<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
--- of 1934 for the quarterly period ended March 31, 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: (408) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ----
As of April 30, 1999, the Corporation had 938,840 shares of common stock
outstanding.
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 13,124,000 12,429,900
Due From Bank - Time Deposits 200,000 100,000
Investment Securities, available for sale (Note 1) 697,800 690,500
Investment Securities, held to maturity (Note 1) 7,263,100 6,265,000
Trading Account 24,800 0
Loans Held for Sale 814,600 951,600
Gross Loans (Note 2) 27,936,300 27,330,300
Allowance for Possible Loan Losses (Note 3) (296,400) (336,200)
Deferred Origination Fees (29,500) (31,900)
------------ -----------
Net Loans 27,610,400 26,962,200
Bank Premises and Equipment, Net 1,847,900 1,868,600
Interest Receivable and Other Assets 2,118,800 1,835,600
------------ -----------
Total Assets 53,676,600 51,103,400
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 45,701,100 42,851,700
Borrowed Funds 4,000,000 4,000,000
Interest Payable and Other Liabilities 472,900 817,100
------------ -----------
Total Liabilities 50,174,000 47,668,800
------------ -----------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 1999 and 1998
Outstanding:939,836 in 1999 and 943,804 1998 2,957,800 2,962,200
Retained Earnings 580,200 504,400
Accumulated Other Comprehensive Income (Loss) (35,400) (32,000)
------------ -----------
Total Shareholders' Equity 3,502,600 3,434,600
------------ -----------
Total Liabilities & Shareholders' Equity 53,676,600 51,103,400
------------ -----------
------------ -----------
</TABLE>
2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 31
1999 1998
------------ --------------
<S> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 755,600 696,500
Interest on Time Deposits with
Financial Institutions 1,300 1,500
Interest on Investment Securities 99,300 143,200
Interest on Federal Funds 107,200 62,900
------------ ---------------
Total Interest Income 963,400 904,100
------------ ---------------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 28,200 27,200
Interest on Savings Accounts 18,900 12,000
Interest on Time Deposits 291,500 303,500
Interest on Other Borrowed Funds 60,500 59,600
------------ ---------------
Total Interest Expense 399,100 402,300
------------ ---------------
Net Interest Income 564,300 501,800
PROVISION FOR LOAN LOSSES 10,000 10,000
------------ ---------------
Net Interest Income After
Provision for Possible Loan Losses 554,300 491,800
------------ ---------------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 93,100 78,600
SBA Loan Sales & Servicing Income 64,000 61,500
Other Operating Income 331,600 270,200
------------ ---------------
Total Noninterest Income 488,700 410,300
------------ ---------------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 403,400 331,900
Occupancy and Equipment Expense 69,000 67,600
Professional Fees 18,500 25,200
Data Processing 50,100 49,500
FDIC & State Assessments 2,900 3,700
Other Operating Expenses 400,500 321,900
Income Tax Expense 22,100 25,700
------------ ---------------
Total Non-interest Expense 966,500 825,500
------------ ---------------
NET INCOME (LOSS) 76,500 76,600
------------ ---------------
------------ ---------------
Earnings per common share
Primary 0.081 0.081
Diluted 0.065 0.069
</TABLE>
3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
NET INCOME 76,500 76,600
Adjustments to net income:
Depreciation and amortization expense 36,900 33,100
Amortization/Accretion on investments 1,900 (4,500)
Provision for possible loan losses 10,000 10,000
Increase in deferred servicing premium 2,800 0
Amortization of deferred servicing premium 100 4,600
Amortization of deferred income (1,200) (1,100)
Increase (decrease) in accrued expenses (219,900) (338,000)
(Increase) decrease in other assets (326,500) (153,300)
Increase (decrease) in interest payable (120,300) (91,300)
(Increase) decrease in interest receivable 33,400 (38,600)
---------------- ---------------
Total adjustments to net income (582,800) (579,100)
---------------- ---------------
---------------- ---------------
Net cash provided (used) by operations (506,300) (502,500)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of due from time 100,000 0
Proceeds from maturity of investments 0 2,495,000
Purchase of securities (1,007,300) (4,864,200)
Net (increase) decrease in loans (658,100) 95,500
(Increase) decrease in loans held for sale 137,000 (434,500)
Proceeds from sale of equipment 0 1,400
Capital expenditures (16,200) (24,800)
Stock Repurchase (4,400) 0
---------------- ---------------
Net cash provided (used) in investing activities (1,549,000) (2,731,600)
---------------- ---------------
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 2,849,400 (606,000)
Net increase (decrease) in borrowed funds 0 1,000,000
Net cash provided (used) by financing activities 2,849,400 394,000
---------------- ---------------
---------------- ---------------
Net increase (decrease) in cash & cash equivalents 794,100 (2,840,300)
Cash & cash equivalents - beginning of year 12,529,900 11,160,600
---------------- ---------------
---------------- ---------------
Cash & cash equivalents - end of period 13,324,000 8,320,300
</TABLE>
See Note 5 for supplemental disclosures
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
------------------ ---------------------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
Other Securities 697,800 690,500
------------------ ---------------------
------------------ ---------------------
Held to maturity:
US Government Securities 2,499,100 1,500,200
State and Local Agency Securities 4,764,000 4,764,800
------------------ ---------------------
7,263,100 6,265,000
------------------ ---------------------
------------------ ---------------------
(NOTE 2) GROSS LOANS:
Commercial and Industrial 11,327,700 11,163,200
Construction 1,268,700 355,600
Real Estate - Mortgage 14,862,800 15,294,100
Installment 322,000 358,600
Government Guaranteed Loans Purchased 155,100 158,800
------------------ ---------------------
Gross Loans 27,936,300 27,330,300
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 336,200 269,100
Recoveries 6,500 12,600
Provision for Possible Loan Losses 10,000 130,000
Loans Charged Off (56,300) (75,500)
------------------ ---------------------
Balance at End of Period 296,400 336,200
(NOTE 4) DEPOSITS:
Demand 10,773,800 9,897,400
Interest-Bearing Transaction 9,959,600 8,960,400
Savings 4,075,300 3,605,100
Time Under $100,000 12,840,500 12,355,300
Time Equal to or Greater than $100,000 8,051,900 8,033,500
------------------ ---------------------
45,701,100 42,851,700
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 3/31/99 3/31/98
------------------ ---------------------
Interest 399,100 342,700
Income Taxes 21,900 25,700
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be
read in conjunction with the financial statements and the other financial
data presented elsewhere herein. The Corporation had no activities other than
its organization.
For the three months ended March 31, 1999 net income was $76,500,
compared to $76,600 for the same period in 1998. For the three months ended
March 31, 1999 interest income after provision for loan losses increased
$62,500, non-interest income increased $78,400, while non-interest expense
increased $141,000.
6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at and for the three months ended, March 31, 1999 and 1998.
<TABLE>
<CAPTION>
The three months The three months
Ended March 31, 1999 Ended March 31, 1998
-------------------- --------------------
(Dollars in thousands except per share data)
<S> <C> <C>
Summary of Operating Results:
Total interest income 963 904
Total interest expense 399 402
---------------- -----------------
Net interest income 564 502
Provision for possible loan losses 10 10
---------------- -----------------
Net interest income after
provision for loan loss 554 492
Total other income 489 411
Total other expense 942 800
---------------- -----------------
Income (loss) before taxes 101 102
Provision for income tax 22 26
---------------- -----------------
Net income (loss) 76 77
Per Common Share Data:
Net income - Primary (1) 0.081 0.081
Net income - Diluted (2) 0.065 0.069
Book value, end of period (3) 3.73 3.29
Avg shares outstanding (4) 939,836 943,804
Balance Sheet Data:
Total loans, net of
unearned income (5) 28,721 26,215
Total assets 53,677 46,143
Total deposits 45,701 38,589
Stockholders' equity (6) 3,503 3,107
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
The three months The three months
Ended March 31, 1999 Ended March 31, 1998
-------------------- --------------------
<S> <C> <C>
Selected Financial Ratios (4):
Return on average assets (5) 0.60% 0.67%
Return on average stockholders' equity (5) 9.07% 9.98%
Net interest spread 4.25% 4.39%
Net interest margin 4.95% 5.01%
Avg shareholders' equity to average assets 6.67% 6.67%
Risked-Based capital ratios
Tier 1 9.29% 9.74%
Total 10.11% 10.66%
Total loans to total deposits at end of period 60.21% 67.93%
Allowance to total loans at end of period 1.03% 1.07%
Nonperforming loans to total loans at end of period 0.44% 0.70%
Net charge-offs to average loans 0.19% 0.00%
</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 938,840 and 944,378 for March 31, 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 1,043,146 for March 31, 1999 and
1998, respectively.
(3) Includes loans being held for sale.
(4) Averages are of daily balances.
(5) March 31, 1999 calculated on an annualized basis.
8
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned
on interest-earning assets and (b) interest paid on interest-bearing
liabilities, is the most significant component of the Bank's earnings.
Changes in net interest income from period to period result from increases or
decreases in the average balances of interest-earning assets portfolio, the
availability of particular sources of funds and changes in prevailing
interest rates.
Net interest income for the three months ended March 31, 1999 was
$564,300 compared to $501,800 for the same period in 1998. The increase of
$62,500 resulted from total interest income increasing $59,300, while total
interest expense decreased $3,200. Average interest earning assets increased
$6,023,000 (15.22%), while the average rate earned decreased 64 basis points.
Average interest bearing liabilities increased $3,702,000 (10.78%), while the
average rate paid decreased 49 basis points, reflecting decreases in
certificate of deposit rates.
The following table shows the components of the Bank's net interest
income, setting forth, for each the three months ended March 31, 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.
9
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, 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 131 1 3.87 100 2 6.06 100 6 5.98
Invest securities 7,272 99 5.46 8,922 143 6.42 8,160 481 5.90
Federal funds sold 9,248 107 4.64 4,605 63 5.46 5,771 314 5.44
---------------------- -------------------- ----------------------
Total investments 16,650 208 4.99 13,627 208 6.09 14,031 801 5.71
Loans
Real estate 16,074 416 10.36 13,918 360 10.36 14,641 1,554 10.62
Installment 338 10 12.04 462 13 11.25 464 60 13.02
Commercial 12,582 329 10.46 11,597 318 10.95 12,348 1,341 10.86
---------------------- -------------------- ----------------------
Total loans 28,993 756 10.42 25,976 691 10.64 27,453 2,955 10.77
Total Interest
earning assets 45,644 963 8.44 39,603 898 9.08 41,485 3,757 9.06
---------------------- -------------------- ----------------------
---------------------- -------------------- ----------------------
Interest Bearing
Liabilities:
Int-bearing demand 7,847 21 1.05 5,720 17 1.15 6,206 73 1.17
Money market savings 1,562 8 1.92 1,827 11 2.34 1,623 38 2.31
Savings deposits 3,718 19 2.04 2,192 12 2.19 2,846 63 2.22
Time deposits
LESS THAN $100M 8,213 114 5.55 8,266 120 5.79 8,042 471 5.86
Time deposits
GREATER THAN $100M 12,686 178 5.60 12,374 184 5.95 12,049 713 5.92
Other Borrowing 4,000 60 6.05 3,944 60 6.05 4,000 246 6.14
---------------------- -------------------- ----------------------
Total interest
bearing liabilities 38,026 399 4.20 34,324 402 4.69 34,765 1,603 4.61
---------------------- -------------------- ----------------------
---------------------- -------------------- ----------------------
Net interest income 564 496 2,154
Net interest spread 4.25 4.39 4.45
Net yield on interest
earning assets 4.95 5.01 5.19
</TABLE>
10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, 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 2 0 2 2 (2) 1
Invest securities (26) (17) (44) 393 (1) 392
Federal funds sold 63 (19) 44 (36) 10 (27)
----------------------------- -------------------------
Total investments 46 (46) 0 324 42 366
Loans
Real estate 56 0 56 157 30 186
Installment (3) 1 (3) (26) 6 (20)
Commercial 27 (16) 11 177 (93) 84
----------------------------- -------------------------
Total loans 80 (16) 65 308 (57) 251
Total Interest Earning Assets 137 (72) 65 844 (224) 620
----------------------------- -------------------------
----------------------------- -------------------------
Interest Bearing Deposits:
Int-bearing demand 6 (2) 4 (7) (0) (7)
Money market savings (2) (2) (3) 8 (15) (7)
Savings deposits 8 (1) 7 139 (5) 134
Time deposits
LESS THAN $100M (1) (5) (6) 17 (39) (22)
Time deposits
GREATER THAN $100M 5 (11) (6) 102 61 163
Other Borrowing 1 0 1 0 0 0
----------------------------- -------------------------
Total interest bearing deposits 43 (47) (3) 308 (38) 269
----------------------------- -------------------------
----------------------------- -------------------------
Net change in net interest 94 (25) 68 536 (186) 350
</TABLE>
11
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan
losses represents amounts set aside for the specific purpose of absorbing
losses that may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation
of the risks inherent in the loan portfolio, both generally and with respect
to specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the State Banking Department and FDIC examinations, independent
accountants' observations, and the Bank's internal review as additional
indicators to determine if the amount in the allowance for loan losses is
adequate to protect against estimated future losses. It is the Bank's
current practice, which could change in accordance with the factors mentioned
above, to maintain an allowance which is at least equal to the sum of the
following percentage of loan balances by loan category.
<TABLE>
<CAPTION>
Loan Category Reserve %
<S> <C>
Classified Loans:
Loans classified loss 100.00%
Loans classified doubtful 50.00%
Loans classified substandard
Real Estate Secured 5.00%
Non Real Estate Secured 20.00%
Unclassified Loans:
Real Estate - Loan to value 80% or less 0.10%
Real Estate - Loan to value over 80% 0.50%
Loans to Individuals 3.00%
Commercial 3.00%
SBA Loans - Unguaranteed portion 2.00%
Unfunded Loan Commitments .25%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
</TABLE>
Although no assurance can be given that actual losses will not exceed
the amount provided for in the allowance, Management believes that the
allowance is adequate to provide for all estimated credit losses in light of
all known relevant factors. At March 31, 1999 and 1998 the Bank's allowance
stood at 1.03 percent and 1.07 percent of gross loans, respectively. A
provision of $10,000 was made to the allowance during the three months
ended March 31, 1999, and 1998. Loans charged off during the three months
12
<PAGE>
ended March 31, 1999, totaled $56,300, compared to $1,000 in the same period
of 1998. Recoveries for the same periods were $6,500 and $2,800, respectively.
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .44 percent at March 31, 1999
compared with .70 percent for the same period in 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 three months ended March 31, 1999 was
$488,700, compared with $410,300 for the same period in 1998. The increase of
$78,400 was the result of service charges on deposit accounts increasing
$14,100, income from SBA loan sales and servicing increased $3,000 and income
from other service charges, commissions and fees increasing $61,300.
Increased merchant services fees accounted for $54,300 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 the impact
these changes will not have a significant impact on SBA income.
13
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the three months ended March 31, 1999
increased $71,500 compared with the same period in 1998. The increase was due
to the addition of two loan officers, employee merit pay increases and bonus
accruals.
Total occupancy and equipment expense for the three months ended March
31, 1999 was $69,000 compared to $67,600 for the same period in 1998.
For the three months ended March 31, 1999 professional fees decreased
$6,700 compared to the same period in 1998.
Data processing expenses for the three months ended March 31, 1999 was
$50,100 compared to $49,500 for the same period in 1998.
Other expenses for the three months ended March 31, 1999 totaled
$425,400 compared with $347,600 for the same period in 1998. Significant
changes occurred in the following categories with increases in business
development ($4,500), insurance expense ($5,100), merchant expense ($55,800),
Year 2000 expense ($9,600), subscriptions ($4,400), operational losses
($4,400) and decreases in collection expense ($7,900), bank security
($2,400), taxes ($3,600).
LOANS
Loans represented 63.55% of average earning assets, and 55.70% of
average total assets for the three months ended March 31, 1999, compared with
65.62% and 56.49%, respectively during 1998. For the three months ended March
31, 1999, average loans increased 11.57% from $26,014,000 for the same period
in 1998 to $29,023,000. Average real estate loans increased $1,987,000
(14.11%), installment loans decreased $111,000 (23.10%); while average
commercial loans increased $1,133,000 (9.89%).
The Bank's commercial and industrial loans are generally made for the
purpose of providing working capital, financing the purchase of equipment or
inventory, and other business purposes. Such loans generally have maturities
ranging from one year to several years. Short-term business loans are
generally intended to finance current transactions and typically provide for
monthly interest payments with principal being payable at maturity or at
90-day intervals. Term loans (usually for a term of two to five years)
normally provide for monthly installments of principal and interest. The Bank
from time to time utilizes accounts receivable and inventory as security for
loans.
14
<PAGE>
The Bank is a recognized leader for Small Business Administration
lending in Monterey County, and holds SBA's coveted Preferred Lender Status.
Generally, SBA loans are guaranteed, by the SBA, for 75 to 80 percent of
their principal amount, which can be retained in portfolio or sold to
investors. Such loans are made at floating interest rates, but generally for
longer terms (up to 25 years) than are available on a conventional basis to
small businesses. The unguaranteed portion of the loans, although generally
supported by collateral, is considered to be more risky than conventional
commercial loans because they may be based upon credit standards the Bank
would not otherwise apply, such as lower cash flow coverage, or longer
repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has
also developed a broker program for generating residential real estate loans.
The Bank does not make real estate development loans. Real estate
construction loans are made for a much shorter term, and often at higher
interest rates, than conventional single-family residential real estate
loans. The cost of administering such loans is often higher than for other
real estate loans, as principal is drawn on periodically as construction
progresses.
The Bank also makes real estate loans secured by a first deed of trust
on single family residential properties and commercial and industrial real
estate. California commercial banks are permitted, depending on the type and
maturity of the loan, to lend up to 90 percent of the fair market value of
real property (or more if the loan is insured either by private mortgage
insurers or governmental agencies). In certain instances, the appraised value
may exceed the actual amount that could be realized on foreclosure, or
declines in market value subsequent to making the loan can impair the Bank's
security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's
consumer installment loans are generally secured by the personal property
being purchased. The Bank generally makes consumer loans to those customers
with a prior banking relationship with the Bank.
NON-PERFORMING AND NON-ACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which
are past due as to principal or interest 90 days or more, except for loans
which are well secured or when collection of interest and principal is deemed
likely. When a loan is placed on non-accrual, previously accrued and unpaid
interest is generally reversed out of income unless adequate collateral from
which to collect the principal of, and interest on, the loan appears to be
available.
15
<PAGE>
The following table presents information with respect to loans which, as
of the dates indicated, were past due 90 days or more or were placed on
non-accrual status (referred to collectively as "non-performing loans"):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Accruing, past due 90 days or more:
- -----------------------------------
Real Estate 70 71
Commercial 0 0
Installment 0 0
Other 0 0
------------ -----------------
Total accruing 70 71
Nonaccrual Loans:
- -----------------
Commercial 57 96
Installment 0 16
Other 0 0
------------ -----------------
Total nonaccrual 57 112
Total nonperforming 127 183
Total loans end of period 28,721 26,215
Ratio of nonperforming loans
to total loans at end of period 0.44% 0.70%
</TABLE>
These ratios have been maintained as a result of conservative
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.
16
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1999 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding 28,993 26,014
Allowance, beginning of period 336 269
Loans charged off during period:
Commercial 56 0
Installment 0 1
Real Estate 0 0
Other 0 0
----------- -------------
Total charge offs 56 1
Recoveries during period:
Commercial 3 3
Installment 4 0
Other 0 0
----------- -------------
Total recoveries 7 3
Net Loans charged off
during the period 50 (2)
Additions to allowance for
possible loan losses 10 10
Allowance, end of period 296 281
Ratio of net loans charged off to average
loans outstanding during the period 0.17% (0.01)%
Ratio of allowance to total
loans at end of period 1.03% 1.07%
</TABLE>
17
<PAGE>
FUNDING SOURCES
Average deposits for the three months ended March 31, 1999 were
$43,798,000 an increase of 14.19% compared with the same period in 1998.
Average certificates of deposit represented 47.72% of average deposits for
the three months ended March 31, 1999. Average interest bearing checking,
money market and savings accounts as a group were 29.97% of average deposits.
Average demand deposits represented 22.73% of average deposits. The decrease
in certificates of deposit as a percentage of total deposits resulting in
lower cost of funds.
The Bank has a line of credit from the Federal Home Loan Bank of San
Francisco with a maximum borrowing limit on March 31, 1999 of $4,295,000. The
line of credit is secured by certain of the Bank's real estate secured loans.
At March 31, 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 March 31,
1999, stockholders' equity was $3,502,600 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 actions. The
guidelines employ two measures of capital: (1) risk-based capital and (2)
leverage capital.
Under current rules, all banks are required to maintain Tier 1 capital
of at least 4 percent and total capital of 8.0% of risk-adjusted assets. The
Bank had a Tier 1 risk-based capital ratio of 9.29% and a total risk-based
capital ratio of 10.11% at March 31, 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 6.46% March 31, 1999.
18
<PAGE>
LIQUIDITY
Liquidity represents a bank's ability to provide sufficient cash flows
or cash resources in a manner that enables it to meet obligations in a timely
fashion and adequately provides for anticipated future cash needs. For the
Bank, liquidity considerations involve the capacity to meet expected and
potential requirements of depositors seeking access to balances and to
provide for the credit demands of borrowing customers. In the ordinary course
of the Bank's business, funds are generated from the repayment of loans,
maturities within the investment securities portfolio and the acquisition of
deposit balances and short-term borrowings. In addition, the Bank has a line
of credit from the Federal Home Loan Bank of San Francisco of approximately
$4,295,000 and a $1,000,000 Federal Funds Purchased line of credit with
Pacific Coast Bankers' Bank, to meet temporary liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid
assets, including marketable investment securities, equal to a least 10
percent of total assets ("primary liquidity"), while maintaining sources of
secondary liquidity (borrowing lines from other institutions) equal to at
least an additional 10 percent of assets. In addition, it seeks to generally
limit loans to not more than 90 percent of deposits. Within these ratios, the
Bank generally has excess funds available to sell as federal funds on a daily
basis, and is able to fund its own liquidity needs without the need of
short-term borrowing. The Bank's primary liquidity at March 31, 1999 was
24.18, while its average loan to deposit ratio for the three months ended
March 31, 1999 was 66.27 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.
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
19
<PAGE>
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 March 31, 1999 the affect of a 2% increase in
the federal funds sold rate, expressed as a percentage of equity, was a
positive 5.8%, while a 2% decrease in the fed funds rate was a negative 5.8%
of equity.
The Corporation has limited cash on hand and no sources of revenues or
liquidity other than dividends, tax equalization payments or management fees
from the Bank. The ability of the Bank to pay such items to the Corporation
is subject to limitations under state and Federal law.
20
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities at March 31, 1999:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
March 31, 1999
Book Market
value value
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Available for sale:
Other Securities 697,800 697,800
----------- ------------
----------- ------------
Held to maturity:
U.S. Government Securities 2,499,400 2,497,900
State and Local Agency Securities 4,763,700 4,777,700
----------- ------------
7,263,100 7,275,600
----------- ------------
----------- ------------
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at March 31, 1999:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 5
1 year through through over 10
or less 5 years 10 years years
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government Agency Securities --- --- 500 1,999
State and Local Agency Securities --- --- --- 4,764
Other Securities 698 --- --- ---
----------- ---------- ------------- -----------
Total 698 --- 500 6,763
</TABLE>
YEAR 2000
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 provided by outside service providers has been
implemented and will be an ongoing process throughout 1999. We have completed
the review of test results from the data processing
21
<PAGE>
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 review of test results on non-mission critical systems,
i.e. accounts payable, fixed assets, is in process. Testing of the systems
used to process merchant credit card transactions is underway, results to
date have been favorable. 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 will be evaluated to
determine if specific allocations for loan loss reserves should be made. The
evaluation process for business purpose borrowers with loans greater than
$200,000 and a Year 2000 high risk rating will include site visits. The
Company has not completed its evaluation of these borrowers and therefore has
not determined the impact if any on provisions for possible loan losses.
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
22
<PAGE>
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: May 7, 1999 By: /s/ Charles T. Chrietzberg, Jr.
-------------------- ---------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: May 7, 1999 By: /s/ Bruce N. Warner
--------------------- ---------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FROM THE
COMPANY FORM 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,609,000
<INT-BEARING-DEPOSITS> 200,000
<FED-FUNDS-SOLD> 9,515,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 697,800
<INVESTMENTS-CARRYING> 7,263,100
<INVESTMENTS-MARKET> 7,275,600
<LOANS> 27,906,800
<ALLOWANCE> 296,400
<TOTAL-ASSETS> 53,676,600
<DEPOSITS> 45,701,100
<SHORT-TERM> 0
<LIABILITIES-OTHER> 472,900
<LONG-TERM> 4,000,000
0
0
<COMMON> 2,957,800
<OTHER-SE> 544,800
<TOTAL-LIABILITIES-AND-EQUITY> 53,676,600
<INTEREST-LOAN> 755,600
<INTEREST-INVEST> 207,800
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 963,400
<INTEREST-DEPOSIT> 338,600
<INTEREST-EXPENSE> 399,100
<INTEREST-INCOME-NET> 564,300
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 966,500
<INCOME-PRETAX> 88,600
<INCOME-PRE-EXTRAORDINARY> 88,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,500
<EPS-PRIMARY> .081
<EPS-DILUTED> .065
<YIELD-ACTUAL> 4.95
<LOANS-NON> 57,100
<LOANS-PAST> 69,700
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 132,200
<ALLOWANCE-OPEN> 336,200
<CHARGE-OFFS> 56,300
<RECOVERIES> 6,500
<ALLOWANCE-CLOSE> 296,400
<ALLOWANCE-DOMESTIC> 296,400
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
