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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required) for fiscal year ended DECEMBER 31, 1998
/ / Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) for the period from
______________ to ______________
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
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(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (408) 649-4600
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB /X/
Revenues for the year ended December 31, 1998. $ 4,907,400.
As of March 1, 1999, the Corporation had 940,322 shares of common stock
outstanding. The aggregate market value of voting stock held by
non-affiliates of the Corporation was $1,567,600, based on the most recent
sale at $3.00 per share on January 25, 1999.
The following documents are incorporated by reference to the parts
indicated of this Form 10-KSB:
1. Portions of the Independent Auditor's Report for the fiscal year
ended December 31, 1998 are incorporated by reference in Part I Item 3 and
Part II Item 6.
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FORM 10-KSB CROSS REFERENCE INDEX
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PART I
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ITEM 1 Business 3
ITEM 2 Properties 16
ITEM 3 Legal Proceedings 16
ITEM 4 Submission of Matters to a Vote of Security Holders 16
PART II
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ITEM 5 Market for the Corporation's Common Stock and Related
Stockholder Matters 17
ITEM 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
ITEM 7 Financial Statements and Supplementary Data 41
Independent Auditors' Report on the Financial Statements FS 1
Consolidated Balance Sheets at December 31, 1998 and 1997 FS 2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998 FS 3-4
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1998 FS 5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998 FS 6-7
Notes to Consolidated Financial Statements FS 8-31
ITEM 8 Changes in and Disagreements with Accountants and Financial Disclosure 41
PART III
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ITEM 9 Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act 42
ITEM 10 Executive Compensation 43
ITEM 11 Security Ownership of Certain Beneficial Owners and Management 46
ITEM 12 Certain Relationships and Related Transactions 48
ITEM 13 Exhibits and Reports 49
Signatures 50
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PART I
ITEM 1. BUSINESS
GENERAL
Northern California Bancorp, Inc. (the "Corporation") was incorporated
on August 29, 1995, as a for-profit corporation under the California
Corporate laws for the principal purpose of engaging in banking and
non-banking activities as allowed for a bank holding company. The
Corporation owns 100% of Monterey County Bank (the "Bank"). The
Corporation's sole sources of (unconsolidated) revenues at this time are
potential dividends, management fees and tax equalization payments, if any,
from the Bank. While these sources cannot be assured, and may be limited,
the Corporation has no direct cash needs other than limited expenses related
to corporate and regulatory compliance.
Compliance with environmental laws has not had a material impact on the
operations of the Bank or the Corporation, although the Bank faces potential
liability or losses if its borrowers fail to comply with such laws and the
Bank acquires contaminated properties in foreclosure.
BANK SUBSIDIARY
Monterey County Bank, an independent, California chartered commercial
banking corporation was chartered by the State of California on July 30,
1976. The Bank's customer base includes individuals, small and medium sized
businesses and a variety of government agencies with residences, offices or
other relationships located in or about the city and county of Monterey,
California, including the cities of Carmel and Pacific Grove. The Bank
offers its customers a wide variety of the normal personal, consumer and
commercial services expected of a locally owned, independently operated bank.
The Bank's deposits are insured by the FDIC, and, as such, the Bank is
subject to regulations by that federal agency and to periodic audits of its
operations and documentary compliance by FDIC personnel. As a state
chartered bank, which is not a member of the Federal Reserve System, it is
also regulated and periodically examined by the California State Banking
Department.
The Bank's activities are conducted at its principal offices, 601 Munras
Ave., Monterey, California and at its two branch offices in Carmel and
Pacific Grove, California.
At December 31, 1998 the Bank had total assets, deposits and
shareholders' equity of approximately $51,140,300, $42,938,800 and
$3,391,100, respectively.
EMPLOYEES
At December 31, 1998 the Northern California Bancorp, Inc. and its
subsidiary Monterey County Bank employed a total of 33 full time equivalent
persons.
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COMPETITION
All phases of the Bank's business have been, since inception, and will
continue to be subject to significant competitive forces. Although the Bank
has increasing recognition in its primary service area and Monterey County,
it nevertheless has to compete with other independent local banking
institutions, including commercial banks and savings and loan associations,
as well as branch offices of regional commercial banks, some of which have
assets, capital and lending limits substantially larger than the Bank, as
well as wider geographic markets, more support services and larger media
advertising capabilities. The Bank will also compete with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies, regulated small
loan companies and credit unions, as well as securities brokerage offices
which can issue commercial paper and other securities (such as shares in
money market funds).
Among the advantages such institutions have over the Bank are their
ability to finance wide ranging advertising campaigns and to allocate their
investment assets to regions of highest yields and demand. Many institutions
offer certain services, such as trust services and international banking,
which the Bank does not currently offer or plan to offer. By virtue of their
greater total capital, such institutions have substantially higher lending
limits than the Bank (legal lending limits to an individual customer being
limited to a percentage of a bank's total capital accounts). These
competitors may intensify their advertising and marketing activities to
counter any efforts by the Bank to further attract new business as a
commercial bank. In addition, as a result of legislation enacted earlier in
the decade, there is increased competition between banks, savings and loan
associations and credit unions for the deposit and loan business of
individuals. These activities may hinder the Bank's ability to capture a
significant market share.
To compete with the financial institutions in its primary service area,
the Bank intends to use the flexibility which its independent status will
permit. Its activities in this regard include an ability and intention to
respond quickly to changes in the interest rates paid on time and savings
deposits and charged on loans, and to charges imposed on depository accounts,
so as to remain competitive in the market place. It also will continue to
emphasize specialized services for the small business person and
professional, and personal contacts by the Bank's officers, directors and
employees. If there are customers whose loan demands exceed the Bank's
lending limits, the Bank has the ability to arrange for such loans on a
participation basis with other financial institutions. No assurance can be
given, however, that the Bank's efforts to compete with other financial
institutions in its primary service area will be successful.
The Bank provides a range of competitive retail and commercial banking
services. The deposit services offered include various types of personal and
business checking accounts, savings accounts, money market investment
accounts, certificates of deposit, and retirement accounts. Lending services
include consumer loans, various type of mortgage loans for residential and
commercial real estate, personal lines of credit, home equity loans, real
estate construction, accounts receivable financing, commercial loans to small
and medium size businesses and professionals. The Bank also provides
drive-through facilities, at its Monterey and Carmel offices, and night
depository facilities for customer convenience. The Bank offers safe deposit
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box facilities, cashiers' checks, travelers checks, U.S. Savings Bonds, and
wire transfers. The Bank does not provide trust services.
While the Bank has the authority to engage in a wide range of banking
activities, and offers most of the types of banking services of a commercial
bank, over the past three years it has derived much of its profitability and
differentiated itself from its competitors through (i) commercial and real
estate loans guaranteed by the Small Business Administration ("SBA"); and
(ii) credit card depository services for merchants.
The Bank depends largely on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings, and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio,
comprise the major portion of the Bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly, the earnings and growth of the Bank are subject to the influence
of domestic and foreign economic conditions, including inflation, recession
and unemployment.
Monetary and fiscal policies of the federal government and the policies
of regulatory agencies, particularly the Federal Reserve Board, also impact
on the Bank's business. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in U.S. Government securities, by
adjusting the required level of reserves for financial intermediaries subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on
deposits. The nature and impact of any future changes in monetary policies
cannot be predicted.
SUPERVISION AND REGULATION
THE CORPORATION
Future offers or sales of the stock of the Corporation will be subject
to the registration requirements of the Securities Act of 1933, and
qualification under the California Corporate Securities Act of 1968, and
possibly other state Blue Sky laws, (unless an exemption is available),
although the Bank's Common Stock is exempt from such requirements.
On December 29, 1995, after receipt of appropriate approvals, and/or
passage of notice periods without objection, from the California
Superintendent of Banks, the Federal Deposit Insurance Corporation, the Board
of Governors of the Federal Reserve System and the shareholders of the Bank,
the Corporation acquired the Bank through a reverse triangular merger (the
"Merger"). As a result, by operation of law, each outstanding share of
common stock of the Bank prior to the Merger was converted into a share of
common stock of the Corporation, while the Corporation became the sole owner
of the newly issued shares of common stock of the Bank.
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The Bank Holding Company Act of 1956, as amended, places the Corporation
under the supervision of the Board of Governors of the Federal Reserve System
(the "FRB"). The Corporation must generally obtain the approval of the FRB
before acquiring all or substantially all of the assets of any bank, or
ownership or control of any voting securities of any bank if, after giving
effect to such acquisition, the Corporation would own or control more than 5%
of the voting shares of such bank. An application for such approval with
respect to the acquisition of the Bank has been prepared.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in non-banking activities unless the FRB, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
such determinations, the FRB considers whether the performance of such
activities by a bank holding company would offer advantages to the public
which outweigh possible adverse effects.
The FRB's Regulation "Y" sets out the non-banking activities which are
permissible for bank holding companies under the law, subject to the FRB's
approval in individual cases. Most of these activities are now permitted for
California banks that are well-capitalized. The Corporation and its
subsidiaries will also be subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of securities.
Bills have been introduced in Congress that may eliminate the barrier between
commercial banking and investment banking, commerce or insurance, or some
combination thereof. In many of the legislative proposals, in order to
protect the relevant deposit funds, certain activities within a holding
company system would only be permitted to be engaged in by non-bank
subsidiaries of the holding company. Management cannot predict whether any
such proposals or legislation will be adopted or what the effect, if adopted,
they will have on the Bank or Corporation.
The Corporation will be required to file reports with the FRB and
provide such additional information as the FRB may require. The FRB will also
have the authority to examine the Corporation and each of its subsidiaries
with the cost thereof to be borne by the Corporation. Under California
banking law, the Corporation and its subsidiaries are also subject to
examination by, and may be required to file reports with, the Superintendent.
The Corporation and any subsidiaries which it may acquire or organize
after the reorganization will be deemed affiliates of the Bank within the
meaning of the Federal Reserve Act. Pursuant thereto, loans by the Bank to
affiliates, investments by the Bank in affiliates' stock, and taking
affiliates' stock by the Bank as collateral for loans to any borrower will be
limited to 10% of the Bank's capital, in the case of any one affiliate, and
will be limited to 20% of the Bank's capital, in the case of all affiliates.
Federal and State law place other limitations on transactions between the
Bank and its affiliates designed to ensure that the Bank receives treatment
in such transactions comparable to that available from unaffiliated third
parties.
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The Corporation and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of services. For example, with certain
exceptions, the Bank may not condition an extension of credit on a customer's
obtaining other services provided by it, the Corporation or any other
subsidiary, or on a promise from its customer not to obtain other services
from a competitor.
SUBSIDIARY BANK
Both federal and state law provide extensive regulation of the banking
business. State and federal statutes and regulations apply to many aspects
of the Bank's operations, including minimum capital requirements, reserves
against deposits, interest rates payable on deposits, loans, investments,
mergers and acquisitions, borrowings, dividends and locations of branch
offices. The California Superintendent of Banks and the FDIC provide primary
supervision, periodic examination and regulation of the Bank.
The FDIC, through its Bank Insurance Fund (the "BIF") insures the Bank's
deposits, currently up to a maximum of $100,000 per depositor. For this
protection, the Bank, like all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the FDIC. Although
the Bank is not a member of the Federal Reserve System, certain regulations
of the Federal Reserve Board also apply to its operations.
California law restricts the amount available for cash dividends by
state-chartered banks to the lesser of retained earnings or the bank's net
income for its last three fiscal years (less any distributions to
stockholders made during such period). Cash dividends may also be paid in an
amount not exceeding the net income for such bank's last preceding fiscal
year after obtaining the prior approval of the Superintendent. The FDIC also
has authority to prohibit the Bank from engaging in unsafe or unsound
practices. The FDIC can use this power, under certain circumstances, to
restrict or prohibit a bank from paying dividends.
Federal law imposes restrictions on banks with regard to transactions
with affiliates, including any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, its affiliates, as well as the
purchase of or investments in stock or other securities thereof, or the
taking of such securities as collateral for loans, and the purchase of assets
of from affiliates. These restrictions have the effect of preventing
affiliates (such as the Corporation) from borrowing from the Bank unless the
loans are secured by marketable obligations of designated amounts. Secured
loans and investments by the Bank are limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) in the case of any one
affiliate, and 20% thereof in the case of all affiliates. California law
also imposes certain restrictions with respect to transactions involving
other controlling persons of the Bank.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made in Congress, in the
California legislature and before various
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bank regulatory and other professional agencies. The Bank cannot predict
what, if any legislation or regulations will be enacted, or the impact
thereof on its business and profitability.
CAPITAL STANDARDS
Government agencies have traditionally regulated bank capital through
explicit and implicit guidelines and rules. State law requires "adequate"
capital, without objective definition. Federal law and regulations require
minimum levels of risk-based and so-called "Leverage" capital.
FDIC guidelines implement the risk-based capital requirements. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles (using
the rough measures set forth therein) among banking organizations, take
certain off-balance sheet items into account in assessing capital adequacy
and minimize disincentives to holding liquid, low-risk assets. Under these
guidelines, assets and credit equivalent amounts of off-balance sheet items,
such as letters of credit and outstanding loan commitments, are assigned to
one of several risk categories, which range from 0% for risk-free assets,
such as cash and certain U.S. government securities, to 100% for relatively
high-risk assets, such as loans and investments in fixed assets, premises and
other real estate owned. The aggregate dollar amount of each category is then
multiplied by the risk-weight associated with that category. The resulting
weighted values from each of the risk categories are then added together to
determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier I
capital. Higher risk-based ratios are required to be considered "well
capitalized" under prompt corrective action provisions.
A banking organization's qualifying total capital consists of two
components: Tier I capital (core capital) and Tier 2 capital (supplementary
capital). Tier I capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchased credit card
relationships may be included, subject to certain limitations. At least 50%
of the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock and related surplus;
(iii) hybrid capital instruments (instruments with characteristics of both
debt and equity), perpetual debt and mandatory convertible debt securities;
and (iv) eligible term subordinated debt and intermediate-term preferred
stock with an original maturity of five years or more, including related
surplus, in an amount up to 50% of Tier 1 capital. The inclusion of the
foregoing elements of Tier 2 capital are subject to certain requirements and
limitations of the federal banking agencies.
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The FDIC imposes a minimum leverage ratio of Tier I capital to average
total assets of 3% for the highest rated banks, and 4% for all other banks.
Institutions experiencing or anticipating significant growth or those with
other than minimum risk profiles are expected to maintain capital at least
100-200 basis points above the minimum level.
In addition, the Federal Reserve Board and the FDIC have issued or
proposed rules to take account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities in calculating risk-based
capital.
For capital adequacy purposes, deferred tax assets that can be realized
from taxes paid in prior carry-back years, and from the future reversal of
temporary differences, are generally unlimited. However, deferred tax assets
that can only be realized through future taxable earnings, including the
implementation of a tax planning strategy, count toward regulatory capital
purposes only up to the lesser of (i) the amount that can be realized within
one year of the quarter-end report date or (ii) 10% of Tier I capital. The
amount of deferred taxes in excess of this limit, if any, would be deducted
from Tier I capital and total assets in regulatory capital calculations.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets, including
dollar equivalents for certain off-balance sheet assets.
Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the
concentration of credit and nontraditional activities. Institutions which
have significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these
risks, will be required to set aside capital in excess of the regulatory
minimums. The federal banking agencies have not imposed any quantitative
assessment for determining when these risks are significant, but have
identified these issues as important factors they will review in assessing an
individual bank's capital adequacy. Management of the Company does not
believe that the Bank's assets and activities, as currently structured, would
lead the FDIC to require additional capital under this rule.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses (the "ALLL")
which calls for the maintenance of the ALLL at a level at least equal to the
"estimated credit losses" in the bank's loan portfolio. "Estimated credit
losses" are defined as "an estimate of the current amount of the loan and
lease portfolio (net of unearned income) that is not likely to be collected;
that is, net charge-offs that are likely to be realized for a loan or pool of
loans given facts and circumstances as of the evaluation date." The policy
statement also suggests that a test of reasonableness be applied to the ALLL,
which test is satisfied if the ALLL equals or exceeds the sum of (a) assets
classified loss; (b) 50% of assets classified doubtful; (c) 15% of assets
classified substandard; and (d) estimated credit losses on other assets over
the upcoming twelve months. The Bank believes that its ALLL exceeds the
amounts that would be required under the terms of this policy statement and
under such test of reasonableness. However, this a very subjective matter,
and the Bank
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cannot assure that any bank examiner would agree with its evaluation, or that
losses ultimately incurred from the Bank's portfolio would not exceed the
amounts so provided.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency
is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall
generally be deemed to be: (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more
and is not subject to specified requirements to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that
is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0%
(3.0% under certain circumstances); (iv) "significantly undercapitalized" if
it has a total risk-based capital ratio that is less than 6.0%, a Tier I
risk-based capital ratio that is less than 3.0% or a Tier I leverage capital
ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has
a ratio of tangible equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. (The FDIC may not, however,
reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At December 31, 1998, the Bank met the tests to be categorized as "well
capitalized" under the prompt corrective action regulations of the FDIC.
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SAFETY AND SOUNDNESS STANDARDS
Federal law requires the federal banking regulatory agencies to prescribe,
by regulation, standards for all insured depository institutions relating to:
(i) internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
(v) asset growth; and (vi) compensation, fees and benefits. The federal banking
agencies recently adopted final regulations and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") to implement
safety and soundness standards required by the FDIA. The Guidelines set forth
the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before capital
becomes impaired. The agencies also proposed asset quality and earnings
standards which, if adopted in final, would be added to the Guidelines. Under
the final regulations, if the FDIC determines that the Bank fails to meet any
standard prescribed by the Guidelines, the agency may require the Bank to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDIA. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC adopted regulations implementing a risk-based premium system
required by federal law. Under the regulations which cover the assessment
periods commencing on and after January 1, 1994, insured depository institutions
are required to pay insurance premiums within a range of 23 cents per $100 of
deposits to 31 cents per $100 of deposits depending on their risk
classification. The FDIC, effective September 30, 1995, lowered assessments
from their rates of $.23 to $.31 per $100 of insured deposits to rates of $.04
to $.31, depending on the health of the bank, as a result of the
re-capitalization of the BIF. The FDIC may alter the existing assessment rate
structure for deposit insurance and may change the base assessment rate
(currently, 4 to 31 basis points per year) by rulemaking with notice and
comment. Without notice or comment, the FDIC may increase or decrease the
current rate schedule uniformly by as much as 5 basis points, as deemed
necessary to maintain the target designated reserve ratio 1.25 percent (fund
balance to estimated insured deposits). The insured deposit rates for 1998
were $.00 to $.27, these rates are projected to continue through the first half
of 1999.
The Financing Corporation (FICO), established by the Competitive Equality
Banking Act of 1987, is a mixed-ownership government corporation whose sole
purpose was to function as the financing vehicle for the Federal Savings & Loan
Insurance Corporation (FSLIC). Effective December 12, 1991, as provided by the
Resolution Trust Corporation Refinancing, Restructuring and Improvement Act of
1991, the FICO's ability to issue new debt was terminated. Outstanding FICO
bonds, which are 30-year non-callable bonds with a principal amount of
approximately $8.1 billion, mature in 2017 through 2019.
The FICO has assessment authority, separate from the FDIC's authority to
assess risk-based premiums for deposit insurance, to collect funds from
FDIC-insured institutions sufficient to pay interest on FICO bonds. The FDIC
acts as collection agent for the FICO. The Deposit
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Insurance Funds Act of 1996 (DIFA) authorized the FICO to assess both Bank
Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF) insured
deposits, and required the BIF rate to equal one-fifth the SAIF rate through
the year 1999, or until the insurance funds are merged, whichever occurs
first. Thereafter, BIF and SAIF insured deposits will be assessed at the
same rate by FICO.
The FICO assessment rate is adjusted quarterly to reflect changes in the
assessment basis of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions. The FICO quarterly rates for 1998 were
1.256, 1.244, 1.22 and 1.164. The FICO quarterly rate for the first quarter of
1999 is 1.22.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a bank
holding company that is adequately capitalized and managed may obtain regulatory
approval to acquire an existing bank located in another state without regard to
state law. A bank holding company would not be permitted to make such an
acquisition if, upon consummation, it would control (a) more than 10% of the
total amount of deposits of insured depository institutions in the United States
or (b) 30% or more of the deposits in the state in which the bank is located. A
state may limit the percentage of total deposits that may be held in that state
by any one bank or bank holding company if application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum length
of time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction.
The Interstate Act is likely to increase competition in the Bank's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Bank's operations.
On October 2, 1995, the "California Interstate Banking and Branching Act of
1995" (the "1995 Act") became effective. The 1995 Acts generally allows
out-of-state banks to enter California by merging with, or purchasing, a
California bank or industrial loan company which is at least five years old.
Also, the 1995 Act repeals the California Interstate (National) Banking Act
PAGE 12
<PAGE>
of 1986, which previously regulated the acquisition of California banks by
out-of-state bank holding companies. In addition, the 1995 Act permits
California state banks, with the approval of the Superintendent of Banks, to
establish agency relationships with FDIC-insured banks and savings
associations. Finally, the 1995 Act provides for regulatory relief, including
(i) authorization for the Superintendent to exempt banks from the requirement
of obtaining approval before establishing or relocating a branch office or
place of business, (ii) repeal of the requirement of directors' oaths
(Financial Code Section 682), and (iii) repeal of the aggregate limit on real
estate loans (Financial Code Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements, reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (the "CRA"). The CRA generally requires the federal banking
agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
In May, 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institutions' actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact. Management of the Bank believes
that the Bank is in substantial compliance with all requirements under these
provisions. Following the Bank's most recent CRA examination, the Bank's rating
was "satisfactory".
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement
Section 304 of FDICIA which requires federal banking agencies to adopt uniform
regulations prescribing standards for real estate lending. Each insured
depository institution must adopt and maintain a comprehensive written real
estate lending policy, developed in conformance with prescribed guidelines, and
each agency has specified loan-to-value limits in guidelines concerning various
categories of real estate loans.
Section 24 of the Federal Deposit Insurance Act (the "FDIA"), as amended by
the FDICIA, generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity
PAGE 13
<PAGE>
investments, an insured state bank generally may not directly or indirectly
acquire or retain any equity investment of a type, or in an amount, that is
not permissible for a national bank. An insured state bank is not prohibited
from, among other things, (i) acquiring or retaining a majority interest in a
subsidiary, (ii) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's
total assets, (iii) acquiring up to 10% of the voting stock of a company that
solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for
insured depository institutions, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met.
FDIC regulations implementing Section 24 of the FDIA provide that an
insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements. Any insured state-chartered
bank directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
REGULATORY ENFORCEMENT POWERS
Commercial banking organizations, such as the Bank, may be subject to
enforcement actions by the FDIC and the Superintendent for engaging in unsafe or
unsound practices in the conduct of their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits,
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the imposition
of restrictions and sanctions under the prompt corrective action provisions of
the FDICIA.
CALIFORNIA AND FEDERAL BANKING LAW
The Federal Change in Bank Control Act of 1978 prohibits a person or
group of persons "acting in concert" from acquiring "control" of a bank or
holding company unless the appropriate federal regulatory agency has been given
60 days' prior written notice of such proposed acquisition and, within that time
period, has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to the expiration of the
disapproval period if the agency issues written notice of its intent not to
disapprove the action. The acquisition of more than 10% of a class of voting
stock of a bank (or holding company) with a class of securities registered under
Section 12 of the Securities Exchange Act of 1934, as amended (such as the
Common Stock), is generally presumed, subject to rebuttal. to constitute the
acquisition of control.
PAGE 14
<PAGE>
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Superintendent has approved such acquisition of control. A
person would be deemed to have acquired control of the Corporation under this
state law if such person, directly or indirectly, has the power (i) to vote 25%
or more of the voting power of the Corporation or (ii) to direct or cause the
direction of the management and policies of the Corporation. For purposes of
this law, a person who directly or indirectly owns or controls 10% or more of
the Common Stock would be presumed to control the Corporation, subject to
rebuttal.
In addition, any "company" would be required to obtain the approval of
the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), before acquiring 25% (5% in the case of an acquirer that is, or is
deemed to be, a bank holding company) or more of the outstanding Common Stock
of, or such lesser number of shares as constitute control over, the Bank or the
Corporation.
The Community Reinvestment Act of 1977 ("CRA") and the related Regulations
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve and the Federal Deposit Insurance Corporation ("FDIC") are intended to
encourage regulated financial institutions to help meet the credit needs of
their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The CRA and such regulations provide that the appropriate
regulatory authority will assess the records of regulated financial institutions
in satisfying their continuing and affirmative obligations to help meet the
credit needs of their local communities as part of their regulatory examination
of the institution. The results of such examinations are made public and are
taken into account upon the filing of any application to establish a domestic
branch, to merge or to acquire the assets or assume the liabilities of a bank.
In the case of a bank holding company, the CRA performance record of the
subsidiary bank(s) involved in the transaction is reviewed in connection with
the filing of an application to acquire ownership or control of shares or assets
of a bank or to merge with any other bank holding company. An unsatisfactory
record can substantially delay or block the transaction.
RESEARCH
Neither the Corporation nor the Bank makes any material expenditures for
research and development.
PAGE 15
<PAGE>
DEPENDENCE UPON A SINGLE CUSTOMER
Neither the Corporation nor the Bank is dependent upon a single customer or
very few customers. The Bank's business is concentrated in, and largely
dependent upon the strength of the local economy in, the Monterey Peninsula area
of Northern California. The local economy is affected by both national trends
and by local factors. Tourism and the activities at the former Fort Ord
military base are among the major contributors to the local economy. The
opening of the California State University at Monterey Bay on the former Fort
Ord military base may lessen the impact of the base closure.
ITEM 2. PROPERTIES
The main office of the Bank, which also serves as the principal office of
the Corporation, is located at 601 Munras Ave., Monterey, California 93940.
This facility contains a lobby, executive and customer service offices, teller
stations, safe deposit boxes and related non-vault area, vault, operations area,
lounge and miscellaneous areas. A drive-through facility and adequate paved
parking are also on the premises. Both the land and all improvements thereto
are owned by the Bank. The Bank currently operates two branch offices in Carmel
and Pacific Grove, California, both within approximately 10 miles from the
Bank's main office. The land and improvements dedicated to the Carmel and
Pacific Grove branch offices are leased. See Footnote 9 to the Corporation's
financial statements included herewith.
Generally, neither the Bank nor the Corporation may invest in equity
interests in real estate, except for the direct use of the Bank or the
Corporation in their business. The Bank makes and/or purchases loans secured by
real estate, subject to normal banking practices, its own policies and the
restrictions described above under Item 1.
ITEM 3. LEGAL PROCEEDINGS
In May 1998 Monterey County Bank entered into a settlement agreement with
Monterey Bay Bank, whereby Monterey County Bank agreed to terminate its trade
name infringement litigation against Monterey Bay Bank. Under the terms of the
settlement Monterey County Bank received a lump sum payment in the amount of
$117,100.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None submitted.
PAGE 16
<PAGE>
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
Neither the Corporation's, which is held by approximately 550 persons, nor
the Bank's, stock has ever been actively traded. To the Corporation's knowledge
no brokers have handled trades in the Bank's stock during the past four years,
and there are no published "bid/asked" quotes for such stock or the stock of the
Corporation. During the same period, no broker acted as a market maker for the
Corporation or Bank's Common Stock. Accordingly, the market price data
contained herein does not represent the value which would be assigned in an
efficient market. The Common Stock is not listed on any securities exchange or
quoted on the National Association of Securities Dealers Automated System.
The Corporation, at the request of a shareholder, repurchased 3,482 shares
of common stock at $3.00 per share. These transactions occurred during the
fourth quarter of 1998.
The following table sets forth, according to information known to the
Corporation, the price paid per share in, and volume of, transactions in the
Bank's stock during the quarters ended March 31, 1996 to December 31, 1998.
<TABLE>
<CAPTION>
Quarter/Year Price Volume(1)
------------------------------------- ----------------- ------------------
<S> <C> <C>
1st quarter of 1996 2.75 6,720
2nd quarter of 1996 2.50/2.75 1,285
3rd quarter of 1996 2.75 210
4th quarter of 1996 2.75 1,574
1st quarter of 1997 2.50/2.75 1,772
2nd quarter of 1997 2.75 210
3rd quarter of 1997 2.75/3.00 22,144
4th quarter of 1997 2.75 762
1st quarter of 1998 2.75 787
2nd quarter of 1998 3.00 300
3rd quarter of 1998 --- 0
4th quarter of 1998 2.75/3.00 6,328
</TABLE>
(1) For the period presented, the information indicated may not include
information on shares which may have been traded directly by shareholders
or through dealers.
PAGE 17
<PAGE>
The principal source of cash flow of the Corporation, including cash flow
to pay dividends on its stock or principal and interest on debt, is dividends
from the Bank. There are statutory and regulatory limitations on the payment of
dividends by the Bank to the Corporation, as well as by the Corporation to its
shareholders.
If in the opinion of the applicable federal and/or state regulatory
authority, a depository institution or holding company is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the depository institution or holding company, could include the
payment of dividends), such authority may require, after notice and hear (except
in the case of an emergency proceeding where there in no notice or hearing),
that such institution or holding company cease and desist from such practice.
Moreover, the Federal Reserve and the FDIC have issued policy statements which
provide that bank holding companies and insured depository institutions
generally should only pay dividends out of current operating earnings.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), an FDIC insured depository institution may not pay any dividend if
payment would cause it to become undercapitalized or once it is
undercapitalized.
The Bank's payment of dividends, as a California chartered commercial
banking corporation, is regulated by the California Financial Code. Under the
California Financial Code, funds available for cash dividend payments by the
Bank are restricted to the lessor of: (i) retained earnings; or (ii) the Bank's
net income for its last three fiscal years (less any distributions to the
stockholders made during such period). As of December 31, 1998, the Bank had
$588,000 in retained earnings. The Bank's net income for the last three fiscal
years less distributions to stockholders was $586,400.
In December 1998 the corporation paid a ten (10) percent stock
dividend. In December 1997 and 1996 the Corporation paid cash dividends of
$.12 and $.11 per share, respectively. The Bank paid dividends totaling
$50,000.00, $170,000.00 and $150,000.00 to the Corporation during 1998, 1997 and
1996, respectively.
PAGE 18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
OVERVIEW
The following discussion reviews and analyzes the operating results and
financial condition of the Corporation, focusing on the Bank. It should be read
in conjunction with the financial statements and the other financial data
presented elsewhere herein. The Corporation had no activities other than its
organization during 1995.
Net income for each of the last three years was $464,200 in 1998, $225,900
in 1997, and $213,400 in 1996. The primary net income per share for each of the
last three years was $.49, $.24, and $.22 respectively. The diluted net income
per share for the same time periods were $.42, $.20 and $.19, respectively.
Return on average shareholders' equity was 14.43%, 7.34% and 7.25% in 1998, 1997
and 1996, respectively. Return on average assets was .97%, .54%, and .56% in
1998, 1997 and 1996, respectively.
The increase in earnings for 1998 was due to an increase of $191,700
in net interest income after provision for loan losses, an increase of $76,400
in other income; an increase of $78,800 in operating expenses, a decrease of
$101,700 in income taxes and an extraordinary item, litigation settlement, of
$64,400 net of income tax expense of $52,700.
The increase in earnings for 1997 was due to an increase of $77,600 in net
interest income after provision for loan losses, an increase of $90,800 in other
income; partially offset by a $60,300 increase in operating expenses and an
increase of $95,600 in income taxes.
The following table provides a summary of the income statement,
balance sheet, and selected ratios for the last five years. A more detailed
analysis of each component of net income is included under the appropriate
captions, which follows.
PAGE 19
<PAGE>
<TABLE>
<CAPTION>
As of and for the years Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
-------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands except per share data)
Summary of Operating Results:
Total interest income 3,757 3,399 3,140 2,952 2,734
Total interest expense 1,603 1,447 1,334 1,183 933
------------- ----------- ------------- --------------- --------------
Net interest income 2,154 1,952 1,807 1,768 1,801
Provision for possible
loan losses 130 120 53 120 30
------------- ----------- ------------- --------------- --------------
Net interest income after
provision for loan loss 2,024 1,832 1,754 1,648 1,771
Total other income 1,152 1,074 983 1,035 1,036
Total other expense 2,585 2,505 2,444 2,356 2,570
------------- ----------- ------------- --------------- --------------
Income (loss) before taxes 591 402 293 327 236
Provision for income tax 127 176 80 49 (21)
------------- ----------- ------------- --------------- --------------
Net income (loss) 464 226 213 278 257
Per Common Share Data:
Basic Earnings
Income before
extraordinary item (1) 0.42 0.24 0.22 0.29 0.27
Extraordinary item (1) 0.07 --- --- --- ---
------------- ----------- ------------- --------------- --------------
Net Income (1) 0.49 0.24 0.22 0.29 0.27
Diluted Earnings
Income before
extraordinary item (2) 0.36 0.20 0.19 0.25 0.24
Extraordinary item (2) 0.06 --- --- --- ---
------------- ----------- ------------- --------------- --------------
Net income (2) 0.42 0.20 0.19 0.25 0.24
Book value, end of period 3.65 3.21 3.00 2.88 2.68
Avg shares outstanding (3) 942,984 955,878 964,743 964,743 964,743
Balance Sheet Data:
Total loans, net of
unearned income (4) 28,250 25,606 25,310 22,494 23,918
Total assets 51,103 46,113 40,799 36,658 33,787
Total deposits 42,852 39,206 36,167 31,188 28,782
Stockholders' equity 3,435 3,031 2,898 2,776 2,584
</TABLE>
PAGE 20
<PAGE>
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios (5):
Return on average assets 0.97% 0.54% 0.56% 0.79% 0.75%
Return on average
stockholders' equity 14.43% 7.34% 7.25% 9.57% 9.85%
Net interest spread 4.45% 4.74% 4.91% 5.24% 5.59%
Net interest margin 5.20% 5.42% 5.54% 5.86% 6.08%
Avg shareholders' equity
to average assets 6.73% 7.37% 7.72% 8.24% 7.57%
Primary capital to assets
at end of period 7.32% 7.85% 7.68% 8.14% 8.31%
Total loans to total deposits
at end of period 65.92% 65.31% 65.31% 69.98% 83.10%
Allowance to total loans
at end of period 1.18% 1.04% 1.01% 1.00% 1.01%
Nonperforming loans to total
loans at end of period 0.42% 0.81% 1.11% 0.14% 0.84%
Net charge-offs to
average loans 0.23% 0.40% 0.10% 0.59% 0.16%
</TABLE>
(1) Primary earnings (loss) per share amounts were computed on the basis of the
weighted average number of shares of common stock during the year. The
weighted average number of shares used for this computation was 868,453,
for 1998, 881,405 for 1997 and 890,212 for 1996, 1995, and 1994.
(2) Fully diluted earnings (loss) per share amounts were computed on the basis
of the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents include
employee stock options. The weighted average number of shares used for
this computation
PAGE 21
<PAGE>
was 1,108,686, 1,121,983, 1,109,455, 1,131,997 and 1,050,926, in 1998,
1997, 1996, 1995 and 1994, respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned
on interest-earning assets and (b) interest paid on interest-bearing
liabilities, is the most significant component of the Bank's earnings.
Changes in net interest income from period to period result from increases or
decreases in the average balances of interest earning assets portfolio, the
availability of particular sources of funds and changes in prevailing
interest rates.
The following table summarizes the Bank's net interest income. It is
not presented on a tax equivalent basis, as the Bank 's tax-exempt interest
income is insignificant.
<TABLE>
<CAPTION>
Years Ended Increase (Decrease)
December 31, From Prior Year
1998 1997 1996 1998/97 1997/96
--------------------------------- ------------------ -------------------
Amt % Amt %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income 3,757 3,399 3,140 358 10.53 259 8.25
Interest Expense 1,603 1,447 1,334 156 10.77 113 8.49
---------- --------- --------- -------------------- ------------------
Net Interest Income 2,154 1,952 1,806 202 10.35 146 8.08
</TABLE>
Net interest income increased $202,000 (10.35%) from 1997 to 1998.
Average interest bearing assets increased 15.15%, while the average rate
earned decreased 38 basis points, resulting in an increase of $357,800 in
total interest income. Interest expense increased $156,100 the result of a
12.98% increase in average interest bearing liabilities and a 9 basis points
decrease in the average rate paid. Average interest rates on loans increased
20 basis points. Of the $5,453,000 increase in earning assets $4,078,000
(74.8%) was in investment securities that provide a lower yield, average
yield on investments was 5.71 percent, than loans which had an average yield
of 10.78 percent in 1998.
Net interest income increased $145,100 (8.08%) from 1996 to 1997.
Average interest bearing assets increased 10.09%, while the average rate
earned decreased 16 basis points, resulting in an increase of $258,700 in
total interest income. Interest expense increased $113,600 the result of a
8.96% increase in average interest bearing liabilities and an 2 basis points
decrease in the average rate paid. Average interest rates on loans decreased
39 basis points, due primarily
PAGE 22
<PAGE>
to competitive pressures. Over half (57.7%) of the $3,300,000 increase in
earning assets was in investment securities which provide a lower yield,
average yield on investments was 6.46 percent, lower than loans which had an
average yield of 10.58 percent in 1997.
The following table shows the components of the Bank's net interest
income, setting forth, for each of the three years ended December 31, 1998,
1997 and 1996 (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.
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- -------------------------- ---------------------------
Int Avg Int Avg Int Avg
Avg Earn % Avg Earn % Avg Earn %
Bal Paid Rate Bal Paid Rate Bal Paid Rate
--------------------------- -------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 100 6 5.98 24 1 4.36 71 5 7.67
Invest securities 8,160 478 5.86 4,498 347 7.70 1,519 90 5.91
Federal funds sold 5,771 317 5.49 5,432 296 5.45 6,460 341 5.27
----------------------- ----------------------- --------------------------
Total investments 14,031 801 5.71 9,953 643 6.46 8,050 436 5.42
Loans
Real estate 14,641 1,516 10.36 14,648 1,503 10.26 13,138 1,368 10.41
Installment 508 61 11.96 491 60 12.16 686 80 11.70
Commercial 12,268 1,378 11.24 10,902 1,193 10.95 10,823 1256 11.61
----------------------- ----------------------- --------------------------
Total loans 27,417 2,955 10.78 26,042 2,756 10.58 24,647 2,704 10.97
Total Interest
earning assets 41,449 3,757 9.06 35,995 3,399 9.44 32,697 3,140 9.60
----------------------- ----------------------- --------------------------
----------------------- ----------------------- --------------------------
Interest Bearing Liabilities:
Int-bearing demand 6,206 73 1.17 5,308 74 1.39 4,534 64 1.40
Money market savings 1,623 38 2.31 1,958 47 2.39 1,911 45 2.34
Savings deposits 2,846 63 2.22 2,184 48 2.21 2,541 70 2.76
Time deposits > $100M 8,042 471 5.86 7,056 408 5.78 5,698 338 5.92
Time deposits < $100M 12,049 713 5.92 12,112 744 6.15 11,774 735 6.24
Other Borrowing 4,008 246 6.13 2,162 126 5.82 1,790 83 4.62
----------------------- ----------------------- --------------------------
Total interest
PAGE 23
<PAGE>
bearing liabilities 34,773 1,603 4.61 30,779 1,447 4.70 28,249 1,334 4.72
----------------------- ----------------------- --------------------------
----------------------- ----------------------- --------------------------
Net interest income 2,154 1,952 1,807
Net interest spread 4.45 4.74 4.88
Net yield on interest
earning assets 5.20 5.42 5.53
</TABLE>
INTEREST SPREAD ANALYSIS (Continued):
<TABLE>
<CAPTION>
1998 vs 1997 1997 vs 1996
------------ ------------
Increase(Decrease) Increase(Decrease)
Due to changes Due to Changes
---------------------------------- --------------------------------
Avg Avg Avg Avg
Volume Rate Total Volume Rate Total
---------------------------------- --------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 3 2 5 (4) (1) (4)
Invest securities 282 (150) 132 176 81 257
Federal funds sold 18 3 21 (54) 9 (45)
-------------------------------- --------------------------------
Total investments 264 (106) 158 103 104 208
Loans
Real estate (1) 15 14 157 (23) 135
Installment 2 (1) 1 (23) 2 (21)
Commercial 150 35 185 9 (72) (63)
-------------------------------- --------------------------------
Total loans 146 54 200 153 (102) 51
Total Interest Earning Assets 515 (156) 359 317 (58) 259
Interest Bearing Deposits:
Int-bearing demand 12 (13) (1) 11 (1) 10
Money market savings (8) (1) (9) 1 1 2
Savings deposits 15 0 15 (10) (12) (22)
Time deposits > $100M 57 6 63 80 (10) 70
Time deposits < $100M (4) (28) (32) 21 (12) 10
Other Borrowing 108 12 120 17 26 43
-------------------------------- --------------------------------
Total interest bearing deposits 188 (32) 156 119 (6) 114
-------------------------------- --------------------------------
-------------------------------- --------------------------------
Net change in net interest 327 (124) 203 197 (52) 146
</TABLE>
PAGE 24
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan
losses represents amounts which have been set aside for the specific purpose
of absorbing losses which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation
of the risks inherent in the loan portfolio, both generally and with respect
to specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the State Banking Department and FDIC examinations, independent
accountants' observations, and the Bank 's internal review as additional
indicators to determine if the amount in the allowance for loan losses is
adequate to protect against estimated future losses. It is the Bank 's
current practice, which could change in accordance with the factors mentioned
above, to maintain an allowance which is at least equal to the sum of the
following percentage of loan balances by loan category.
<TABLE>
<CAPTION>
Loan Category Reserve %
<S> <C>
Classified Loans:
Loans classified loss 100.00%
Loans classified doubtful 50.00%
Loans classified substandard
Real Estate Secured 5.00%
Non Real Estate Secured 20.00%
Unclassified Loans:
Real Estate - Loan to value 80% or less 0.10%
Real Estate - Loan to value over 80% 0.50%
Loans to Individuals 3.00%
Commercial 3.00%
SBA Loans - Unguaranteed portion 2.00%
Unfunded Loan Commitments .25%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
</TABLE>
Although no assurance can be given that actual losses will not exceed
the amount provided for in the allowance, Management believes that the
allowance is adequate to provide for
PAGE 25
<PAGE>
all estimated credit losses in light of all known relevant factors. At the
end of 1998, 1997 and 1996, the Bank's allowance stood at 1.18 percent, 1.04
percent, and 1.01 percent of gross loans, respectively. Provisions were made
to the allowance for loan losses in 1998, 1997 and 1996 of $130,000,
$120,000, and $52,500, respectively. Loans charged off totaled $75,500 in
1998, $106,200 in 1997, and $44,400 in 1996. Recoveries for these same
periods were $12,600 $1,800, and $20,700.
The Bank's non performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .42 percent .81 percent and 1.11
percent as of the end of 1998, 1997 and 1996, respectively.
Based upon statistics released by Federal and state banking
authorities regarding banks of similar size or otherwise located in
California, Management believes that the Bank's ratios of delinquent and non
performing loans to total loans are far better than average. Prudent
collection efforts, and tighter lending controls, are responsible for the
Bank's strong performance on these measures of credit quality. However, no
assurance can be given that the Bank's loan portfolio will continue to
measure well against its peers on these ratios and quality measures, or that
losses will not otherwise occur in the future.
NON-INTEREST INCOME
The following table presents a summary of the Bank's non-interest income:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit
accounts 371 328 372
Other service charges, commissions
and fees 406 421 353
Income from sales and servicing
of SBA loans 374 324 259
------------ -------------- -------------
Total non-interest Income 1,151 1,074 983
</TABLE>
Total non-interest income increased $76,400 (7.11%) in 1998 when
compared with 1997. Income from sales and servicing of SBA loans increased
$49,600 and service charges on deposit accounts decreased $42,600; while
other service charges, commissions and fees decreased $15,800. Merchant
credit card processing income decreased by $43,200 during 1998 compared to
1997.
PAGE 26
<PAGE>
Total non-interest income increased $90,700 (9.22%) in 1997 when
compared with 1996. Income from sales and servicing of SBA loans increased
$65,500 and other service chanrges, commissions and fees increased $32,000;
while service charges on deposit accounts decreased $43,300. Merchant credit
card processing income increased by $70,700 during 1997 compared to 1996.
The sale of Small Business Administration (SBA) guaranteed loans is a
significant contributor to the Bank's income. SBA guaranteed loans yield up
to 3 3/4% over the New York prime rate, and the guaranteed portions can be
sold at premiums which vary with market conditions. SBA loans are guaranteed
by the full faith of the United States Government from 70 to 80 percent of
the principal amount. The guaranteed portion has risks comparable for an
investor to a U. S. Government security and can usually be sold in the
secondary financial market, either at a premium or at a yield which allows
the Bank to maintain a significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for
the Bank to continually expand its program in this area, and may limit the
level of premium that can be earned with regard thereto. Furthermore, the
SBA recently began requiring lenders to share a portion of premiums in excess
of 10% earned on the sale of the guaranteed portions.
The following table presents a summary of the activity in SBA loans for
the years ended 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- ---------------------
<S> <C> <C> <C>
SBA loans authorized $2,458,000 $3,551,800 $1,937,000
------------------- -------------------- ---------------------
------------------- -------------------- ---------------------
SBA loans sold $2,811,900 $2,524,100 $1,842,800
------------------- -------------------- ---------------------
------------------- -------------------- ---------------------
SUMMARY OF INCOME FROM SALES AND
SERVICING OF SBA LOANS
Income from premium $199,200 $178,400 $138,600
Income from servicing 176,400 170,000 165,000
Less loan origination expense (1,600) (24,000) (44,700)
------------------ -------------------- ---------------------
Total income from sales and
servicing of SBA loans $374,000 $324,400 $258,900
------------------- -------------------- ---------------------
------------------- -------------------- ---------------------
</TABLE>
PAGE 27
<PAGE>
NON-INTEREST EXPENSE
The following table presents a summary of the Bank's other non-interest
expense:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and benefits 1,499 1,405 1,362
Occupancy and equipment expense 281 251 256
Professional fees 107 85 121
Data Processing 193 172 149
Other expenses 620 591 556
------------ ------------ -----------
Total other Expenses 2,700 2,505 2,444
</TABLE>
Salary expense increased $94,000 in 1998 as a result of the
addition of a Commercial Lending Officer, employee merit increases and bonus
payments. Salary expense increased $42,700 in 1997 as a result of opening in
April of the Pacific Grove branch office and employee merit increases. The
increase in salary expense of $125,000 in 1996 was due to merit increases,
additions to staff for the planned opening of the Pacific Grove branch and a
severance payment to a former officer.
Occupancy and equipment expenses increased $30,300 in 1998, with
increases of $9,300 in maintenance and repairs, $7,400 in depreciation,
$6,000 and $4,400 in utilities. In 1997 occupancy and equipment expenses
decreased $5,000 compared with a decrease of $6,900 in 1996. These nominal
decreases were due to lower depreciation expense.
Data processing expense increased $20,300 in 1998 as the result of
increases in the number of accounts and transaction volumes. In 1997 data
processing expenses increased $23,600, due to increased number of accounts,
increased activity, upgraded data communications and a 2.7% cost of living
increase. Data processing expenses had remained level in 1996 when compared
to 1995.
In 1998 professional fees increased $21,400 when compared to 1997. The
Bank recovered $117,100 in legal fees associated with the Bank's settling
its name infringement lawsuit against Monterey Bay Bank, this settlement is
shown as a extraordinary item on the statement of operations. Professional
fees decreased $35,400 in 1997 due to a $42,800 decrease in legal fees. The
increase of $5,600 in professional fees in 1996 was the net affect of
audit/accounting fees decreasing $18,700; while legal fees increased $24,300.
The increase in legal fees was the result of the Bank incurring approximately
$60,000 in legal fees and other costs associated with the Monterey Bay Bank
trade name infringement lawsuit.
PAGE 28
<PAGE>
Other expenses for 1998 totaled $619,600 compared with $590,700 for
1997. Significant changes occurred in the following categories with in
increases collection expense ($7,000), poppy account expense ($4,600),
director fees ($4,700), dues and memberships ($2,500), entertainment and
meals ($6,400) loan expense ($10,800), messenger and freight ($3,800),
insurance ($12,000), Year 2000 expense ($28,800)); while decreases occurred
in advertising ($3,900), business development ($18,700), donations ($8,900)
FDIC and State assessments ($6,900), SBA loan expense ($22,400), telephone
($7,300), travel expense ($3,000).
Other expenses for 1997 totaled $590,700 compared with $556,300 for
1996. Significant changes occurred in the following categories with increases
in advertising ($25,500), director fees ($7,100), FDIC and State assessments
($7,500), security expense ($11,000), loan expense ($3,700), messenger and
freight ($4,300), postage ($3,600), subscriptions/publications ($5,300) and
travel expense ($11,800); while decreases occurred in business development
($24,500), collection expense ($8,800), SBA loan expense ($20,700),
stationery and supplies expense ($4,800), operating losses ($4,300)
Other expenses for 1996 totaled $556,300 compared with $599,500 for
1995. Significant changes occurred in the following categories with decreases
in FDIC and State assessments ($36,600), miscellaneous expense ($14,700),
travel ($18,400), operational losses ($5,800), shareholder expense ($4,800)
and director fees ($3,800); increases in business development ($36,200),
advertising ($25,800) and stationery/supplies ($8,900).
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (Statement 109). Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. Deferred assets are recognized for deductible temporary
differences and operating loss and tax credit carry forwards, and then a
valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
The Bank adopted Statement 109 and has applied the provisions of the
statement as of January 1, 1992.
Allocation of federal and state income taxes between current and
deferred portions is as follows:
PAGE 29
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------------------- ------------------- -----------------
<S> <C> <C> <C>
Current
Federal $ 49,600 $ 171,300 $ 78,500
State 43,900 57,400 35,600
---------------------- ------------------- -----------------
---------------------- ------------------- -----------------
93,500 228,700 114,100
---------------------- ------------------- -----------------
Deferred
Federal (16,800) (31,400) (34,000)
State (2,800) (21,700) (100)
---------------------- ------------------- -----------------
---------------------- ------------------- -----------------
(19,600) (53,100) (34,100)
---------------------- ------------------- -----------------
$ 73,900 $ 175,600 $ 80,000
---------------------- ------------------- -----------------
---------------------- ------------------- -----------------
</TABLE>
A reconciliation of the statutory federal income tax rate and the
effective tax rate on (loss) income follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Statutory federal tax rate 34.0 % 34.0 % 34.0 %
State franchise 7.2 10.8 11.3
Municipal bond income (25.6) --- ---
Utilization of general business credits --- (1.1) (10.8)
Decrease in deferred tax asset
valuation allowance --- --- (7.2)
------------------ ------------------ ------------------
Effective tax rates 15.6 % 43.7 % 27.3 %
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
The Corporation has applied all unused general business tax credit
carryforwards for financial reporting and income tax purposes.
The components of the net deferred tax asset, included in other
assets, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ----------------
<S> <C> <C>
Deferred tax asset
Federal $ 173,800 $ 161,600
State 58,200 66,700
---------------- -------------
Net deferred tax asset $ 232,000 $ 228,300
</TABLE>
PAGE 30
<PAGE>
The components of the net deferred tax asset, included in other assets, are
as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax asset
Accrual to cash adjustments 142,600 $ 216,600
Investments:
Net unrealized (gain) loss on
securities available for sale (17,000) (59,800)
State franchise tax 29,600 (22,700)
Allowance for loan losses 94,200 74,900
Depreciation (17,400) 19,300
--------------- ---------------
Net deferred tax asset 232,000 228,300
</TABLE>
Management has evaluated the deferred tax asset recognized under
Statement 109. As of December 31, 1998 and 1997 management expects all
temporary differences to be offset against future taxable income, and no
valuation allowance was deemed necessary.
LOANS
Loans, the largest component of earning assets, represented 66.15% of
average earning assets, and 53.10% of average total assets during 1998,
compared with 72.35% and 62.32%, respectively during 1997. In 1998, average
loans increased 5.28% from $26,042,000 in 1997 to $27,417,000. Average
commercial loans increased $1,366,000 (12.53%) and installment loans
increased $16,000 (3.35%) while average real estate loans decreased $7,000
(.05%).
Loan policies and procedures provide the overall direction to the
administration of the loan portfolio. The Bank's loan underwriting process
is intended to encourage sound and consistent credit decisions are made.
Emphasis is placed upon credit quality, the borrower's ability to repay
through cash flow, secondary, and (occasionally, tertiary) repayment sources,
and the value of collateral.
The Bank's commercial and industrial loans are generally made for the
purpose of providing working capital, financing the purchase of equipment or
inventory, and other business purposes. Such loans generally have maturities
ranging from one year to several years. Short-term business loans are
generally intended to finance current transactions and typically provide for
monthly interest payments with principal being payable at maturity or at
90-day intervals. Term loans (usually for a term of two to five years)
normally provide for monthly installments of principal and interest. The
Bank from time to time utilizes accounts receivable and inventory as security
for loans.
PAGE 31
<PAGE>
The Bank is the recognized leader for Small Business Administration
lending in Monterey County, and holds SBA's coveted Preferred Lender Status.
Generally, SBA loans are guaranteed by the SBA for 70 to 80 percent of their
principal amount, which can be retained in portfolio or sold to investors.
Such loans are made at floating interest rates, but generally for longer
terms (up to 25 years) than are available on a conventional basis to small
businesses. The unguaranteed portion of the loans, although generally
supported by collateral, is considered to be more risky than conventional
commercial loans because they may be based upon credit standards the Bank
would not otherwise apply, such as lower cash flow coverage, or longer
repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has
also developed a broker program for generating residential real estate loans.
The Bank does not make real estate development loans. Real estate construction
loans are made for a much shorter term, and often at higher interest rates,
than conventional single-family residential real estate loans. The cost of
administering such loans is often higher than for other real estate loans, as
principal is drawn on periodically as construction progresses.
The Bank also makes real estate loans secured by a first deed of trust
on single family residential properties and commercial and industrial real
estate. California commercial banks are permitted, depending on the type and
maturity of the loan, to lend up to 90 percent of the fair market value of
real property (or more if the loan is insured either by private mortgage
insurers or governmental agencies). In certain instances, the appraised
value may exceed the actual amount which could be realized on foreclosure, or
declines in market value subsequent to making the loan can impair the Bank's
security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's
consumer installment loans are generally secured by the personal property
being purchased. The Bank generally makes consumer loans to those customers
with a prior banking relationship with the Bank.
The following table presents the composition of the loan portfolio,
including loans held for sale, at December 31 for the last five years.
PAGE 32
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial 12,084 10,843 10,120 10,059 9,083
Real estate, construction 356 347 --- --- ---
Real estate, mortgage 15,294 13,921 14,336 11,246 13,528
Installment 390 520 583 888 1,241
Government guaranteed
loans purchased 159 284 307 328 343
-------------------------------------------------------------------
28,282 25,914 25,346 22,521 24,195
Less:
Allowance for possible loan losses (336) (269) (254) (225) (245)
Deferred origination fees, net (32) (40) (37) (27) (32)
-------------------------------------------------------------------
Net Loans 27,914 25,606 25,056 22,270 23,918
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
PAGE 33
<PAGE>
NON-PERFORMING AND NON-ACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which are
past due as to principal or interest 90 days or more, except for loans which are
well secured or when collection of interest and principal is deemed likely.
When a loan is placed on non-accrual, previously accrued and unpaid interest is
generally reversed out of income unless adequate collateral from which to
collect the principal of, and interest on, the loan appears to be available.
The following table presents information with respect to loans which, as of
the dates indicated, were past due 90 days or more or were placed on non-accrual
status (referred to collectively as "non-performing loans"):
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing, past due 90 days or more:
Real Estate 63 134 209 0 0
Commercial 0 0 14 0 0
Installment 0 0 0 0 0
------ ------ ------ ------ ------
Total accruing 63 134 223 0 0
Nonaccrual Loans:
Real Estate 0 0 0 0 0
Commercial 57 55 35 31 170
Installment 0 21 23 0 33
------ ------ ------ ------ ------
Total non-accrual 57 76 58 31 203
Total non-performing 120 210 281 31 203
Total loans end of period 28,282 25,914 25,346 22,521 24,195
Ratio of non-performing loans
to total loans at end of period 0.42 0.81 1.11 0.14 0.84%
</TABLE>
The low level of non-performing loans is the result of underwriting
criteria intended to be conservative, frequent review of new and delinquent
loans and a firm collection policy (with the assistance of outside legal
counsel). The Bank does not have any foreign loans or loans for highly
leveraged transactions.
PAGE 34
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
For the Years ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans
outstanding 27,414 26,042 24,647 26,663 24,631
Allowance, beginning
of period 269 254 225 245 255
Loans charged off during period:
Commercial 69 101 39 147 41
Installment 5 5 5 12 4
Real Estate 2 0 0 0 0
Other 0 0 1 0 0
------ ------ ------ ------ ------
Total charged off 75 106 45 159 45
Recoveries during period:
Commercial 12 1 8 13 2
Installment 1 1 13 6 4
Other 0 0 0 0 0
------ ------ ------ ------ ------
Total recoveries 13 2 21 19 6
Net Loans charged off
during the period 63 104 24 140 39
Additions to allowance for
possible loan losses 130 120 53 120 30
Allowance, end of period 336 269 254 225 246
Ratio of net loans charged
off to average Loans
outstanding during the
period 0.23% 0.40% 0.10% 0.53% 0.16%
Ratio of allowance to total
at end of period 1.18% 1.04% 1.01% 1.00% 1.01%
</TABLE>
PAGE 35
<PAGE>
FUNDING SOURCES
Average deposits increased 10.73% to $39,958,000 in 1998 from $36,085,000
in 1997. In 1998 the mix of deposits changed as average certificates of deposit
increased 4.82%, average demand deposits increased 23.09% and average interest
checking, money market and savings accounts as a group increased 12.96%.
Average certificates of deposit represented 50.28% of average deposits in 1998
compared with 53.12% in 1997. Average interest checking, money market and
savings accounts as a group were 26.72% of average deposits in 1998 compared
with 26.19% in 1997. Average demand deposits represented 23.01% of average
deposits in 1998 compared with 20.69% in 1997.
The Bank has a lines of credit from the Federal Home Loan Bank of San
Francisco with a maximum borrowing limit on December 31, 1998 of $4,605,000 and
a $1,000,000 unsecured federal funds purchased line from the Pacific Coast
Bankers' Bank. The Federal Home Loan Bank line of credit is secured by certain
of the Bank's real estate secured loans and investment securities. At December
31, 1998 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 1998, 1997 or 1996.
CAPITAL RESOURCES
The Corporation maintains capital to comply with legal requirements, to
provide a margin of safety for its depositors and stockholders, and to provide
for future growth and the ability to pay dividends. At December 31, 1998,
stockholders' equity was $3,434,600 versus $3,030,200 at December 31, 1997.
The Corporation issued a 10% stock dividend in 1998 and paid cash dividends of
$.12 and $.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, respectively.
The FDIC and Federal Reserve Board have adopted capital adequacy
guidelines for use in their examination and regulation of banks and bank
holding companies. If the capital of a bank or bank holding company falls
below the minimum levels established by these guidelines, it may be denied
approval to acquire or establish additional banks or non-bank businesses, or
the FDIC or Federal Reserve Board may take other administrative actions. The
guidelines employ two measures of capital: (1) risk-based capital and (2)
leverage capital.
In general, the risk-based capital guidelines provide detailed definitions
of which obligations will be treated as capital, and assign different weights to
various assets and off-balance sheet items, depending upon the perceived degree
of credit risk associated with each asset. Each asset is assigned to one of
four risk-weighted categories. For example, 0 percent for cash and
unconditionally guaranteed government securities; 20 percent for deposits with
other banks and fed funds; 50 percent for state bonds and certain residential
real estate loans; and 100 percent for
PAGE 36
<PAGE>
commercial loans and other assets. Capital is categorized as either Tier 1
capital, consisting of common stock and retained earnings (or deficit), or
Tier 2 capital, which includes limited-life preferred stock and allowance for
loan losses (subject to certain limitations). The guidelines also define and
set minimum capital requirements (risk-based capital ratios) which increased
over a transition period ended December 31, 1992. Under the final 1992
rules, all banks were required to maintain Tier 1 capital of at least 4
percent and total capital of 8.0% of risk-adjusted assets. The Corporation
had a Tier 1 capital ratio of 10.00% and 10.26% at December 31, 1998 and
1997, respectively, and a total risk-based capital ratio of 10.90% and 11.20%
at December 31, 1998 and 1997, respectively.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Corporation
had a leverage capital ratio of 7.60% and 6.63% at December 31, 1998 and 1997,
respectively.
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 lines of credit
from the Federal Home Loan Bank of San Francisco of approximately $4,605,000 and
a $1,000,000 federal funds line of credit with the Pacific Coast Bankers' Bank
to meet temporary liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid assets,
including marketable investment securities, equal to a least 15 percent of total
assets ("primary liquidity"), while maintaining sources of secondary liquidity
(borrowing lines from other institutions) equal to at least an additional 10
percent of assets. In addition, it seeks to generally limit loans to not more
than 90 percent of deposits. Within these ratios, the Bank generally has excess
funds available to sell as federal funds on a daily basis, and is able to fund
its own liquidity needs without the need of short-term borrowing. The Bank's
primary liquidity at December 31, 1998, 1997 and 1996 was 23.92 percent, 23.46
percent, and 30.27 percent respectively, while its average loan to deposit ratio
for such years was 68.61 percent, 72.17 percent and 75.03 percent respectively.
Brokered deposits are deposit instruments, such as certificates of deposit,
deposit notes, bank investment contracts and certain municipal investment
contracts that are issued through brokers and dealers who then offer and/or sell
these deposit instruments to one or more investors. Additionally, deposits on
which a financial institution pays an interest rate significantly higher than
prevailing rates are considered to be brokered deposits. Federal law and
regulation restricts banks from soliciting or accepting brokered deposits,
unless the bank is well capitalized under Federal guidelines. The Bank does not
have any brokered deposits.
PAGE 37
<PAGE>
Management of interest rate sensitivity (asset/liability management)
involves matching and repricing rates of interest-earning assets with
interest-bearing liabilities in a manner designed to optimize net interest
income within the constraints imposed by regulatory authorities, liquidity
determinations and capital considerations. The Bank instituted formal
asset/liability policies at the end of 1989.
The purpose for asset/liability management is to provide stable net
interest income growth by protecting the Bank's earnings from undue interest
rate risk. The Bank expects to generate earnings from increasing loan volume,
appropriate loan pricing and expense control and not from trying to accurately
forecast interest rates. Another important function of asset/liability
management is managing the risk/return relationships between interest rate risk,
liquidity, market risk and capital adequacy. The Bank gives priority to
liquidity concerns followed by capital adequacy, then interest rate risk and
market risk in the investment portfolio. The policy of the Bank will be to
control the exposure of the Bank's earnings to changing interest rates by
generally maintaining a position within a narrow range around an "earnings
neutral position." An earnings neutral position is defined as the mix of assets
and liabilities that generate a net interest margin that is not affected by
interest rate changes. However, Management does not believe that the Bank can
maintain a totally earnings neutral position. Further, the actual timing of
repricing of assets and liabilities does not always correspond to the timing
assumed by the Bank for analytical purposes. Therefore, changes in market rates
of interest will generally impact on the Bank's net interest income and net
interest margin for long or short periods of time.
The Bank monitors its interest rate risk on a 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 December 31, 1998 the affect of a 2% increase in the fed funds
rate, expressed as a percentage of equity, was a positive 7.1%, while a 2%
decrease in the fed funds rate was a negative 7.3% of equity.
The Corporation has no sources of revenues or liquidity other than
dividends, tax equalization payments or management fees from the Bank. The
ability of the Bank to pay such items to the Corporation is subject to
limitations under state and Federal law.
PAGE 38
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
(Dollars in thousands)
1998 1997
-----------------------------------------------
Book Market Book Market
value value value value
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Bank Stock 541 541 330 330
Pacific Coast Bankers'
Bank Stock 150 150 150 150
----- ----- ----- -----
Total 691 691 480 480
----- ----- ----- -----
----- ----- ----- -----
Held to maturity:
U.S. Treasury securities --- --- 500 501
State and Local Agencies 4,765 4,788 --- ---
U.S. Government Agencies 1,501 1,517 4,995 5,000
----- ----- ----- -----
Total 6,265 6,305 5,495 5,501
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at December 31, 1998:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 5
1 year thru thru over 10
or less 5 years 10 years years Total
------- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
State and Local Agencies --- --- 500 1,000 1,500
U.S. Government Agencies --- --- --- 4,765 4,765
Federal Home Loan Bank Stock 541 --- --- --- 541
Pacific Coast Bankers' Bank Stock 150 --- --- --- 150
----- ----- ----- ----- -----
Total 691 0 500 5,765 6,956
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
PAGE 39
<PAGE>
YEAR 2000
As we approach the year 2000 we are addressing a critical issue
concerning computer systems, both hardware operating systems and software
programs. The issue involves the ability of 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 is scheduled to be completed by second quarter of 1999.
The Company continues developing and reviewing contingency plans for mission
critical systems. 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. In addition, efforts are being made to
increase the awareness level of all customers through direct mailings and
messages printed on bank statements and notice forms. The Company's Year
2000 expense in 1998 was $28,800, and $38,400 has been budgeted for 1999.
Even with all of the Company's preparation, there can be no assurance that
problems will not arise which could have an adverse impact due to the
complexities involved in resolving the Year 2000 problem and the fact that
systems of other companies which the Company may rely on must corrected be in a
timely manner. Delays or failures in correcting Year 2000 system problems of
other companies could have an adverse impact upon the Company and its ability to
mitigate the risk of adverse impact of Year 2000 problems for its customers.
PAGE 40
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements included in the
Consolidated Financial Report issued by Hutchinson and Bloodgood LLP, Certified
Public Accountants at the pages indicated are incorporated herein by reference:
<TABLE>
<S> <C>
Independent Auditors' Report on the Financial Statements 1
Consolidated Balance Sheets at December 31, 1998 and 1997 2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998 3-4
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1998 5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998 6-7
Notes to Consolidated Financial Statements 8-31
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on any
matter of accounting principles, practices or financial statement disclosure
during 1998, 1997 or 1996.
PAGE 41
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The name, age, title and five-year business background of each director,
executive officer and significant employee of the Corporation (including the
Bank) as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Name & Position with Bank Age Principal Occupation During Past Five Years
- ------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 57 Chairman of the Board & Chief Executive Officer of
Director since 1985, Monterey County Bank since 3/87
Chairman of the Board, President
& Chief Executive Officer
Sandra G. Chrietzberg 55 Formerly President and CEO Queen of Chardonnay, Inc.,
Director, 1988 to 1994 and dba La Reina Winery 8/84-12/93
since 1995
Peter J. Coniglio, Esq. 69 Partner - Hudson, Martin, Ferrante & Street, Monterey
Director since 1976
Carla S. Hudson, CPA 45 Partner - Huey and Hudson, Certified Public Accountants
Director since 1994
John M. Lotz 57 President and Chief Executive Officer, of Couroc of Monterey
Director since 1991 since 1996. Real estate developer 1991 - 1996.
Ronald J. Keenan 55 Vice President, Chief Lending Officer of Monterey County
Senior Vice President, Bank since 1998, Vice President Union Bank of California
Chief Lending Officer from 6/98 to 10/98, Retail Management from 1/93 to 6/98.
Bruce N. Warner 51 Senior Vice President, Chief Financial Officer and Chief
Senior Vice President, Operating Officer of Monterey County Bank since 1993;
Chief Financial Officer
and Chief Operating Officer
PAGE 42
<PAGE>
Andre G. Herrera 34 Vice President, Corporate Secretary of Monterey County
Vice President, Bank since 1/96; Vice President, Manager Management
Corporate Secretary Information Systems and Merchant Services since 2/94,
Assistant Vice President, Merchant Services 2/93,
Merchant Services Representative 1/92.
Mary Ellen Stanton 61 Senior Vice President, Loan Administration, Monterey County
Senior Vice President Since 10/98.
Vice President, Loan Administration, Monterey County
Bank 10/88.
</TABLE>
Directors of the Corporation serve in similar capacities with the Bank.
Executive officers of the Bank (except for Mr. Keenan and Mrs. Stanton) serve
in similar capacities with the Corporation, although the limited operations
of the Corporation do not require significant amounts of their time. There
are no family relationships among the persons listed above, except that Mr.
and Mrs. Chrietzberg are spouses and Mr. Herrera is Mr. and Mrs.
Chrietzberg's son-in-law.
Based solely upon a review of the relevant forms furnished to the Bank
and the Corporation, except as disclosed below, the Corporation believes that
all officers, directors and principal shareholders filed appropriate forms as
required by Section 16(a) of the Exchange Act, and related regulations,
during 1998.
ITEM 10. EXECUTIVE COMPENSATION
The following tables sets forth certain information regarding the
compensation paid to the only executive officer of the Corporation/Bank whose
salary and bonus exceeded $100,000 for 1998.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
----------------------------------- -----------------------------------------
Other Restricted Securities All
Annual Stock Underlying Other
Name & Principal Position Year Salary Bonus Compensation Award Options/SARs Compensation
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 1998 $156,020 $160,000 $5,343 (1) None 25,000 $2,199 (2)
Chairman, President & CEO 1997 150,938 $160,000 $5,197 (1) None None $7,530 (2)
1995 164,360 130,000 3,555 (1) None None 16,088 (2)
Bruce N. Warner 1998 74,254 28,358 None None 5,000 None
Senior Vice President, 1997 67,268 18,020 None None 10,000 None
Chief Financial Officer, 1996 61,147 15,000 None None None None
Chief Operating Officer
</TABLE>
(1) Represents personal use of company automobile and insurance premiums on
life insurance policy as described below.
(2) Represents the expense accrued in the Salary Continuation Plan as more
fully described in the Long Term Incentive Plan Table.
PAGE 43
<PAGE>
Until June 1, 1990 the Bank furnished certain executive officers with a
taxable car allowance. The Bank discontinued car allowances on June 1, 1990
and purchased a bank owned automobile for the use of its Chief Executive
Officer (the value of his personal use of the automobile is included above).
The Bank furnishes, on a non-discriminatory basis, to the employees: (i)
insurance benefits; and (ii) other benefits. The value of these benefits
(excluding non-discriminatory plan benefits) was less than the lesser of
$25,000 or ten percent of the compensation shown above for the respective
persons or group, and is not included in the table.
The Board of Directors authorized the Bank to enter into a three year
employment contract with Mr. Chrietzberg, effective January 1, 1997. It
provides for a base salary of $150,000 per year, a Bank furnished automobile
or automobile allowance, and a bonus based on profits. The minimum bonus,
not to exceed $160,000 annually, will equal $10,000 for each 0.1 percent that
the Bank's profits exceed 0.8 percent return on average assets plus $10,000
for each 1 percent that the Bank's return on equity exceeds 9.0 percent.
Under the terms of the contract, if Mr. Chrietzberg is terminated other than
for cause (as defined in the contract), he is entitled to severance
compensation for his monthly salary plus a pro rated incentive bonus for the
lesser of 24 months or the remaining term of his contract (which ends in
December, 1999); however, if the termination follows within six (6) months
after a change in control transaction (as defined in the contract), he is
entitled to such severance compensation for the greater of 24 months or the
remainder of the term of the contract. In addition, the Bank provides Mr.
Chrietzberg with insurance on his life, owned by the Bank but payable to his
beneficiary, in the amount of $1,000,000 in excess of the amounts provided on
a non-discriminatory basis to other employees. Mr. Chrietzberg's beneficiary
has agreed to reimburse the Bank out of the proceeds of such policy an amount
equal to the greater of the cash value of such policy at the time of Mr.
Chrietzberg's death, or the amount of premiums paid by the Bank.
The following tables set forth certain information regarding the long
term incentive plans provided for Mr. Chrietzberg.
<TABLE>
<CAPTION>
Performance or Estimated Future Payouts under
Number of Other Period Non-Stock Price-Based Plans
Shares, Units Until --------------------------------
or Other Rights Maturation or Threshold Target Maximum
Name (#) Payment ($ or #) ($ or #) ($ or #)
- ---- --- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Charles T. Salary Retirement at age 65, subject None None 75,000/yr.
Chrietzberg, Jr. Continuation to provisions for earlier payout 15 years
Agreement described below
</TABLE>
In December, 1993, the Board of Directors approved a Salary Continuation
Agreement for the benefit of Mr. Chrietzberg that provided for payments of
$75,000 per year, for 15 years, if he remains with the Bank until normal
retirement, commencing age 65. After consideration of the impact of such an
agreement on the Bank's income, the Bank amended the Agreement to provide for
one half the original benefit amounts, but adopted Surviving Income
Agreements which
PAGE 44
<PAGE>
provide benefits upon the death of the executive to his beneficiary in a
single payment, in an amount equal to the retirement benefit. The Salary
Continuation Agreement provides for lesser payments in the event of early
retirement, generally designated to coincide with increases in the
anticipated surrender value for the life insurance policies described below.
The Bank's obligations under the Salary Continuation Agreement are not
secured by any segregated amounts, but are informally funded by the purchase
of single-premium life insurance policies. The salary continuation expense
accrued in 1998, 1997 and 1996 was $2,199, $7,530 and $11,776, respectively.
Based upon the current projected earnings of the insurance used to fund the
Bank's obligations under the Agreement, and the anticipated salary
continuation expense to be booked, net of tax benefits, the Bank anticipates
(based upon current tax laws and assumptions regarding the yield on
alternative investment(s) that the cost of the benefits to be provided under
the agreement will not have a material adverse impact on the Bank's net
income after taxes in the future, although no assurance can be given in this
regard. Additionally, since the Surviving Income Agreement has been adopted
to provide part of the benefits upon the death of the executive, the total
amount of payout can not be precisely determined. However, the information
represents the best estimate of Management based on the terms of the plan.
The following table sets forth certain information concerning the grant
of stock options under the Corporation's 1998 Amended Stock Option Plan to
the named executive officer during the year ended December 31, 1998.
<TABLE>
<CAPTION>
Option/SAR Grants in Last fiscal Year
Number of Percent of
Securities total options/
Underlying SARs granted Exercise or
Options/Sars to employees base price Expiration
Name granted (#) in fiscal year ($/Sh) date
- ----------------------------- -------------------- ----------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 25,000 39.68% 3.30 10/1/03
Kevin N. Quinn 5,000 7.94% 3.00 10/1/03
Bruce N. Warner 5,000 7.94% 3.00 10/1/03
Andre G. Herrera 5,000 7.94% 3.00 10/1/03
Mary Ellen Stanton 5,000 7.94% 3.00 10/1/03
</TABLE>
PAGE 45
<PAGE>
The following table sets forth the number of shares of Common Stock
acquired by each of the named executive officers upon exercise of stock
options during 1998, the net value realized upon exercise, the number of
shares of common Stock represented by outstanding stock options held by each
of the named executive officers as of December 31, 1998 and the value of
such options based on the last transaction in 1998, which the Corporation has
knowledge of, and certain information concerning unexercised options under
the 1998 Stock Option Plan.
<TABLE>
<CAPTION>
Aggregated Option/Sar Exercises in Last Fiscal Year
and FY-End Options/Sar Values
Value of
Number of Unexercised
Unexercised in-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End ($)
Name Exercise (#) Received ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. None None 93,500 None 66,000 None
Kevin N. Quinn None None 7,700 None 2,585 None
Bruce N. Warner None None 22,000 None 11,000 None
Mary Ellen Stanton None None 16,500 None 8,250 None
Andre G. Herrera None None 16,500 None 8,250 None
</TABLE>
In 1998, each director received a standard fee of $500 per regular board
meeting attended and $150 for each committee meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the management of the Company, the following
shareholders own more than five percent (5%) of the outstanding common stock
of the Company, its only class of voting securities.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Class
---------------- -------------------- ------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 453,311 (1) 43.85
P.O. Box 1344
Carmel, CA 93921
David S. Lewis, Trust 121,000 12.87
30500 Aurora del Mar
Carmel, CA 93923
</TABLE>
(1) Includes 93,500 shares subject to employee stock options and 12,580 shares
held beneficially for Mr. Chrietzberg and Mrs. Chrietzberg in Individual
Retirement Accounts where voting power is shared with the custodian of the
account. 275,000 shares of the Common Stock owned by Mr. Chrietzberg are
pledged to secure a loan from an unaffiliated bank.
PAGE 46
<PAGE>
The following table sets forth similar information regarding the
beneficial ownership, both by numerical holding and percentage interest of
each of the Company's directors and all of its directors and executive
officers as a group. All addresses are in care of the Corporation at 601
Munras Ave. Monterey, CA 93940.
<TABLE>
<CAPTION>
Shares Subject Percent of
Amt. & Nature Percent of to Purchase Class w/o
Name and Address Ben. Ownership Class Option Option Shares
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 453,311 (1)(2)(3) 43.85% 93,500 38.26%
Sandra G. Chrietzberg 453,311 (2)(3) 43.85% 93,500 38.26%
Peter J. Coniglio 45,897 (4)(5) 4.77% 22,000 2.54%
Carla S. Hudson 18,263 (6) 1.91% 13,750 0.48%
John M. Lotz 19,250 (7) 2.01% 16,500 0.29%
All directors & executive
officers as a Group 623,516 (8) 54.38% 206,250 44.37%
</TABLE>
(1) Includes 93,500 shares subject to his employee stock options. 275,000
shares of the common Stock owned by Mr. Chrietzberg are pledged to secure a
loan from an unaffiliated bank.
(2) The shares include an aggregate of 12,580 shares held beneficially by Mr.
Chrietzberg and Mrs. Chrietzberg in Individual Retirement Accounts, where
voting power is also shared with the custodian of the account.
(3) Includes shares of spouse pursuant to California's community property laws.
(4) Sole voting power.
(5) Includes 22,000 shares subject to the respective director's stock options.
Of the remaining shares 18,122 are held in a family trust controlled by Mr.
Coniglio, as to which he has sole voting and investment power, while 5,775
shares are held by Hudson, Martin, Ferrante & Street, a partnership of
which Mr. Coniglio is the managing partner, with voting and investment
power.
(6) Includes 13,750 shares subject to the respective director's stock options.
The remaining shares are held jointly with family members, other than 1,100
shares held in a corporate pension, as to which Ms. Hudson has voting and
investment power.
(7) Includes 16,500 shares subject to the respective director's stock options.
The remaining shares are held jointly with family members, with shared
voting and investment power.
(8) Includes all options included above, plus 60,500 shares subject to options
held by executive officers who are not also directors.
PAGE 47
<PAGE>
275,000 shares of the common stock owned by Mr. Chrietzberg are pledged
to secure a loan from an unaffiliated bank. Should he default under such
credit, the shares could be acquired by the lender, or sold pursuant to
applicable terms of the Uniform Commercial Code, in a transaction that could
result in a change of control of the Corporation. Such transaction may
require approval under provisions of Federal and California change in bank
control laws.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking
transactions in the ordinary course of its business with directors, officers,
principal shareholders and their associates. Management of the Bank believes
that these transactions have been (and those in the future are intended to
be) on substantially the same terms, including interest rates, collateral and
repayment terms on extensions of credit, as those prevailing at the same time
for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features.
Management does not believe that any such loans are outside the ordinary
course of business. The following table sets forth information on extensions
of credit to directors and to directors, principal shareholders and officers.
<TABLE>
<CAPTION>
Outstanding as of
Maximum December 31, 1998
------- -----------------
Percent of Percent of
Equity Equity
Name Amount Capital Amount Capital
- ------------------------------------------ ----------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Peter J. Coniglio 90,725 2.96% 0 0.00%
Carla S. Hudson 56,000 1.63% 56,000 1.63%
John M. Lotz 119,307 3.66% 108,298 3.15%
Directors, Principal 271,793 8.87% 167,742 4.88%
Shareholders, and Officers
as a Group (8 in number)
</TABLE>
During 1998, the law firm of Hudson, Martin, Ferrante & Street, of which
Mr. Peter J. Coniglio is a partner, performed legal services for the Bank,
for which the Bank paid $3,045. The Board of Directors has determined that
it obtained those legal services at no less favorable rates than could have
been obtained from a non-affiliated law firm.
PAGE 48
<PAGE>
ITEM 13. EXHIBITS AND REPORTS
A. EXHIBITS
<TABLE>
<CAPTION>
Item Description
- ---- -----------
<S> <C>
2 Plan of Merger and Merger Agreement, Monterey County Bank with Monterey
County Merger Corporation un the Charter of Monterey County Bank under
the Title of Monterey County Bank, joined in by Northern California Bancorp,
Inc. dated November 1, 1995.
Filed as exhibit to Form 10-KSB dated December 31, 1995.
3 (i) Articles of Incorporation
Filed as exhibit to Form 10-KSB dated December 31, 1995.
3 (ii) Bylaws
Filed as exhibit to Form 10-KSB dated December 31, 1995.
10 (i) D Lease agreement Carmel Branch Office
Filed as exhibit to Form 10-KSB dated December 31, 1995.
10 (ii) A (1) Employment Contract of Charles T. Chrietzberg, Jr., dated May 14, 1997
Filed as exhibit to Form 10-KSB Dated December 31, 1997
(2) Deferred Compensation Agreement, dated December 31, 1993.
Filed as exhibit to Form 10-KSB Dated December 31, 1995.
(3) Northern California Bancorp, Inc. 1998 Stock Option Plan and Stock Option
Agreements
11 Statement Reference Computation of Per Share Earnings
21 Subsidiaries
</TABLE>
B. REPORTS
None
PAGE 49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORTHERN CALIFORNIA BANCORP, INC.
Date: MARCH 18, 1999 By: /s/ CHARLES T. CHRIETZBERG, JR.
---------------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: MARCH 18, 1999 By: /s/ BRUCE N. WARNER
---------------------------------------------
Bruce N. Warner
Chief Financial Officer
and Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Position Date
- ---- -------- ----
/s/ CHARLES T. CHRIETZBERG, JR. March 18, 1999
- -----------------------------------
Charles T. Chrietzberg, Jr.
Director
/s/ SANDRA G. CHRIETZBERG March 18, 1999
- -----------------------------------
Sandra G. Chrietzberg
Director
/s/ PETER J. CONIGLIO March 18, 1999
- -----------------------------------
Peter J. Coniglio
Director
/s/ CARLA S. HUDSON March 18, 1999
- -----------------------------------
Carla S. Hudson
Director
/s/ JOHN M. LOTZ March 18, 1999
- -----------------------------------
John M. Lotz
Director
PAGE 50
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL
STATEMENTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3-4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-31
</TABLE>
<PAGE>
[HUTCHINSON AND BLOODGOOD LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Northern California Bancorp, Inc.
Monterey, California
We have audited the accompanying consolidated balance sheets of Northern
California Bancorp, Inc. and its wholly owned subsidiary, as of December 31,
1998 and 1997 and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the representation of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Northern
California Bancorp, Inc. and its wholly owned subsidiary, as of December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Hutchinson and Bloodgood LLP
January 25, 1999
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks (Note 2) $ 12,429,900 $ 11,060,600
Time deposits with other financial institutions 100,000 100,000
Investment securities, available for sale (Note 3) 690,500 480,200
Investment securities, held to maturity (Note 3) 6,265,000 5,495,300
Loans, held for sale 951,600 543,400
Loans, net (Note 5 and 13) 26,962,200 25,062,100
Bank premises and equipment, net (Note 6) 1,868,600 1,898,900
Interest receivable and other assets 1,835,600 1,472,100
------------ ------------
Total assets $ 51,103,400 $ 46,112,600
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 9,897,400 $ 8,734,200
Interest-bearing transaction 8,960,400 7,483,900
Savings 3,605,100 2,145,300
Time 12,355,300 12,742,700
Time in denominations of $100,000 or more 8,033,500 8,099,500
------------ ------------
Total deposits 42,851,700 39,205,600
Federal Home Loan Bank borrowed funds (Note 7) 4,000,000 3,000,000
Interest payable and other liabilities 817,100 876,800
------------ ------------
Total liabilities 47,668,800 43,082,400
------------ ------------
Commitments (Note 9 and 10)
Stockholders' equity (Notes 10, 12, and 14)
Common stock, no stated par value, authorized: 2,500,000 shares
issued and outstanding: 940,322 in 1998 and 858,526 in 1997 2,962,200 2,716,800
Retained earnings 504,400 296,700
Accumulated other comprehensive income (32,000) 16,700
------------ ------------
Total stockholders' equity 3,434,600 3,030,200
------------ ------------
Total liabilities and stockholders' equity $ 51,103,400 $ 46,112,600
------------ ------------
------------ ------------
</TABLE>
The notes to consolidated financial statements are an integral
part of these statements.
-2-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $ 2,940,300 $ 2,755,700 $ 2,676,800
Time deposits with financial institutions 6,000 1,000 5,400
Investment securities 496,500 346,500 117,500
Federal funds sold 314,100 295,900 340,700
----------- ----------- -----------
Total interest income 3,756,900 3,399,100 3,140,400
----------- ----------- -----------
Interest expense
Interest-bearing transaction accounts 110,300 120,500 108,300
Savings and time deposit accounts 778,700 797,900 810,800
Time deposits in denominations of $100,000 or more 468,700 402,900 331,800
Federal Home Loan Bank 245,600 125,900 82,700
----------- ----------- -----------
Total interest expense 1,603,300 1,447,200 1,333,600
----------- ----------- -----------
Net interest income
2,153,600 1,951,900 1,806,800
Provision for loan losses (Note 5) 130,000 120,000 52,500
----------- ----------- -----------
Net interest income, after provision for loan losses 2,023,600 1,831,900 1,754,300
----------- ----------- -----------
Other income
Service charges on deposit accounts 371,000 328,400 371,700
Income from sales and servicing of SBA loans (Note 4) 374,000 324,400 258,900
Other income 405,500 421,300 352,700
----------- ----------- -----------
Total other income 1,150,500 1,074,100 983,300
----------- ----------- -----------
Operating expense
Salaries and employee benefits 1,499,100 1,405,100 1,362,400
Occupancy and equipment expense 281,300 251,000 256,000
Professional fees 107,800 85,400 120,800
Data processing 192,600 172,300 148,700
Other general and administrative 619,600 590,700 556,300
----------- ----------- -----------
Total operating expenses 2,700,400 2,504,500 2,444,200
----------- ----------- -----------
Income before tax provision 473,700 401,500 293,400
Income tax provision (Note 8) 73,900 175,600 80,000
----------- ----------- -----------
Income before extraordinary item 399,800 225,900 213,400
Extraordinary item - litigation settlement
(net of income tax expense of $52,700), (Note 17) 64,400 -- --
----------- ----------- -----------
Net Income $ 464,200 $ 225,900 $ 213,400
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(Continued)
The notes to consolidated financial statements are an integral
part of these statements.
-3-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Earnings per common share (Note 11)
Basic
Income before extraordinary item $ 0.42 $ 0.24 $ 0.22
Extraordinary item 0.07 -- --
----------- ----------- -----------
Net income $ 0.49 $ 0.24 $ 0.22
----------- ----------- -----------
----------- ----------- -----------
Diluted
Income before extraordinary item $ 0.36 $ 0.20 $ 0.19
Extraordinary item 0.06 -- --
----------- ----------- -----------
Net income
$ 0.42 $ 0.20 $ 0.19
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The notes to consolidated financial statements are an integral part of
these statements.
-4-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
NUMBER OF COMMON RETAINED COMPREHENSIVE
SHARES STOCK EARNINGS INCOME TOTAL
--------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 879,465 $ 2,779,600 $ 1,600 $ (5,700) $ 2,775,500
Comprehensive income:
Net income for the year -- -- 213,400 -- 213,400
Change in net unrealized gain
on securities and other assets
net of tax effects -- -- -- 5,700 5,700
-----------
Total comprehensive income 219,100
-----------
Cash dividends ($.11 per share) -- -- (96,700) -- (96,700)
--------- ----------- --------- ------------- -----------
Balance at December 31, 1996 879,465 2,779,600 118,300 -- 2,897,900
-----------
Comprehensive income:
Net income for the year -- -- 225,900 -- 225,900
Change in net unrealized gain
on securities and other assets
net of tax effects -- -- -- 16,700 16,700
-----------
Total comprehensive income 242,600
-----------
Cumulative effect of change in
accounting principle -- -- 55,500 -- 55,500
Cash dividends ($.12 per share) -- -- (103,000) -- (103,000)
Repurchase of common stock (20,939) (62,800) -- -- (62,800)
--------- ----------- --------- ------------- -----------
Balance at December 31, 1997 858,526 2,716,800 296,700 16,700 3,030,200
-----------
Comprehensive income:
Net income for the year -- -- 464,200 -- 464,200
Change in net unrealized gain
on securities and other assets
net of tax effects -- -- -- (48,700) (48,700)
-----------
Total comprehensive income 415,500
-----------
10% common stock dividend 85,278 255,800 (256,500) -- (700)
Repurchase of common stock (3,482) (10,400) -- -- (10,400)
--------- ----------- --------- ------------- -----------
Balance at December 31, 1998 940,322 $ 2,962,200 $ 504,400 $ (32,000) $ 3,434,600
--------- ----------- --------- ------------- -----------
--------- ----------- --------- ------------- -----------
</TABLE>
The notes to the consolidated financial statements are an
integral part of these statements.
-5-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 464,200 $ 225,900 $ 213,400
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 139,100 135,200 118,400
Amortization of premiums (discounts) on investment securities (2,300) (2,500) 53,200
Provision for loan losses 130,000 120,000 52,500
Amortization of deferred servicing premium 13,200 19,100 31,700
Amortization of deferred gains on SBA loans (4,200) (4,400) (4,800)
Increase (decrease) in other liabilities (81,100) 173,900 (65,900)
(Increase) decrease in other assets (373,100) 124,500 (165,600)
Increase in deferred tax asset (19,600) (53,100) (34,100)
Increase (decrease) in interest payable 25,600 (39,000) 58,300
Increase in interest receivable (28,200) (16,900) (38,600)
------------ ------------ -----------
Net cash provided by operating activities 263,600 682,700 218,500
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of time deposits -- -- 99,000
Purchase of time deposits -- (100,000) --
Proceeds from maturity of investment securities 3,995,000 2,500,000 697,100
Principal payments on investment securities -- -- 78,600
Purchase of investment securities (4,977,300) (5,675,500) (2,559,200)
Net increase in loans (2,030,100) (540,600) (3,215,000)
(Increase) decrease in loans held for sale (408,200) (128,900) 375,900
-- -- 12,700
Additions to Bank premises and equipment (108,700) (369,900) (99,000)
------------ ------------ -----------
Net cash used by investing activities (3,529,300) (4,314,900) (4,609,900)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,646,100 3,038,500 4,979,300
Advance (repayment) of Federal Home Loan Bank advance 1,000,000 2,000,000 (1,000,000)
Repurchase of common stock (10,400) (62,800) --
Cash dividends paid on common stock (700) (103,000) (96,700)
------------ ------------ -----------
Net cash provided by financing activities 4,635,000 4,872,700 3,882,600
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 1,369,300 1,240,500 (508,800)
CASH AND CASH EQUIVALENTS, BEGINNING 11,060,600 9,820,100 10,328,900
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, ENDING $ 12,429,900 $ 11,060,600 $ 9,820,100
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
-6-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OTHER CASH FLOW INFORMATION
Interest paid $ 1,421,600 $ 1,360,300 $ 1,281,100
------------ ------------ ------------
------------ ------------ ------------
Income taxes paid $ 241,500 $ 70,000 $ 153,400
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
-7-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Northern
California Bancorp, Inc. (the "Corporation") and its wholly-owned
subsidiary, Monterey County Bank (the "Bank"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the
valuation of foreclosed real estate, and the valuation of deferred tax
assets.
BUSINESS
The Bank provides a variety of financial services to individuals and
small businesses through its three offices on the Monterey Peninsula.
Its primary deposit products are demand and term certificate accounts.
Its primary lending products are residential, commercial, and SBA
loans.
RECLASSIFICATION
Certain amounts have been reclassified in the 1997 and 1996
consolidated financial statements to conform to the 1998 presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks and federal
funds sold on a daily basis.
INTEREST-BEARING DEPOSITS IN BANKS
Interest-bearing deposits in banks mature within one year and are
carried at cost.
-8-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Investments in debt securities that management has the positive intent
and ability to hold to maturity are classified as "held to maturity"
and reflected at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized as adjustments to
interest income. Other marketable securities are classified as
"available for sale" and are reflected at fair value, with unrealized
gains and losses excluded from earnings and reported in other
comprehensive income. Federal Home Loan Bank and Pacific Coast
Bankers' Bank stocks are reflected at cost. Gains and losses on
disposition are generally recognized on the trade date, based on the
net proceeds and the adjusted carrying amount of the securities sold
using the specific identification method.
SALES AND SERVICING OF SBA LOANS
The Bank originates loans to customers under the Small Business
Administration (SBA) program that generally provides for SBA
guarantees of 70% to 80% of each loan. The Bank generally sells the
guaranteed portion of each loan to a third party and retains only the
unguaranteed portion in its own portfolio. A gain is recognized on
these loans through collection on sale of a premium over the adjusted
carrying value, or through retention of an ongoing rate differential
less a normal service fee between the rate paid by the borrower to the
Bank and the rate paid by the Bank to the purchaser (excess servicing
fee). In calculating the gain, the Bank assumes that the loans sold
will be outstanding for one-half of their contractual lives.
The Bank's investment in an SBA loan is allocated among the retained
portion of the loan, excess servicing retained, and the sold portion
of the loan, based on the relative fair market value of each portion
at the time of loan origination, adjusted for payments and other
activities. Because the portion retained does not carry an SBA
guarantee, part of the gain recognized on the sold portion of the loan
is deferred and amortized as a yield enhancement on the retained
portion of the loan. Excess servicing fees are reflected as an asset
which is amortized over an assumed half life; in the event future
prepayments are significant and future expected cash flows are
inadequate to cover the unamortized excess servicing asset, additional
amortization is recognized.
LOANS HELD FOR SALE
Loans held for sale consist of the portion of loans which are
guaranteed by the SBA and are carried at the lower of cost or market.
Market value for loans guaranteed by the SBA is generally determined
based on the price at which the loans were committed to be sold on the
trade date. Direct loan origination costs are recorded at settlement
as an adjustment to gain or loss on sale.
-9-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND LOAN FEES
The Bank grants mortgage, commercial, and consumer loans to customers.
A substantial portion of the loan portfolio is represented by mortgage
loans on the Monterey Peninsula. The ability of the Bank's debtors to
honor their contracts is dependent upon the real estate and general
economic sectors in the area.
Loans, as reported, have been reduced by undisbursed loan funds, net
deferred loan fees, and the allowance for loan losses.
Loan fees, net of direct origination costs, are deferred on all loans
and recognized over the expected life of the related loans as an
adjustment of yield.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to earnings and is maintained at a level
considered adequate to provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a
regular basis by management and are based upon management's periodic
review of the collectibility of the loans in light of historical
experience, known and inherent risks in the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to
significant change. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for losses on loans and other real estate owned.
Such agencies may require the Bank to recognize additions to the
allowance based on their judgment of information available to them at
the time of their examination. Ultimately, losses may vary from
current estimates and future additions to the allowance may be
necessary.
Loan losses are charged against the allowance when management believes
the collectibility of the loan balance is unlikely. Subsequent
recoveries, if any, are credited to the allowance.
-10-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis by either the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent. Substantially all of
the Bank's loans which have been identified as impaired have been
measured by the fair value of existing collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer loans for impairment disclosure.
LOAN SERVICING
The Bank has adopted Statement of Financial Accounting Standards
("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," as
superseded by SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," whereby rights
to service mortgage loans for others are capitalized as separate
assets, whether acquired through purchase or origination, if such
loans are sold or securitized with servicing rights retained.
Accordingly, the total cost of the mortgage loan is allocated to the
related servicing right and to the loan based on the relative fair
values if it is practicable to estimate those fair values.
The Bank estimates fair value based on the present value of estimated
expected future cash flows using prepayment speeds and discount rates
commensurate with the risks involved, and servicing costs determined
on an incremental cost basis. Prior to the adoption of SFAS No. 122,
the capitalization of originated mortgage servicing rights was not
allowed under generally accepted accounting principles.
-11-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOAN SERVICING (CONCLUDED)
Capitalized mortgage servicing rights are amortized to servicing
revenue in proportion to, and over the period of, estimated net
servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. For purposes of
measuring impairment, the rights are stratified based on the following
predominant risk characteristics of the underlying loans: loan type,
size, note rate, date of origination, term, and geographic location.
Impairment is recognized through a valuation allowance for an
individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and equipment are carried at cost,
less accumulated depreciation computed on the straight-line method
over the estimated useful lives of the assets.
It is general practice to charge the cost of maintenance and repairs
to earnings when incurred; major expenditures for betterments are
capitalized and depreciated.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted accordingly through the provision for income
taxes. The Bank's base amount of its federal income tax reserve for
loan losses is a permanent difference for which there is no
recognition of a deferred tax liability. However, the loan loss
allowance maintained for financial reporting purposes is a temporary
difference with allowable recognition of a related deferred tax asset,
if it is deemed realizable.
-12-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
The Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." This Statement encourages
all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," whereby compensation cost is the excess,
if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to
acquire the stock. Stock options issued under the Corporation's stock
option plan have no intrinsic value at the grant date, and under
Opinion No. 25 no compensation cost is recognized for them. Under the
Corporation's employee stock purchase plan, compensation cost is
recognized to the extent that the quoted market price of the stock on
the date of grant exceeds the amount that the employee is required to
pay. The Corporation has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, must make pro forma
disclosures of net income, earnings per share, and other disclosures,
as if the fair value based method of accounting had been applied. The
pro forma disclosures include the effects of all awards granted on or
after January 1, 1995. (See Note 11.)
EARNINGS PER SHARE
Basic earnings per share represents income available to common
shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Corporation relate solely to
outstanding stock options, and are determined using the treasury stock
method. The weighted average number of shares used in the computation
of basic earnings per share was 942,984 for 1998, 955,878 for 1997 and
964,743 for 1996. The weighted average number of shares used in the
computation of earnings per share assuming dilution of stock options
was 1,108,686 for 1998, 1,121,983 for 1997 and 1,109,455 for 1996.
The 10% stock dividend was retroactively reflected in the 1997 and
1996 weighted shares.
-13-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net
income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance
sheet, such items along with net income, are components of
comprehensive income. The adoption of SFAS No.130 had no effect on
the Bank's net income or shareholders' equity.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Unrealized holding gains (losses) on available-for-sale
securities $(88,500) $ 30,400 $ 10,400
Tax effect 39,800 (13,700) (4,700)
-------- -------- --------
Net-of-tax amount $(48,700) $ 16,700 $ 5,700
-------- -------- --------
-------- -------- --------
</TABLE>
NOTE 2. CASH AND DUE FROM BANKS
Aggregate reserves (in the form of cash and deposits with the Federal
Reserve Bank) of $221,000 were maintained to satisfy federal
regulatory requirements at December 31, 1998.
-14-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses, follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------DECEMBER 31, 1998------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Federal Home Loan Bank $ 540,600 $ - $ - $ 540,600
Pacific Coast Banker's
Bank Stock 149,900 - - 149,900
----------- ---------- ---------- -----------
Total securities available
for sale $ 690,500 $ - $ - $ 690,500
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
SECURITIES HELD TO MATURITY
State and Local agencies $ 4,764,800 $ 23,200 $ - $ 4,788,000
U.S. Government agencies 1,500,200 17,100 - 1,517,300
----------- ---------- ---------- -----------
Total securities held to
maturity $ 6,265,000 $ 40,300 $ - $ 6,305,300
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
--------------------------DECEMBER 31, 1997------------------------
SECURITIES AVAILABLE FOR SALE
Federal Home Loan Bank $ 330,300 $ - $ - $ 330,300
Pacific Coast Banker's
Bank Stock 149,900 - - 149,900
----------- ---------- ---------- -----------
Total securities available
for sale $ 480,200 $ - $ - $ 480,200
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
SECURITIES HELD TO MATURITY
U.S. Treasury securities $ 499,900 $ 700 $ - $ 500,600
U.S. Government agencies 4,995,400 4,700 - 5,000,100
----------- ---------- ---------- -----------
Total securities held to
maturity $ 5,495,300 $ 5,400 $ - $ 5,500,700
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
-15-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
The Bank's investment in Federal Home Loan Bank stock is required as
part of a borrowing agreement. The stock will be redeemed at par
value.
The amortized cost and fair value of debt securities by contractual
maturity at December 31, 1998 are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ - $ -
Due between one and five years - -
Due between five and ten years 500,500 508,600
Due after ten years 5,764,500 5,796,700
------------------ ------------------
$ 6,265,000 $ 6,305,300
------------------ ------------------
------------------ ------------------
</TABLE>
Proceeds from maturity of investment securities during 1998 were
$3,995,000, with no gain or loss realized. There was no gain or loss
realized from the sale of investments in 1997 and 1996.
Note 4. SALES AND SERVICING OF SBA LOANS
A summary of the activity of SBA loans follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
SBA loans authorized $2,458,000 $3,551,800 $1,937,000
------------- ------------- -------------
------------- ------------- -------------
SBA loans sold $2,811,900 $2,524,100 $1,842,800
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
A summary of income from SBA loans sold is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C>
Income from premiums $ 199,200 $ 178,400 $ 138,600
Income from servicing 176,400 170,000 165,000
Less loan origination expense (1,600) (24,000) (44,700)
------------- ------------- -------------
Total SBA sales and service income $ 374,000 $ 324,400 $ 258,900
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
-16-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Commercial and industrial $11,131,900 $10,299,500
Construction 355,600 346,500
Real estate, mortgage 15,294,100 13,920,900
Installment 389,900 519,900
Government guaranteed loans purchased 158,800 284,000
------------- ------------
27,330,300 25,370,800
Less allowance for loan losses (336,200) (269,100)
Less deferred origination fees, net (31,900) (39,600)
------------- ------------
$26,962,200 $25,062,100
------------- ------------
------------- ------------
The maturities of total loans follows:
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Loans with a fixed rate:
Due within one year $ 1,919,000 $ 2,907,400
Due one to five years 8,307,200 5,909,400
Due over five years 2,516,500 3,667,900
------------ ------------
12,742,700 12,484,700
Loans with a variable rate 14,587,600 12,886,100
------------ ------------
Total loans $27,330,300 $25,370,800
------------ ------------
------------ ------------
</TABLE>
-17-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Beginning balance $ 269,100 $ 253,500 $ 224,800
Recoveries 12,600 1,800 20,700
Loans charged off (75,500) (106,200) (44,500)
Provision for loan losses 130,000 120,000 52,500
----------- ----------- -----------
Ending balance $ 336,200 $ 269,100 $ 253,500
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
As of December 31, 1998 and 1997, the recorded investment in impaired
loans totaled $180,100 and $283,000 with corresponding valuation
allowances of $17,800 and $32,200, respectively. No additional
amounts are committed to be advanced in connection with impaired
loans.
For the years ended December 31, 1998 and 1997, the average recorded
investment in impaired loans amounted to approximately $262,200 and
$463,500, respectively. Non-accrual loans totaled $57,100 and $75,900
at December 31, 1998 and 1997, respectively. If interest on
non-accrual loans had been accrued, such income would have
approximated $8,000 and $11,000 for 1998 and 1997, respectively.
Note 6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises
and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
1998 1997 USEFUL LIVES
<S> <C> <C>
Building and land $ 915,400 $ 915,400 40 years
Building improvements 338,600 338,600 40 years
Leasehold improvements 469,800 479,700 Lease term
Furniture and equipment 1,391,800 1,620,800 3-8 years
------------ ------------
3,115,600 3,354,500
Accumulated depreciation (1,247,000) (1,455,600)
------------ ------------
$1,868,600 $1,898,900
------------ ------------
------------ ------------
</TABLE>
Depreciation expense of $139,100, $135,200, and $118,400 was included
in occupancy and equipment expense for the years ended 1998, 1997, and
1996, respectively.
-18-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Note 7. FEDERAL HOME LOAN BANK BORROWINGS
The Bank entered into an advance and security agreement with the
Federal Home Loan Bank of San Francisco on January 21, 1993. At
December 31, 1998 the Bank has four $1,000,000 advances which bear
interest at 6.53%, 4.83%, 6.81%, and 6.36%, respectively. The advances
are secured by pledged loan principal in the amount of $4,491,300 and
investment securities totaling $1,500,000. The advances mature in
June 2000, October 2003, June 2004 and January 2028 respectively.
Note 8. INCOME TAXES
Allocation of federal and state income taxes between current and
deferred portions is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Current tax provision:
Federal $ 49,600 $ 171,300 $ 78,500
State 43,900 57,400 35,600
--------- ---------- ---------
93,500 228,700 114,100
--------- ---------- ---------
Deferred tax benefit:
Federal (16,800) (31,400) (34,000)
State (2,800) (21,700) (100)
--------- ---------- ---------
(19,600) (53,100) (34,100)
--------- ---------- ---------
$ 73,900 $ 175,600 $ 80,000
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The reasons for the differences between the statutory federal income
tax rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 7.2 7.2 7.5
Municipal bond income (25.6) - -
Utilization of general business credits - (1.1) (7.0)
Decrease in deferred tax asset valuation
allowance (7.2)
Other, net - 3.6 -
------- ------- -------
Effective tax rates 15.6% 43.7% 27.3%
------- ------- -------
------- ------- -------
</TABLE>
-19-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 8. INCOME TAXES (CONTINUED)
In addition, the Corporation has applied all unused general business
tax credit carryforwards for financial reporting and income tax
purposes.
The components of the net deferred tax asset, included in other
assets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Deferred tax asset
Federal $ 173,800 $ 161,600
State 58,200 66,700
---------------------- ---------------------
Net deferred tax asset $ 232,000 $ 228,300
---------------------- ---------------------
---------------------- ---------------------
</TABLE>
The tax effects of each type of income and expense item that give rise
to deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Deferred tax assets (liabilities)
Accrual to cash adjustments $ 142,600 $ 216,600
Investments:
Net unrealized gain on securities
available for sale (17,000) (59,800)
State franchise tax 29,600 (22,700)
Allowance for loan losses 94,200 74,900
Depreciation (17,400) 19,300
---------------------- ---------------------
Net deferred tax asset $ 232,000 $ 228,300
---------------------- ---------------------
---------------------- ---------------------
</TABLE>
As of December 31, 1998 and 1997 management expects all temporary
differences to be offset against future taxable income, and no
valuation reserve was deemed necessary.
-20-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments
and contingencies which are not reflected in the consolidated
financial statements.
OPERATING LEASE COMMITMENTS
The Bank leases its branch buildings in Carmel and Pacific Grove. The
Carmel building has a twenty-five year lease which commenced in March
1981 and may be adjusted annually for changes in the Consumer Price
Index. The Pacific Grove building has a five year lease with five,
five year options and commenced in April 1997. The Bank also leases
certain equipment used in the normal course of business.
Rent expense for operating leases is included in occupancy and
equipment expense and amounted to approximately $83,800, $75,000, and
$59,000 in 1998, 1997, and 1996, respectively.
At December 31, 1998, approximate future minimum rental commitments
for all noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999 $ 100,400
2000 96,400
2001 101,700
2002 87,100
2003 79,800
Thereafter 168,500
--------------------
$ 633,900
--------------------
--------------------
</TABLE>
LOAN COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit. Such commitments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual
amount of these commitments. The Bank uses the same credit policies
in making commitments as it does for on-balance-sheet instruments.
At December 31, 1998 and 1997, such commitments to extend credit were
approximately $5,007,200 and $5,093,000, respectively of undisbursed
lines of credit and undisbursed loans in process.
-21-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 10. STOCKHOLDERS' EQUITY
MINIMUM REGULATORY REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's and Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet
specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total and
Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998 and 1997, that the
Corporation and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Corporation and the Bank
as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, they must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the following tables. There are no
conditions or events since the notifications that management believes
have changed the Corporation's or Bank's category. The Corporation's
and the Bank's actual capital amounts and ratios as of December 31,
1998 and 1997 are also presented in the tables.
-22-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
Minimum To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
(All dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $ 3,747 10.9% $ 2,740 8.0% $ 3,425 10.0%
Monterey County Bank 3,687 10.8% 2,739 8.0% 3,424 10.0%
Tier 1 Capital to Risk Weighted Assets:
Consolidated 3,411 10.0% 1,370 4.0% 2,055 6.0%
Monterey County Bank 3,351 9.8% 1,370 4.0% 2,055 6.0%
Tier 1 Capital to Average Assets:
Consolidated 3,411 7.6% 1,912 4.0% 2,389 5.0%
Monterey County Bank 3,351 7.5% 1,911 4.0% 2,389 5.0%
<CAPTION>
DECEMBER 31, 1997
Minimum To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
(All dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $ 3,228 11.2% $ 2,307 8.0% $ 2,883 10.0%
Monterey County Bank 3,147 10.9% 2,306 8.0% 2,883 10.0%
Tier 1 Capital to Risk Weighted Assets:
Consolidated 2,958 10.3% 1,153 4.0% 1,730 6.0%
Monterey County Bank 2,877 10.0% 1,153 4.0% 1,730 6.0%
Tier 1 Capital to Average Assets:
Consolidated 2,958 6.6% 1,784 4.0% 2,230 5.0%
Monterey County Bank 2,877 6.5% 1,784 4.0% 2,230 5.0%
</TABLE>
-23-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 11. STOCK OPTIONS AND STOCK DIVIDENDS
On June 12, 1998, the 1998 Stock Option Plan was approved by the
shareholders. Under the Plan, options may be granted to officers, key
employees, and directors of the Corporation and its subsidiaries, so
long as a majority of the equity interests of such subsidiaries are
owned by the Corporation. Incentive Stock Options may be granted at
prices not lower than 100% of the fair market value of the common
stock on the date of grant. However, an incentive stock option granted
to an individual owning 10% or more of the Corporation's stock after
such grant must have an exercise price of at least 110% of such fair
market value and an exercise period of not more than five years.
Non-qualified stock options may be granted at prices not lower than
85% of the fair market value of the common stock on the date of grant.
The Board of Directors is authorized to determine when options become
exercisable within a period not extending 10 years from the date of
grant. The maximum number of shares available for issuance under the
Plan is 250,000 shares.
The Corporation applies APB Opinion 25 and related interpretations in
accounting for the plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Corporation's stock-based
compensation plan been determined based on the fair value at the grant
date for awards under the plan consistent with the method prescribed
by SFAS No. 123, the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Net income:
As reported $464,200 $225,900 $213,400
Pro forma 450,700 208,000 213,400
Earnings per share
As reported $ 0.49 $ 0.24 $ 0.22
Pro forma 0.48 0.22 0.22
Earnings per share,
assuming dilution for stock options:
As reported $ 0.42 $ 0.20 $ 0.19
Pro forma 0.41 0.19 0.19
</TABLE>
-24-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 11. STOCK OPTIONS (CONTINUED)
The fair value of these options was estimated at grant date using a
Black-Scholes option pricing model with the following weighed-average
assumptions for 1998 and 1997: risk-free interest rates of 6.21
percent; dividend yield of 4.4 percent; expected option life of 6
years; and volatility of 30 percent.
At December 31, 1998, options for the purchase of 240,350 shares of
the Holding Corporation's common stock were outstanding and
exercisable at prices ranging from $2.00 to $3.00. The status of all
optioned shares is as follows:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Shares Price Range Contractual Life
<S> <C> <C> <C>
Outstanding at December 31, 1996 142,500 $2.20 - $2.75 3.63 Years
Granted 40,000 $2.75
Cancelled (25,000) $2.20
-------
Outstanding at December 31, 1997 157,500 $2.20 - $2.75 3.2 Years
Granted 99,850 $2.73 - $3.00
Cancelled (17,000) $2.50 - $2.75
-------
Outstanding at December 31, 1998 240,350 $2.00 - $3.00 3.6 Years
-------
-------
</TABLE>
NOTE 12. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1997 accounting pronouncement SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" changed the accounting treatment of
U.S. Small Business Administration (SBA) loans sold in the secondary
market. Financial statements for 1996 have not been restated, and the
cumulative effect of the change of $55,500 is shown as a one time
credit to equity in the 1997 financial statement, with no effect on
net income.
-25-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 13. RELATED PARTY TRANSACTIONS
The Corporation has, and expects to have in the future, banking
transactions in the ordinary course of its business with directors,
officers, principal shareholders, and their associates. These
transactions, including loans and deposits, are granted on
substantially the same terms, including interest rates and collateral
on loans, as those prevailing at the same time for comparable
transactions with others and do not involve more than the normal risk
of collectibility or present other unfavorable features.
Aggregate loan transactions with related parties are approximately as
follows:
<TABLE>
<S> <C>
Balance as of December 31, 1996 $ 837,300
New loans 232,100
Repayments (815,400)
---------
Balance as of December 31, 1997 $ 254,000
New loans 41,600
Repayments (128,800)
---------
Balance as of December 31, 1998 $ 166,800
---------
---------
</TABLE>
Related party deposits totaled approximately $142,000 and $155,100 at
December 31, 1998 and 1997, respectively.
NOTE 14. EMPLOYEE BENEFIT PLANS
During 1995, the Corporation established an employee stock ownership
plan (ESOP) to invest in the Corporation's common stock for the
benefit of eligible employees. The Corporation's contribution to the
plan is determined by the Board of Directors. Shares in the plan
generally vest after seven years. The Corporation did not make a
contribution to the ESOP trust in 1998, 1997, or 1996.
The Bank has a salary reduction plan under Section 401(K) of the
Internal Revenue Code. The plan covers substantially all full-time
employees who have completed one year of service with the Bank.
Employees are allowed to defer up to a maximum of 15% or $10,000 of
their income. Under the provisions of the plan, the Bank's
contribution policy is discretionary. No contributions were made by
the Bank in 1998, 1997 or 1996.
-26-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 15. REGULATORY MATTERS
The Corporation is subject to regulation by the Board of Governors of
the Federal Reserve System under the Bank Holding Corporation Act.
The Bank is subject to regulation, supervision, and regular
examination by the Superintendent and the FDIC. The regulations of
these agencies affect most aspects of the Corporation's business and
prescribe permissible types of loans and investments, the amount of
required reserves, requirements for branch offices, the permissible
scope of the Corporation's activities and various other requirements.
The Corporation is also subject to certain regulations of the Federal
Reserve Bank dealing primarily with check clearing activities,
establishment of banking reserves, Truth-in-Lending (Regulation Z) ,
and Equal Credit opportunity (Regulation B).
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values of all financial
instruments where it is practicable to estimate such values. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Accordingly, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. Statement No. 107
excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and
short-term instruments approximate fair values.
INVESTMENT SECURITIES: Fair values for investment securities,
excluding Federal Home Loan Bank stock, are based on quoted
market prices. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions
of the Federal Home Loan Bank of San Francisco.
-27-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair value of performing fixed rate loans is estimated by
discounting future cash flows using the Corporation's current offering
rate for loans with similar characteristics. The fair value of
performing adjustable rate loans is considered to be the same as book
value. The fair value of nonperforming loans is estimated at the fair
value of the related collateral or, when, in management's opinion,
foreclosure upon the collateral is unlikely, by discounting future
cash flows using rates which take into account management's estimate
of credit risk.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The
Corporation does not generally enter into long-term fixed rate
commitments or letters of credit. These commitments are generally at
prices which are currently prevailing rates. These rates are
generally variable and, therefore, there is no interest rate exposure.
Accordingly, the fair market value of these instruments is equal to
the carrying value amount of their net deferred fees. The net
deferred fees associated with these instruments are not material. The
Corporation has no unusual credit risk associated with these
instruments.
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, savings, and certain types
of money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate
fair value.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other
short-term borrowings maturing within ninety days approximate their
fair values. Fair values of other short-term borrowings are estimated
using discounted cash flow analyses based on the Corporation's current
incremental borrowing rates for similar types of borrowing
arrangements.
-28-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 16. FAIR VALUE OF FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values, and related carrying amounts, of the
Corporation's financial instruments as of December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C>
Financial Assets
Cash and cash equivalents $12,469,900 $12,469,900 $11,060,600 $11,060,600
Time deposits 100,000 100,000 100,000 100,000
Investment securities,
available for sale 690,500 690,500 480,200 480,200
Investment securities,
held to maturity 6,265,000 6,305,300 5,495,300 5,500,700
Loans, held for sale 951,600 951,600 543,400 543,400
Loans, net 26,962,200 27,198,300 25,062,100 25,028,000
Accrued interest receivable 287,700 287,700 259,500 259,500
Financial Liabilities
Deposits 42,938,800 43,065,600 39,205,600 38,902,600
Long-term debt 4,000,000 4,135,300 3,000,000 2,718,200
Accrued interest payable 355,900 355,900 355,900 355,900
</TABLE>
NOTE 17. EXTRAORDINARY ITEM - LITIGATION SETTLEMENT
In May 1998 Monterey County Bank entered into a settlement agreement
with Monterey Bay Bank, whereby Monterey County Bank agreed to
terminate its trade name infringement litigation against Monterey Bay
Bank. Under the terms of the settlement Monterey County Bank received
a lump sum payment in the amount of $117,100.
-29-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 18. NORTHERN CALIFORNIA BANCORP, INC. (PARENT CORPORATION ONLY)
The following are the financial statements of Northern California
Bancorp, Inc. (parent Corporation only) as of December 31, 1998 and
1997:
BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets
Cash account and due from Banks $ 47,100 $ 35,200
Organization costs 3,100 4,600
Investment in common stock of
Monterey County Bank 3,391,100 3,004,400
---------- ----------
$3,441,300 $3,044,200
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 800 $ 1,500
Dividend payable 5,900 12,500
Stockholders' Equity 3,434,600 3,030,200
---------- ----------
$3,441,300 $3,044,200
---------- ----------
---------- ----------
</TABLE>
-30-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE 18. NORTHERN CALIFORNIA BANCORP, INC. (PARENT CORPORATION ONLY)
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
1998 1997 1996
<S> <C> <C>
Equity in income of subsidiary $ 485,300 $ 237,600 $ 233,400
Operating expenses 29,700 16,100 18,900
Applicable taxes (benefit) (8,600) (4,400) 1,100
--------- --------- ---------
Net income $ 464,200 $ 225,900 $ 213,400
--------- --------- ---------
--------- --------- ---------
STATEMENTS OF CASH FLOWS
1998 1997 1996
Cash flows from operating activities:
Net Income $ 464,200 $ 225,900 $ 213,400
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of
Monterey County Bank (485,300) (237,600) (233,400)
Decrease in other assets 1,500 5,900 29,700
(Increase) decrease in accrued expenses (700) 700 (39,500)
(Increase) decrease in other liabilities (6,700) (3,900) 16,500
--------- --------- ---------
(27,000) (9,000) (13,300)
--------- --------- ---------
Cash flows from financing activities:
Cash dividends received from subsidiary 50,000 170,000 150,000
Cash dividends paid on common stock (700) (103,000) (96,700)
Stock repurchase (10,400) (62,800) -
--------- --------- ---------
38,900 4,200 53,300
--------- --------- ---------
Net increase in cash and cash equivalents 11,900 (4,800) 40,000
Cash and cash equivalents, beginning of year 35,200 40,000 -
--------- --------- ---------
Cash and cash equivalents, end of year $ 47,100 $ 35,200 $ 40,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The ability of the Corporation to pay dividends will largely
depend upon the dividends paid to it by the Bank. There are legal
limitations on the ability of the Bank to provide funds to the
Corporation in the form of loans, advances, or dividends.
-31-
<PAGE>
EXHIBIT
ITEM 10(ii)A(3)
Northern California Bancorp, Inc. 1998 Stock Option Plan
and Stock Option Agreements
<PAGE>
Northern California Bancorp
1998 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this 1998 Stock Option Plan
("Plan") of Northern California Bancorp, a California corporation ("Company") is
to provide the Company with a means of attracting and retaining the services of
highly motivated and qualified directors and key personnel. The Plan is
intended to advance the interests of the Company by affording to directors and
key employees, upon whose skill, judgment, initiative and efforts the Company is
largely dependent for the successful conduct of its business, an opportunity for
investment in the Company and the incentives inherent in stock ownership in the
Company. In addition, the Plan contemplates the opportunity for investment in
the Company by employees of companies that do business with the Company. For
purposes of this Plan, the term Company shall include subsidiaries, if any, of
the Company, including Monterey County Bank, a California banking corporation,
so long as a majority of the equity interests of such subsidiaries are owned by
the Company.
2. LEGAL COMPLIANCE. All options granted under the Plan ("Options")
shall be either "Incentive Stock Options" ("ISO's"), as such term is defined in
Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), or
non-qualified stock options ("NQO's"). ISO's shall be granted only to employees
of the Company. An Option shall be identified as an ISO or an NQO in writing in
the document or documents evidencing the grant of the Option. All Options that
are not so identified as ISO's shall be NQO's. In addition, the Plan provides
for the grant of NQO's to employees of companies that do business with the
Company. It is the further intent of the Plan that it conform in all respects
with the requirements of Rule 16b-3 of the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"). In all
respects, the Plan and any Options granted thereunder shall be interpreted
consistent with the applicable requirements of the Code and Rule 16b-3. To the
extent that any aspect of the Plan or its administration shall at any time be
viewed as inconsistent with the requirements of Rule 16b-3 or, in connection
with ISO's, the Code, such aspect shall be deemed to be modified, deleted or
otherwise changed as necessary to ensure continued compliance with such
provisions.
<PAGE>
ADMINISTRATION OF THE PLAN.
3.1 PLAN COMMITTEE. The Plan shall be administered by a
committee ("Committee"). The members of the Committee shall be appointed from
time to time by the Board of Directors of the Company ("Board") and shall
consist of not less than two (2) nor more than five (5) persons. Such persons
shall be Non-Employee Directors of the Company within the meaning of
Rule 16b-3. If no Committee is appointed, the Board as a whole shall serve as
the Committee.
3.2 GRANTS OF OPTIONS BY THE COMMITTEE. In accordance with the
provisions of the Plan, the Committee, by resolution, shall select those
eligible persons to whom Options shall be granted ("Optionees"); shall determine
the time or times at which each Option shall be granted, whether an Option is an
ISO or an NQO and the number of shares to be subject to each Option; and shall
fix the time and manner in which the Option may be exercised, the Option
exercise price, and the Option period. The Committee shall determine the form
of option agreement to evidence the foregoing terms and conditions of each
Option, which need not be identical, in the form provided for in Section 7.
Such option agreement may include such other provisions as the Committee may
deem necessary or desirable consistent with the Plan, the Code and Rule 16b-3.
3.3 COMMITTEE PROCEDURES. The Committee from time to time may
adopt such rules and regulations for carrying out the purposes of the Plan as it
may deem proper and in the best interests if the Company. The Committee shall
keep minutes of its meetings and records of its actions. A majority of the
members of the Committee shall constitute a quorum for the transaction of any
business by the Committee. The Committee may act at any time by an affirmative
vote of a majority of those members voting. Such vote may be taken at a meeting
(which may be conducted in person or by any telecommunication medium) or by
written consent of Committee members without a meeting.
3.4 COMMITTEE PROCEDURES. The Committee shall resolve all
questions arising under the Plan and option agreements entered into pursuant
to the Plan. Each determination, interpretation, or other action made or
taken by the Committee shall be final and conclusive and binding on all
persons, including, without limitation, the Company, its shareholders, the
Committee and each of
2
<PAGE>
the members of the Committee, and the directors, officers and employees of
the Company, including Optionees and their respective successors in interest.
3.5 NON-LIABILITY OF COMMITTEE MEMBERS. No Committee member
shall be liable for any action or determination made by him or her in good faith
with respect to the Plan or any Option granted under it.
4. BOARD POWER TO AMEND. SUSPEND. OR TERMINATE THE PLAN. The Board
may, from time to time, make such changes in or additions to the Plan as it
may deem proper and in the best interests of the Company and its
shareholders. The Board may also suspend or terminate the Plan at any time,
without notice, and in its sole discretion. Notwithstanding the foregoing,
no such change, addition, suspension, or termination by the Board shall (i)
materially impair any option previously granted under the Plan without the
express written consent of the optionee; or (ii) materially increase the
number of shares subject to the Plan, materially increase the benefits
accruing to optionees under the Plan, materially modify the requirements as
to eligibility to participate in the Plan or alter the method of determining
the option exercise price described in Section 8, without shareholder
approval.
5. SHARES SUBJECT TO THE PLAN. For purposes of the Plan, the
Committee is authorized to grant Options for up to 250,000 shares of the
Company's common stock ("Common Stock"), or the number and kind of shares of
stock or other securities which, in accordance with Section 13, shall be
substituted for such shares of Common Stock or to which such shares shall be
adjusted. The Committee is authorized to grant Options under the Plan with
respect to such shares. Any or all unsold shares subject to an Option which
for any reason expires or otherwise terminates (excluding shares returned to
the Company in payment of the exercise price for additional shares) may again
be made subject to grant under the Plan.
Not withstanding the foregoing, the number of shares which may be subject
to options issued by the Company under the Plan shall be reduced by the number
of shares of Common Stock then subject to outstanding options ("Reducing
Options") issued under the 1987 Amended Stock Option
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Plan of Monterey County Bank (the "1987 Plan"). To the extent so reduced,
the number of shares which may be subject to options issued by the Company
under the Plan shall be increased to the extent that any Reducing Options
lapse, or are canceled, without being exercised.
6. OPTIONEES. Options shall be granted only to officers, directors
or key employees of the Company, or to employees of companies that do
business with the Company designated by the Committee from time to time as
Optionees. Any Optionee may hold more than one option to purchase Common
Stock, whether such option is an Option held pursuant to the Plan or
otherwise. An Optionee who is an employee of the Company ("Employee
Optionee") and who holds an Option must remain a continuous full or part-time
employee of the Company from the time of grant of the Option to him until the
time of its exercise, except as provided in Section 10.3. Options may be
granted under the Plan from time to time in substitution for stock options
held by individuals employed by, or serving as directors of, corporations who
become employees as a result of a merger or consolidation or other business
combination of the employing corporation with the Company or any subsidiary.
GRANTS OF OPTIONS. The Committee shall have the sole discretion to
grant Options under the Plan and to determine whether any Option shall
be an ISO or an NQO. The terms and conditions of Options granted
under the Plan may differ from one another as the Committee, in its
absolute discretion, shall determine as long as all Options granted
under the Plan satisfy the requirements of the Plan. Upon
determination by the Committee that an Option is to be granted to an
Optionee, a written option agreement evidencing such Option shall be
given to the Optionee, specifying the number of shares subject to the
Option, the Option exercise price, whether the Option is an ISO or an
NQO, and the other individual terms and conditions of such Option.
Such option agreement may incorporate generally applicable provisions
from the Plan, a copy of which shall be provided to all Optionees at
the time of their initial grants under the Plan. The Option shall be
deemed granted as of the date specified in the grant resolution of the
Committee, and the option agreement shall be dated as of the date of
such resolution. Notwithstanding the foregoing, unless the Committee
consists solely of non-employee directors, any Option granted to an
executive officer, director or 10% beneficial owner
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for purposes of Section 16 of the Securities Exchange Act of
1934, as amended ("Section 16 of the 1934 Act"), shall either
be (a) conditioned upon the Optionee's agreement not to sell,
the shares of Common Stock underlying the Option for at least
six (6) months after the date of grant or (b) approved by the
Board of Directors, or by the shareholders, of the Company.
8. OPTION EXERCISE PRICE. The price per share to be paid by the
Optionee at the time an ISO is exercised shall not be less than one hundred
percent (100%) of the Fair Market Value (as hereinafter defined) of one share
of the optioned Common Stock on the date on which the Option is granted. No
ISO may be granted under the Plan to any person (a "10% Owner") who, at the
time of such grant, owns (within the meaning of Section 424(d) of the Code)
stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any parent thereof, unless
the exercise price of such ISO is at least equal to one hundred and ten
percent (110%) of Fair Market Value on the date of grant. The price per
share to be paid by the Optionee at the time an NQO is exercised shall not be
less than eighty-five percent (85%) of the Fair Market Value on the date on
which the NQO is granted, as determined by the Committee. For purposes of
the Plan, the "Fair Market Value" of a share of the Company's Common Stock as
of a given date shall be: (i) the closing price of a share of the Company's
Common Stock on the principal exchange on which shares of the Company's
Common Stock are then trading, if any, on the day immediately preceding such
date, or, if shares were not traded on such date, then on the next preceding
trading day during which a sale occurred; or (ii) if the Company's Common
Stock is not traded on an exchange but is quoted on NASDAQ or a successor
quotation system, (1) the last sales price (if the Common Stock is then
listed as a National Market Issue under the NASDAQ National Market System) or
(2) the closing representative bid price (in all other cases) for the Common
Stock on the day immediately preceding such date as reported by NASDAQ or
such successor quotation system; or (iii) if the Company's Common Stock is
not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the closing bid price for the Common Stock on such date as
determined in good faith by the Committee; or (iv) if the Company's Common
Stock is not publicly traded, the fair market value established by the
Committee acting in good faith. In addition, with respect to any ISO, the
Fair Market Value on any given date shall be determined in a manner
consistent with any regulations issued by the Secretary
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of the Treasury for the purpose of determining fair market value of
securities subject to an ISO plan under the Code.
9. CEILING OF ISO GRANTS. The aggregate Fair Market Value
(determined at the time any ISO is granted) of the Common Stock with respect
to which an Optionee's ISO's, together with incentive stock options granted
under any other plan of the Company and any parent, are exercisable for the
first time by such Optionee during any calendar year shall not exceed
$100,000. If an Optionee holds such incentive stock options that become
first exercisable (including as a result of acceleration of exercisability
under the Plan) in any one year for shares having a Fair Market Value at the
date of grant in excess of $100,000, then the most recently granted of such
ISO's, to the extent that they are exercisable for shares having an aggregate
Fair Market Value in excess of such limit, shall be deemed to be NQO's.
10. DURATION, EXERCISABILITY. AND TERMINATION OF OPTIONS
10.1 OPTION PERIOD. The option period shall be determined
by the Committee with respect to each Option granted. In no event, however,
may the option period exceed ten (10) years from the date on which the Option
is granted, or five (5) years in the case of a grant of an ISO to an Optionee
who is a 10% Owner (as described in Section 8) at the date on which the
Option is granted.
10.2 EXERCISABILITY OF OPTIONS. Each Option shall be
exercisable in whole or in such consecutive installments, cumulative or
otherwise, during its term, as determined in the discretion of the Committee.
The last day of such term shall be the Expiration Date of the Option.
10.3 TERMINATION OF OPTIONS DUE TO TERMINATION OF
EMPLOYMENT, DISABILITY, OR DEATH OF OPTIONEE; TERMINATION FOR "CAUSE", OR
RESIGNATION IN VIOLATION OF AN EMPLOYMENT AGREEMENT. All Options granted
under the Plan to any Employee Optionee shall terminate and may no longer be
exercised if the Employee Optionee ceases, at any time during the period
between the grant of the Option and its exercise, to be an employee of the
Company or a subsidiary of the Company.
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Notwithstanding the foregoing, (i) if the Employee Optionee's employment with
the Company shall have terminated for any reason (other than involuntary
dismissal for "cause" or voluntary resignation), he may, at any time before
the earlier of expiration of three (3) months after such termination or
expiration of the Option, exercise the Option (to the extent that the Option
was exercisable by him on the date of the termination of his employment);
(ii) if the Employee Optionee's employment shall have terminated due to
disability (as defined in Section 22(e)(3) of the Code and subject to such
proof of disability as the Committee may require), such Option may be
exercised by the Employee Optionee (or by his guardian(s), or conservator(s),
or other legal representative(s)) before the earlier of expiration of twelve
(12) months after such termination or expiration of the Option (to the extent
that the Option was exercisable by him on the date of the termination of his
employment); (iii) in the event of the death of the Employee Optionee, an
Option exercisable by him at the date of his death shall be exercisable by
his legal representative(s), legatee(s), or heir(s), or by his beneficiary or
beneficiaries so designated by him, as the case may be, until the earlier of
the expiration of twelve (12) months after his death or expiration of the
Option (to the extent that the Option was exercisable by him on the date of
his death); and (iv) if the Employee Optionee's employment is terminated for
"cause" or in violation of any agreement to remain in the employ of the
Company, including, without limitation, any such agreement pursuant to
Section 14, his Option shall terminate immediately upon termination of
employment, and such Option shall be deemed to have been forfeited by the
Optionee. In no event, however may an option be exercised after its
Expiration Date.
For purposes of the Plan, "cause" may include, without limitation, any
illegal or improper conduct (1) which injures or impairs the reputation,
goodwill, or business of the Company; (2) which involves the misappropriation
of funds of the Company, or the misuse of data, information, or documents
acquired in connection with employment by the Company; or (3) which violates
any other directive or policy promulgated by the Company; provided, however,
that if the Employee serves pursuant to a written employment contract that
includes a definition of conditions under which he may be terminated for
"cause" (whether defined as a termination for cause, or using other
terminology having the same effect), such definition shall apply for the
purposes of this section. A termination for "cause" shall also include any
resignation in anticipation of discharge for "cause" or resignation accepted
by the Company in lieu of a formal discharge for "cause."
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11. MANNER OF OPTION EXERCISE; RIGHTS AND OBLIGATIONS OF OPTIONEES
11.1 WRITTEN NOTICE OF EXERCISE. An Optionee may elect to
exercise an Option in whole or in part, from time to time, subject to the
terms and conditions contained in the Plan and in the agreement evidencing
such Option, by giving written notice of exercise to the Chief Executive
Officer or Chief Financial Officer of the Company at its principal executive
office.
11.2 CASH PAYMENT FOR OPTIONED SHARES. If an Option is
exercised for cash, such notice shall be accompanied by a cashier's or personal
check, or money order, made payable to the Company for the full exercise price
of the shares purchased.
11.3 STOCK SWAP FEATURE. At the time of the Option exercise,
and subject to the discretion of the Committee to accept payment in cash only,
the Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. If the Optionee elects to pay the total purchase price in whole or in
part with previously acquired shares of Common Stock, the value of such shares
shall be equal to their Fair Market Value on the date of exercise, determined by
the Committee in the same manner used for determining Fair Market Value at the
time of grant for purposes of Section 8.
11.4 INVESTMENT REPRESENTATION FOR NON-REGISTERED SHARES AND
LEGALITY OF ISSUANCE. Unless the shares issuable in connection with the exercise
of an Option are covered by an effective registration statement filed under the
Securities Act of 1933 (the "Act"), the exercise of the Option shall be deemed
to constitute a representation and agreement by the Optionee (which shall
include any other person who exercises the Option on his or her behalf as
permitted by Section 10.3) that, at the time of such exercise, it is the intent
of the Optionee to acquire the shares for investment only, for his own account,
and not with a view toward resale or distribution in violation of the Act, or
any other securities law. As a condition to such exercise, the Company may
require Optionee to enter into such written representations, warranties and
agreements as Company may reasonably request in order to comply with the Act or
any other securities law or with this Option Agreement. Optionee agrees that
Company shall not be obligated to take any affirmative action in
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order to cause the issuance or transfer of Shares hereunder to comply with
any law, rule or regulation that applies to the Shares subject to the Option.
The certificate for unregistered shares issued for investment shall bear
such legends and restrictions on transfer as determined by the Company or its
counsel to be appropriate in order to evidence compliance with the Act and
any other securities laws, and the Shares represented thereby shall not be
transferable unless the Company receives an opinion of counsel satisfactory
to the Company to the effect that such restriction is not necessary under
then pertaining law, or the Shares are then (i) covered by an effective and
current registration statement under the Securities Act of 1933, as amended,
and (ii) either quailed or exempt from qualification under applicable state
securities laws. The Company shall, however, under no circumstances be
required to sell or issue any shares under the Plan if, in the opinion of the
Committee, (i) the issuance of such shares would constitute a violation by
the Optionee or the Company of any applicable law or regulation of any
governmental authority, or (ii) the consent or approval of any governmental
body is necessary or desirable as a condition of, or in connection with, the
issuance of such shares,
11.5 SHAREHOLDER RIGHTS OF OPTIONEE. Upon exercise, the
Optionee (or any other person who exercises the Option on his behalf as
permitted by Section 10.3) shall be recorded on the books of the Company as the
owner of the shares, and the Company shall deliver to such record owner one or
more duly issued stock certificates evidencing such ownership. No person shall
have any rights as a shareholder with respect to any shares of Common Stock
covered by an Option granted pursuant to the Plan until such person shall have
become the holder of record of such shares. Except as provided in Section 13, no
adjustments shall be made for cash dividends or other distributions or other
rights as to which there is a record date preceding the date such person becomes
the holder of record of such shares.
11.6 HOLDING PERIODS FOR TAX PURPOSES. The Plan does not provide
that an Optionee must hold shares of Common Stock acquired under the Plan for
any minimum period of time. Optionees are urged to consult with their own tax
advisors with respect to the tax consequences to them of their individual
participation in the Plan. Neither Company nor any subsidiary makes any
commitment or guarantee that any federal or state tax treatment will apply or be
available to any person eligible for benefits under the Option.
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12. SUCCESSIVE GRANTS. Successive grants of 0ptions may be made to
any Optionee under the Plan.
13. ADJUSTMENTS.
(a) If the outstanding Common Stock shall be hereafter
increased or decreased, or changed into or exchanged for a different number or
kind of shares or other securities of the Company or of another corporation, by
reason of a recapitalization, reclassification, reorganization, merger,
consolidation, share exchange, or other business combination in which the
Company is the surviving parent corporation, stock split-up, combination of
shares, or dividend or other distribution payable in capital stock or rights to
acquire capital stock, appropriate adjustment shall be made by the Committee in
the number and kind of shares for which options may be granted under the Plan.
In addition, the Committee shall make appropriate adjustment in the number and
kind of shares as to which outstanding and unexercised options shall be
exercisable, to the end that the proportionate interest of the holder of the
option shall, to the extent practicable, be maintained as before the occurrence
of such event. Such adjustment in outstanding options shall be made without
change in the total price applicable to the unexercised portion of the option
but with a corresponding adjustment in the exercise price per share.
(b) In the event of the dissolution or liquidation of the
Company, any outstanding and unexercised options shall terminate no later than a
future date to be fixed by the Committee.
(c) In the event of a Reorganization (as hereinafter defined),
then,
(i) If there is no plan or agreement with respect to the
Reorganization ("Reorganization Agreement"), or if the Reorganization Agreement
does not specifically provide for the adjustment, change, conversion, or
exchange of the outstanding and unexercised options for cash or other property
or securities of another corporation, then any outstanding and unexercised
options shall terminate no later than a future date to be fixed by the
Committee; or
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(ii) If there is a Reorganization Agreement, and the
Reorganization Agreement specifically provides for the adjustment, change,
conversion, or exchange of the outstanding and unexercised options for cash or
other property or securities of another corporation, then the Committee shall
adjust the shares under such outstanding and unexercised options, and shall
adjust the shares remaining under the Plan which are then available for the
issuance of options under the Plan if the Reorganization Agreement makes
specific provisions therefor, in a manner not inconsistent with the provisions
of the Reorganization Agreement for the adjustment, change, conversion, or
exchange of such options and shares.
(d) The term "Reorganization" as used in this Section 13 shall
mean any reorganization, merger, consolidation, share exchange, or other
business combination pursuant to which the Company is not the surviving parent
corporation after the effective date of the Reorganization, or any sale or lease
of all or substantially all of the assets of the Company. Nothing herein shall
require the Company to adopt a Reorganization Agreement, or to make provision
for the adjustment, change, conversion, or exchange of any options, or the
shares subject thereto, in any Reorganization Agreement which it does adopt.
(e) The Committee shall provide to each optionee then holding
an outstanding and unexercised option not less than thirty (30) calendar days'
advanced written notice of any date fixed by the Committee pursuant to this
Section 13 and of the terms of any Reorganization Agreement providing far the
adjustment, change, conversion, or exchange of outstanding and unexercised
options. Except as the Committee may otherwise provide, each optionee shall
have the right during such period to exercise his option only to the extent that
the option was exercisable on the date such notice was provided to the optionee.
Any adjustment to any outstanding ISO pursuant to this
Section 13, if made by reason of a transaction described in Section 424(a) of
the Code, shall be made so as to conform to the requirements of that Section and
the regulations thereunder. If any other transaction described in Section
424(a) of the Code affects the Common Stock subject to any unexercised ISO
theretofore granted under the Plan (hereinafter for purposes of this Section 13
referred to as the "old option"),
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the Board of Directors of the Company or of any surviving or acquiring
corporation may take such action as it deems appropriate, in conformity with
the requirements of that Code Section and the regulations thereunder, to
substitute a new option for the old option, in order to make the new option,
as nearly as may be practicable, equivalent to the old option, or to assume
the old option.
(f) No modification, extension, renewal, or other change in
any option granted under the Plan may be made, after the grant of such option,
without the Optionee's consent, unless the same is permitted by the provisions
of the Plan and the option agreement. In the case of an ISO, optionees are
hereby advised that certain changes may disqualify the ISO from being considered
as such under Section 422 of the Code, or constitute a modification, extension,
or renewal of the ISO under Section 424(h) of the Code.
(g) All adjustments and determinations under this Section 13
shall be made by the Committee in good faith in its sole discretion.
14. CONTINUED EMPLOYMENT. Neither the creation of the Plan nor the
granting of Option(s) under it shall be deemed to create a right in an
Employee Optionee to continued employment with the Company, and each such
Employee Optionee shall be and shall remain subject to discharge by the
Company as though the Plan had never come into existence. Except as
specifically provided by the Committee in any particular case, the loss of
existing or potential profit in options granted under this Plan shall not
constitute an element of damages in the event of termination of the
employment of an employee even if the termination is in violation of an
obligation of the Company to the employee by contract or otherwise.
15. TAX WITHHOLDING. The exercise of any Option granted under the
Plan is subject to the condition that if at any time the Company shall
determine, in its discretion, that the satisfaction of withholding tax or
other withholding liabilities under any federal, state or local law is
necessary or desirable as a condition of, or in connection with, such
exercise or a later lapsing of time or restrictions on or disposition of the
shares of Common Stock received upon such exercise, then in such event, the
exercise of the Option shall not be effective unless such withholding shall
have been effected or obtained in a manner acceptable to the Company.
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When an Optionee is required to pay to the Company an amount required to
be withheld under applicable income tax laws in connection with the exercise
of any Option, the Optionee may, subject to the approval of the Committee,
satisfy the obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock having a value equal to the amount required
to be withheld. The value of the Common Stock withheld pursuant to the
election shall be determined by the Committee, in accordance with the
criteria set forth in Section 8, with reference to the date the amount of tax
to be withheld is determined. The Optionee shall pay to the Company in cash
any amount required to be withheld that would otherwise result in the
withholding of a fractional share. The Company shall have no responsibility
to the Optionee for any adverse tax or securities law consequences of such
election, including consequences which may arise under Section 16 of the
Securities and Exchange Act of 1934, as amended.
16. TERM OF PLAN.
16.1 EFFECTIVE DATE. The Plan shall become effective upon the
date of its adoption by the Board; provided, that the Plan shall terminate if it
is not approved by the stockholders of the Company within twelve months
thereafter. Notwithstanding any provision of the Plan or of any Option
Agreement, no Option shall be exercisable prior to such stockholder approval.
16.2 TERMINATION DATE. No further Options may be granted
under the Plan after ten years from the date the Plan is adopted by the
Board. The Plan shall remain in effect until all Options granted under the
Plan have been satisfied or expired. The Plan may be suspended or terminated
at any earlier time by the Board within the limitations set forth in Section
4.
17. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to amend, modify, or rescind any previously approved compensation
plans, programs or options entered into by the Company. This Plan shall be
construed to be in addition to and independent of any and all such other
arrangements. Neither the adoption of the Plan by the Board nor the
submission of the Plan to the shareholders of the Company for approval shall
be construed as creating any limitations on the power or authority of the
Board to adopt, with or without shareholder approval, such additional or
other compensation arrangements as the Board may from time to time deem
desirable.
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18. GOVERNING LAW. The Plan and all rights and obligations under it
shall be construed and enforced in accordance with the laws of the State of
California.
19. INFORMATION TO OPTIONEES. Optionees under the Plan who do not
otherwise have access to financial statements of the Company will receive the
Company's financial statements at least annually.
20. CHANGE IN CONTROL.
20.1 DEFINITION As used in the Plan, the term "Change in
Control" shall mean:
(a) any person (within the meaning of Section 13(d) or 14(d) under
the Exchange Act, including any group (within the meaning of Section
13(d)(3) under the Exchange Act), a "Person") is or becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of securities of the
Company (such Person being referred to as an "Acquiring Person")
representing 25% or more of the combined voting power of the Company's
outstanding securities; or
(b) individuals who constituted the Board as of April 30, 1998 (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a
director subsequent to April 30, 1998 whose appointment to fill a
vacancy or to fill a new Board position or whose nomination for
election by the Company's shareholders was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board.
For purposes of clause (a) above, if at any time there exist
securities of different classes entitled to vote separately in the election of
directors, the calculation of the proportion of the voting power held by a
beneficial owner of the Company's securities shall be determined as follows:
first,
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the proportion of the voting power represented by securities held by such
beneficial owner of each separate class or group of classes voting separately
in the election of directors shall be determined, provided that securities
representing more than 50% of the voting power of securities of any such
class or group of classes shall be deemed to represent 100% of such voting
power; second, such proportion shall then be multiplied by a fraction, the
numerator of which is the number of directors which such class or classes is
entitled to elect and the denominator of which is the total number of
directors elected to membership on the Board at the time; and third, the
product obtained for each such separate class or group of classes shall be
added together, which sum shall be the proportion of the combined voting
power of the Company's outstanding securities held by such beneficial owner.
For purposes of clause (a) above, the term "Outside Persons" means any
Persons other than Charles T. Chrietzberg, Jr., Sandra G. Chrietzberg, and
persons acquiring substantially all of the shares of the Company owned by
them, of record or beneficially.
20.2 EFFECT OF CHANGE OF CONTROL. Upon the occurrence of a
Change in Control, with respect to each Optionee, all Options granted to such
recipient and outstanding at such time shall immediately become exercisable
in full, whether or not otherwise exercisable, for a period of thirty (30)
calendar days following the occurrence of the Change in Control (but subject,
however, in the case of Incentive Stock Options, to the aggregate fair market
value, determined as of the date the Incentive Stock Options are granted, of
the stock with respect to which Incentive Stock Options are exercisable for
the first time by such recipient during any calendar year not exceeding
$100,000); and, except as required by law, all restrictions on the transfer
of shares acquired pursuant to such Options shall terminate.
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NORTHERN CALIFORNIA BANCORP
1998 STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
This Option Agreement is made and entered into by and between
Northern California Bancorp, a national banking association ("Company") and
_____________, ("Optionee), as of the ___ day of _____________, 19____ ("Date of
Grant"). If the Optionee is presently or subsequently becomes employed by a
subsidiary of the Company, the term "Company" shall, with reference to the
Optionee's Employer, be deemed to refer collectively to Northern California
Bancorp and the subsidiary or subsidiaries that employs the Optionee.
RECITALS
A. The Board of Directors of the Company has adopted the Northern California
Bancorp 1998 Stock Option Plan ("Plan") as an employee incentive to retain key
employees, officers, directors, and consultants of the Company and to enhance
the ability of the Company to attract new employees, officers, directors, and
consultants whose services are considered unusually valuable by providing an
opportunity to have a proprietary interest in the success of the Company.
B. The Committee established to administer the Plan ("Committee") has approved
the granting of options to the Optionee pursuant to the Plan to provide an
incentive to the Optionee to focus on the long-term growth of the Company.
In consideration of the mutual covenants and conditions hereinafter set
forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Optionee
agree as follows:
1. GRANT OF OPTIONS. The Company hereby grants to the Optionee the
right and option (hereinafter referred to as the "Option") to purchase an
aggregate of _________________ (__________), shares (such number being subject
to adjustment as provided in paragraph 10 hereof and Section 13 of the Plan) of
the Common Stock of the Company (the "Stock") on the terms and conditions herein
set forth.
This Option may be exercised in whole or in part and from time to time as
hereinafter provided. The Option granted under this Agreement is intended to be
an "incentive stock option" as set forth in Section 422 of the Internal Revenue
Code of 1986, as amended.
2. VESTING OF OPTION. The Option shall become exercisable by you at
any time during a period of _________, (_____) months from the granting date of
__________________, at which time 100% of the Stock subject to the Option shall
be vested and exercisable.
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3. PURCHASE PRICE. The price at which the Optionee shall be entitled
to purchase the Stock covered by the Option shall be $_________, per share,
which price is not less than 100% of the Fair Market Value (as defined in the
Plan) of the Stock on the Date of Grant.
4. TERM OF OPTION. The Option granted under this Agreement shall
expire, unless otherwise exercised, _______, ( ___ ) years from the Date of
Grant, through and including the normal close of business of the Company on
__________________, _______"("Expiration Date"), subject to earlier termination
as provided in paragraph 8 hereof.
5. EXERCISE OF OPTION. The Option may be exercised by the Optionee as
to all or any part of the Stock then vested by delivery to the Company of
written notice of exercise and payment of the purchase price as provided in
paragraphs 6 and 7 hereof.
6. METHOD OF EXERCISING OPTION. Subject to the terms and conditions
of this Option Agreement, the Option may be exercised by timely delivery to the
Company of written notice, which notice shall be effective on the date received
by the Company ("Effective Date"). The notice shall state the Optionee's
election to exercise the Option, the number of shares in respect of
which an election to exercise has been made, the method of payment elected (see
paragraph 7 hereof), the exact name or names in which the shares will be
registered and the Social Security number of the Optionee. Such notice shall be
signed by the Optionee and shall be accompanied by payment of the purchase price
of such shares. In the event the Option shall be exercised by a person or
persons other than Optionee pursuant to paragraph 8 hereof, such notice shall be
signed by such other person or persons and shall be accompanied by proof
acceptable to the Company of the legal right of such person or persons to
exercise the Options. All shares delivered by the Company upon exercise of the
Option shall be fully paid and nonassessable upon delivery.
7. METHOD OF PAYMENT FOR OPTIONS. Payment for shares purchased upon
the exercise of the Option shall be made by the Optionee in cash or such other
method permitted by the Committee and communicated to the Optionee in writing
prior to the date the Optionee exercises all or any portion of the Option.
8. TERMINATION OF EMPLOYMENT
8.1. GENERAL. If the Optionee terminates employment for any other
reason than for Cause (as such term is defined in the Plan) or voluntary
resignation, then the Optionee may only exercise the Option at any time
within three (3) months after the effective date of termination of
employment and only to the extent that the Optionee was entitled to
exercise the Option at the date of termination, provided that in no event
shall the Option be exercisable after the Expiration Date. If the Optionee
terminates employment on account of a voluntary resignation, the Optionee
may only exercise the Option at any time within thirty (30) days after the
effective date of such termination of employment, and only with the consent
of the Committee to the extent that the Optionee was entitled to exercise
the Option at the date of termination. In no event shall the Option, or
any part thereof, be exercisable after the Expiration Date. If the
employment of the Optionee is terminated for Cause, then the optionee's
right to exercise the Option shall immediately terminate.
17
<PAGE>
Except as specifically provided by the Committee in any particular case,
the loss of existing or potential profit in options granted under this Plan
shall not constitute an element of damages in the event of termination of the
employment of an employee, even if the termination is in violation of an
obligation of the Company to the employee by contract or otherwise.
8.2. DEATH OR DISABILITY OF OPTIONEE. In the event of the death or
Disability (as that term is defined in the Plan) of the Optionee within a
period during which the Option, or any part thereof, could have been
exercised by the Optionee, including three (3) months after termination of
employment other than for Cause or voluntary resignation (the "Option
Period"), the Option shall lapse unless it is exercised with in the Option
Period, but in no event later than twelve (l2), months after the date of
the Optionee's Death or Disability, by the Optionee or the Optionee's legal
representative or representatives in the case of a Disability or, in the
case of Death, by the person or persons entitled to do so under the
Optionee's last will and testament or if the Optionee fails to make a
testamentary disposition of such Option or shall die intestate, by the
person or persons entitled to receive such Option under the applicable laws
of descent and distribution. An Option may be exercised following the
Death or Disability of the Optionee only to the extent that the Option was
exercisable by the Optionee immediately prior to his Death or Disability.
In no event shall the Option be exercisable after the Expiration Date. The
Committee shall have the right to require evidence satisfactory to it of
the rights of any person or persons seeking to exercise the Option under
this paragraph 8 to exercise the Option.
9. NON-TRANSFERABILITY. The Option granted by this Option Agreement
shall be exercisable only during the term of the Option provided in paragraph 4
hereof and, except as provided in paragraphs above, only by the Optionee during
his lifetime and while an Employee of the Company. This Option shall not be
transferable by the Optionee or any other person claiming through the Optionee,
either voluntarily or involuntarily, except by will or the laws of descent and
distribution or such other events as set forth in Section 14 of the Plan.
10. ADJUSTMENTS IN NUMBER OF SHARES AND OPTION PRICE. In the event of
a stock dividend or in the event the Stock shall be changed into or exchanged
for a different number or class of shares of stock of the Company or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, there shall be substituted for
each such remaining share of Stock then subject to this Option the number and
class of shares of stock into which each outstanding share of Stock shall be so
exchanged. all without any change in the aggregate purchase price for the shares
then subject to the Option, all as set forth in Section 13 of the Plan.
11. DELIVERY OF SHARES. No shares of Stock shall be delivered upon
exercise of the Option until (i) the purchase price shall have been paid in
full in the manner herein provided; (ii) applicable taxes required to be
withheld have been paid or withheld in full, (iii) approval of any governmental
authority required in connection with the Option, or the issuance of shares
thereunder, has been received by the Company; and (iv) if required by the
Committee, the Optionee has delivered to the Committee an Investment Letter in
form and content satisfactory to the Company as provided in paragraph 12 hereof.
18
<PAGE>
12. SECURITIES ACT. The Company shall not be required to deliver any
shares of Stock pursuant to the exercise of all or any part of the Option if, in
the opinion of counsel for the Company, such issuance would violate the
Securities Act of 1933 or any other applicable federal or state securities laws
or regulations. The Committee may require that the Optionee, prior to the
issuance of any such shares pursuant to exercise of the Option, sign and deliver
to the Company a written statement ("Investment Letter") stating (i) that the
Optionee is purchasing the shares for investment, for his own account, and not
with a view to the sale or distribution thereof; (ii) that the Optionee will not
sell any shares received upon exercise of the Option or any other shares of the
Company that the Optionee may then own or thereafter acquire except either (a)
through a broker on a national securities exchange or (b) with the prior written
approval of the Company; and (iii) containing such other terms and conditions as
counsel for the Company may reasonably require to assure compliance with the
Securities Act of 1933 or other applicable federal or state securities laws and
regulations. Such Investment Letter shall be in form and content acceptable to
the Committee in its sole discretion.
13. FEDERAL AND STATE TAXES. Upon exercise of the Option, or any part
thereof, the Optionee may incur certain liabilities for federal, state or local
taxes and the Company may be required by law to withhold such taxes for payment
to taxing authorities. Upon determination by the Company of the amount of taxes
required to be withheld, if any, with respect to the shares to be issued
pursuant to the exercise of the Option, the Optionee shall pay all Federal,
state and local tax withholding requirements to the Company.
14. DEFINITIONS; COPY OF PLAN. To the extent not specifically provided
herein, all capitalized terms used in this Option Agreement shall have the same
meanings ascribed to them in the Plan. By the execution of this Agreement, the
Optionee acknowledges receipt of a copy of the Plan.
15. ADMINISTRATION. This Option Agreement shall at all times be
subject to the terms and conditions of the Plan and the Plan shall in all
respects be administered by the Committee in accordance with the terms of and as
provided in the Plan. The Committee shall have the sole and complete discretion
with respect to all matters reserved to it by the Plan and decisions of the
majority of the Committee with respect thereto and to this Option Agreement
shall be final and binding upon the Optionee and the Company. In the event of
any conflict between the terms and conditions of this Option Agreement and the
Plan, the provisions of the Plan shall control.
16. CONTINUATION OF EMPLOYMENT. This Option Agreement shall not be
construed to confer upon the Optionee any right to continue in the employ of the
Company and shall not limit the right of the Company, in its sole discretion to
terminate the employment of the Optionee at any time.
17. OBLIGATION TO EXERCISE. The Optionee shall have no obligation to
exercise any option granted by this Agreement.
18. GOVERNING LAW. This Option Agreement shall be interpreted and
administered under the laws of the State of California.
19
<PAGE>
19. AMENDMENTS. This Option Agreement may be amended only by a written
agreement executed by the Company and the Optionee. The Company and the
Optionee acknowledge that changes in Federal tax laws enacted subsequent to the
Date of Grant, and applicable to stock options, may provide for tax benefits to
the Company or the Optionee. In any such event, the Company and the Optionee
agree that this Option Agreement may be amended as necessary to secure for the
Company and the Optionee any benefits that may result from such legislation.
Any such amendment shall be made only upon the mutual consent of the parties,
which consent (of either party) may be withheld for any reason.
20. TAX INFORMATION AND NOTICE OF DISQUALIFYING DISPOSITION. This
Option is intended to be eligible for treatment as an Incentive Stock Option
under Section 422 of the Internal Revenue Code ("Code"). Whether this Option
will receive such tax treatment will depend, in part, on the actions by the
Optionee after exercise of this Option. For example, if the Optionee disposes
of any of the Stock acquired under this Option within two years after the Date
of Grant or within one year of the date of exercise of this Option, the Optionee
may lose the benefits of Code Section 422. Accordingly, the Company makes no
representations by way of the Plan, this Agreement, or otherwise, with respect
to the actual tax consequences of the grant or exercise of this Option or the
subsequent disposition of the Stock acquired under this Option.
If the Optionee sells or makes a disposition (within the meaning of
Section 422 of the Code) of any of the Stock acquired under this Option prior
to the later of (i) one year from the date of exercise of such Stock, or (ii)
two years from the Date of Grant, the Optionee agrees to give written notice
to the Company of such disposition. The notice shall include the Optionee's
name, the number, exercise price and exercise date of the shares of Stock
disposed of, and the date of disposition.
Neither Company nor any subsidiary makes any commitment or
guarantee that any federal or state tax treatment will apply or be available
to any person eligible for benefits under the Option.
IN WITNESS WHEREOF, the Company has caused this Option Agreement to
be duly executed by its officers thereunto duly authorized and the Optionee has
hereunto set his or her hand as of the date first written above.
NORTHERN CALIFORNIA BANCORP,
By:
------------------------------ ---------------------------------
President Optionee
20
<PAGE>
NORTHERN CALIFORNIA BANCORP
1998 STOCK OPTION PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
This Option Agreement is made and entered into by and between
Northern California Bancorp, a national banking association ("Company") and
__________________ ("Optionee), as of the _________ day of _________________,
199__ ("Date of Grant"). If the Optionee is presently or subsequently becomes
employed by a subsidiary of the Company, the term "Company" shall, with
reference to the Optionee's Employer, be deemed to refer collectively to
Northern California Bancorp and the subsidiary or subsidiaries that employs the
Optionee.
RECITALS
A. The Board of Directors of the Company has adopted the Northern California
Bancorp 1998 Stock Option Plan ("Plan") as an employee incentive to retain key
employees, officers, directors, and consultants of the Company and to enhance
the ability of the Company to attract new employees, officers, directors, and
consultants whose services are considered unusually valuable by providing an
opportunity to have a proprietary interest in the success of the Company.
B. The Committee established to administer the Plan ("Committee") has approved
the granting of options to the Optionee pursuant to the Plan to provide an
incentive to the Optionee to focus on the long-term growth of the Company.
C. This option is an Employee Option unless the initials of the President of
the Company are affixed in the following space.{ } {THE PRESIDENT SHOULD
INITIAL THIS BOX
ONLY IF THIS IS
NOT AN EMPLOYEE
OPTION}
In consideration of the mutual covenants and conditions hereinafter set
forth and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and the Optionee agree as follows:
1. GRANT OF OPTIONS. The Company hereby grants to the Optionee the
right and option (hereinafter referred to as the "Option") to purchase an
aggregate of ______________ shares (such number being subject to adjustment as
provided in paragraph 10 hereof and Section 13 of the Plan) of the Common Stock
of the Company (the "Stock") on the terms and conditions herein set forth.
This Option may be exercised in whole or in part and from time to time as
hereinafter provided. The Option granted under this Agreement is intended to be
an "incentive stock option" as set forth in Section 422 of the Internal Revenue
Code of 1986, as amended.
2. VESTING OF OPTION. The Option shall become exercisable by you at
any time during a period of sixty (60) months from the granting date of
__________________, at which time 100% of the Stock subject to the Option shall
be vested and exercisable.
21
<PAGE>
3. PURCHASE PRICE. The price at which the Optionee shall be entitled
to purchase the Stock covered by the Option shall be _______ per share, which
price is not less than 100% of the Fair Market Value (as defined in the Plan) of
the Stock on the Date of Grant.
4. TERM OF OPTION. The Option granted under this Agreement shall
expire, unless otherwise exercised, ______________, (_____) years from the Date
of Grant, through and including the normal close of business of the Company on
__________________, 20____, ("Expiration Date"), subject to earlier termination
as provided in paragraph 8 hereof.
5. EXERCISE OF OPTION. The Option may be exercised by the Optionee as
to all or any part of the Stock then vested by delivery to the Company of
written notice of exercise and payment of the purchase price as provided in
paragraphs 6 and 7 hereof.
6. METHOD OF EXERCISING OPTION. Subject to the terms and conditions
of this Option Agreement, the Option may be exercised by timely delivery to the
Company of written notice, which notice shall be effective on the date received
by the Company ("Effective Date"). The notice shall state the Optionee's
election to exercise the Option, the number of shares in respect of which an
election to exercise has been made, the method of payment elected (see paragraph
7 hereof), the exact name or names in which the shares will be registered and
the Social Security number of the Optionee. Such notice shall be signed by the
Optionee and shall be accompanied by payment of the purchase price of such
shares. In the event the Option shall be exercised by a person or persons other
than Optionee pursuant to paragraph 8 hereof, such notice shall be signed by
such other person or persons and shall be accompanied by proof acceptable to the
Company of the legal right of such person or persons to exercise the Options.
All shares delivered by the Company upon exercise of the Option shall be fully
paid and nonassessable upon delivery.
7. METHOD OF PAYMENT FOR OPTIONS. Payment for shares purchased upon
the exercise of the Option shall be made by the Optionee in cash or such other
method permitted by the Committee and communicated to the Optionee in writing
prior to the date the Optionee exercises all or any portion of the Option.
8. TERMINATION OF EMPLOYMENT
8.1. GENERAL. If the Optionee terminates employment for any other
reason than for Cause (as such term is defined in the Plan) or voluntary
resignation, then the Optionee may only exercise the Option at any time
within three (3) months after the effective date of termination of
employment and only to the extent that the Optionee was entitled to
exercise the Option at the date of termination, provided that in no event
shall the Option be exercisable after the Expiration Date. If the Optionee
terminates employment on account of a voluntary resignation, the Optionee
may only exercise the Option at any time within thirty (30) days after the
effective date of such termination of employment, and only with the consent
of the Committee to the extent that the Optionee was entitled to exercise
the Option at the date of termination. In no event shall the Option, or
any part thereof, be exercisable after the Expiration Date. If the
employment of the Optionee is terminated for Cause, then the optionee's
right to exercise the Option shall immediately terminate.
22
<PAGE>
Except as specifically provided by the Committee in any particular case,
the loss of existing or potential profit in options granted under this Plan
shall not constitute an element of damages in the event of termination of the
employment of an employee, even if the termination is in violation of an
obligation of the Company to the employee by contract or otherwise.
8.2. DEATH OR DISABILITY OF OPTIONEE. In the event of the death or
Disability (as that term is defined in the Plan) of the Optionee within a
period during which the Option, or any part thereof, could have been
exercised by the Optionee, including three (3) months after termination of
employment other than for Cause or voluntary resignation (the "Option
Period"), the Option shall lapse unless it is exercised with in the Option
Period, but in no event later than twelve (12), months after the date of
the Optionee's Death or Disability, by the Optionee or the Optionee's legal
representative or representatives in the case of a Disability or, in the
case of Death, by the person or persons entitled to do so under the
Optionee's last will and testament or if the Optionee fails to make a
testamentary disposition of such Option or shall die intestate, by the
person or persons entitled to receive such Option under the applicable laws
of descent and distribution. An Option may be exercised following the
Death or Disability of the Optionee only to the extent that the Option was
exercisable by the Optionee immediately prior to his Death or Disability.
In no event shall the Option be exercisable after the Expiration Date. The
Committee shall have the right to require evidence satisfactory to it of
the rights of any person or persons seeking to exercise the Option under
this paragraph 8 to exercise the Option.
9. NON-TRANSFERABILITY. The Option granted by this Option Agreement
shall be exercisable only during the term of the Option provided in paragraph 4
hereof and, except as provided in paragraphs above, only by the Optionee during
his lifetime and while an Employee of the Company. This Option shall not be
transferable by the Optionee or any other person claiming through the Optionee,
either voluntarily or involuntarily, except by will or the laws of descent and
distribution or such other events as set forth in Section 14 of the Plan.
10. ADJUSTMENTS IN NUMBER OF SHARES AND OPTION PRICE. In the event of
a stock dividend or in the event the Stock shall be changed into or exchanged
for a different number or class of shares of stock of the Company or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, there shall be substituted for
each such remaining share of Stock then subject to this Option the number and
class of shares of stock into which each outstanding share of Stock shall be so
exchanged. all without any change in the aggregate purchase price for the shares
then subject to the Option, all as set forth in Section 13 of the Plan.
11. DELIVERY OF SHARES. No shares of Stock shall be delivered upon
exercise of the Option until (i) the purchase price shall have been paid in
full in the manner herein provided; (ii) applicable taxes required to be
withheld have been paid or withheld in full, (iii) approval of any governmental
authority required in connection with the Option, or the issuance of shares
thereunder, has been received by the Company; and (iv) if required by the
Committee, the Optionee has delivered to the Committee an Investment Letter in
form and content satisfactory to the Company as provided in paragraph 12 hereof.
23
<PAGE>
12. SECURITIES ACT. The Company shall not be required to deliver any
shares of Stock pursuant to the exercise of all or any part of the Option if, in
the opinion of counsel for the Company, such issuance would violate the
Securities Act of 1933 or any other applicable federal or state securities laws
or regulations. The Committee may require that the Optionee, prior to the
issuance of any such shares pursuant to exercise of the Option, sign and deliver
to the Company a written statement ("Investment Letter") stating (i) that the
Optionee is purchasing the shares for investment, for his own account, and not
with a view to the sale or distribution thereof; (ii) that the Optionee will not
sell any shares received upon exercise of the Option or any other shares of the
Company that the Optionee may then own or thereafter acquire except either (a)
through a broker on a national securities exchange or (b) with the prior written
approval of the Company; and (iii) containing such other terms and conditions as
counsel for the Company may reasonably require to assure compliance with the
Securities Act of 1933 or other applicable federal or state securities laws and
regulations. Such Investment Letter shall be in form and content acceptable to
the Committee in its sole discretion.
13. FEDERAL AND STATE TAXES. Upon exercise of the Option, or any part
thereof, the Optionee may incur certain liabilities for federal, state or local
taxes and the Company may be required by law to withhold such taxes for payment
to taxing authorities. Upon determination by the Company of the amount of taxes
required to be withheld, if any, with respect to the shares to be issued
pursuant to the exercise of the Option, the Optionee shall pay all Federal,
state and local tax withholding requirements to the Company.
14. DEFINITIONS; COPY OF PLAN. To the extent not specifically provided
herein, all capitalized terms used in this Option Agreement shall have the same
meanings ascribed to them in the Plan. By the execution of this Agreement, the
Optionee acknowledges receipt of a copy of the Plan.
15. ADMINISTRATION. This Option Agreement shall at all times be
subject to the terms and conditions of the Plan and the Plan shall in all
respects be administered by the Committee in accordance with the terms of and as
provided in the Plan. The Committee shall have the sole and complete discretion
with respect to all matters reserved to it by the Plan and decisions of the
majority of the Committee with respect thereto and to this Option Agreement
shall be final and binding upon the Optionee and the Company. In the event of
any conflict between the terms and conditions of this Option Agreement and the
Plan, the provisions of the Plan shall control.
16. CONTINUATION OF EMPLOYMENT. This Option Agreement shall not be
construed to confer upon the Optionee any right to continue in the employ of the
Company and shall not limit the right of the Company, in its sole discretion to
terminate the employment of the Optionee at any time.
17. OBLIGATION TO EXERCISE. The Optionee shall have no obligation to
exercise any option granted by this Agreement.
18. GOVERNING LAW. This Option Agreement shall be interpreted and
administered under the laws of the State of California.
24
<PAGE>
19. AMENDMENTS. This Option Agreement may be amended only by a written
agreement executed by the Company and the Optionee. The Company and the
Optionee acknowledge that changes in Federal tax laws enacted subsequent to the
Date of Grant, and applicable to stock options, may provide for tax benefits to
the Company or the Optionee. In any such event, the Company and the Optionee
agree that this Option Agreement may be amended as necessary to secure for the
Company and the Optionee any benefits that may result from such legislation.
Any such amendment shall be made only upon the mutual consent of the parties,
which consent (of either party) may be withheld for any reason.
20. TAX INFORMATION AND NOTICE OF DISQUALIFYING DISPOSITION. This
Option is intended to be eligible for treatment as an Incentive Stock Option
under Section 422 of the Internal Revenue Code ("Code"). Whether this Option
will receive such tax treatment will depend, in part, on the actions by the
Optionee after exercise of this Option. For example, if the Optionee disposes
of any of the Stock acquired under this Option within two years after the Date
of Grant or within one year of the date of exercise of this Option, the Optionee
may lose the benefits of Code Section 422. Accordingly, the Company makes no
representations by way of the Plan, this Agreement, or otherwise, with respect
to the actual tax consequences of the grant or exercise of this Option or the
subsequent disposition of the Stock acquired under this Option.
If the Optionee sells or makes a disposition (within the meaning of
Section 422 of the Code) of any of the Stock acquired under this Option prior
to the later of (i) one year from the date of exercise of such Stock, or (ii)
two years from the Date of Grant, the Optionee agrees to give written notice
to the Company of such disposition. The notice shall include the Optionee's
name, the number, exercise price and exercise date of the shares of Stock
disposed of, and the date of disposition.
Neither Company nor any subsidiary makes any commitment or
guarantee that any federal or state tax treatment will apply or be available
to any person eligible for benefits under the Option.
IN WITNESS WHEREOF, the Company has caused this Option Agreement to
be duly executed by its officers thereunto duly authorized and the Optionee has
hereunto set his or her hand as of the date first written above.
NORTHERN CALIFORNIA BANCORP,
By:
----------------------------------- -------------------------------
President Optionee
25
<PAGE>
EXHIBIT
ITEM 11
Statement Reference Computation of Per Share Earnings
Primary earnings (loss) per share amounts were computed on the basis of the
weighted average number of shares of common stock during the year. The weighted
average number of shares used for this computation was 868,453 for 1998, 881,405
for 1997 and 890,212 for 1996, 1995, and 1994.
Fully diluted earnings (loss) per share amounts were computed on the basis
of the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents include
employee stock options. The weighted average number of shares used for this
computation was 1,108,686, 1,121,983, 1,109,455, 1,131,997 and 1,050,926, in
1998, 1997, 1996, 1995, and 1994, respectively.
<PAGE>
EXHIBIT
ITEM 21
Subsidiaries
Monterey County Bank
Incorporated in the State of California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FROM THE
COMPANY FORM 10-KSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,499,900
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 9,930,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 690,500
<INVESTMENTS-CARRYING> 6,265,000
<INVESTMENTS-MARKET> 6,305,300
<LOANS> 28,250,000
<ALLOWANCE> 336,200
<TOTAL-ASSETS> 51,103,400
<DEPOSITS> 42,851,700
<SHORT-TERM> 0
<LIABILITIES-OTHER> 817,100
<LONG-TERM> 4,000,000
0
0
<COMMON> 2,962,200
<OTHER-SE> 472,400
<TOTAL-LIABILITIES-AND-EQUITY> 3,434,600
<INTEREST-LOAN> 2,940,300
<INTEREST-INVEST> 816,600
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,756,900
<INTEREST-DEPOSIT> 1,357,700
<INTEREST-EXPENSE> 1,603,300
<INTEREST-INCOME-NET> 2,153,600
<LOAN-LOSSES> 130,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,700,400
<INCOME-PRETAX> 473,700
<INCOME-PRE-EXTRAORDINARY> 399,800
<EXTRAORDINARY> 64,400
<CHANGES> 0
<NET-INCOME> 464,200
<EPS-PRIMARY> .49
<EPS-DILUTED> .42
<YIELD-ACTUAL> 9.06
<LOANS-NON> 57,100
<LOANS-PAST> 62,900
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 180,100
<ALLOWANCE-OPEN> 336,200
<CHARGE-OFFS> 75,500
<RECOVERIES> 12,600
<ALLOWANCE-CLOSE> 336,200
<ALLOWANCE-DOMESTIC> 17,800
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 318,500
</TABLE>
