<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange
---
Act of 1934 for the quarterly period ended JUNE 30, 1999
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: (831) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of August 4, 1999, the Corporation had 937,190 shares of common
stock outstanding.
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
------------------ -----------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 4,989,300 12,429,900
Due From Bank - Time Deposits 200,000 100,000
Investment Securities, available for sale (Note 1) 744,300 690,500
Investment Securities, held to maturity (Note 1) 9,291,600 6,265,000
Trading Account 57,300 0
Federal Funds Sold 2,965,000 0
Loans Held for Sale 2,107,600 951,600
Gross Loans (Note 2) 31,881,500 27,330,300
Allowance for Possible Loan Losses (Note 3) (341,000) (336,200)
Deferred Origination Fees (35,800) (31,900)
------------------ -----------------
Net Loans 31,504,700 26,962,200
Bank Premises and Equipment, Net 1,814,900 1,868,600
Interest Receivable and Other Assets 1,698,600 1,835,600
------------------ -----------------
Total Assets 55,373,300 51,103,400
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 46,861,200 42,851,700
Borrowed Funds 4,357,500 4,000,000
Interest Payable and Other Liabilities 548,400 817,100
------------------ -----------------
Total Liabilities 51,767,100 47,668,800
------------------ -----------------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1999 and 1998
Outstanding: 937,190 in 1999 and 943,804 1998 2,952,000 2,962,200
Retained Earnings 693,000 504,400
Accumulated Other Comprehensive Income (Loss) (38,800) (32,000)
------------------ -----------------
Total Shareholders' Equity 3,606,200 3,434,600
------------------ -----------------
Total Liabilities & Shareholders' Equity 55,373,300 51,103,400
================== =================
</TABLE>
Page 2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- -------------------------
1999 1998 1999 1998
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 806,400 747,700 1,562,000 1,444,200
Interest on Time Deposits with
Financial Institutions 2,600 1,600 3,900 3,100
Interest on Investment Securities 125,800 113,600 225,100 256,800
Interest on Federal Funds 69,600 74,500 176,800 137,400
------------- ------------ ----------- ------------
Total Interest Income 1,004,400 937,400 1,967,800 1,841,500
------------- ------------ ----------- ------------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 26,300 27,500 54,500 54,700
Interest on Savings Accounts 19,500 15,000 38,400 27,000
Interest on Time Deposits 296,800 293,900 588,300 597,400
Interest on Other Borrowed Funds 65,600 61,300 126,100 120,900
------------- ------------ ----------- ------------
Total Interest Expense 408,200 397,700 807,300 800,000
------------- ------------ ----------- ------------
Net Interest Income 596,200 539,700 1,160,500 1,041,500
------------- ------------ ----------- ------------
PROVISION FOR POSSIBLE LOAN LOSSES 70,000 70,000 80,000 80,000
------------- ------------ ----------- ------------
Net Interest Income After
Provision for Possible Loan Losses 526,200 469,700 1,080,500 961,500
------------- ------------ ----------- ------------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 92,800 92,100 185,900 170,700
SBA Loan Sales & Servicing Income 112,800 76,100 176,800 137,600
Other Operating Income 407,900 306,200 739,500 576,400
------------- ------------ ----------- ------------
Total Noninterest Income 613,500 474,400 1,102,200 884,700
------------- ------------ ----------- ------------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 396,000 400,300 799,400 732,200
Occupancy and Equipment Expense 71,100 68,200 140,100 135,800
Professional Fees 15,700 (66,000) 34,200 (40,800)
Data Processing 49,200 45,100 99,300 94,600
FDIC & State Assessments 4,000 3,900 6,900 7,600
Other Operating Expenses 453,900 364,700 854,400 686,600
Income Tax Expense 37,600 30,000 59,700 55,700
------------- ------------ ----------- ------------
Total Noninterest Expense 1,027,500 846,200 1,994,000 1,671,700
------------- ------------ ----------- ------------
NET INCOME (LOSS) 112,200 97,900 188,700 174,500
============= ============ =========== ============
Earnings Per Common Share
Primary 0.12 0.10 0.20 0.19
Diluted 0.10 0.09 0.16 0.16
</TABLE>
Page 3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
NET INCOME 188,700 130,700
Adjustments to net income:
Depreciation and amortization expense 76,000 45,000
Amortization/Accretion on investments 1,900 (300)
(Gain) loss on sale of securities (6,800) 0
Provision for possible loan losses 80,000 60,000
Amortization of deferred servicing premium (7,700) 6,600
Amortization of deferred income (2,000) (2,200)
Increase (decrease) in accrued expenses (173,200) (179,300)
(Increase) decrease in prepaid expenses 183,900 178,600
Increase (decrease) in interest payable (93,600) (170,400)
(Increase) decrease in interest receivable (65,500) (41,300)
(Increase) decrease in loans held for sale (666,561) (30,900)
--------------- ---------------
Total adjustments to net income (673,561) (134,200)
=============== ===============
Net cash provided (used) by operations (484,861) (3,500)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of due from time (100,000) 0
Proceeds from sale of investments 27,700 0
Principal payments on investments 160,600 1,500,000
Purchase of securities (3,220,200) (3,663,000)
Net (increase) decrease in loans (5,111,800) (519,400)
Stock repurchase (10,200) 0
Capital expenditures (22,300) (272,400)
--------------- ---------------
Net cash provided (used) in investing activities (8,276,200) (2,954,800)
=============== ===============
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 4,009,600 (1,362,200)
Net increase (decrease) in borrowed funds 357,500 2,000,000
--------------- ---------------
Net cash provided (used) by financing activities 4,367,100 637,800
=============== ===============
Net increase (decrease) in cash & cash equivalents (4,400,900) (2,320,500)
Cash & cash equivalents - beginning of year 12,529,900 9,820,100
=============== ===============
Cash & cash equivalents - end of period 8,129,000 7,499,600
See Note 5 for supplemental disclosures
</TABLE>
Page 4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
------------------- ------------------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
Other Securities 744,300 690,500
=================== ==================
Held to maturity:
US Government Securities 2,499,400 1,500,200
State and Local Agency Securities 6,792,200 4,764,800
------------------- ------------------
9,291,600 6,265,000
=================== ==================
(NOTE 2) GROSS LOANS:
Commercial and Industrial 11,649,200 11,163,200
Construction 2,132,500 355,600
Real Estate - Mortgage 17,527,500 15,294,100
Installment 419,800 358,600
Government Guaranteed Loans Purchased 152,500 158,800
------------------- ------------------
Gross Loans 31,881,500 27,330,300
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 336,200 269,100
Recoveries 12,200 12,600
Provision for Possible Loan Losses 80,000 130,000
Loans Charged Off (87,400) (75,500)
------------------- -----------------
Balance at End of Period 341,000 336,200
(NOTE 4) DEPOSITS:
Demand 10,768,000 9,897,400
Interest-Bearing Transaction 9,259,100 8,960,400
Savings 3,951,400 3,605,100
Time Under $100,000 13,667,700 12,355,300
Time Equal to or Greater than $100,000 9,215,000 8,033,500
-------------------- ------------------
46,861,200 42,851,700
</TABLE>
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
<TABLE>
<CAPTION>
Payments during the period ending: 6/30/99 6/30/98
-------------------- ------------------
<S> <C> <C>
Interest 681,200 679,100
Income Taxes 59,700 55,700
</TABLE>
Page 5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be
read in conjunction with the financial statements and the other financial
data presented elsewhere herein. The Corporation has had no activities other
than its organization.
For the six months, ended June 30, 1999 net income was $188,700, an
increase of $14,200 when compared to the same period in 1998. The increase in
earnings during this period was the result of a $119,000 increase in net
interest income after provision for loan losses and a $217,500 increase in
non-interest income, partially offset by a $322,300 increase in non-interest
expense.
Page 6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at and for the six months ended, June 30, 1999 and 1998.
<TABLE>
<CAPTION>
For the six months For the six months
Ended June 30, 1999 Ended June 30, 1998
------------------- -------------------
<S> <C> <C>
(Dollars in thousands except per share data)
Summary of Operating
Results:
Total interest income 1,968 1,841
Total interest expense 807 800
------------------- -------------------
Net interest income 1,160 1,041
Provision for possible loan losses 80 80
------------------- -------------------
Net interest income
after provision for loan loss 1,080 961
Total other income 1,102 885
Total other expense 1,934 1,616
------------------- -------------------
Income (loss) before taxes 248 230
Provision for income tax 60 56
------------------- -------------------
Net income (loss) 189 174.55
Per Common Share
Data:
Net income - Primary (1) 0.20 0.19
Net income - Diluted (2) 0.16 0.16
Book value, end of period 3.84 3.34
Avg shares outstanding (3) 939,836 943,804
Balance Sheet Data:
Total loans, net
of unearned income (4) 33,953 27,468
Total assets 55,312 47,038
Total deposits 46,854 39,412
Stockholders' equity 3,606 3,150
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
For the six months For the six months
Ended June 30, 1999 Ended June 30, 1998
------------------- -------------------
<S> <C> <C>
Selected Financial Ratios (4):
Return on average assets(5) 0.71% 0.84%
Return on average
stockholders' equity(6) 10.72% 11.18%
Net interest spread 4.33% 4.52%
Net interest margin 5.03% 5.19%
Avg shareholders' equity
to average assets 6.65% 7.47%
Risked-Based capital ratios
Tier 1 9.37% 9.49%
Total 10.22% 10.37%
Total loans to total deposits
at end of period 72.47% 69.70%
Allowance to total loans
at end of period 1.00% 1.04%
Non-performing loans to total
loans at end of period 0.23% 0.31%
Net charge-offs to
average loans 0.25% 0.23%
</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 939,836 and 943,804 for June 30, 1999 and 1998,
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 1,175,394 and 1,113,778 for June 30, 1999 and
1998, respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
(6) June 30, 1999 calculated on an annualized basis.
Page 8
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned
on interest-earning assets and (b) 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 six-month period ended June 30, 1999 was
$1,160,500 compared to $1,041,500 for the same period in 1998. The increase
of $119,000 resulted from total interest income increasing $126,300, while
total interest expense increased $7,300. Average interest earning assets
increased $6,275,000 (15.69%) with average loans increasing $3,870,000 and
investments increasing $2,404,000, while the average rate earned decreased 71
basis points. The average interest rate earned on investments decreased 79
basis points while the average interest rated earned on loans decreased 61
basis points. Average interest bearing liabilities increased $4,121,000
(12.01%), while the average rate paid remained level with 1998.
The following table shows the components of the Bank's net interest
income, setting forth, for each the six months ended June 30, 1999 and 1998
and for the twelve months ended December 31, 1998, (i) average assets,
liabilities and investments, (ii) interest income earned on interest-earning
assets and interest expense paid on interest-bearing liabilities, (iii)
average yields earned on interest-earning assets and average rates paid on
interest-bearing liabilities, (iv) the net interest spread (i.e., the average
yield earned on interest-earning assets less the average rate paid on
interest-bearing liabilities) and (v)the net interest yield on average
interest-earning assets (i. e., net interest income divided by average
interest-earning assets). Yields are not computed on a tax-equivalent basis.
Non-accrual loans and overdrafts are included in average loan balances.
Average loans are presented net of unearned income.
Page 9
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
The Six Months The Twelve Months
Ended June 30, Ended December 31,
1999 1998 1998
--------------------- ----------------------- ------------------------
Int Avg Int Avg Int Avg
Avg Earn % Avg Earn % Avg Earn %
Bal Paid Rate Bal Paid Rate Bal Paid Rate
--------------------- ----------------------- ------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Interest Earning Assets:
Int-bearing deposits
at other banks 166 4 4.70 100 3 6.13 100 6 5.98
Invest securities 8,200 225 5.49 8,465 257 6.07 8,160 481 5.90
Federal funds sold 7,500 177 4.72 4,897 137.4 5.61 5,771 314 5.44
---------------- --------------- -------------------------
Total investments 15,866 406 5.11 13,462 397 5.90 14,031 801 5.71
Loans
Real estate 17,128 882 10.30 14,171 742 10.48 14,641 1,554 10.62
Installment 354 25 14.06 529 34.57 13.07 464 60 13.02
Commercial 12,927 655 10.14 11,839 667.4 11.27 12,348 1341 10.86
---------------- --------------- -------------------------
Total loans 30,410 1,562 10.27 26,540 1,444 10.88 27,453 2,955 10.77
Total Interest
earning assets 46,276 1,968 8.50 40,002 1,841 9.21 41,485 3,757 9.06
================ =============== =========================
Interest Bearing Liabilities:
Int-bearing demand 7,717 40 1.03 5,862 34 1.16 6,206 73 1.17
Money market savings 1,577 15 1.90 1,747 21 2.36 1,623 38 2.31
Savings deposits 3,846 38 2.00 2,452 27 2.20 2,846 63 2.22
Time deposits Greater
than $100M 8,374 232 5.53 8,155 238 5.84 8,042 471 5.86
Time deposits less
than $100M 12,920 357 5.52 12,125 359 5.93 12,049 713 5.92
Other Borrowing 4,103 126 6.14 3,972 121 6.09 4,000 246 6.14
---------------- --------------- -------------------------
Total interest
bearing liabilities 38,434 807 4.19 34,313 800 4.66 34,765 1,603 4.61
================ =============== =========================
Net interest income 1,161 1,041 2,154
Net interest spread 4.32 4.54 4.45
Net yield on interest
Earning assets 5.02 5.21 5.19
</TABLE>
Page 10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Six Months Twelve Months
Ended June 30, Ended December 31,
1999 vs 1999 1998 vs 1997
------------ ------------
Increase(Decrease) Increase(Decrease)
Due to changes Due to Changes
------------------------------ -----------------------------
Avg Avg Avg Avg
Volume Rate Total Volume Rate Total
------------------------------ -----------------------------
<S> <C> <C>
(Dollars in thousands)
Interest Earning Assets:
Int-bearing deposits
at other banks 3 0 3 2 (2) 1
Invest securities (5) (24) (29) 393 (1) 392
Federal funds sold 73 (34) 39 (36) 10 (27)
---------------------------- ----------------------
Total investments 71 (62) 9 324 42 366
Loans
Real estate 155 (15) 139 157 30 186
Installment (11) 2 (10) (26) 6 (20)
Commercial 61 (73) (12) 177 (93) 84
---------------------------- ----------------------
Total loans 105 (46) 59 308 (57) 251
Total Interest Earning Assets 289 (163) 126 844 (224) 620
============================ ======================
Interest Bearing Deposits:
Int-bearing demand 11 (5) 6 (7) (0) (7)
Money market savings (2) (4) (6) 8 (15) (7)
Savings deposits 15 (4) 11 139 (5) 134
Time deposits greater than $100M 6 (13) (7) 17 (39) (22)
Time deposits less than $100M 24 (26) (3) 102 61 163
Other Borrowing 4 1 5 0 0 0
---------------------------- ----------------------
Total interest bearing deposits 98 (91) 7 308 (38) 269
============================ ======================
Net change in net interest 190 (71) 119 536 (186) 350
</TABLE>
Page 11
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan
losses represents amounts, which have been set aside for the specific purpose
of absorbing losses, which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation
of the risks inherent in the loan portfolio, both generally and with respect
to specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the California Department of Financial Institutions and FDIC
examinations, independent accountants' observations, and the Bank 's internal
review as additional indicators to determine if the amount in the allowance
for loan losses is adequate to protect against estimated future losses. It is
the Bank 's current practice, which could change in accordance with the
factors mentioned above, to maintain an allowance which is at least equal to
the sum of the following percentage of loan balances by loan category.
Loan Category Reserve %
Classified Loans:
Loans classified loss 100.00%
Loans classified doubtful 50.00%
Loans classified substandard
Real Estate Secured 5.00%
Non Real Estate Secured 20.00%
Unclassified Loans:
Real Estate - Loan to value 80% or less 0.10%
Real Estate - Loan to value over 80% 0.50%
Loans to Individuals 3.00%
Commercial 3.00%
SBA Loans - Unguaranteed portion 2.00%
Unfunded Loan Commitments .25%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
Although no assurance can be given that actual losses will not exceed
the amount provided for in the allowance, Management believes that the
allowance is adequate to provide for all estimated credit losses in light of
all known relevant factors. At June 30, 1999 and 1998 the Bank's allowance
stood at 1.00 and 1.05 percent, respectively. A provision of $80,000 was made
to the allowance during the six months ended June 30, 1999 and in the same
period in 1998. Charged off loans during the six months ended June 30, 1999
and 1998 totaled $87,400 and $67,800 respectively. Recoveries for the same
periods were $12,200 and $5,800, respectively.
Page 12
<PAGE>
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .23 percent at June 30, 1999
compared with .31 percent at June 30, 1998.
Based upon statistics released by Federal and state banking authorities
regarding banks of similar size or otherwise located in California,
Management believes that the Bank 's ratios of delinquent and non performing
loans to total loans are far better than average. Prudent collection efforts,
and tighter lending controls, are responsible for the Bank's strong
performance on these measures of credit quality. However, no assurance can be
given that the Bank's loan portfolio will continue to measure well against
its peers on these ratios and quality measures, or that losses will not
otherwise occur in the future.
NON-INTEREST INCOME
Total non-interest income for the six months ended June 30, 1999 was
$1,102,200, compared with $844,700 for the same period in 1998. The increase
of $217,500 was the result of a $39,200 increase in income from SBA loan
sales and servicing and income from other service charges, commissions and
fees increased $163,100 and service charges on deposit accounts increased
$15,200. Merchant credit card discount fees increased $138,100 the primary
factor in the increase in other service charges, commissions and fees.
The sale of Small Business Administration (SBA) guaranteed loans is a
significant contributor to the Bank's income. SBA guaranteed loans yield up
to 3 3/4% over the New York prime rate, and the guaranteed portions can be
sold at premiums, which vary with market conditions. SBA loans are guaranteed
by the full faith of the United States Government from 75 to 80 percent of
the principal amount. The guaranteed portion has risks comparable for an
investor to a U. S. Government security and can usually be sold in the
secondary financial market, either at a premium or at a yield which allows
the Bank to maintain a significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for
the Bank to continually expand its program in this area, and may limit the
level of premium that can be earned with regard thereto. The level of premium
income on longer-term loans has been significantly reduced due to the volume
of loans that have been paid off early.
Page 13
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the six months ended June 30, 1999
increased $67,200 compared with the same period in 1998. The increase was due
primarily to employee merit pay increases, bonus accruals, and an increase of
two full time equivalent staff positions.
Total occupancy and equipment expense for the six months ended June 30,
1999 was $140,100 compared to $135,800 for the same period in 1998.
For the six months ended June 30, 1999 professional fees were $92,100
compared with $(40,800) the same period in 1998. The 1998 number includes the
recovery of $117,100 in legal expenses associated with a trade name
infringement lawsuit.
Data processing for the six months ended June 30, 1999 increased $4,700
compared to the same period in 1998. The increase was due to increased
numbers of accounts and transactions.
Other expenses for the six months ended June 30, 1999 totaled $854,400
compared with $686,600 for the same period in 1998. Significant changes
occurred in the following categories with increases in merchant expense of
$132,900, stationary & supplies expense $10,300, subscription/publications
$6,800, telephone $5,400, travel $4,200 operational losses $3,200,
miscellaneous expense $4,200 and Year 2000 expense $9,600 and decreases in
collection expense $5,900, entertainment & meals expense $4,700, security
expense $3,900, insurance expense $4,800 and shareholder expense $3,200.
LOANS
Loans represented 65.71% of average earning assets, and 57.52% of
average total assets for the six months ended June 30, 1999, compared with
66.35% and 57.28%, respectively during 1998. For the six months ended June
30, 1999 average loans increased 14.58% from $26,540,000 for the same period
in 1998 to $30,410,000. Average commercial loans increased $1,088,000
(9.19%), average real estate loans increased $2,957,000 (20.87%); while
installment loans decreased $175,000 (33.02%).
The Bank's commercial and industrial loans are generally made for the
purpose of providing working capital, financing the purchase of equipment or
inventory, and other business purposes. Such loans generally have terms
ranging from one year to several years. Short-term business loans are
generally intended to finance current transactions and typically provide for
monthly interest payments with principal being payable at maturity or at
90-day intervals. Term loans (usually for a term of two to five years)
normally provide for monthly installments of principal and interest. The Bank
from time to time utilizes accounts receivable and inventory as security for
loans.
Page 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, the SBA guarantees SBA loans for 75 to 80 percent of their
principal amount, which can be retained in portfolio or sold to investors.
Such loans are made at floating interest rates, but generally for longer
terms (up to 25 years) than are available on a conventional basis to small
businesses. The unguaranteed portion of the loans, although generally
supported by collateral, is considered to be more risky than conventional
commercial loans because they may be based upon credit standards the Bank
would not otherwise apply, such as lower cash flow coverage, or longer
repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has
also developed a broker program for generating residential real estate loans.
The Bank does not make real estate development loans. Real estate
construction loans are made for a much shorter term, and often at higher
interest rates, than conventional single-family residential real estate
loans. The cost of administering such loans is often higher than for other
real estate loans, as principal is drawn on periodically as construction
progresses.
The Bank also makes real estate loans secured by a first deed of trust
on single family residential properties and commercial and industrial real
estate. California commercial banks are permitted, depending on the type and
maturity of the loan, to lend up to 90 percent of the fair market value of
real property (or more if the loan is insured either by private mortgage
insurers or governmental agencies). In certain instances, the appraised value
may exceed the actual amount, which could be realized on foreclosure, or
declines in market value subsequent to making the loan can impair the Bank's
security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's
consumer installment loans are generally secured by the personal property
being purchased. The Bank generally makes consumer loans to those customers
with a prior banking relationship with the Bank.
Page 15
<PAGE>
NONPERFORMING AND NONACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which
are past due as to principal or interest 90 days or more, except for loans
which are well secured or when collection of interest and principal is deemed
likely. When a loan is placed on non-accrual, previously accrued and unpaid
interest is generally reversed out of income unless adequate collateral from
which to collect the principal of, and interest on, the loan appears to be
available.
The following table presents information with respect to loans which, as
of the dates indicated, were past due 90 days or more or were placed on
non-accrual status (referred to collectively as "non-performing loans"):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
(Dollars in thousands)
Accruing,
PAST DUE 90 DAYS OR MORE:
Real Estate 68 71
Commercial 0 0
Installment 0 0
Other 0 0
---------- ----------
Total accruing 68 71
Nonaccrual Loans:
Real Estate 0 0
Commercial 9 2
Installment 0 11
Other 0 0
---------- ----------
Total non-accrual 9 14
Total non-performing 77 84
Total loans end of period 33,953 27,468
Ratio of non-performing loans
to total loans at end of period 0.23% 0.31%
</TABLE>
Page 16
<PAGE>
These ratios have been maintained as a result of a strengthening of
underwriting criteria, frequent review of new and delinquent loans and a firm
collection policy (with the assistance of outside legal counsel). The Bank does
not have any foreign loans or loans for highly leveraged transactions.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
---------------- ----------------
<S> <C> <C>
(Dollars in thousands)
Average loans outstanding 30,410 26,540
Allowance, beginning of period 336 269
Loans charged off during period:
Commercial 87 67
Installment 0 1
Real Estate 0 0
Other 0 0
---------------- ----------------
Total charge offs 87 68
Recoveries during period:
Commercial 7 5
Installment 5 1
Other 0 0
---------------- ----------------
Total recoveries 12 6
Net Loans charged off
during the period 75 62
Additions to allowance for
possible loan losses 80 80
Allowance, end of period 341 287
Ratio of net loans charged off to
average Loans outstanding
during the period 0.25% 0.23%
Ratio of allowance to total
loans at end of period 1.00% 1.04%
</TABLE>
Page 17
<PAGE>
FUNDING SOURCES
Average deposits for the six months ended June 30, 1999 were $44,697,000
an increase of 15.63% compared with the average balance for 1998. Average
certificates of deposit represented 47.64% of average deposits for the six
months ended June 30, 1999. Average interest bearing checking, money market
and savings accounts as a group were 29.40% of average deposits. Average
demand deposits represented 22.96% of average deposits.
The Company has a $1,000,000 revolving line of credit with the Pacific
Coast Bankers' Bank which matures in May 2000. The interest rate is a
floating rate based on the prime lending rate plus seventy five (75) basis
points. At June 30, 1999 the Company had drawn down $357,500 under the line
of credit.
The Bank has a line of credit from the Federal Home Loan Bank of San
Francisco with a maximum borrowing limit on June 30, 1999 of approximately
$6,250,000. The line of credit is secured by certain of the Bank's real
estate secured loans and investment securities. At June 30, 1999 the Bank had
four $1,000,000 advances which bear interest at 6.53%, 4.83%, 6.81% and
6.36%, respectively. The advances mature in June 2000, October 2003, June
2004 and January 2028, respectively. Management believes that these advances
provide funds at a lower cost than comparable deposits. The Bank did not
utilize any short-term borrowings in 1999, 1998 or 1997.
CAPITAL RESOURCES
The Bank maintains capital to comply with legal requirements, to provide
a margin of safety for its depositors and stockholders, and to provide for
future growth and the ability to pay dividends. The Company injected an
additional $300,000 of capital into the Bank in May 1999 and will inject an
additional $200,000 in July 1999. At June 30, 1999, stockholders' equity was
$3,606,200 versus $3,434,600 at December 31, 1998. The Company paid a ten
(10%) percent stock dividend in 1998 and cash dividends of $0.12 and $0.11
per share in 1997 and 1996, respectively. The Bank paid cash dividends
totaling $50,000, $170,000 and $150,000 to the Corporation in 1998, 1997 and
1996.
The FDIC and Federal Reserve Board have adopted capital adequacy
guidelines for use in their examination and regulation of banks and bank
holding companies. If the capital of a bank or bank holding company falls
below the minimum levels established by these guidelines, it may be denied
approval to acquire or establish additional banks or non-bank businesses, or
the FDIC or Federal Reserve Board may take other administrative actions. The
guidelines employ two measures of capital: (1) risk-based capital and (2)
leverage capital.
Page 18
<PAGE>
Under current rules, all banks were required to maintain Tier 1 capital
of at least 4 percent and total capital of 8.0% of risk-adjusted assets. The
Bank had a Tier 1 risk-based capital ratio of 9.37% and a total risk-based
capital ratio of 10.22% at June 30, 1999 well above the minimum regulatory
requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 7.13% at June 30, 1999.
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. The Bank has a line of credit
from the Federal Home Loan Bank of San Francisco of approximately $6,250,000
and a $1,000,000 unsecured Federal Funds Purchased line of credit with the
Pacific Coast Bankers' Bank to meet temporary liquidity requirements. The
Bank is in the process of pledging loans and/or securities to the Federal
Reserve Bank of San Francisco to secure $6,000,000 in funding through the
Federal Reserve Bank's loan and discount facility.
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 total liquidity at June 30, 1999 was 32.37
percent; while its average loan to deposit ratio for the six months ended
June 30, 1999 was 68.04 percent.
INTEREST RATE RISK
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.
Page 19
<PAGE>
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 quarterly basis through
the use of a model which calculates the effect on earnings of changes in the
fed funds rate. The model converts a fed funds rate change into rate changes
for each major class of asset and liability, then simulates the bank's net
interest margin based on the bank's actual repricing over a one year period,
assuming that maturities are reinvested in instruments identical to those
maturing during the period. At June 30, 1999 the affect of a 2% change,
either increase or decrease, in the federal funds sold rate would result in a
2.5% change in equity.
The Corporation has limited sources of revenues and 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 20
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the book and market value of the
Bank's investment securities at June 30, 1999:
INVESTMENT PORTFOLIO MIX
<TABLE>
<CAPTION>
Book Market
Value value
----------- ------------
<S> <C> <C>
(Dollars in thousands)
Available for sale:
Equity Securities 744 744
Held to maturity:
U.S. Agency securities 2,499 2,424
State/Local Agency securities 6,792 6,592
----------- ------------
Total 9,292 9,016
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at June 30, 1999:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 3 over 5
1 year through through through over
or less 3 years 5 years 15 years 15 years
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Agency securities --- --- --- 2,499 ---
State/Local Agencies --- --- --- --- 6,792
Equity Securities 744 --- --- --- ---
----------- ----------- ---------- ---------- ----------
Total 744 --- --- 2,499 6,792
</TABLE>
Page 21
<PAGE>
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following proposals were presented to shareholders at the Corporation's
annual shareholders' meeting held on July 22, 1999.
Proposal Number 1: Election of Directors
<TABLE>
<CAPTION>
Number of Number of
Affirmative Votes Votes Withheld
----------------- -----------------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 738,261 35,975
Sandra G. Chrietzberg 738,184 36,052
Peter J. Coniglio 771,889 2,347
Carla S. Hudson 773,419 817
John M. Lotz 773,419 817
</TABLE>
ITEM 5. OTHER INFORMATION.
The Year 2000 issue involves the ability of computer systems to
recognize date values on and after January 1, 2000. Many operating systems
and software programs were written to recognize two digit year date values,
i.e. 98 in the year field represents 1998. As a result some systems and
programs may recognize "00" in a date field as the year 1900 rather than
2000. This issue affects all users of computer systems, not just financial
institutions.
The Company has established a plan of action designed to ascertain the
actions necessary to address the "Year 2000" issue. The Company has completed
testing of the hardware and operating systems under its direct control; two
older personal computers failed the tests and have been replaced. The testing
of mission critical systems has been completed with no problems identified.
We have completed the review of test results from the data processing system
that processes transactions and maintains records on all loan, deposit and
general ledger accounts. These tests have not identified any Year 2000
related problems. The Company continues developing and reviewing contingency
plans for mission critical systems.
The Company must rely on its customers to make necessary preparations
for Year 2000 so that their business operations will not be impacted. Those
customers with loans and unused commitments outstanding cause the greatest
concern for any lender. All current and prospective borrowers, who may be
impacted by the Year 2000 problem, have been/will be asked to complete a
questionnaire regarding their Year 2000 readiness. Each borrower is assigned
one of two Year 2000 risk levels: low or high. Business purposes borrowers
are further rated based on an evaluation of their Year 2000 plan and the
progress in completing the plan. Business purpose borrowers with loans
greater than
Page 22
<PAGE>
$50,000 and a Year 2000 high risk rating have been evaluated to determine if
specific allocations for loan loss reserves should be made. The evaluation
process, including site visits, for business purpose borrowers with loans
greater than $200,000 and a Year 2000 high risk rating has been completed.
The Company as of June 30, 1999 has allocated $10,190 of the reserve for
possible loan losses for Year 2000 exposure.
The Company is reliant on third parties for basic infrastructure
services and services provided by other financial institutions and
governmental agencies. Failure by third parties may jeopardize our
operations, but the degree of risk depends on the nature and duration of the
failures. The greatest impact on our operations would result from the
inability of third parties to supply basic services such as electric power,
telecommunications and services provided by other financial institutions and
governmental agencies. We monitor available information regarding the
readiness preparation of basic infrastructure providers. We are unable,
however, to estimate the likelihood of significant disruptions among our
basic infrastructure suppliers.
Efforts are being made to increase the awareness level of all customers
through direct mailings and messages printed on bank statements and notice
forms. These efforts will include information on the Year 2000 problem,
sources of reliable information, information on the Company's preparedness
and warnings concerning scam artists.
The Company's Year 2000 expense in 1998 was $28,800, and $38,400 has
been budgeted for 1999. These expenses include fees for testing mission
critical systems, postage and the cost of information pieces provided to
customers. The Company has not allocated any personnel cost associated with
the significant number of man-hours devoted to the Year 2000 project.
Even with all of the Company's preparation, there can be no assurance
that problems will not arise which could have an adverse impact due to the
complexities involved in resolving the Year 2000 problem and the fact that
systems of other companies which the Company may rely on must corrected be in
a timely manner. Delays or failures in correcting Year 2000 system problems
of other companies could have an adverse impact upon the Company and its
ability to mitigate the risk of adverse impact of Year 2000 problems for its
customers.
Page 23
<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: August 6, 1999 By: /s/ Charles T. Chrietzberg, Jr.
-------------- -----------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: August 6, 1999 By: /s/ Bruce N. Warner
-------------- -----------------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
Page 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FROM THE
COMPANY FORM 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,989,300
<INT-BEARING-DEPOSITS> 200,000
<FED-FUNDS-SOLD> 2,965,000
<TRADING-ASSETS> 57,300
<INVESTMENTS-HELD-FOR-SALE> 744,300
<INVESTMENTS-CARRYING> 9,291,000
<INVESTMENTS-MARKET> 9,016,300
<LOANS> 33,953,300
<ALLOWANCE> 341,000
<TOTAL-ASSETS> 55,373,300
<DEPOSITS> 46,861,200
<SHORT-TERM> 357,500
<LIABILITIES-OTHER> 548,400
<LONG-TERM> 4,000,000
0
0
<COMMON> 2,962,200
<OTHER-SE> 654,200
<TOTAL-LIABILITIES-AND-EQUITY> 55,373,300
<INTEREST-LOAN> 1,562,000
<INTEREST-INVEST> 405,800
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,967,800
<INTEREST-DEPOSIT> 681,200
<INTEREST-EXPENSE> 807,300
<INTEREST-INCOME-NET> 1,160,500
<LOAN-LOSSES> 80,000
<SECURITIES-GAINS> 6,800
<EXPENSE-OTHER> 1,934,300
<INCOME-PRETAX> 248,400
<INCOME-PRE-EXTRAORDINARY> 248,400
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 188,700
<EPS-BASIC> .20
<EPS-DILUTED> .16
<YIELD-ACTUAL> 5.03
<LOANS-NON> 46,500
<LOANS-PAST> 68,300
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 92,200
<ALLOWANCE-OPEN> 336,200
<CHARGE-OFFS> 87,400
<RECOVERIES> 12,200
<ALLOWANCE-CLOSE> 341,100
<ALLOWANCE-DOMESTIC> 341,100
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 326,200
</TABLE>
