivery if delivered in person or on the second day
next succeeding the date of mailing if sent by certified or registered mail,
postage prepaid.
5. SUCCESSORS. This Agreement shall be binding upon, and shall inure
to the benefit of, the successors and assigns of the parties.
6. ENTIRE AGREEMENT. Except as provided herein, this Agreement
constitutes the entire agreement between the parties, and all prior
negotiations, representations, or agreements between the parties, whether oral
or written, are merged into this Agreement. This Agreement may only be
modified by an agreement in writing executed by both of the parties hereto.
7. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of California.
8. EXECUTED COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which together shall constitute a single agreement
and each of which shall be an original for all purposes.
9. SECTION HEADINGS. The various section headings are inserted for
convenience of reference only and shall not affect the meaning or
interpretation of this Agreement or any section hereof.
10. CALENDAR DAYS/CLOSE OF BUSINESS. Unless the context so requires,
all periods terminating on a given day, period of days or date shall
terminate on the close of business on that day or date and references to
"days" shall refer to calendar days.
11. SEVERABILITY. In the event that any of the provisions, or portions
thereof, of this Agreement are held to the unenforceable or invalid by any
court of competent jurisdiction, the validity and enforceability of the
remaining provisions of portions thereof, shall not be affected thereby.
-7-
<PAGE>
12. ATTORNEY'S FEES. In the event that any party shall bring an action
or arbitration in connection with the performance, breach or interpretation
hereof, then the prevailing party in such action as determined by the court
or other body having jurisdiction shall be entitled to recover from the
losing party in such action, as determined by the court or other body having
jurisdiction, all reasonable costs and expenses of litigation or arbitration,
including reasonable attorney's fees, court costs, costs of investigation and
other costs reasonably related to such proceeding, in such amounts as may be
determined in the discretion of the court or other body having jurisdiction.
IN WITNESS WHEREOF, this Agreement is executed as of the day and year
first above written.
BANK: MONTEREY COUNTY BANK
By: /s/ BRUCE N. WARNER
---------------------------
Bruce Warner
Senior Vice President and
Chief Operating Officer
EXECUTIVE: /s/ CHARLES T. CHRIETZBERG, JR.
------------------------------------
CHARLES T. CHRIETZBERG, JR.
-8-
<PAGE>
EXHIBIT D-4
CALCULATION OF BONDS
The ROA and ROE Bonuses shall be based on the Bank's pretax return on
average assets and beginning equity using in the following amounts:
ROA ROA BONUS ROE ROE BONUS
---- --------- --- ---------
0.8% $ 10,000 9% $ 10,000
0.9% $ 20,000 10% $ 20,000
1.0% $ 30,000 11% $ 30,000
1.1% $ 40,000 12% $ 40,000
1.2% $ 50,000 13% $ 50,000
1.3% $ 60,000 14% $ 60,000
1.4% $ 70,000 15% $ 70,000
1.5% $ 80,000 16% $ 80,000
1.6% $ 90,000 17% $ 90,000
1.7% $100,000 18% $100,000
1.8% $110,000 19% $110,000
1.9% $120,000 20% $120,000
2.0% $130,000 21% $130,000
2.1% $140,000 22% $140,000
2.2% $150,000 23% $150,000
2.3% $160,000 24% $160,000
MAXIMUM COMBINED - $160,000, or $310,000 minus non-bonus salary excluding
compensation, if any, for vacation not taken) for the year. The return's
shall be calculated before deduction for any annual performance bonuses, but
after deduction for commissions and bonuses paid on a monthly basis.
-9-
<PAGE>
EXHIBIT
ITEM II
Statement Reference Computation of Per Share Earnings
Primary earnings (loss) per share amounts were computed on the basis of
the weighted average number of shares of common stock during the year. The
weighted average number of shares used for this computation was 868,248 for
1997 and 879,465 for 1996, 1995, 1994 and 1993.
Fully 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 employee stock options. The weighted average number of shares used
for this computation was 1,034,574, 1,022,402, 1,044,684, 1,012,773 and
1,034,972, in 1997, 1996, 1995, 1994, and 1993, respectively.
<PAGE>
EXHIBIT 21
EXHIBIT
ITEM 21
Subsidiaries
Monterey County Bank
Incorporated in the State of California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM THE
COMPANY FORM 10-KSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,770,600
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 7,290,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 480,200
<INVESTMENTS-CARRYING> 5,495,300
<INVESTMENTS-MARKET> 5,500,700
<LOANS> 25,874,600
<ALLOWANCE> 269,100
<TOTAL-ASSETS> 46,112,600
<DEPOSITS> 39,205,600
<SHORT-TERM> 0
<LIABILITIES-OTHER> 876,800
<LONG-TERM> 3,000,000
0
0
<COMMON> 2,716,800
<OTHER-SE> 313,400
<TOTAL-LIABILITIES-AND-EQUITY> 46,112,600
<INTEREST-LOAN> 2,755,700
<INTEREST-INVEST> 643,400
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,399,100
<INTEREST-DEPOSIT> 1,321,300
<INTEREST-EXPENSE> 125,900
<INTEREST-INCOME-NET> 1,951,900
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,504,500
<INCOME-PRETAX> 401,500
<INCOME-PRE-EXTRAORDINARY> 225,900
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225,900
<EPS-PRIMARY> .26
<EPS-DILUTED> .22
<YIELD-ACTUAL> 9.44
<LOANS-NON> 75,900
<LOANS-PAST> 133,845
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 463,500
<ALLOWANCE-OPEN> 253,500
<CHARGE-OFFS> 106,200
<RECOVERIES> 1,800
<ALLOWANCE-CLOSE> 269,100
<ALLOWANCE-DOMESTIC> 32,200
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 236,900
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM [identify
specific financial statements here] THE CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON PAGES 2 AND 3 OF THE COMPANY'S
FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 2,457,000 2,852,100 3,028,300 9,820,100
<INT-BEARING-DEPOSITS> 99,000 99,000 0 0
<FED-FUNDS-SOLD> 9,000,000 6,300,000 4,800,000 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0 299,800
<INVESTMENTS-CARRYING> 486,000 790,300 2,795,300 2,500,200
<INVESTMENTS-MARKET> 486,000 788,900 2,778,000 2,499,500
<LOANS> 22,596,100 25,339,400 25,875,200 25,309,500
<ALLOWANCE> 226,200 256,200 262,500 253,500
<TOTAL-ASSETS> 37,286,400 37,904,600 39,153,700 40,799,100
<DEPOSITS> 34,481,000 32,456,900 33,560,600 36,167,100
<SHORT-TERM> 1,000,000 1,000,000 2,000,000 0
<LIABILITIES-OTHER> 437,400 482,500 468,600 733,800
<LONG-TERM> 1,000,000 1,000,000 0 1,000,000
0 0 0 0
0 0 0 0
<COMMON> 2,779,600 2,779,600 2,779,600 2,779,600
<OTHER-SE> 25,800 185,600 344,900 118,600
<TOTAL-LIABILITIES-AND-EQUITY> 37,286,400 37,904,600 39,153,700 40,799,100
<INTEREST-LOAN> 613,200 1,298,000 2,105,500 2,676,800
<INTEREST-INVEST> 101,300 204,700 312,900 463,600
<INTEREST-OTHER> 0 0 0 0
<INTEREST-TOTAL> 714,500 1,503,500 2,328,400 3,140,400
<INTEREST-DEPOSIT> 305,800 615,200 930,500 1,250,900
<INTEREST-EXPENSE> 328,600 660,800 999,100 1,333,600
<INTEREST-INCOME-NET> 385,900 842,700 1,329,300 1,806,800
<LOAN-LOSSES> 0 25,000 45,000 52,500
<SECURITIES-GAINS> 5,700 5,700 5,700 5,700
<EXPENSE-OTHER> 580,400 1,153,300 1,662,900 2,444,200
<INCOME-PRETAX> 37,100 221,400 407,200 293,400
<INCOME-PRE-EXTRAORDINARY> 37,100 221,400 407,200 293,400
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 26,200 184,000 343,300 213,400
<EPS-PRIMARY> .030 .209 .390 .243
<EPS-DILUTED> .026 .180 .336 .209
<YIELD-ACTUAL> 9.15 9.88 9.63 9.63
<LOANS-NON> 74,500 81,800 110,700 58,000
<LOANS-PAST> 199,200 0 262,100 223,000
<LOANS-TROUBLED> 0 0 0 31,800
<LOANS-PROBLEM> 246,000 262,400 442,600 486,200
<ALLOWANCE-OPEN> 224,800 224,800 224,800 224,800
<CHARGE-OFFS> 0 5,400 19,900 44,500
<RECOVERIES> 1,400 11,800 12,600 20,700
<ALLOWANCE-CLOSE> 226,200 256,200 262,500 253,500
<ALLOWANCE-DOMESTIC> 56,400 39,300 39,500 39,200
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 169,800 216,900 223,000 214,300
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM [identify
specific financial statements here] THE CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS FROM THE COMPANY FORM 10-KSB FOR YEAR TO
DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 7,204,200 2,655,500 2,991,200
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 0 4,900,000 6,800,000
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 454,500 470,300 475,000
<INVESTMENTS-CARRYING> 4,492,800 4,493,000 3,993,200
<INVESTMENTS-MARKET> 4,392,300 4,458,000 4,002,800
<LOANS> 24,726,400 25,806,600 26,678,300
<ALLOWANCE> 249,700 262,300 273,100
<TOTAL-ASSETS> 39,582,000 41,271,600 43,822,800
<DEPOSITS> 35,177,500 34,804,900 37,223,600
<SHORT-TERM> 1,000,000 0 3,000,000
<LIABILITIES-OTHER> 396,300 382,200 408,100
<LONG-TERM> 0 3,000,000 0
0 0 0
0 0 0
<COMMON> 2,779,600 2,779,600 2,716,800
<OTHER-SE> 228,600 304,900 474,300
<TOTAL-LIABILITIES-AND-EQUITY> 39,582,000 41,271,600 43,822,800
<INTEREST-LOAN> 663,000 1,337,400 2,054,800
<INTEREST-INVEST> 132,200 270,800 436,600
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 795,200 1,608,200 2,491,400
<INTEREST-DEPOSIT> 321,300 635,300 971,600
<INTEREST-EXPENSE> 333,300 669,300 1,051,600
<INTEREST-INCOME-NET> 461,900 938,900 1,439,800
<LOAN-LOSSES> 30,000 60,000 120,000
<SECURITIES-GAINS> 0 0 0
<EXPENSE-OTHER> 755,600 1,594,000 1,825,900
<INCOME-PRETAX> 81,300 175,600 346,800
<INCOME-PRE-EXTRAORDINARY> 81,300 175,600 282,300
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 54,800 130,700 282,300
<EPS-PRIMARY> .062 .149 .324
<EPS-DILUTED> .054 .127 .272
<YIELD-ACTUAL> 9.24 9.46 9.46
<LOANS-NON> 55,900 178,000 122,900
<LOANS-PAST> 204,000 195,000 195,500
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 474,100 484,400 444,500
<ALLOWANCE-OPEN> 253,500 253,500 253,500
<CHARGE-OFFS> 34,500 52,400 102,200
<RECOVERIES> 600 1,200 1,700
<ALLOWANCE-CLOSE> 249,600 262,300 273,000
<ALLOWANCE-DOMESTIC> 40,000 52,100 34,800
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 209,600 210,200 238,200
</TABLE>
