<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- ---- of 1934 for the quarterly period ended September 30, 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 November 3, 1999, the Corporation had 995,189 shares of common
stock outstanding.
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
-------------------- ----------------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 3,862,000 2,499,900
Due From Bank - Time Deposits 200,000 100,000
Investment Securities, available for sale (Note 1) 1,741,400 690,500
Investment Securities, held to maturity (Note 1) 9,290,900 6,265,000
Trading Account 101,100 0
Federal Funds Sold 3,040,000 9,930,000
Loans Held for Sale 1,249,900 951,600
Gross Loans (Note 2) 36,248,400 27,330,300
Allowance for Possible Loan Losses (Note 3) (372,700) (336,200)
Deferred Origination Fees (39,900) (31,900)
------------------- ----------------------
Net Loans 35,835,800 26,962,200
Bank Premises and Equipment, Net 1,856,300 1,868,600
Interest Receivable and Other Assets 2,179,200 1,835,600
------------------- ----------------------
Total Assets 59,356,600 41,173,400
=================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 50,354,600 42,851,700
Borrowed Funds 4,500,000 4,000,000
Interest Payable and Other Liabilities 704,400 817,100
------------------- ----------------------
Total Liabilities 55,559,000 47,668,800
------------------- ----------------------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1999 and 1998
Outstanding:995,189 in 1999 and 943,804 in 1998 3,060,000 2,962,200
Retained Earnings 782,500 504,400
Accumulated Other Comprehensive Income (Loss) (44,900) (32,000)
------------------- ----------------------
Total Shareholders' Equity 3,797,600 3,434,600
------------------- ----------------------
Total Liabilities & Shareholders' Equity 59,356,600 51,103,400
=================== ======================
</TABLE>
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ----------------------------
1999 1998 1999 1998
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 939,800 635,700 2,501,800 2,197,700
Interest on Time Deposits with
Financial Institutions 2,600 700 6,500 4,600
Interest on Investment Securities 145,100 143,100 370,200 368,200
Interest on Federal Funds 45,400 41,200 222,200 218,000
------------ ------------ ------------- ------------
Total Interest Income 1,132,900 820,700 3,100,700 2,788,500
------------ ------------ ------------- ------------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 27,700 26,900 82,200 81,400
Interest on Savings Accounts 15,200 6,300 53,600 44,700
Interest on Time Deposits 336,700 304,600 925,000 892,900
Interest on Other Borrowed Funds 73,100 56,800 199,200 182,900
------------ ------------ ------------- ------------
Total Interest Expense 452,700 394,600 1,260,000 1,201,900
------------ ------------ ------------- ------------
Net Interest Income 680,200 426,100 1,840,700 1,586,600
------------ ------------ ------------- ------------
PROVISION FOR POSSIBLE LOAN LOSSES 30,000 0 110,000 80,000
------------ ------------ ------------- ------------
Net Interest Income After
Provision for Possible Loan Losses 650,200 426,100 1,730,700 1,506,600
------------ ------------ ------------- ------------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 96,700 85,100 282,600 271,000
SBA Loan Sales & Servicing Income 128,600 69,100 305,400 245,900
Other Operating Income 499,000 237,000 1,238,500 976,500
------------ ------------ ------------- ------------
Total Noninterest Income 724,300 391,200 1,826,500 1,493,400
------------ ------------ ------------- ------------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 463,400 288,400 1,262,800 1,087,800
Occupancy and Equipment Expense 83,600 73,100 223,700 213,200
Professional Fees 19,600 (57,200) 53,800 (23,000)
Data Processing 54,100 44,300 153,400 143,600
FDIC & State Assessments 5,000 4,000 11,900 10,900
Other Operating Expenses 558,200 253,700 1,412,600 1,108,100
Income Tax Expense 45,700 72,200 105,400 131,900
------------ ------------ ------------- ------------
Total Noninterest Expense 1,229,600 678,500 3,223,600 2,672,500
------------ ------------ ------------- ------------
NET INCOME (LOSS) 144,900 138,800 333,600 327,500
============ ============ ============= ============
Earnings Per Common Share
Primary 0.15 0.15 0.35 0.35
Diluted 0.12 0.13 0.29 0.30
</TABLE>
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
NET INCOME 333,600 327,500
Adjustments to net income:
Depreciation and amortization expense 105,800 101,800
Amortization/Accretion on investments (2,200) 3,000
(Gain) loss on sale of securities (7,400) 0
Provision for possible loan losses 110,000 80,000
Amortization of deferred servicing premium (18,300) 25,500
Amortization of deferred income (2,500) (3,000)
Increase (decrease) in accrued expenses (57,200) (152,500)
(Increase) decrease in prepaid expenses (100,600) (505,200)
Increase (decrease) in interest payable (50,400) (65,800)
(Increase) decrease in interest receivable (57,000) (53,400)
(Increase) decrease in loans held for sale (666,600) (382,200)
------------------ -----------------
Total adjustments to net income (746,400) (951,800)
================== =================
Net cash provided (used) by operations (412,800) (624,300)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase due from time deposits (100,000) 0
Proceeds from maturity of investments 160,600 0
Proceeds from sale of investments 1,034,500 0
Principal payments on investments 0 2,995,000
Purchase of securities (5,258,900) (4,882,600)
Unrealized gain (loss) available for sale securities 0 (48,100)
Net (increase) decrease in loans (8,858,200) (1,955,800)
Proceeds from sale of equipment 0 2,800
Capital expenditures (93,500) (68,700)
Exercise of stock options 132,000 0
Stock repurchase (34,200) 0
------------------ -----------------
Net cash provided (used) in investing activities (13,017,700) (3,957,400)
================== =================
</TABLE>
4
<PAGE>
NORTHERN CALIFORNIA BNACORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 7,502,900 2,061,700
Net increase (decrease) in borrowed funds 500,000 1,000,000
--------------------- -----------------
Net cash provided (used) by financing activities 8,002,900 3,061,700
===================== =================
Net increase (decrease) in cash & cash equivalents (5,427,600) (1,542,400)
Cash & cash equivalents - beginning of year 12,529,900 11,160,600
===================== =================
Cash & cash equivalents - end of period 7,102,300 9,618,200
</TABLE>
See Note 5 for Supplemental Disclosures
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
----------------------- ------------------------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
US Government Securities 991,300 0
Other Securities 750,100 690,500
======================= ========================
1,741,400 690,500
Held to maturity:
US Government Securities 2,499,400 1,500,200
State and Local Agency Securities 6,791,500 4,764,800
----------------------- ------------------------
9,290,900 6,265,000
======================= ========================
(NOTE 2) GROSS LOANS:
Commercial and Industrial 11,574,200 11,163,200
Construction 2,665,200 355,600
Real Estate - Mortgage 21,366,900 15,294,100
Installment 491,800 358,600
Government Guaranteed Loans Purchased 150,300 158,800
----------------------- ------------------------
Gross Loans 36,248,400 27,330,300
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 336,200 269,100
Recoveries 14,900 12,600
Provision for Possible Loan Losses 110,000 130,000
Loans Charged Off (88,400) (75,500)
----------------------- ------------------------
Balance at End of Period 372,700 336,200
(NOTE 4) DEPOSITS:
Demand 11,970,100 9,897,400
Interest-Bearing Transaction 8,975,200 8,960,400
Savings 3,173,700 3,605,100
Time Under $100,000 16,318,200 12,355,300
Time Equal to or Greater than $100,000 9,917,400 8,033,500
----------------------- ------------------------
50,354,600 42,851,700
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 9/30/99 9/30/98
----------------------- ------------------------
Interest 1,060,800 1,084,800
Income Taxes 105,400 140,500
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The following discussion reviews and analyzes the operating results
and financial condition of the Corporation, focusing on the Bank. It should
be read in conjunction with the financial statements and the other financial
data presented elsewhere herein. The Corporation has had no activities other
than its organization.
For the nine months ended September 30, 1999 net income was
$333,600, an increase of $6,100 when compared to the same period in 1998. The
increase in earnings during this period resulted from a $224,100 increase in
net interest income after provision for loan losses, a $333,100 increase in
net non-interest income which were offset by a $551,100 increase in
non-interest expense.
7
<PAGE>
The following table sets forth certain selected financial ratios of
the Corporation at, and for the nine months ended, September 30, 1999 and
1998.
<TABLE>
<CAPTION>
For the nine months For the nine months
Ended September 30, 1999 Ended September 30, 1998
------------------------- --------------------------
(Dollars in thousands except per share data)
<S> <C> <C>
Summary of Operating Results:
Total interest income 3,101 2,788
Total interest expense 1,260 1,202
------------------------- --------------------------
Net interest income 1,841 1,587
Provision for possible
loan losses 110 80
------------------------- --------------------------
Net interest income after
provision for loan loss 1,731 1,507
Total other income 1,827 1,493
Total other expense 3,118 2,541
------------------------- --------------------------
Income (loss) before taxes 439 459
Provision for income tax 105 132
------------------------- --------------------------
Net income (loss) 334 327
Per Common Share
Data:
Net income - Primary (1) 0.35 0.35
Net income - Diluted (2) 0.29 0.30
Book value, end of period 3.82 3.51
Avg shares outstanding (3) 942,592 943,804
Balance Sheet Data:
Total loans, net of
unearned income (4) 37,458 28,152
Total assets 59,357 49,219
Total deposits 50,355 41,266
Stockholders' equity 3,798 3,310
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the nine months For the nine months
Ended September 30, 1999 Ended September 30, 1998
------------------------- --------------------------
<S> <C> <C>
Selected Financial Ratios (5):
Return on average assets(6) 0.82% 0.93%
Return on average
stockholders' equity(6) 12.41% 13.81%
Net interest spread 4.48% 4.50%
Net interest margin 5.21% 5.21%
Avg shareholders' equity
to average assets 6.58% 6.74%
Risked-Based capital ratios
Tier 1 9.19% 9.65%
Total 10.02% 10.50%
Total loans to total deposits
at end of period 74.39% 68.22%
Allowance to total loans
at end of period 0.99% 1.01%
Non-performing loans to total
loans at end of period 0.23% 0.95%
Net charge-offs to
average loans 0.23% 0.22%
</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 942,592 and 943,804 for September 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 1,170,399 and 1,107,154 for September 30, 1999 and
1998, respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
(6) Calculated on an annualized basis.
9
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees
earned on interest-earning assets and (b) interest paid on interest-bearing
liabilities, is the most significant component of the Bank's earnings.
Changes in net interest income from period to period result from increases or
decreases in the average balances of interest-earning assets portfolio, the
availability of particular sources of funds and changes in prevailing
interest rates.
Net interest income for the nine month period ended September 30,
1999 was $1,840,700 compared to $1,586,600 for the same period in 1998. The
increase of $254,100 resulted from total interest income increasing $312,200,
while total interest expense increased $58,100. Average interest earning
assets increased $6,957,000 (17.14%), while the average rate earned decreased
47 basis points. Average interest bearing liabilities increased $4,940,000
(14.35%), while the average rate paid decreased 44 basis points. The decrease
in the average interest rates earned and paid was due to the decline in
interest rates over the twelve month period.
The following table shows the components of the Bank's net interest
income, setting forth, for each the nine months ended September 30, 1999 and
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.
10
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
The Nine Months The Twelve Months
Ended September 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
---------------------- ----------------------- ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 177 7 4.90 100 5 6.16 100 6 5.98
Invest securities 8,978 370 5.50 8,260 368 5.94 8,160 481 5.90
Federal funds sold 6,119 222 4.84 5,123 218 5.67 5,771 314 5.44
--------------- --------------- ----------------------
Total investments 15,274 599 5.23 13,483 591 5.84 14,031 801 5.71
Loans
Real estate 18,765 1,472 10.46 14,391 1,118 10.36 14,641 1,554 10.62
Installment 357 34 12.81 537 51 12.54 464 60 13.02
Commercial 13,161 996 10.09 12,189 1,029 11.25 12,348 1,341 10.86
--------------- --------------- ----------------------
Total loans 32,283 2,502 10.33 27,117 2,198 10.81 27,453 2,955 10.77
Total Interest
earning assets 47,558 3,101 8.69 40,600 2,788 9.16 41,485 3,757 9.06
=============== =============== ======================
Interest Bearing Liabilities:
Int-bearing demand 7,750 59 1.02 5,904 52 1.17 6,206 73 1.17
Money market savings 1,623 23 1.89 1,665 30 2.38 1,623 38 2.31
Savings deposits 3,653 54 1.96 2,698 45 2.21 2,846 63 2.22
Time deposits GREATER THAN$100M 8,796 365 5.53 8,198 360 5.86 8,042 471 5.86
Time deposits LESS THAN$100M 13,533 560 5.52 11,969 533 5.93 12,049 713 5.92
Other Borrowing 4,000 183 6.12 3,982 183 6.12 4,000 246 6.14
--------------- --------------- ----------------------
Total interest
bearing liabilities 39,356 1,244 4.22 34,416 1,202 4.66 34,765 1,603 4.61
=============== =============== ======================
Net interest income 1,857 1,587 2,154
Net interest spread 4.48 4.50 4.45
Net yield on interest
earning assets 5.21 5.21 5.19
</TABLE>
11
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Nine Months Twelve Months
Ended September 30, Ended December 31,
1999 vs 1998 1998 vs 1997
------------ ------------
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 (2) 2 2 (2) 1
Invest securities 32 (30) 2 393 (1) 392
Federal funds sold 42 (38) 4 (36) 10 (27)
---------------------------- ----------------------------
Total investments 78 (70) 8 324 42 366
Loans
Real estate 340 14 354 157 30 186
Installment (17) 1 (16) (26) 6 (20)
Commercial 82 (115) (33) 177 (93) 84
---------------------------- ----------------------------
Total loans 419 (115) 304 308 (57) 251
Total Interest Earning Assets 497 (185) 312 844 (224) 620
============================ ============================
Interest Bearing Deposits:
Int-bearing demand 16 (9) 7 23 (14) 9
Money market savings (1) (6) (7) (7) (0) (7)
Savings deposits 16 (7) 9 139 (15) 123
Time deposits GREATER THAN$100M 26 (21) 5 139 (5) 134
Time deposits LESS THAN$100M 70 (42) 27 17 (39) (22)
Other Borrowing 1 (0) 1 102 61 163
---------------------------- ----------------------------
Total interest bearing deposits 173 (130) 42 308 (38) 269
============================ ============================
Net change in net interest 325 (55) 270 536 (186) 350
</TABLE>
12
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan losses
represents amounts which have been set aside for the specific purpose of
absorbing losses which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation
of the risks inherent in the loan portfolio, both generally and with respect to
specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the State Banking Department and FDIC examinations, independent
accountants' observations, and the Bank 's internal review as additional
indicators to determine if the amount in the allowance for loan losses is
adequate to protect against estimated future losses. It is the Bank 's current
practice, which could change in accordance with the factors mentioned above, to
maintain an allowance which is at least equal to the sum of the following
percentage of loan balances by loan category.
<TABLE>
<CAPTION>
Loan Category Reserve %
<S> <C>
Classified Loans:
Loans classified loss 100.00%
Loans classified doubtful 50.00%
Loans classified substandard
Real Estate Secured 5.00%
Non Real Estate Secured 20.00%
Unclassified Loans:
Real Estate - Loan to value 80% or less 0.10%
Real Estate - Loan to value over 80% 0.50%
Loans to Individuals 3.00%
Commercial 3.00%
SBA Loans - Unguaranteed portion 2.00%
Unfunded Loan Commitments .25%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
</TABLE>
Although no assurance can be given that actual losses will not exceed
the amount provided for in the allowance, Management believes that the allowance
is adequate to provide for all estimated credit losses in light of all known
relevant factors. At September 30, 1999 and 1998 the Bank's allowance stood at
.99 percent and 1.01 percent of gross loans, respectively. A provision of
$110,000 was made to the allowance during the nine months ended September 30,
1999, compared to a provision of $80,000 in the same
13
<PAGE>
period in 1998. Charged off loans during the nine months ended September 30,
1999 and 1998 totaled $88,400 and $69,900 respectively. Recoveries for the same
periods were $14,900 and $9,000, respectively.
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was 0.23 percent at September 30, 1999
compared with 0.95 percent at September 30, 1998 and 0.31 percent at December
31, 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 nine months ended September 30, 1999
was $1,826,500, compared with $1,493,400 for the same period in 1998. The
increase of $333,100 was the result of a $11,600 increase in service charges on
deposit accounts, income from SBA loan sales and servicing increased $59,500 and
income from other service charges, commissions and fees increased $262,000.
Merchant credit card processing accounted for $214,800 of the increase in other
service charges, commissions and fees.
The sale of Small Business Administration (SBA) guaranteed loans is a
significant contributor to the Bank's income. SBA guaranteed loans yield up to 3
3/4% over the New York prime rate, and the guaranteed portions can be sold at
premiums which vary with market conditions. SBA loans are guaranteed by the full
faith of the United States Government from 75 to 80 percent of the principal
amount. The guaranteed portion has risks comparable for an investor to a U. S.
Government security and can usually be sold in the secondary financial market,
either at a premium or at a yield which allows the Bank to maintain a
significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for the
Bank to continually expand its program in this area, and may limit the level of
premium that can be earned with regard thereto. Furthermore, the SBA recently
began requiring lenders to share a portion of premiums in excess of 10% earned
on the sale of the guaranteed portions, and to pay 50 basis points on the
outstanding guaranteed balance. Management cannot predict that the impact of
these changes will not have a significant impact on SBA income.
14
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the nine months ended September 30,
1999 increased $175,000 compared with the same period in 1998. The increase was
primarily due to the addition of a loan officer and two clerical positions and
employee merit increases.
Total occupancy and equipment expense for the nine months ended
September 30, 1999 was $223,700 compared to $213,200 for the same period in
1998. The increase of $10,500 was due to increases in maintenance expense
$6,500, depreciation expense increased $12,700 and premises rent $2,300,
janitorial services $4,700, while decreases occurred in net merchant terminal
expense decreased $5,600, utilities $3,600 and property taxes $1,500 .
Data processing expense for the nine months ended September 30, 1999
increased $9,800 compared to the same period in 1998. The increase was due to a
2.0% cost of living increase, effective July 1999 and increased numbers of
accounts and transactions.
For the nine months ended September 30, 1999 professional fees
increased $76,800 compared to the same period in 1998. The increase reflects
the 1998 recovery of legal expenses associated with a trade name infringement
lawsuit.
Other expenses for the nine months ended September 30, 1999 totaled
$1,119,000 compared with $1,119,000 for the same period in 1998. Significant
changes occurred in the following categories with increases in merchant
processing expense $240,600, Year 2000 expense $9,600, loan expense $7,900,
postage $4,800, stationary and supplies $14,700, subscriptions $9,800,
advertising $5,200, telephone expense $7,600, travel $5,300, donations $5,400
and insurance $5,200; decreases occurred in business development $3,600, meals
and entertainment $10,300, SBA loan expense $1,300 and bank security $6,500.
LOANS
Loans represented 67.88% of average earning assets, and 59.34% of
average total assets for the nine months ended September 30, 1999, compared with
66.79% and 57.80%, respectively during 1998. For the nine months ended September
30, 1999 average loans increased 19.05% from $27,117,000 for the same period in
1998 to $32,283,000. Average commercial loans increased $971,000 (7.97%); while
average real estate loans decreased $4,375,000 (30.40%) and average installment
loans decreased $180,000 (33.55%).
15
<PAGE>
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 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.
16
<PAGE>
NONPERFORMING AND NONACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans
which are past due as to principal or interest 90 days or more, except for
loans which are well secured or when collection of interest and principal is
deemed likely. When a loan is placed on non-accrual, previously accrued and
unpaid interest is generally reversed out of income unless adequate
collateral from which to collect the principal of, and interest on, the loan
appears to be available.
The following table presents information with respect to loans
which, as of the dates indicated, were past due 90 days or more or were
placed on non-accrual status (referred to collectively as "non-performing
loans"):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Accruing, past due 90 days or more:
Real Estate 63 258
Commercial 0 0
Installment 0 0
Other 0 0
-------------- ---------------
Total accruing 63 258
Nonaccrual Loans:
Real Estate 8 2
Commercial 15 0
Installment 0 7
Other 0 0
-------------- ---------------
Total non-accrual 22 9
Total non-performing 85 267
Total loans end of period 37,498 28,186
Ratio of non-performing loans
to total loans at end of period 0.23% 0.95%
</TABLE>
17
<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>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding 32,283 27,117
Allowance, beginning of period 336 269
Loans charged off during period:
Commercial 88 69
Installment 0 1
Real Estate 0 0
Other 0 0
------------------ ------------------
Total charge offs 88 70
Recoveries during period:
Commercial 9 8
Installment 6 1
Other 0 0
------------------ ------------------
Total recoveries 15 9
Net Loans charged off
during the period 73 61
Additions to allowance for
possible loan losses 110 80
Allowance, end of period 373 288
Ratio of net loans charged off to
average Loans outstanding
during the period 0.23% 0.22%
Ratio of allowance to total
loans at end of period 0.99% 1.01%
</TABLE>
18
<PAGE>
FUNDING SOURCES
Average deposits for the nine months ended September 30, 1999 were
$46,037,000 an increase of 17.38% compared with the average balance for 1998.
Average certificates of deposit represented 48.50% of average deposits for
the nine months ended September 30, 1999. Average interest checking account,
money market and savings accounts as a group were 28.30% of average deposits.
Average demand deposits represented 23.20% 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 September 30, 1999 the Company had drawn down $500,000 under the
line of credit.
The Bank has a line of credit through the Federal Reserve Bank of
San Francisco's loan and discount facility. The line of credit, currently
$6,000,000, is secured by certain of the Bank's investment securities. The
Bank may increase the amount available through this facility by pledging
additional investment securities and/or loans.
The Bank has a line of credit from the Federal Home Loan Bank of San
Francisco with a maximum borrowing limit on September 30, 1999 of
approximately $7,265,000. The line of credit is secured by certain of the
Bank's real estate secured loans and investment securities. At September 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 Company maintains capital to comply with legal requirements, to
provide a margin of safety for its depositors and stockholders, and to
provide for future growth and the ability to pay dividends. At September 30,
1999, stockholders' equity was $3,797,600 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
19
<PAGE>
actions. The guidelines employ two measures of capital: (1) risk-based
capital and (2) leverage capital.
Under current rules, all banks were required to maintain Tier 1
capital of at least 4 percent and total capital of 8.0% of risk-adjusted
assets. The Bank had a Tier 1 risk-based capital ratio of 9.19% and a total
risk-based capital ratio of 10.02% at September 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 7.62% at September 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 $7,265,000,
a $1,000,000 unsecured Federal Funds Purchased line of credit with the
Pacific Coast Bankers' Bank and $6,000,000 in funding available through the
Federal Reserve Bank's loan and discount facility, to meet temporary
liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid
assets, including marketable investment securities, equal to a least 15
percent of total assets ("primary liquidity"), while maintaining sources of
secondary liquidity (borrowing lines from other institutions) equal to at
least an additional 10 percent of assets. In addition, it seeks to generally
limit loans to not more than 90 percent of deposits. Within these ratios, the
Bank generally has excess funds available to sell as federal funds on a daily
basis, and is able to fund its own liquidity needs without the need of
short-term borrowing. The Bank's primary liquidity at September 30, 1999 was
12.36 percent, while its average loan to deposit ratio for the nine months
ended September 30, 1999 was 70.12 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.
20
<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 September 30, 1999 the affect of a 2%
increase in the federal funds sold rate would result in a 2.0% increase in
equity, while a 2% decrease in the federal funds sold rate would result in a
2.5% decrease in equity.
21
<PAGE>
The Corporation has limited sources of revenues or liquidity other
than dividends, tax equalization payments or management fees from the Bank.
The ability of the Bank to pay such items to the Corporation is subject to
limitations under state and Federal law.
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities as of September 30, 1999:
INVESTMENT PORTFOLIO MIX
<TABLE>
<CAPTION>
September 30, 1999
Book Market
value value
--------------- -------------
<S> <C> <C>
(Dollars in thousands)
Available for Sale:
Equity Securities 750 750
U. S. Agency Securities 1,000 991
--------------- -------------
1,750 1,741
Held to Maturity:
U. S. Agency Securities 2,499 2,416
State/Local Agency Securities 6,792 6,219
--------------- -------------
9,291 8,635
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at September 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 --- --- --- 3,499 ---
State/Local Agencies --- --- --- --- 6,792
Equity Securities 750 --- --- --- ---
----------- ----------- ---------- ---------- ----------
Total 750 --- --- 3,499 6,792
</TABLE>
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
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 $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 September 30, 1999 has allocated $11,100 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
23
<PAGE>
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.
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: November 5, 1999 By: /s/ Charles T. Chrietzberg, Jr.
---------------- -----------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: November 5, 1999 By: /s/ Bruce N. Warner
---------------- --------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,862,000
<INT-BEARING-DEPOSITS> 200,000
<FED-FUNDS-SOLD> 3,040,000
<TRADING-ASSETS> 101,100
<INVESTMENTS-HELD-FOR-SALE> 1,741,400
<INVESTMENTS-CARRYING> 9,290,900
<INVESTMENTS-MARKET> 8,635,000
<LOANS> 37,458,400
<ALLOWANCE> 372,700
<TOTAL-ASSETS> 59,356,600
<DEPOSITS> 50,354,600
<SHORT-TERM> 500,000
<LIABILITIES-OTHER> 704,400
<LONG-TERM> 4,000,000
0
0
<COMMON> 3,060,000
<OTHER-SE> 737,600
<TOTAL-LIABILITIES-AND-EQUITY> 59,356,600
<INTEREST-LOAN> 2,501,800
<INTEREST-INVEST> 598,900
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,100,700
<INTEREST-DEPOSIT> 1,060,800
<INTEREST-EXPENSE> 1,260,000
<INTEREST-INCOME-NET> 1,840,700
<LOAN-LOSSES> 110,000
<SECURITIES-GAINS> 6,800
<EXPENSE-OTHER> 3,118,200
<INCOME-PRETAX> 439,000
<INCOME-PRE-EXTRAORDINARY> 439,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333,600
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 5.21
<LOANS-NON> 46,900
<LOANS-PAST> 62,900
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 92,300
<ALLOWANCE-OPEN> 336,200
<CHARGE-OFFS> 88,400
<RECOVERIES> 14,900
<ALLOWANCE-CLOSE> 372,800
<ALLOWANCE-DOMESTIC> 10,300
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 362,500
</TABLE>
