<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the quarterly period ended March
31, 1998
----- Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No fee required) for the
period from to
-------- --------
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
---------------------------------
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (408) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
------ ------
As of May 2, 1998, the Corporation had 858,526 shares of common stock
outstanding.
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 8,220,300 11,060,600
Due From Bank - Time Deposits 100,000 100,000
Investment Securities, available for sale (Note 1) 582,000 480,200
Investment Securities, held to maturity (Note 1) 7,767,200 5,495,300
Loans Held for Sale 874,100 543,400
Gross Loans (Note 2) 25,378,900 25,370,800
Allowance for Possible Loan Losses (Note 3) (280,900) (269,100)
Deferred Origination Fees (37,600) (39,600)
------------ -------------
Net Loans 25,060,400 25,062,100
Bank Premises and Equipment, Net 1,887,000 1,898,900
Interest Receivable and Other Assets 1,651,900 1,472,100
------------ -------------
Total Assets 46,142,900 46,112,600
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 38,598,100 39,205,600
Borrowed Funds 4,000,000 3,000,000
Interest Payable and Other Liabilities 437,800 876,800
------------ -------------
Total Liabilities 43,035,900 43,082,400
------------ -------------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1998 and 1997
Outstanding: 858,526 in 1998 and 1997 2,716,800 2,716,800
Retained Earnings 317,800 240,800
Unrealized Gain (Loss) Available
for Sale Securities 72,400 72,600
------------ -------------
Total Shareholders' Equity 3,107,000 3,030,200
------------ -------------
Total Liabilities & Shareholders' Equity 46,142,900 46,112,600
------------ -------------
------------ -------------
</TABLE>
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 31
1998 1997
--------- ---------
<S> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 696,500 663,000
Interest on Time Deposits with
Financial Institutions 1,500 0
Interest on Investment Securities 143,200 60,100
Interest on Federal Funds 62,900 72,100
--------- ---------
Total Interest Income 904,100 795,200
--------- ---------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 27,200 28,300
Interest on Savings Accounts 12,000 13,000
Interest on Time Deposits 303,500 280,000
Interest on Other Borrowed Funds 59,600 12,000
--------- ---------
Total Interest Expense 402,300 333,300
--------- ---------
Net Interest Income 501,800 461,900
PROVISION FOR LOAN LOSSES 10,000 30,000
--------- ---------
Net Interest Income After
Provision for Possible Loan Losses 491,800 431,900
--------- ---------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 78,600 92,000
SBA Loan Sales & Servicing Income 61,500 52,500
Other Operating Income 270,200 260,500
--------- ---------
Total Non-interest Income 410,300 405,000
--------- ---------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 331,900 303,500
Occupancy and Equipment Expense 67,600 52,400
Professional Fees 25,200 30,800
Data Processing 49,500 42,900
FDIC & State Assessments 3,700 4,700
Other Operating Expenses 321,900 321,300
Income Tax Expense 25,700 26,500
--------- ---------
Total Non-interest Expense 825,500 782,100
--------- ---------
NET INCOME (LOSS) 76,600 54,800
--------- ---------
--------- ---------
Earnings per common share
Primary 0.09 0.06
Diluted 0.08 0.05
</TABLE>
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
NET INCOME 76,600 54,800
Adjustments to net income:
Depreciation and amortization expense 33,100 24,200
Amortization/Accretion on investments (4,500) (100)
Provision for possible loan losses 10,000 30,000
Increase in deferred servicing premium 0 (2,900)
Amortization of deferred servicing premium 4,600 4,700
Increase in deferred income 0 0
Amortization of deferred income (1,100) (1,100)
Increase (decrease) in accrued expenses (338,000) (190,800)
(Increase) decrease in prepaid expenses (153,300) 146,600
Increase (decrease) in interest payable (91,300) (139,900)
(Increase) decrease in interest receivable (38,600) 34,900
(Increase) decrease in loans held for sale (434,500) 77,400
------------- ------------
Total adjustments to net income (1,013,600) (17,000)
------------- ------------
------------- ------------
Net cash provided (used) by operations (937,000) 37,800
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investments 2,495,000 1,500,000
Proceeds from sale of investments 0 0
Principal payments on investments 0 0
Purchase of securities (4,864,200) (3,647,200)
Unrealized gain (loss) available for sale securities (200) 55,500
Net (increase) decrease in loans 95,500 508,200
Proceeds from sale of equipment 1,400 0
Capital expenditures (24,800) 104,900
------------- ------------
Net cash provided (used) in investing activities (2,297,300) (1,478,600)
------------- ------------
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (606,000) (964,900)
Net increase (decrease) in borrowed funds 1,000,000 0
Net cash provided (used) by financing activities 394,000 (964,900)
------------- ------------
------------- ------------
Net increase (decrease) in cash & cash equivalents (2,840,300) (2,615,900)
Cash & cash equivalents - beginning of period 11,160,600 9,820,100
------------- ------------
------------- ------------
Cash & cash equivalents - end of period 8,320,300 7,204,200
</TABLE>
See Note 5 for supplemental disclosures
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
------------- -------------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
Other Securities 582,000 480,200
------------- -------------
------------- -------------
Held to maturity:
US Treasury Securities 500,100 499,900
US Government Securities 2,500,100 4,995,400
State and Loacal Agency Securities 4,767,000 4,680,400
------------- -------------
7,767,200 5,495,300
------------- -------------
------------- -------------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 10,818,800 10,299,500
Construction 0 346,500
Real Estate - Mortgage 13,814,500 13,920,900
Installment 466,400 519,900
Government Guaranteed Loans Purchased 279,200 284,000
------------- -------------
Gross Loans 25,378,900 25,370,800
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 269,100 253,500
Recoveries 2,800 1,800
Provision for Possible Loan Losses 10,000 (106,200)
Loans Charged Off (1,000) 120,000
------------- -------------
Balance at End of Period 280,900 269,100
(NOTE 4) DEPOSITS:
Demand 8,850,400 8,734,200
Interest-Bearing Transaction 7,535,000 7,483,900
Savings 2,430,000 2,145,300
Time Under $100,000 12,101,100 12,742,700
Time Equal to or Greater than $100,000 7,681,600 8,099,500
------------- -------------
38,598,100 39,205,600
</TABLE>
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
3/31/98 3/31/97
Payments during the period ending: ------------ -------------
<S> <C> <C>
Interest 342,700 333,300
Income Taxes 25,700 26,500
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be
read in conjunction with the financial statements and the other financial
data presented elsewhere herein. The Corporation had no activities other
than its organization.
For the three months ended March 31, 1998 net income was $76,600, an
increase of $21,800 when compared to the same period in 1997. The increase
in earnings during this period was the result of a $59,900 increase in net
interest income after provision for loan losses and a $5,300 increase in
non-interest income; partially offset by an increase of $43,400 in
non-interest expense.
6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at and for the three months ended, March 31, 1998 and 1997.
<TABLE>
<CAPTION>
The three months The three months
Ended March 31, 1998 Ended March 31, 1997
--------------------- --------------------
(Dollars in thousands except per share data)
<S> <C> <C>
Summary of Operating Results:
Total interest income 904 795
Total interest expense 402 333
------------ -----------
Net interest income 502 462
Provision for possible
loan losses 10 30
------------ -----------
Net interest income after
provision for loan loss 492 432
Total other income 411 405
Total other expense 800 756
------------ -----------
Income (loss) before taxes 102 81
Provision for income tax 26 26
------------ -----------
Net income (loss) 77 55
Per Common Share Data:
Net income - Primary (1) 0.09 0.06
Net income - Diluted (2) 0.08 0.05
Book value, end of period 3.62 3.42
Avg. shares outstanding 858,526 879,465
Balance Sheet Data:
Total loans, net of
unearned income (3) 26,215 24,690
Total assets 46,143 39,582
Total deposits 38,589 35,178
Stockholders' equity 3,107 3,008
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
The three months The three months
Ended March 31, 1998 Ended March 31, 1997
-------------------- --------------------
<S> <C> <C>
Selected Financial Ratios (4):
Return on average assets (5) 0.67% 0.60%
Return on average
stockholders' equity (5) 9.98% 7.52%
Net interest spread 4.39% 4.65%
Net interest margin 5.01% 5.37%
Avg. shareholders' equity
to average assets 6.67% 7.31%
Risked-Based capital ratios
Tier 1 10.66% 11.39%
Total 9.74% 12.37%
Total loans to total deposits
at end of period 67.93% 70.19%
Allowance to total loans
at end of period 1.07% 1.01%
Non-performing loans to total
loans at end of period 0.70% 1.05%
Net charge-offs to
average loans 0.00% 0.14%
</TABLE>
(1) Primary earnings per share amounts were computed on the basis of the
weighted average number of shares of common stock outstanding during the
year. The weighted average number of common shares used for this
computation was 858,526 and 879,465 for March 31, 1998 and 1997,
respectively.
(2) Diluted earnings (loss) per share amounts were computed on the basis of
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents
include director/employee stock options. The weighted average number of
shares used for this computation was 1,009,082 and 1,021,965 for March
31, 1998 and 1997, respectively.
(3) Includes loans being held for sale.
(4) Averages are of daily balances.
(5) March 31, 1998 calculated on an annualized basis.
8
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned
on interest-earning assets and (b) interest paid on interest-bearing
liabilities, is the most significant component of the Bank's earnings.
Changes in net interest income from period to period result from increases or
decreases in the average balances of interest-earning assets portfolio, the
availability of particular sources of funds and changes in prevailing
interest rates.
Net interest income for the three months ended March 31, 1998 was
$501,800 compared to $461,900 for the same period in 1997. The increase of
$39,900 resulted from total interest income increasing $108,900, while total
interest expense increased $69,000. Average interest earning assets
increased $5,231,000 (15.20%), while the average rate earned decreased 16
basis points. Average interest bearing liabilities increased $5,313,000
(18.13%), while the average rate paid increased 10 basis points, reflecting
decreases in certificate of deposit rates.
The following table shows the components of the Bank's net interest
income, setting forth, for each the three months ended March 31, 1998 and
1997, (i) average assets, liabilities and investments, (ii) interest income
earned on interest-earning assets and interest expense paid on
interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, (iv) the net
interest spread (i.e., the average yield earned on interest-earning assets
less the average rate paid on interest-bearing liabilities) and (v)the net
interest yield on average interest-earning assets (i.e., net interest income
divided by average interest-earning assets). Yields are not computed on a
tax-equivalent basis. Non-accrual loans and overdrafts are included in
average loan balances. Average loans are presented net of unearned income.
9
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended December 31,
1998 1997 1997
------------------------- ------------------------- -------------------------
Int Avg Int Avg Int Avg
Avg Earn % Avg Earn % Avg Earn %
Bal Paid Rate Bal Paid Rate Bal Paid Rate
------------------------- ------------------------- -------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 100 2 6.06 0 0 0.00 71 5 7.67
Invest securities 8,922 143 6.42 3,522 60 6.83 1,519 90 5.91
Federal funds sold 4,605 63 5.46 5,785 72 4.99 6,460 341 5.27
------------------------- ------------------------- -------------------------
Total investments 13,627 208 6.09 9,307 132 5.68 8,050 436 5.42
Loans
Real estate 13,918 360 10.36 13,977 351 10.03 13,138 1,368 10.41
Installment 462 13 11.25 516 14 11.16 686 80 11.70
Commercial 11,597 318 10.95 10,611 298 11.23 10,823 1,256 11.61
------------------------- ------------------------- -------------------------
Total loans 25,976 691 10.64 25,104 663 10.56 24,647 2,704 10.97
Total Interest
earning assets 39,603 898 9.08 34,411 795 9.24 32,697 3,140 9.60
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
Interest Bearing Liabilities:
Int-bearing demand 5,720 17 1.15 5,201 16 1.27 4,534 64 1.40
Money market savings 1,827 11 2.34 1,953 12 2.43 1,911 45 2.34
Savings deposits 2,192 12 2.19 2,267 13 2.29 2,541 70 2.76
Time deposits > $100M 8,266 120 5.79 6,660 98 5.86 5,698 338 5.92
Time deposits < $100M 12,374 184 5.95 11,931 182 6.12 11,774 735 6.24
Other Borrowing 3,944 60 6.05 1,000 12 4.81 1,790 83 4.62
------------------------- ------------------------- -------------------------
Total interest
bearing liabilities 34,324 402 4.69 29,012 333 4.59 28,249 1,334 4.72
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
Net interest income 496 462 1,806
Net interest spread 4.39 4.65 4.88
Net yield on interest
earning assets 5.01 5.37 5.52
</TABLE>
10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended December 31,
1998 vs 1997 1997 vs 1996
--------------------------- ---------------------------
Increase (Decrease) Increase (Decrease)
Due to changes Due to Changes
--------------------------- ---------------------------
Avg Avg Avg Avg
Volume Rate Total Volume Rate Total
--------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 2 0 2 (17) (2) (19)
Invest securities 92 (9) 83 21 (7) 14
Federal funds sold (15) 5 (9) 75 (13) 62
--------------------------- ---------------------------
Total investments 61 14 75 89 (32) 57
Loans
Real estate (1) 11 10 52 (55) (3)
Installment (2) 0 (1) (35) 3 (32)
Commercial 28 (8) 20 89 78 166
--------------------------- ---------------------------
Total loans 23 5 28 107 24 131
Total Interest Earning Assets 120 (16) 103 246 (59) 187
--------------------------- ---------------------------
--------------------------- ---------------------------
Interest Bearing Deposits:
Int-bearing demand 2 (2) 0 1 2 3
Money market savings (1) (0) (1) (8) (3) (11)
Savings deposits (0) (1) (1) 41 (5) 36
Time deposits > $100M 24 (1) 22 121 9 130
Time deposits < $100M 7 (5) 2 (10) 0 (9)
Other Borrowing 35 12 48 0 0 0
--------------------------- ---------------------------
Total interest bearing deposits 61 8 69 100 51 151
--------------------------- ---------------------------
--------------------------- ---------------------------
Net change in net interest 59 (24) 34 146 (110) 36
</TABLE>
11
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan
losses represents amounts 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 March 31, 1998 and 1997 the Bank's allowance
stood at 1.07 percent and 1.01 percent of gross loans, respectively. A
provision of $10,000 was made to the allowance during the three months ended
March 31, 1998, compared to a provision of $30,000 during the same period in
1997. Loans charged off during the three months ended March 31, 1998,
totaled
12
<PAGE>
$1,000, compared to $34,500 in the same period of 1997. Recoveries for the
same periods were $2,800 and $600, respectively.
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .70% at March 31, 1998 compared with
.81 percent and 1.11 percent as of the end of 1997 and 1996, respectively.
The ratio at December 31, 1996 was significantly impacted by one
non-performing loan that represented 69.40% of the total non-performing
loans.
Based upon statistics released by Federal and state banking authorities
regarding banks of similar size or otherwise located in California,
Management believes that the Bank 's ratios of delinquent and non performing
loans to total loans are far better than average. Prudent collection
efforts, and tighter lending controls, are responsible for the Bank's strong
performance on these measures of credit quality. However, no assurance can
be given that the Bank's loan portfolio will continue to measure well against
its peers on these ratios and quality measures, or that losses will not
otherwise occur in the future.
NON-INTEREST INCOME
Total non-interest income for the three months ended March 31, 1998 was
$410,300, compared with $405,000 for the same period in 1997. The increase
of $5,300 was the result of service charges on deposit accounts decreasing
$13,400 and income from other service charges, commissions and fees
increasing $9,700, while income from SBA loan sales and servicing increased
$9,000.
The sale, of Small Business Administration (SBA) guaranteed loans, is a
significant contributor to the Bank's income. SBA guaranteed loans yield up
to 3 3/4% over the New York prime rate, and the guaranteed portions can be
sold at premiums, which vary with market conditions. SBA loans are
guaranteed by the full faith of the United States Government from 75 to 80
percent of the principal amount. The guaranteed portion has risks comparable
for an investor to a U. S. Government security and can usually be sold in the
secondary financial market, either at a premium or at a yield which allows
the Bank to maintain a significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for
the Bank to continually expand its program in this area, and may limit the
level of premium that can be earned with regard thereto. Furthermore, the
SBA recently began requiring lenders to share a portion of premiums in excess
of 10% earned on the sale of the guaranteed portions, and to pay 50 basis
points on the outstanding guaranteed balance. Management cannot predict the
impact these changes will not have a significant impact on SBA income.
13
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the three months ended March 31, 1998
increased $28,400 compared with the same period in 1997. These increases were
primarily due to employee merit pay increases.
Total occupancy and equipment expense for the three months ended March
31, 1998 was $67,600 compared to $52,400 for the same period in 1997. The
increase was due to the opening of the Pacific Grove branch office in April
1997.
For the three months ended March 31, 1998 professional fees decreased
$5,600 compared to the same period in 1997.
Data processing expenses for the three months ended March 31, 1998
increased $6,600 compared to the same period in 1997. The increase was due
to a 2.7% cost of living increase, effective April 1997, and increased
numbers of accounts and transactions.
Other expenses for the three months ended March 31, 1998 totaled
$347,600 compared with $347,800 for the same period in 1997. Significant
changes occurred in the following categories with increases in advertising
($6,800), director fees ($3,300), merchant expense ($13,900), collection
expense ($10,500), and decreases in SBA loan expense ($6,900), automobile
expense ($3,700), donations ($3,800), telephone expense ($4,400), business
development ($7,200), insurance expense ($7,100).
LOANS
Loans represented 65.62% of average earning assets, and 56.49% of
average total assets for the three months ended March 31, 1998, compared with
72.95% and 62.98%, respectively during 1997. For the three months ended
March 31, 1998, average loans increased 3.63% from $25,104,000 for the same
period in 1997 to $26,014,000. Average real estate loans increased $110,000
(0.79%), installment loans decreased $35,000 (6.77%); while average
commercial loans increased $835,000 (7.87%).
The Bank's commercial and industrial loans are generally made for the
purpose of providing working capital, financing the purchase of equipment or
inventory, and other business purposes. Such loans generally have maturities
ranging from one year to several years. Short-term business loans are
generally intended to finance current transactions and typically provide for
monthly interest payments with principal being payable at maturity or at
90-day intervals. Term loans (usually for a term of two to five years)
normally provide for monthly installments of principal and interest. The
Bank from time to time utilizes accounts receivable and inventory as security
for loans.
14
<PAGE>
The Bank is a recognized leader for Small Business Administration
lending in Monterey County, and holds SBA's coveted Preferred Lender Status.
Generally, SBA loans are guaranteed, by the SBA, for 75 to 80 percent of
their principal amount, which can be retained in portfolio or sold to
investors. Such loans are made at floating interest rates, but generally for
longer terms (up to 25 years) than are available on a conventional basis to
small businesses. The unguaranteed portion of the loans, although generally
supported by collateral, is considered to be more risky than conventional
commercial loans because they may be based upon credit standards the Bank
would not otherwise apply, such as lower cash flow coverage, or longer
repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has
also developed a broker program for generating residential real estate loans.
The Bank does not make real estate development loans. Real estate
construction loans are made for a much shorter term, and often at higher
interest rates, than conventional single-family residential real estate
loans. The cost of administering such loans is often higher than for other
real estate loans, as principal is drawn on periodically as construction
progresses.
The Bank also makes real estate loans secured by a first deed of trust
on single family residential properties and commercial and industrial real
estate. California commercial banks are permitted, depending on the type and
maturity of the loan, to lend up to 90 percent of the fair market value of
real property (or more if the loan is insured either by private mortgage
insurers or governmental agencies). In certain instances, the appraised
value may exceed the actual amount that could be realized on foreclosure, or
declines in market value subsequent to making the loan can impair the Bank's
security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's
consumer installment loans are generally secured by the personal property
being purchased. The Bank generally makes consumer loans to those customers
with a prior banking relationship with the Bank.
NON-PERFORMING AND NON-ACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which
are past due as to principal or interest 90 days or more, except for loans
which are well secured or when collection of interest and principal is deemed
likely. When a loan is placed on non-accrual, previously accrued and unpaid
interest is generally reversed out of income unless adequate collateral from
which to collect the principal of, and interest on, the loan appears to be
available.
15
<PAGE>
The following table presents information with respect to loans which, as
of the dates indicated, were past due 90 days or more or were placed on
non-accrual status (referred to collectively as "non-performing loans"):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
--------- ----------
(Dollars in thousands)
<S> <C> <C>
ACCRUING, PAST DUE 90 DAYS OR MORE:
Real Estate 71 0
Commercial 0 204
Installment 0 0
Other 0 0
--------- ----------
Total accruing 71 204
NONACCRUAL LOANS:
Commercial 96 35
Installment 16 21
Other 0 0
--------- ----------
Total non-accrual 112 56
Total non-performing 183 260
Total loans end of period 26,215 24,726
Ratio of non-performing loans
to total loans at end of period 0.70% 1.05%
</TABLE>
The ratio of non-performing loans at March 31, 1997 was significantly
impacted by one loan that represented 75.00% of the total non-performing
loans. These ratios have been maintained as a result of a strengthening of
underwriting criteria, frequent review of new and delinquent loans and a firm
collection policy (with the assistance of outside legal counsel). The Bank
does not have any foreign loans or loans for highly leveraged transactions.
SUMMARY OF LOAN LOSS EXPERIENCE
16
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1998 1997
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding 26,014 25,104
Allowance, beginning of period 269 254
Loans charged off during period:
Commercial 0 35
Installment 1 0
Real Estate 0 0
Other 0 0
------------------ ------------------
Total charge offs 1 35
Recoveries during period:
Commercial 3 0
Installment 0 1
Other 0 0
------------------ ------------------
Total recoveries 3 1
Net Loans charged off
during the period (2) 34
Additions to allowance for
possible loan losses 10 30
Allowance, end of period 281 250
Ratio of net loans charged off to
average Loans outstanding
during the period (0.01)% 0.14%
Ratio of allowance to total
loans at end of period 1.07% 1.01%
</TABLE>
FUNDING SOURCES
17
<PAGE>
Average deposits for the three months ended March 31, 1998 were
$38,555,000 an increase of 8.32% compared with the same period in 1997.
Average certificates of deposit represented 53.81% of average deposits for
the three months ended March 31, 1998. Average interest bearing checking,
money market and savings accounts as a group were 25.39% of average deposits.
Average demand deposits represented 20.79% of average deposits. The trend of
deposits shifting to certificates of deposit has continued, resulting in a
increased cost of funds.
The Bank has a line of credit from the Federal Home Loan Bank of San
Francisco with a maximum borrowing limit on March 31, 1998 of $4,520,000.
The line of credit is secured by certain of the Bank's real estate secured
loans. At March 31, 1998 the Bank had four $1,000,000 advances which bear
interest at 4.88%, 6.53%, 6.81% and 6.36%, respectively. The advances mature
in October 1998, June 2000, June 2004 and January 2008, 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 1998, 1997 or 1996.
CAPITAL RESOURCES
The Company maintains capital to comply with legal requirements, to
provide a margin of safety for its depositors and stockholders, and to
provide for future growth and the ability to pay dividends. At March 31,
1998, stockholders' equity was $3,107,000 versus $3,030,200 at December 31,
1997. The Company paid cash dividends of $0.12 and $0.11 per share in 1997
and 1996, respectively. The Bank paid cash dividends totaling $170,000 and
$150,000 to the Corporation in 1997 and 1996.
The FDIC and Federal Reserve Board have adopted capital adequacy
guidelines for use in their examination and regulation of banks and bank
holding companies. If the capital of a bank or bank holding company falls
below the minimum levels established by these guidelines, it may be denied
approval to acquire or establish additional banks or non-bank businesses, or
the FDIC or Federal Reserve Board may take other administrative actions. The
guidelines employ two measures of capital: (1) risk-based capital and (2)
leverage capital.
Under current rules, all banks are required to maintain Tier 1 capital
of at least 4 percent and total capital of 8.0% of risk-adjusted assets. The
Bank had a Tier 1 risk-based capital ratio of 9.74% and a total risk-based
capital ratio of 10.66% at March 31, 1998, well above the minimum regulatory
requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 6.43% March 31, 1998.
18
<PAGE>
LIQUIDITY
Liquidity represents a bank's ability to provide sufficient cash flows
or cash resources in a manner that enables it to meet obligations in a timely
fashion and adequately provides for anticipated future cash needs. For the
Bank, liquidity considerations involve the capacity to meet expected and
potential requirements of depositors seeking access to balances and to
provide for the credit demands of borrowing customers. In the ordinary
course of the Bank's business, funds are generated from the repayment of
loans, maturities within the investment securities portfolio and the
acquisition of deposit balances and short-term borrowings. In addition, the
Bank has a line of credit from the Federal Home Loan Bank of San Francisco of
approximately $4,520,000 and a $1,000,000 Federal Funds Purchased line of
credit with Pacific Coast Bankers' Bank, to meet temporary liquidity
requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid
assets, including marketable investment securities, equal to a least 15
percent of total assets ("primary liquidity"), while maintaining sources of
secondary liquidity (borrowing lines from other institutions) equal to at
least an additional 10 percent of assets. In addition, it seeks to generally
limit loans to not more than 90 percent of deposits. Within these ratios,
the Bank generally has excess funds available to sell as federal funds on a
daily basis, and is able to fund its own liquidity needs without the need of
short-term borrowing. The Bank's primary liquidity at March 31, 1998 was
35.57, while its average loan to deposit ratio for the three months ended
March 31, 1998 was 67.93 percent. The high level of liquidity has an adverse
impact on interest income.
INTEREST RATE RISK
Interest rate risk is the exposure the Bank's earnings have to changes
in interest rates. The goal is to manage the miss-match between
rate-sensitive assets and rate-sensitive liabilities, to reduce interest rate
risk to an acceptable level. Rate sensitive is defined as anything maturing
or repricing within the next twelve months. Twelve months is considered an
appropriate time frame for several reasons. Forecasting is required in order
to ascertain the volume and mix of rate-sensitive assets and liabilities for
the twelve month period. Forecasting involves making assumptions about
multiple variables in the future; interest rates, loan demand, deposit mix,
bank growth, regulatory changes, etc. As most of these variables are outside
of the control of bank management, forecasting beyond twelve months would
sacrifice accuracy and reliability and will therefore not be done.
Additionally, we feel that an analysis of twelve months gives us adequate
time to recognize and adjust to any relevant trends.
19
<PAGE>
The primary tool of management for quantifying our interest rate
exposure is or Earnings Change Ratio (ECR) analysis. The ECR analysis
provides a display of the balance sheet gap, weighted by the appropriate rate
sensitivity factor, to define the impact on the income statement from a 100
basis-point change in National Prime. The analysis assumes an immediate and
parallel change in all rates, and calculates the effect of the change for the
next twelve-month period.
The Bank's maximum exposure to interest rate risk, defined as the
difference in one-year rate-sensitive assets and one-year rate-sensitive
liabilities as a percentage of total assets is 25% when asset sensitive
(positive gap) and 15% when liability sensitive (negative gap). The
following table sets forth the Bank's interest rate risk analysis as of March
31, 1998.
<TABLE>
<CAPTION>
Falling Rates Rising Rates
-------------------- --------------------
One Year One Year One Year
Balance Earnings Income Earnings Income
Sheet Change Statement Change Statement
Gap Ratio* Gap Ratio* Gap
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
DUE FROM BANKS- TIME 100 61% 61 61% 61
LOANS:
Fixed rate < 1 year 2,766 84% 2,311 84% 2,311
Floating rate < 1 year 11,759 90% 10,602 90% 10,602
SECURITIES:
Fed Funds Sold & Repos 5,670 100% 5,670 100% 5,670
Fixed Rate Securities - Maturities < 1 year 500 81% 404 81% 404
Fixed Rate Securities - Callable < 1 year 1,000 58% 581 0% 0
------ ------ ------
Total Rate Sensitive Assets 21,794 19,629 19,048
RATE SENSITIVE LIABILITIES
Savings 2,431 31% 745 31% 745
Money Market Checking 5,579 16% 885 16% 892
Money Market Savings 1,956 28% 542 28% 542
CDs > $100,000 5,542 79% 4,367 79% 4,367
CDs < $100,000 7,686 80% 6,113 80% 6,113
FFP, Repos & Other Borrowing 1,000 56% 562 56% 562
------ ------ ------
Total Rate Sensitive Liabilities 24,194 13,213 13,220
Rate Sensitivity Gap (Assets-Liabilities) (2,399) 6,416 5,828
Total Assets 46,139 46,139 46,139
Gap as a percentage of Total Assets (5.20)% 13.91% 12.63%
Estimated change in net interest margin
if prime rate falls 1%: (64.16)
Estimated change in net interest margin
if prime rate rises 1%: 58.28
</TABLE>
20
<PAGE>
Except as noted, the table above indicates the time periods in which
interest-earning assets and interest-bearing liabilities will theoretically
mature or are otherwise subject to repricing in accordance with their
contractual terms. However, this table does not necessarily indicate the
impact of general interest rate movements on the Bank's net interest yield
because the repricing of various categories or assets and liabilities is
discretionary and is subject to competitive and other pressures. As a
result, various assets and liabilities indicated as repricing within the same
period may, in fact, reprice at different times and at different interest
rate levels.
The Corporation has limited cash on hand and no sources of revenues or
liquidity other than dividends, tax equalization payments or management fees
from the Bank. The ability of the Bank to pay such items to the Corporation
is subject to limitations under state and Federal law.
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities at March 31, 1998:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
March 31, 1998
Book Market
value value
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Available for sale:
Other Securities 582,000 480,200
----------- ------------
----------- ------------
Held to maturity:
US Treasury Securities 500,100 499,900
US Government Securities 2,500,100 4,995,400
State and Local Agency Securities 4,767,000
----------- ------------
7,767,200 5,495,300
----------- ------------
----------- ------------
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at March 31, 1998:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 5
1 year through through over 10
or less 5 years 10 years years
------- ------- -------- -------
<S> <C> <C> <C> <C>
U.S. Treasury Securities 500 --- --- ---
U.S. Government Agency Securities --- --- 500 2,000
State and Local Agency Securities --- --- --- 4,767
Other Securities 582 --- --- ---
------- ------- -------- -------
Total 1,082 --- 500 6,767
</TABLE>
21
<PAGE>
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORTHERN CALIFORNIA BANCORP, INC.
Date: May 6, 1998 By: /s/ Charles T. Chrietzberg, Jr.
--------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: May 6, 1998 By: /s/ Bruce N. Warner
--------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FROM THE
COMPANY FORM 10 QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,550,300
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 5,670,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 582,000
<INVESTMENTS-CARRYING> 7,767,200
<INVESTMENTS-MARKET> 7,686,400
<LOANS> 26,215,400
<ALLOWANCE> 280,900
<TOTAL-ASSETS> 46,142,900
<DEPOSITS> 38,598,100
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 437,800
<LONG-TERM> 1,000,000
0
0
<COMMON> 2,716,800
<OTHER-SE> 390,200
<TOTAL-LIABILITIES-AND-EQUITY> 3,107,000
<INTEREST-LOAN> 696,500
<INTEREST-INVEST> 207,600
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 904,100
<INTEREST-DEPOSIT> 342,700
<INTEREST-EXPENSE> 402,300
<INTEREST-INCOME-NET> 501,800
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 825,500
<INCOME-PRETAX> 851,200
<INCOME-PRE-EXTRAORDINARY> 851,200
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,600
<EPS-PRIMARY> .089
<EPS-DILUTED> .076
<YIELD-ACTUAL> 9.08
<LOANS-NON> 112,300
<LOANS-PAST> 70,500
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 290,000
<ALLOWANCE-OPEN> 269,100
<CHARGE-OFFS> 1,000
<RECOVERIES> 2,800
<ALLOWANCE-CLOSE> 280,900
<ALLOWANCE-DOMESTIC> 32,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 248,200
</TABLE>
