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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, 1999
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) for the period from to
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (408) 649-4600
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, 1999. $ 6,792,300.
As of March 1, 2000, the Corporation had 1,112,641 shares of common stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Corporation was $1,635,600, based on the most recent sale at $3.00 per
share on January 14, 2000.
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, 1999 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
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
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, 1999 and 1998 FS 2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1999 FS 3-4
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years
in the period ended December 31, 1999 FS 5
Consolidated Statements of Cash Flows for
each of the three years
in the period ended December 31, 1999 FS 6-7
Notes to Consolidated Financial Statements FS 8-33
ITEM 8 Changes in and Disagreements with Accountants and Financial Disclosure 41
PART III
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 47
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, 1999 the Bank had total assets, deposits and shareholders'
equity of approximately $65,079,500, $55,610,300 and $4,488,000, respectively.
EMPLOYEES
At December 31, 1999 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
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safe deposit 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.
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
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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.
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. The Gramm-Leach-Bliley
Act (the "Act") was signed by the President and enacted into law on November 12,
1999. The Act does three fundamental things: 1) it repeals key provisions of the
Glass Steagal Act to permit commercial banks to affiliate with investment bank,
2) it substantially modifies the Bank Holding Company Act of 1956 to permit
companies that own commercial banks to engage in any type of financial activity
and 3) it allows subsidiaries of banks to engage in a broad range of financial
activities that are not permitted for banks themselves. Management cannot
predict what effect these changes will have on the Bank or the 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.
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.
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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 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.
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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.
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.
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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 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.
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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, 1999, the Bank met the tests to be categorized as "well
capitalized" under the prompt corrective action regulations of the FDIC.
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
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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 1999 were $.00 to $.27, these rates are
projected to continue through the first half of 2000.
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 Insurance Funds Act of 1996
(DIFA) authorized the FICO to asses 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.
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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 1999 were
1.220, 1.176, 1.160 and 1.184. The FICO quarterly rate for the first quarter of
2000 is 2.12.
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 asses the impact such likely increased competition will have
on the Bank' 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 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
PAGE 12
<PAGE>
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 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
PAGE 13
<PAGE>
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.
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
PAGE 14
<PAGE>
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.
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,
PAGE 15
<PAGE>
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 11 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 shareholders, repurchased 11,133 and
3,482 shares of common stock at $3.00 per share in 1999 and 1998, respectively.
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, 1997 to December 31, 1999.
<TABLE>
<CAPTION>
Quarter/Year Price Volume(1)
------------------- --------- ---------
<S> <C> <C>
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
1st quarter of 1999 3.00 1,482
2nd quarter of 1999 3.00/3.50 2,173
3rd quarter of 1999 3.00 8,606
4th quarter of 1999 3.00 2,287
</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.
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
PAGE 17
<PAGE>
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, 1999 the Bank had
$1,014,800 in retained earnings. The Bank's net income for the last three fiscal
years less distributions to stockholders was $929,800.
In December 1999 and 1998 the Corporation paid a ten (10) percent stock
dividend. In December 1997 the Corporation paid a cash dividend of $.12 per
share. The Bank paid dividends totaling $50,000, $50,000.00 and $170,000.00 to
the Corporation during 1999, 1998 and 1997, 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.
Net income for each of the last three years was $453,800 in 1999, $464,200
in 1998, and $$225,900 in 1997. The primary net income per share for each of the
last three years was $.43, $.44, and $.22 respectively. The diluted net income
per share for the same time periods were $.36, $.39 and $.18, respectively.
Return on average shareholders' equity was 12.37%, 14.43% and 7.34% in 1999,
1998 and 1997, respectively. Return on average assets was .80%, .97%, and .54%
in 1999, 1998 and 1997, respectively.
Earnings before extraordinary items increased $54,000 in 1999. The increase
was due primarily to increases of $309,500 in net interest income after
provision for loan losses and $103,500 in other income; partially offset by
increases of $285,900 in operating expenses and $73,100 in income taxes. In 1998
an extraordinary item, litigation settlement, of $64,400 net of income tax
expense of $52,700 was recorded.
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 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,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Total interest income 4,296 3,757 3,399 3,140 2,952
Total interest expense 1,761 1,603 1,447 1,334 1,183
--------- --------- --------- --------- ---------
Net interest income 2,535 2,154 1,952 1,807 1,768
Provision for possible
loan losses 174 130 120 53 120
--------- --------- --------- --------- ---------
Net interest income after
provision for loan loss 2,361 2,024 1,832 1,754 1,648
Total other income 1,255 1,152 1,074 983 1,035
Total other expense 3,015 2,585 2,505 2,444 2,356
--------- --------- --------- --------- ---------
Income (loss) before taxes 601 591 402 293 327
Provision for income tax 147 127 176 80 49
--------- --------- --------- --------- ---------
Net income (loss) 454 464 226 213 278
Per Common Share
Data:
Basic Earnings
Income before extraordinary item (1) 0.43 0.38 0.22 0.20 0.26
Extraordinary Item (1) --- 0.06 --- --- ---
--------- --------- --------- --------- ---------
Net Income (1) 0.43 0.44 0.22 0.20 0.26
Diluted Earnings
Income before extraordinary item (2) .36 0.33 0.18 0.17 0.22
Extraordinary Item (2) --- 0.06 --- --- ---
--------- --------- --------- --------- ---------
Net Income (2) 0.36 0.39 0.18 0.17 0.22
Book value, end of period 3.57 3.30 2.91 2.72 2.61
Avg shares outstanding (3) 1,055,350 1,042,286 1,055,180 1,064,045 1,064,045
Balance Sheet Data:
Total loans, net of
unearned income (4) 39,217 28,250 25,606 25,310 22,494
Total assets 65,214 51,103 46,113 40,799 36,658
Total deposits 55,563 42,852 39,206 36,167 31,188
Stockholders' equity 3,993 3,435 3,031 2,898 2,776
</TABLE>
PAGE 20
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios (5):
Return on average assets 0.80% 0.97% 0.54% 0.56% 0.79%
Return on average
stockholders' equity 12.37% 14.43% 7.34% 7.25% 9.57%
Net interest spread 3.88% 4.45% 4.74% 4.91% 5.24%
Net interest margin 4.60% 5.20% 5.42% 5.54% 5.86%
Avg shareholders' equity
to average assets 6.49% 6.73% 7.37% 7.72% 8.24%
Primary capital to assets
at end of period 6.70% 7.32% 7.85% 7.68% 8.14%
Total loans to total deposits
at end of period 70.58% 65.92% 65.31% 65.31% 69.98%
Allowance to total loans
at end of period 1.01% 1.18% 1.04% 1.01% 1.00%
Nonperforming loans to total
loans at end of period 0.48% 0.25% 0.81% 1.13% 0.12%
Net charge-offs to
average loans 0.32% 0.23% 0.40% 0.10% 0.59%
</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 1,055,350,
for 1999, 1,042,286 for 1998, 1,055,180 for 1997 and 1,064,045 for 1996 and
1995.
(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 was 1,269,623, 1,211,083, 1,253,593, 1,249,033 and 1,263,944,
in 1999, 1998, 1997, 1996 and 1995, respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
PAGE 21
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees earned on
interest-earning assets and (b) interest paid on interest-bearing liabilities,
is the most significant component of the Bank's earnings. Changes in net
interest income from period to period result from increases or decreases in the
average balances of interest earning assets portfolio, the availability of
particular sources of funds and changes in prevailing interest rates.
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
1999 1998 1997 1999/98 1998/97
------------------------------- -------------- --------------
Amt % Amt %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income 4,026 3,757 3,399 269 7.16 358 10.53
Interest Expense 1,788 1,603 1,447 185 11.54 156 10.77
------- ------- ------- -------------- --------------
Net Interest Income 2,238 2,154 1,952 84 16.42 202 10.35
</TABLE>
Net interest income increased $83,800 (3.89%) from 1998 to 1999. Average
interest bearing assets increased 19.24%, while the average rate earned
decreased 91 basis points, resulting in an increase of $268,900 in total
interest income. Interest expense increased $185,100 the result of a 11.54%
increase in average interest bearing liabilities and a 31 basis points decrease
in the average rate paid. Average interest rates on loans decreased 136 basis
points. Of the $7,973,300 increase in earning assets $6,697,700 (84%) was in
loans.
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.
The following table shows the components of the Bank's net interest income,
setting forth, for each of the three years ended December 31, 1999, 1998 and
1997 (i) average assets, liabilities and investments, (ii) interest income
earned on interest-earning assets and interest expense paid on interest-bearing
liabilities, (iii) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, (iv) the net interest spread (i.e.,
the average
PAGE 22
<PAGE>
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 computed on a tax-equivalent basis,
resulting in adjustments to interest earned on non-taxable securities of
$158,400 and $130,400 in 1999 and 1998 respectively. Non-accrual loans and
overdrafts are included in average loan balances. Average loans are presented
net of unearned income.
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ---------------------------
Int Avg Int Avg Int Avg
Avg Earn % Avg Earn % Avg Earn %
Bal Paid Rate Bal Paid Rate Bal Paid Rate
------------------------- ------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 183 9 5.08 100 6 5.98 24 1 4.36
Invest securities - Taxable 3,434 221 6.45 3,642 250 6.86 4,498 347 7.70
Invest securities - Non-Taxable 6,063 463 7.63 4,518 359 7.95 --- --- ---
Federal funds sold 5,627 278 4.94 5,771 317 5.49 5,432 296 5.45
------------------------- ------------------------- --------------------------
Total investments 15,307 971 6.35 14,031 932 6.64 9,953 643 6.46
Loans
Construction 1,977 175 8.86 0 0 0.00 0 0 0.00
Real estate 18,727 1,668 8.91 14,641 1,516 10.36 14,648 1,503 10.26
Installment 407 53 13.05 508 61 11.96 491 60 12.16
Commercial 13,004 1,317 10.12 12,268 1,378 11.24 10,902 1,193 10.95
------------------------- ------------------------- --------------------------
Total loans 34,115 3,213 9.42 27,417 2,955 10.78 26,042 2,756 10.58
Total Interest
earning assets 49,422 4,184 8.47 41,449 3,887 9.38 35,995 3,399 9.44
========================= ========================= ==========================
Interest Bearing Liabilities:
Int-bearing demand 7,785 79 1.01 6,206 73 1.17 5,308 74 1.39
Money market savings 1,634 31 1.88 1,623 38 2.31 1,958 47 2.39
Savings deposits 3,463 68 1.95 2,846 63 2.22 2,184 48 2.21
Time deposits >$100M 9,404 524 5.57 8,042 471 5.86 7,056 408 5.78
Time deposits less than $100M 14,682 815 5.55 12,049 713 5.92 12,112 744 6.15
Other Borrowing 4,438 273 6.14 4,008 246 6.13 2,162 126 5.82
------------------------- ------------------------- --------------------------
Total interest
bearing liabilities 41,404 1,788 4.32 34,773 1,603 4.61 30,779 1,447 4.70
========================= ========================= ==========================
Net interest income 2,396 2,284 1,952
Net interest spread 4.15 4.77 4.74
Net yield on interest
earning assets 4.85 5.51 5.42
</TABLE>
PAGE 23
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
1999 VS 1998 1998 VS 1997
Increase(Decrease) Increase(Decrease)
DUE TO CHANGES DUE TO CHANGES
Avg Avg Avg Avg
Volume Rate Total Volume Rate Total
---------------------------------- --------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Int-bearing deposits
at other banks 5 (2) 3 3 2 5
Invest securities - Taxable (14) (14) (28) (66) (31) (97)
Invest securities - Non-Taxable 123 (19) 104 359 0 359
Federal funds sold (8) (31) (39) 18 3 21
---------------------------------- -------------------------------
Total investments 106 (66) 40 315 (27) 288
Loans
Construction 175 0 175 0 0 0
Real estate 423 (271) 152 (1) 15 14
Installment (12) 4 (8) 2 (1) 1
Commercial 83 (145) (62) 150 35 185
---------------------------------- -------------------------------
Total loans 669 (411) 257 151 49 200
Total Interest Earning Assets 748 (451) 297 466 22 488
Interest Bearing Deposits:
Int-bearing demand 19 0 19 12 (13) (1)
Money market savings 0 (101) (101) (8) (1) (9)
Savings deposits 14 (6) 8 15 0 15
Time deposits >$100M 80 (135) (56) 57 6 63
Time deposits less than $100M 156 (33) 123 (4) (28) (32)
Other Borrowing 26 (85) (58) 108 12 120
---------------------------------- -------------------------------
Total interest bearing deposits 294 (109) 185 180 (24) 156
================================== ===============================
Net change in net interest 480 (368) 112 286 46 332
</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 %
Classified Loans:
<S> <C>
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%
Real Estate - Construction 0.15%
Loans to Individuals 3.00%
Commercial 3.00%
SBA Loans - Unguaranteed portion 2.00%
Unfunded Loan Commitments .25%
SBA Loans - Guaranteed portion 0.00%
Cash Secured Loans 0.00%
</TABLE>
Although no assurance can be given that actual losses will not exceed the
amount provided for in the allowance, Management believes that the allowance is
adequate to provide for all estimated credit losses in light of all known
relevant factors. At the end of 1999, 1998 and 1997, the Bank's allowance stood
at 1.01 percent, 1. 18 percent, and 1.04 percent of gross loans, respectively.
Provisions were made to the allowance for loan losses in 1999, 1998 and 1997 of
$174,200, $130,000, and $$120,000, respectively. Loans charged off totaled
$128,600 in 1999, $75,500 in 1998, and $106,200 in 1997. Recoveries for these
same periods were $18,100 $12,600, and $1,800.
PAGE 25
<PAGE>
The Bank's non performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .48 percent .42 percent and.81 percent
as of the end of 1999, 1998 and 1997, 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 389 371 328
Other service charges, commissions
commissions and fees 440 398 418
Income from sales and servicing
of SBA loans 425 382 327
------------- ------------- --------------
Total non-interest Income 1,254 1,151 1,074
</TABLE>
Total non-interest income increased $103,500 (8.99%) in 1999 when compared
with 1998. Income from sales and servicing of SBA loans increased $42,100,
service charges on deposit accounts increased $18,000 and other service charges,
commissions and fees increased $42,500. Merchant credit card processing income
decreased by $13,800 during 1999 compared to 1998.
Total non-interest income increased $76,400 (7.11%) in 1998 when compared
with 1997. Income from sales and servicing of SBA loans increased $55,000 and
service charges on deposit accounts increased $42,600; while other service
charges, commissions and fees decreased $20,800. Merchant credit card processing
income decreased by $43,200 during 1998 compared to 1997.
PAGE 26
<PAGE>
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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
SBA loans authorized $7,083,000 $2,458,000 $3,551,800
==================== ===================== ======================
SBA loans sold $5,357,900 $2,811,900 $2,524,100
==================== ===================== ======================
SUMMARY OF INCOME FROM SALES AND
SERVICING OF SBA LOANS
Income from premium $267,500 $192,100 $171,800
Income from servicing 158,000 191,900 178,700
Less loan origination expense (1,000) (1,600) (24,000)
------------------- -------------------- ----------------------
Total income from sales and
servicing of SBA loans $424,500 $382,400 $326,500
=================== ==================== ======================
</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,
-------------------------------------------------
1999 1998 1997
------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and benefits 1,742 1,499 1,405
Occupancy and equipment expense 297 281 251
Professional fees 74 107 85
Data Processing 202 193 172
Other expenses 822 620 591
------------- ------------- ------------
Total other Expenses 3,137 2,700 2,505
</TABLE>
Salary expense increased $242,800 in 1999 as a result of the addition of
two positions; a Small Business Administration Lending Officer and a clerical
staff position, employee merit increases and bonus payments. Salary expense
increased $94,000 in 1998 as a result of the addition of Commercial Lending
Officer, employee merit increases and bonus payments. The increase in salary
expense of $42,700 in 1997 was due to merit increases, additions to staff for
the opening of the Pacific Grove branch, employee merit increases and bonus
payments.
Occupancy and equipment expenses increased $15,600 in 1999, with increases
of $10,400 in premises rent, $3,900 in depreciation and $3,700 in equipment
rental; while utilities decreased $3,000 and net merchant terminal expense
decreased $4,600. 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 expense decreased $5,000 due
to lower depreciation expense.
Data processing expense increased $9,400 in 1999 as the result of increases
in the number of accounts and transaction volumes and a 2% cost of living
adjustment. In 1998 data processing expense increased $20,300 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 1999 professional fees decreased $32,700 due to a $36,500 decrease in
legal fees. The Professional fees increased $21,400 in 1998 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
PAGE 28
<PAGE>
operations for 1998. Professional fees decreased $35,400 in 1997 due to a
$42,800 decrease in legal fees.
Other expenses for 1999 totaled $671,000 compared with $619,600 for 1998,
an increase of $52,000. Significant changes occurred in the following categories
with in increases advertising ($10,500), poppy account expense ($2,800),
director fees ($2,800), dues and memberships ($1,900), donations ($4,900), loan
expense ($10,800), bank fees ($4,800), ATM expense ($6,200), stationary/supplies
($9,900), telephone ($8,400), travel ($9,000); while decreases occurred in
business development ($5,300), auto expense ($2,000), entertainment/meals
($13,200), security expense ($9,100), insurance ($2,700), Year 2000 expense
($15,400).
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)
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.
PAGE 29
<PAGE>
Allocation of federal and state income taxes between current and deferred
portions is as follows: Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ------------------- -----------------
<S> <C> <C> <C>
Current
Federal $ 58,600 $ 49,600 $ 171,300
State 57,700 43,900 57,400
---------------------- ------------------- -----------------
116,300 93,500 228,700
---------------------- ------------------- -----------------
Deferred
Federal 22,800 (16,800) (31,400)
State 7,900 (2,800) (21,700)
---------------------- ------------------- -----------------
30,700 (19,600) (53,100)
---------------------- ------------------- -----------------
$ 147,000 $ 73,900 $ 175,600
====================== =================== =================
</TABLE>
A reconciliation of the statutory federal income tax rate and the
effective tax rate on (loss) income follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ------------------- -----------------
<S> <C> <C> <C>
Statutory federal tax rate 34.0 % 34.0 % 34.0 %
State franchise 7.2 7.2 7.2
Municipal bond income (16.7) (25.6) ---
Other, net --- --- 2.5
---------------------- ------------------- -----------------
Effective tax rates 24.5 % 15.6 % 43.7 %
====================== =================== =================
</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>
1999 1998
------------------ ----------------
<S> <C> <C>
Deferred tax asset
Federal $ 189,100 $ 173,800
State 59,800 58,200
---------------- -------------
Net deferred tax asset $ 248,900 $ 232,000
</TABLE>
PAGE 30
<PAGE>
The components of the net deferred tax asset, included in other assets, are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred tax asset
Accrual to cash adjustments 95,100 $ 142,600
Investments:
Net unrealized (gain) loss on
securities available for sale 14,500 (17,000)
State franchise tax 34,100 29,600
Allowance for loan losses 119,100 94,200
Depreciation (13,900) (17,400)
--------------- ---------------
Net deferred tax asset 248,900 232,000
</TABLE>
Management has evaluated the deferred tax asset recognized under Statement
109. As of December 31, 1999 and 1998 management expects all temporary
differences to be offset against future taxable income, and no valuation reserve
was deemed necessary.
LOANS
Loans, the largest component of earning assets, represented 69.03% of
average earning assets, and 52.30% of average total assets during 1999, compared
with 66.15% and 53.10%, respectively during 1998. In 1999, average loans
increased 24.43% from $27,417,000 in 1998 to $34,114,800. Average commercial
loans increased $735,700 (6.00%) and real estate loans decreased $4,086,100
(27.91%); while average installment loans decreased $101,000 (19.18%).
Contruciton loans averaged $1,976,900in 1999.
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.
PAGE 32
<PAGE>
The following table presents the composition of the loan portfolio,
including loans held for sale, at December 31 for the last five years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial 11,441 12,084 10,843 10,120 10,059
Real estate, construction 3,459 356 347 --- ---
Real estate, mortgage 23,788 15,294 13,921 14,336 11,246
Installment 435 390 520 583 888
Government guaranteed
loans purchased 145 159 284 307 328
--------------------------------------------------------------------
39,267 28,282 25,914 25,346 22,521
Less:
Allowance for possible loan losses (400) (336) (269) (254) (225)
Deferred origination fees, net (49 (32 (40 (37 (27)
--------------------------------------------------------------------
Net Loans 38,817 27,914 25,606 25,056 22,270
====================================================================
</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,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing,
PAST DUE 90 DAYS OR MORE:
Real Estate 63 63 134 209 0
Commercial 0 0 0 14 0
Installment 0 0 0 0 0
------------ ------------ ------------ ------------ ------------
Total accruing 63 63 134 223 0
NONACCRUAL LOANS:
Real Estate 0 0 0 0 0
Commercial 125 57 55 35 31
Installment 0 0 21 23 0
------------ ------------ ------------ ------------ ------------
Total non-accrual 125 57 76 58 31
Total non-performing 188 120 210 281 31
Total loans end of period 39,267 28,282 25,914 25,346 22,521
Ratio of non-performing loans
to total loans at end of period 0.48% 0.42% 0.81% 1.11% 0.14%
</TABLE>
PAGE 34
<PAGE>
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.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997 1996 1995
----------- ------------ ------------ ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans outstanding 34,115 27,414 26,042 24,647 26,663
Allowance, beginning of period 336 269 254 225 245
Loans charged off during period:
Commercial 128 69 101 39 147
Installment 0 5 5 5 12
Real Estate 0 2 0 0 0
Other 1 0 0 1 0
------------- ----------- ------------ ------------- ------------
Total charge offs 129 75 106 45 159
Recoveries during period:
Commercial 13 12 1 8 13
Installment 5 1 1 13 6
Other 0 0 0 0 0
------------- ----------- ------------ ------------- ------------
Total recoveries 18 13 2 21 19
Net Loans charged off
during the period 111 63 104 24 140
Additions to allowance for
possible loan losses 174 130 120 53 120
Allowance, end of period 400 336 269 254 225
Ratio of net loans charged
off to average Loans
outstanding during the
period 0.32% 0.23% 0.40% 0.10% 0.53%
Ratio of allowance to total
at end of period 1.01% 1.18% 1.04% 1.01% 1.00%
</TABLE>
PAGE 35
<PAGE>
FUNDING SOURCES
The Corporation has a line of credit, in the amount of $1,000,000, from the
Pacific Coast Bankers' Bank. The line of credit has an interest rate of Wall
Street Journal Prime Rate plus seventy five (75) basis points and is secured by
518,884 shares of Monterey County Bank common stock. At December 31, 1999
$750,000 had been advanced on the line of credit.
Average deposits increased 20.08% to $47,982,200 in 1999 from $39,958,000
in 1998. In 1999 average certificates of deposit increased 19.88%, average
demand deposits increased 19.86% and average interest checking, money market and
savings accounts as a group increased 20.67%. Average certificates of deposit
represented 50.28% of average deposits in 1999 compared with 50.28% in 1998.
Average interest checking, money market and savings accounts as a group were
26.85% of average deposits in 1999 compared with 26.72% in 1998. Average demand
deposits represented 22.96% of average deposits in 1999 compared with 23.01% in
1998.
The Bank has lines of credit from the Federal Reserve Bank of San
Francisco, the Federal Home Loan Bank of San Francisco and Pacific Coast
Bankers' Bank with maximum borrowing limits on December 31, 1999 of $13,500,000,
$4,605,000 and $1,000,000, respectively. The Federal Reserve Bank line of credit
is secured by certain of the Bank's commercial and real estate loans and
municipal securities. 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. The Pacific Coast
Bankers' Bank line of credit is unsecured. The Bank did not utilize any short
term borrowings in 1999, 1998 or 1997.
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, 1999,
stockholders' equity was $3,993,000 versus $3,434,600 at December 31, 1998. The
Corporation issued 10% stock dividends in 1999 and 1998 and paid a cash dividend
of $.12 per share in 1997. The Bank paid cash dividends totaling $50,000,
$50,000, and $170,000 to the Corporation in 1999, 1998 and 1997, 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.
PAGE 36
<PAGE>
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 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 Bank had a Tier 1 capital ratio of 9.75% and 9.79% at
December 31, 1999 and 1998, respectively, and a total risk-based capital ratio
of 10.62% and 10.77% at December 31, 1999 and 1998, respectively.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 7.14% and 7.24% at December 31, 1999 and 1998,
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 lines of credit from the
Federal Reserve Bank of San Francisco of approximately $13,500,000, the Federal
Home Loan Bank of San Francisco of approximately $8,300,000 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, 1999, 1998 and 1997 was 23.92 percent, 23.92
percent, and 23.46 percent respectively, while its average loan to deposit ratio
for such years was 71.10 percent, 68.61 percent and 72.17 percent respectively.
PAGE 37
<PAGE>
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.
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, 1999 the affect of a 2% increase in the fed funds
rate, expressed as a percentage of equity, was negligible, while a 2% decrease
in the fed funds rate was a negative 3.0% of equity.
The Corporation's sources of revenues and liquidity are the dividends, tax
equalization payments or management fees from the Bank, gains on securities held
in a trading account and the line of credit from the Pacific Coast Bankers'
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 Corporation maintains a trading account, at fair value, consisting of
marketable securities. At December 31, 1999 the account value was $135,000. In
addition the Corporation has a $40,000 investment in the Community Bank
Insurance Agency, LLC which provides various services to Community Banks and
their customers.
The following table sets forth the book and market value of the Bank's
investment securities as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
(Dollars in thousands)
1999 1998
-------------------------- ----------------------------
Book Market Book Market
value value value value
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Bank Stock 406 406 541 541
Pacific Coast Bankers'
Bank Stock 350 350 150 150
U.S. Government Agencies 1,000 967 150 150
--------- ----------- ----------- -----------
Total 1,756 1,723 841 841
========= =========== =========== ===========
Held to maturity:
State and Local Agencies 6,791 6,194 4,765 4,788
U.S. Government Agencies 2,499 2,383 1,501 1,517
--------- ----------- ----------- -----------
Total 9,290 8,577 6,265 6,305
========= =========== =========== ===========
</TABLE>
PAGE 39
<PAGE>
The following table summarizes the maturity of the Bank's investment
securities at December 31, 1999:
<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 --- --- --- 6,791 6,791
U.S. Government Agencies --- --- 1,500 1,999 3,499
Federal Home Loan Stock 406 --- --- --- 406
Pacific Coast Bankers' Bank 350 --- --- --- 350
----------- ----------- ----------- ---------- ------------
Total 756 0 1,500 8,790 11,046
=========== =========== =========== ========== ============
</TABLE>
YEAR 2000
The Corporation has not experienced any disruptions associated with the
century date change. Management feels that the extensive testing of hardware and
mission critical systems and the monitoring of borrowers' Year 2000 readiness
limited its exposure to disruptions. The Corporation's Year 2000 expenses were
$13,400 in 1999 and $28,800 in 1998.
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 FS-1
Consolidated Balance Sheets at December 31, 1999 and 1998 FS-2
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1999 FS-3-4
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1999 FS-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999 FS-6-7
Notes to Consolidated Financial Statements FS-8-33
</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 1999, 1998 or 1997.
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, 1999, are as follows:
<TABLE>
<CAPTION>
NAME & POSITION WITH BANK AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Charles T. Chrietzberg, Jr. 58 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 56 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. 70 Partner - Hudson, Martin, Ferrante & Street, Monterey
Director since 1976
Carla S. Hudson, CPA 46 Partner - Huey and Hudson, Certified Public Accountants
Director since 1994
John M. Lotz 58 President and Chief Executive Officer, of Couroc of Monterey
Director since 1991 since 1996. Real estate developer 1991 - 1996.
Ronald J. Keenan 56 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 52 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
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
Andre G. Herrera 35 Vice President, Corporate Secretary of Northern California Bancorp, Inc.
Vice President, and Corporate Secretary of Monterey County
Corporate Secretary Bank and since 1/96; Vice President, Manager Management
Information Systems and Merchant Services since 2/94.
Mary Ellen Stanton 62 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 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
1999.
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 1999.
<TABLE>
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. 1999 $156,769 $160,000 $3,578 (1) None None $13,109 (2)
Chairman, President & CEO 1998 $156,020 $160,000 $5,343 (1) None 25,000 $2,199 (2)
1997 150,938 $160,000 $5,197 (1) None None $7,530 (2)
Bruce N. Warner 1999 78,765 25,888 None None None None
Senior Vice President, 1998 74,254 28,358 None None 5,000 None
Chief Financial
Officer, Chief Operating Officer 1997 67,268 18,020 None None 10,000 None
</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.
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 $50,000 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, 2000. It provides
for a base salary of $180,000 per year, a Bank furnished automobile or
automobile allowance, and a bonus based on profits. The bonus, not to exceed
$160,000 annually, will equal $10,000 for each 0.1 percent that the Bank's
profits exceed 1.0 percent return on average assets plus $10,000 for each 1
percent that the Bank's return on equity exceeds 10.0 percent. Under the terms
of the contract, if Mr. Chrietzberg is terminated other than for cause (as
defined in the contract), he is entitled to severance compensation for his
monthly salary plus a pro rated incentive bonus for the greater of 24 months or
the remaining term of his contract (which ends in December, 2002); however, if
the termination follows within twelve (12) months after a change in control
transaction (as defined in the contract), he is entitled to such severance
compensation for the greater of 24 months or the remainder of the term of the
contract.
The following tables set forth certain information regarding the long term
incentive plans provided for Mr. Chrietzberg.
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF OTHER PERIOD NON-STOCK PRICE-BASED PLANS
SHARES, UNITS UNTIL --------------------------------
OR OTHER RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM
NAME (#) PAYMENT ($ 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 lifetime
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 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.
44
<PAGE>
In August, 1999, the Board of Directors amended the Salary Continuation
Agreement for the benefit of Mr. Chrietzberg which was approved in December,
1993. The amended Salary Continuation Agreement provides for payments of $75,000
per year, for Mr. Chrietzberg's lifetime. The amended Salary Continuation
Agreement provides the following with regard to the division of death proceeds
should Mr. Chrietzberg die before his sixty-fifth (65th) birthday; his
beneficiary(ies) shall be entitled to an amount equal to $1,440,000 or the net
at risk insurance portion of the proceeds, whichever amount is less. The net at
risk insurance portion is the total proceeds less the cash value of the policy.
Should Mr. Chrietzberg die on or subsequent to his sixty-fifth (65th) birthday,
his beneficiary(ies) shall be entitled to an amount equal to $1,000,000 or the
net at risk insurance portion of the proceeds, whichever is less, and the Bank
shall be entitled to the remainder of such proceeds.
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 1999, 1998 and 1997 was $13,100, $2,199, and $$7,530, respectively. Based
upon the current projected earnings of the insurance used to informally 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. The Surviving
Income Agreement was terminated upon adoption of the amended Salary Continuation
Agreement.
During the year ended December 31, 1999 no stock options were granted under
the Corporation's' 1998 Amended Stock Option Plan.
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 1999, 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, 1999 and the value of such options based
on the last transaction in 1999, which the Corporation has knowledge of, and
certain information concerning unexercised options under the 1998 Stock Option
Plan.
Aggregated Option/Sar Exercises in Last Fiscal Year
and FY-End Options/Sar Values
<TABLE>
<CAPTION>
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. 66,000 66,000 30,250 None 15,750 None
Bruce N. Warner 6,050 5,650 18,150 None 11,950 None
</TABLE>
In 1999, each director received a standard fee of $500 per regular board
meeting attended and $150 for each committee meeting attended.
45
<PAGE>
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. 498,642 (1) 43.63
P.O. Box 1344
Carmel, CA 93921
David S. Lewis, Trust 115,600 10.39
30500 Aurora del Mar
Carmel, CA 93923
</TABLE>
(1) Includes 30,250 shares subject to employee stock options and 13,838 shares
held beneficially for Mr. Chrietzberg and Mrs. Chrietzberg in Individual
Retirement Accounts where voting power is shared with the custodian of the
account. 316,000 shares of the Common Stock owned by Mr. Chrietzberg are
pledged to secure a loan from an unaffiliated bank.
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>
AMOUNT AND SHARES
NATURE OF SUBJECT TO PERCENT OF
BENEFICIAL PERCENT OF PURCHASE CLASS WITHOUT
NAME OWNERSHIP CLASS OPTIONS OPTION SHARES
- -------------------------------------------- ---------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Charles T. Chrietzberg, Jr. 498,642(1)(2)(3) 43.63% 30,250 42.10%
Sandra G. Chrietzberg 498,642(2)(3) 43.63% 30,250 42.10%
Peter J. Coniglio 50,486(4)(5) 4.44% 24,200 2.36%
Carla S. Hudson 20,089(6) 1.78% 15,125 0.45%
John M. Lotz 21,175(7) 1.87% 18,150 0.27%
All Directors and Executive
Officers as a group 625,530(8) 51.34% 105,875 46.70%
</TABLE>
46
<PAGE>
(1) Includes 30,250 shares subject to his employee stock options. 316,000
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.
(2) The shares include an aggregate of 13,838 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 24,200 shares subject to the respective director's stock options.
Of the remaining shares 19,934 are held in a family trust controlled by Mr.
Coniglio, as to which he has sole voting and investment power, while 6,352
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 15,125 shares subject to the respective director's stock options.
The remaining shares are held jointly with family members, other than 1,210
shares held in a corporate pension, as to which Ms. Hudson has voting and
investment power.
(7) Includes 18,150 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 18,150 shares subject to options
held by executive officers who are not also directors.
47
<PAGE>
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, 1999
------- ------------------------
PERCENT OF PERCENT OF
EQUITY EQUITY
NAME AMOUNT CAPITAL AMOUNT CAPITAL
- ------------------------------------------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
Peter J. Coniglio 900,000 24.63% 895,178 22.53%
Carla S. Hudson 72,950 2.10% 0 0.00%
John M. Lotz 109,577 3.19% 2,308 0.06%
Directors, Principal
Shareholder, and Officers
as a Group (5 in number) 1,082,527 31.52% 897,486 22.59%
</TABLE>
48
<PAGE>
ITEM 13. EXHIBITS AND REPORTS
A. EXHIBITS
<TABLE>
<CAPTION>
ITEM DESCRIPTION
---- -----------
<S> <C>
2 Plan of Merger and Meger 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 10KSB dated December 31, 1995.
3 (i) Articles of Incorporation
Filed as exhibit to Form 10KSB dated December 31, 1995.
3 (ii) Bylaws
Filed as exhibit to Form 10KSB dated December 31, 1995.
10 (i) D Lease agreement Carmel Branch Office
Filed as exhibit to Form 10KSB dated December 31, 1995.
10 (ii) A (1) Employment Contract of Charles T. Chrietzberg, Jr., dated January 1, 2000
(2) Deferred Compensation Agreement, dated December 31, 1993
Filed as exhibit to Form 10KSB dated December 31, 1995.
(3) Northern California Bancorp, Inc. 1998 Stock Option Plan and Stock Option Agreements
Filed as exhibit to Form 10KSB dated December 31, 1998.
(4) Amendment to the Salary Continuation Agreement Dated December 31, 1993
(5) Life Insurance Endorsement Method Split Dollar Plan Agreement
11 Statement Reference Computation of Per Share Earnings
21 Subsidiaries
</TABLE>
B. REPORTS
None
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, 2000 By: /s/ CHARLES T. CHRIETZBERG, JR.
---------------- -----------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: MARCH 18, 2000 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.
<TABLE>
<CAPTION>
NAME POSITION DATE
- ---- -------- -------------
<S> <C>
/s/ CHARLES T. CHRIETZBERG, JR. MARCH 18, 2000
- ------------------------------- --------------
Charles T. Chrietzberg, Jr.
Director
/s/ SANDRA G. CHRIETZBERG MARCH 21, 2000
- ------------------------------- --------------
Sandra G. Chrietzberg
Director
/s/ PETER J. CONIGLIO MARCH 18, 2000
- ------------------------------- --------------
Peter J. Coniglio
Director
/s/ CARLA S. HUDSON MARCH 20, 2000
- ------------------------------- --------------
Carla S. Hudson
Director
/s/ JOHN M. LOTZ MARCH 21, 2000
- ------------------------------- --------------
John M. Lotz
Director
</TABLE>
50
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL
STATEMENTS FS-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets FS-2
Consolidated Statements of Operations FS-3-4
Consolidated Statements of Changes in Shareholders' Equity FS-5
Consolidated Statements of Cash Flows FS-6-7
Notes to Consolidated Financial Statements FS-8-33
<PAGE>
[LETTERHEAD]
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,
1999 and 1998 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
HUTCHINSON AND BLOODGOOD LLP
January 20, 2000
FS-1
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks (Note 2) $ 10,745,200 $ 12,429,900
Time deposits with other financial institutions 200,000 100,000
Trading assets (Note 3) 135,000 --
Securities available for sale (Note 4) 1,723,100 690,500
Securities held to maturity (Note 4) 9,290,300 6,265,000
Other investments 40,000 --
Loans held for sale 665,300 951,600
Loans net (Notes 6 and 14) 38,152,100 26,962,200
Bank premises and equipment, net (Note 7) 1,849,100 1,868,600
Interest receivable and other assets 2,414,300 1,835,600
------------- -------------
Total assets $ 65,214,400 $ 51,103,400
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest-bearing demand $ 11,792,700 $ 9,897,400
Interest-bearing demand 9,519,200 8,960,400
Savings 2,470,900 3,605,100
Time 19,143,100 12,355,300
Time in denominations of $100,000 or more 12,636,700 8,033,500
------------- -------------
Total deposits 55,562,600 42,851,700
Short-term borrowing (Note 8) 750,000 --
Federal Home Loan Bank borrowed funds (Note 9) 4,000,000 4,000,000
Interest payable and other liabilities 908,800 817,100
------------- -------------
Total liabilities 61,221,400 47,668,800
------------- -------------
Commitments (Note 11)
Shareholders' equity (Notes 12 and 13)
Common stock, no stated par value, authorized: 2,500,000
shares, issued and outstanding: 1,112,641 in 1999 and
940,322 in 1998 3,395,400 2,962,200
Retained earnings 659,600 504,400
Accumulated other comprehensive income (62,000) (32,000)
------------- -------------
Total shareholders' equity 3,993,000 3,434,600
------------- -------------
Total liabilities and stockholders' equity $ 65,214,400 $ 51,103,400
============= =============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
FS-2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $ 3,474,100 $ 2,940,300 $ 2,755,700
Time deposits with financial institutions 9,300 6,000 1,000
Investment securities 534,500 496,500 346,500
Federal funds sold 277,800 314,100 295,900
-------------- ------------- -------------
Total interest income 4,295,700 3,756,900 3,399,100
-------------- ------------- -------------
Interest expense
Interest-bearing transaction accounts 109,700 110,300 120,500
Savings and time deposit accounts 882,600 778,700 797,900
Time deposits in denominations of $100,000 or more 523,500 468,700 402,900
Federal Home Loan Bank and Pacific Coast Bankers'
Bank 272,600 245,600 125,900
-------------- ------------- -------------
Total interest expense 1,788,400 1,603,300 1,447,200
-------------- ------------- -------------
Net interest income 2,507,300 2,153,600 1,951,900
Provision for loan losses (Note 6) 174,200 130,000 120,000
-------------- ------------- -------------
Net interest income, after provision for loan
loss 2,333,100 2,023,600 1,831,900
-------------- ------------- -------------
Other income
Service charges on deposit accounts 388,900 371,000 328,400
Income from sales and servicing of SBA loans
(Note 5) 424,500 382,400 326,500
Other income 440,600 397,100 419,200
-------------- ------------- -------------
Total other income 1,254,000 1,150,500 1,074,100
-------------- ------------- -------------
Operating expense
Salaries and employee benefits 1,741,900 1,499,100 1,405,100
Occupancy and equipment expense 297,000 281,300 251,000
Professional fees 74,100 107,800 85,400
Data processing 202,300 192,600 172,300
Other general and administrative 671,000 619,600 590,700
-------------- ------------- -------------
Total operating expenses 2,986,300 2,700,400 2,504,500
-------------- ------------- -------------
Income before tax provision 600,800 473,700 401,500
Income tax provision (Note 10) 147,000 73,900 175,600
-------------- ------------- -------------
Income before extraordinary item 453,800 399,800 225,900
Extraordinary item - litigation settlement
(net of income tax expense of $52,700)
(Note 18) -- 64,400 --
-------------- ------------- -------------
Net Income $ 453,800 $ 464,200 $ 225,900
============== ============= =============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
FS-3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
1999 1998 1997
Earnings per common share (Note 13)
<S> <C> <C> <C>
Basic
Income before extraordinary item $ 0.43 $ 0.38 $ 0.22
Extraordinary item -- 0.06 --
---------- ----------- -----------
Net income $ 0.43 $ 0.44 $ 0.22
========== =========== ===========
Diluted
Income before extraordinary item $ 0.36 $ 0.33 $ 0.18
Extraordinary item -- 0.06 --
---------- ----------- ----------
Net income $ 0.36 $ 0.39 $ 0.18
========== =========== ==========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
FS-4
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMPRE-
NUMBER OF COMMON RETAINED HENSIVE INCOME
SHARES STOCK EARNINGS (LOSS) TOTAL
<S> <C> <C> <C> <C> <C>
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 loss
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
-----------------
Comprehensive income:
Net income for the year -- -- 453,800 -- 453,800
Change in net unrealized gain
on securities and other assets
net of tax effects -- -- -- (30,000) (30,000)
-----------------
Total comprehensive income 423,800
-----------------
10% common stock dividend 99,302 297,900 (298,600) -- (700)
Repurchase of common stock (11,133) (34,200) -- -- (34,200)
Exercise of stock options (Note 13) 84,150 169,500 -- -- 169,500
-------------- ---------------- ------------- ---------------- -----------------
Balance at December 31, 1999 1,112,641 $ 3,395,400 $ 659,600 $ (62,000) $ 3,993,000
============== ================ ============= ================ =================
</TABLE>
FS-5
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 453,800 $ 464,200 $ 225,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 144,000 139,100 135,200
Amortization of discounts on investment securities (2,800) (2,300) (2,500)
Provision for loan losses 174,200 130,000 120,000
Amortization of deferred servicing premium 18,100 13,200 19,100
Amortization of deferred gains on SBA loans (3,000) (4,200) (4,400)
Increase in trading assets (135,000) -- --
Increase (decrease) in other liabilities 3,100 (81,100) 173,900
(Increase) decrease in other assets (409,700) (373,100) 124,500
Increase in deferred tax asset (16,900) (19,600) (53,100)
Increase (decrease) in interest payable 88,600 25,600 (39,000)
Increase in interest receivable (152,100) (28,200) (16,900)
------------ ------------- ------------
Net cash provided by operating activities 162,300 263,600 682,700
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of time deposits (100,000) -- (100,000)
Proceeds from maturity of investment securities 1,208,400 3,995,000 2,500,000
Purchase of investments (5,522,700) (4,977,300) (5,675,500)
Net increase in loans (11,189,900) (2,030,100) (540,600)
(Increase) decrease in loans held for sale 286,300 (408,200) (128,900)
Proceeds from sale of equipment 1,800 -- --
Additions to Bank premises and equipment (126,400) (108,700) (369,900)
------------ ------------- ------------
Net cash used by investing activities (15,442,500) (3,529,300) (4,314,900)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 12,710,900 3,646,100 3,038,500
Proceeds from borrowings 750,000 1,000,000 2,000,000
Proceeds from exercise of stock options 169,500 -- --
Repurchase of common stock (34,200) (10,400) (62,800)
Cash dividends paid on common stock (700) (700) (103,000)
------------ ------------- ------------
Net cash provided by financing activities 13,595,500 4,635,000 4,872,700
------------ ------------- ------------
Net increase (decrease) in cash and cash (1,684,700) 1,369,300 1,240,500
equivalents
CASH AND CASH EQUIVALENTS, BEGINNING 12,429,900 11,060,600 9,820,100
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, ENDING $ 10,745,200 $ 12,429,900 $ 11,060,600
============ ============= ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
FS-6
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
OTHER CASH FLOW INFORMATION
<S> <C> <C> <C>
Interest paid $ 1,609,000 $ 1,421,600 $ 1,360,300
============== ============= =============
Income taxes paid $ 110,200 $ 241,500 $ 70,000
============== ============= =============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
FS-7
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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 consolidated financial
statements to conform to the 1998 and 1999 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.
FS-8
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRADING ACTIVITIES
The Corporation engages in trading activities for its own account.
Securities that are held principally for resale in the near term are
recorded in the trading assets account at fair value with changes in fair
value recorded in earnings. Interest and dividends are included in net
interest income.
Quoted market prices, when available, are used to determine the fair value
of trading instruments. If quoted market prices are not available, then
fair values are estimated using pricing models, quoted prices of
instruments with similar characteristics, or discounted cash flows.
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.
FS-9
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALES AND SERVICING OF SBA LOANS (CONCLUDED)
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. Since 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.
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.
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.
FS-10
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
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.
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 disclosures.
FS-11
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
FS-12
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," 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 Accounting Principles Board ("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, has provided 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 13.)
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 1,055,350 for 1999,
1,042,286 for 1998 and 1,055,180 for 1997. The weighted average number of
shares used in the computation of earnings per share assuming dilution of
stock options was 1,269,623 for 1999, 1,211,083 for 1998 and 1,253,593 for
1997. The 10% stock dividend was retroactively reflected in the 1998 and
1997 weighted shares.
FS-13
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning
after June 15, 1999. This Statement establishes accounting and reporting
standards for derivative instruments and hedging activities, including
certain derivative instruments embedded in other contracts, and requires
that an entity recognize all derivatives as assets or liabilities in the
balance sheet and measure them at fair value. Management evaluated the
impact of adopting this Statement on the consolidated financial statements,
and determined there was no material impact.
COMPREHENSIVE INCOME
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 components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- -------------
<S> <C> <C> <C>
Unrealized holding gains (losses) on available-for-sale
securities $(54,600) $ (88,500) $ 30,400
Tax effect 24,600 39,800 (13,700)
-------------- --------------- -------------
Net-of-tax amount $(30,000) $ (48,700) $ 16,700
============== =============== =============
</TABLE>
NOTE 2. CASH AND DUE FROM BANKS
Aggregate reserves (in the form of cash and deposits with the Federal
Reserve Bank) of $300,000 were maintained to satisfy federal regulatory
requirements at December 31, 1999.
NOTE 3. TRADING ASSETS
At December 31, 1999, trading assets, at fair value, consist of marketable
equity securities in the amount of $135,000.
FS-14
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 4. 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, 1999---------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government Agencies $ 1,000,000 $ -- $ 32,400 $ 967,600
Federal Home Loan Bank 405,600 -- -- 405,600
Pacific Coast Banker's
Bank Stock 349,900 -- -- 349,900
----------------- ---------------- --------------- ----------------
Total securities available
for sale $ 1,755,500 $ -- $ 32,400 $ 1,723,100
================= ================ =============== ================
SECURITIES HELD TO MATURITY
State and Local agencies $ 6,790,900 $ -- $ 596,800 $ 6,194,100
U.S. Government agencies 2,499,400 -- 116,700 2,382,700
----------------- ---------------- --------------- ----------------
Total securities held to
maturity $ 9,290,300 $ -- $ 713,500 $ 8,576,800
================= ================ =============== ================
------------------------DECEMBER 31, 1998---------------------------
<CAPTION>
<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
================= ================ =============== ================
</TABLE>
FS-15
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 4. 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, 1999 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>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------- -----------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ -- $ --
Due between one and five years -- -- -- --
Due between five and ten years -- -- 1,500,400 1,451,300
Due after ten years 1,000,000 967,600 7,789,900 7,125,500
---------------- --------------- ---------------- ----------------
$1,000,000 $ 967,600 $9,290,300 $8,576,800
================ =============== ================ ================
</TABLE>
Proceeds from maturity of investment securities during 1999 and 1998,
respectively, were $1,208,400 and $3,995,000. Realized gains during 1999
were $600, and no gain or loss was realized from the sale of investments in
1998 and 1997.
FS-16
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 5. SALES AND SERVICING OF SBA LOANS
A summary of the activity of SBA loans follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
SBA loans authorized $ 7,083,000 $ 2,458,000 $ 3,551,800
================= ================= =================
SBA loans sold $ 5,357,900 $ 2,811,900 $ 2,524,100
================= ================= =================
</TABLE>
A summary of income from SBA loans sold is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Income from premiums $ 267,500 $ 192,100 $ 171,800
Income from servicing 158,000 191,900 178,700
Less loan origination expense (1,000) (1,600) (24,000)
------------ ------------ ------------
$ 424,500 $ 382,400 $ 326,500
============ ============ ============
</TABLE>
FS-17
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 6. LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Commercial and industrial $ 10,718,500 $ 11,131,900
Construction 3,459,000 355,600
Real estate, mortgage 23,787,600 15,294,100
Installment 491,500 389,900
Government guaranteed loans purchased 144,900 158,800
------------------ ------------------
38,601,500 27,330,300
Less allowance for loan losses (400,000) (336,200)
Less deferred origination fees, net (49,400) (31,900)
------------------ ------------------
Loans, net $ 38,152,100 $ 26,962,200
================== ==================
</TABLE>
The maturities of total loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Loans with a fixed rate:
Due within one year $ 2,467,800 $ 1,919,000
Due one to five years 15,286,700 8,307,200
Due over five years 2,814,900 2,516,500
------------------ ------------------
20,569,400 12,742,700
Loans with a variable rate 18,032,100 14,587,600
------------------ ------------------
Total loans $ 38,601,500 $ 27,330,300
================== ==================
</TABLE>
FS-18
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 6. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Beginning balance $336,200 $269,100 $253,500
Recoveries 18,100 12,600 1,800
Loans charged off (128,500) (75,500) (106,200)
Provision for loan losses 174,200 130,000 120,000
--------------- ---------------- ----------------
Ending balance $400,000 $336,200 $269,100
=============== ================ ================
</TABLE>
As of December 31, 1999 and 1998, the recorded investment in impaired loans
totaled $610,800 and $180,100 with corresponding valuation allowances of
$39,700 and $17,800, respectively. No additional amounts are committed to
be advanced in connection with impaired loans.
For the years ended December 31, 1999 and 1998, the average recorded
investment in impaired loans amounted to approximately $176,400 and
$262,200, respectively. Non-accrual loans totaled $124,700 and $57,100 at
December 31, 1999 and 1998, respectively. If interest on non-accrual loans
had been accrued, such income would have approximated $3,900 and $8,000 for
1999 and 1998, respectively.
NOTE 7. 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
1999 1998 USEFUL LIVES
<S> <C> <C> <C>
Building and land $ 915,400 $ 915,400 40 years
Building improvements 400,200 338,600 40 years
Leasehold improvements 469,800 469,800 Lease term
Furniture and equipment 1,351,300 1,391,800 3-8 years
----------------- -----------------
3,136,700 3,115,600
Accumulated depreciation (1,287,600) (1,247,000)
----------------- -----------------
$ 1,849,100 $ 1,868,600
================= =================
</TABLE>
Depreciation expense of $144,000, $139,100, and $135,200 was included in
occupancy and equipment expense for the years ended 1999, 1998, and 1997,
respectively.
FS-19
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 8. SHORT-TERM BORROWING
The Corporation entered into a revolving line of credit borrowing agreement
with Pacific Coast Bankers' Bank, which expires May 1, 2000. The line of
credit has a $1,000,000 limit with an option to term out $500,000, fully
amortized, for five years. The agreement requires monthly interest
payments, and the credit line is secured by 518,884 shares of Monterey
County Bank stock. The rate of interest is the prime rate as published in
the Wall Street Journal (the "Index") plus .750 percentage points over the
Index. At December 31, 1999, the interest rate was 9.25%, and the
outstanding principal balance was $750,000.
NOTE 9. 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, 1999,
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.
FS-20
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 10.INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Current tax provision:
Federal $ 58,600 $ 49,600 $171,300
State 57,700 43,900 57,400
---------------- --------------- ---------------
116,300 93,500 228,700
--------------- --------------- ---------------
Deferred tax provision (benefit):
Federal 22,800 (16,800) (31,400)
State 7,900 (2,800) (21,700)
---------------- --------------- ---------------
30,700 (19,600) (53,100)
---------------- --------------- ---------------
$147,000 $ 73,900 $175,600
================ =============== ===============
</TABLE>
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
<TABLE>
1999 1998 1997
<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 7.2
Municipal bond income (16.7) (25.6) --
Other, net -- -- 2.5
---------------- --------------- ---------------
Effective tax rates 24.5% 15.6% 43.7%
================ =============== ===============
</TABLE>
In addition, the Corporation has applied all unused general business tax
credit carryforwards for financial reporting and income tax purposes.
FS-21
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 10. INCOME TAXES (Continued)
The components of the net deferred tax asset, included in other assets, are
as follows:
<TABLE>
DECEMBER 31,
1999 1998
<S> <C> <C>
Deferred tax asset
Federal $ 189,100 $ 173,800
State 59,800 58,200
------------------- -------------------
Net deferred tax asset $ 248,900 $ 232,000
=================== ===================
</TABLE>
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<TABLE>
DECEMBER 31,
1999 1998
<S> <C> <C>
Deferred tax assets (liabilities)
Accrual to cash adjustments $ 95,100 $ 142,600
Investments:
Net unrealized (gain) loss on securities
available for sale 14,500 (17,000)
State franchise tax 34,100 29,600
Allowance for loan losses 119,100 94,200
Depreciation (13,900) (17,400)
------------------- -------------------
Net deferred tax asset $ 248,900 $ 232,000
=================== ===================
</TABLE>
As of December 31, 1999 and 1998, management expects all temporary
differences to be offset against future taxable income, and no valuation
reserve was deemed necessary.
FS-22
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 11. 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 $72,400, $83,800, and $75,000 in
1999, 1998, and 1997, respectively.
At December 31, 1999, approximate future minimum rental commitments for all
noncancelable operating leases are as follows:
2000 $106,100
2001 111,400
2002 96,800
2003 89,500
2004 89,500
Thereafter 100,500
----------------
$593,800
================
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, 1999 and 1998, such commitments to extend credit were
approximately $7,711,000 and $5,007,200, respectively, of undisbursed lines
of credit and undisbursed loans in process.
FS-23
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 12. SHAREHOLDERS' 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. Prompt
corrective action provisions are not applicable to bank holding companies.
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
in the regulations) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1999 and 1998, that the Corporation and the Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution 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
notification that management believes have changed the Bank's category. The
Corporation's and the Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998 are also presented in the tables.
FS-24
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 12. SHAREHOLDERS' EQUITY (Continued)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
MININIMUM CAPITALIZED UNDER
CAPTIAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISISONS
----------------- ---------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------- ---------------- -------------------
(All dollars in thousands)
Total Capital to Risk Weighted Assets:
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 4,393 9.5% $ 3,701 8.0% N/A N/A
Monterey County Bank 4,892 10.6% 3,686 8.0% $ 4,608 10.0%
Tier 1 Capital to Risk Weighted Assets:
Consolidated 3,993 8.6% 1,851 4.0% N/A N/A
Monterey County Bank 4,492 9.7% 1,843 4.0% 2,765 6.0%
Tier 1 Capital to Average Assets:
Consolidated 3,993 7.3% 2,185 4.0% N/A N/A
Monterey County Bank 4,492 7.9% 2,182 4.0% 2,727 5.0%
</TABLE>
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
MININIMUM CAPITALIZED UNDER
CAPTIAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISISONS
----------------- ---------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------- ---------------- -------------------
(All dollars in thousands)
Total Capital to Risk Weighted Assets:
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 3,747 10.9% $ 2,740 8.0% N/A N/A
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% N/A N/A
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% N/A N/A
Monterey County Bank 3,351 7.5% 1,911 4.0% 2,389 5.0%
</TABLE>
FS-25
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 13. 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 subject to adjustment for stock
dividends and stock buy-backs. During 1999, no incentive stock options were
granted to employees.
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
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $ 453,800 $ 464,200 $ 225,900
Pro forma 453,800 450,700 208,000
Earnings per share:
As reported $ 0.43 $ 0.49 $ 0.24
Pro forma 0.43 0.48 0.22
Earnings per share, assuming dilution for stock options:
As reported $ 0.37 $ 0.42 $ 0.20
Pro forma 0.37 0.41 0.19
</TABLE>
FS-26
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 13. STOCK OPTIONS AND STOCK DIVIDENDS (CONTINUED)
The fair value of these options was estimated at the grant date using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999 and 1998: risk-free interest rates of 6.21 percent;
dividend yield of 4.0 to 4.4 percent; expected option life of 6 years; and
volatility of 30 percent.
At December 31, 1999, options for the purchase of 159,115 shares of the
Holding Corporation's common stock were outstanding and exercisable at
prices ranging from $2.07 to $2.48. The status of all optioned shares is as
follows:
<TABLE>
<CAPTION>
Contractual Life
Remaining
Shares Price Range Weighted Average
<S> <C> <C> <C>
Outstanding at December 31, 1997 157,500 $2.20 - $2.75 3.2 Years
Granted 85,800 $2.73 - $3.00
Increase due to stock dividend 14,050 $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
Increase due to stock dividend 16,665 $2.07 - $2.48
Exercised (84,150) $2.00 - $2.07
Cancelled (13,750) $2.50 - $2.73
--------------
Outstanding at December 31, 1999 159,115 $2.07 - $2.48 4.3 Years
==============
</TABLE>
FS-27
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 14. 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, 1997 $ 254,000
New loans 41,600
Repayments (128,800)
-----------
Balance as of December 31, 1998 $ 166,800
New loans 895,200
Repayments (164,500)
-----------
Balance as of December 31, 1999 $ 897,500
===========
</TABLE>
Related party deposits totaled approximately $196,000 and $142,000 at
December 31, 1999 and 1998, respectively.
NOTE 15. 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 1999, 1998, or 1997.
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 15% of their compensation subject to certain limits based on
federal tax laws. Under the provisions of the plan, the Bank's contribution
policy is discretionary. No contributions were made by the Bank in 1999,
1998 or 1997.
FS-28
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 16. 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
California State Banking Department 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 17. 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.
FS-29
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 17. 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
priced at current 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.
FS-30
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 17. FAIR VALUE OF FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values, and related carrying amounts, of the
Corporation's financial instruments as of December 31, 1999 and 1998 are as
follows:
[OBJECT OMITTED]
NOTE 18. 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.
-31-
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 19. 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, 1999 and 1998:
BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
ASSETS
<S> <C> <C>
Cash and due from banks $ 49,800 $ 47,100
Organization costs 1,600 3,100
Investment securities - trading account 135,000 --
Investment in Community Bankers'
Insurance Agency, LLC 40,000 --
Deferred tax asset 13,200 --
Investment in common stock of
Monterey County Bank 4,505,700 3,391,100
------------- -------------
Total assets $ 4,745,300 $ 3,441,300
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 200 $ 800
Dividend payable 2,100 5,900
Note payable 750,000 --
------------- -------------
Total liabilities 752,300 6,700
Shareholders' equity 3,993,000 3,434,600
------------- -------------
$ 4,745,300 $ 3,441,300
============= =============
</TABLE>
FS-32
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 19. NORTHERN CALIFORNIA BANCORP, INC. (PARENT CORPORATION ONLY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Equity in income of subsidiary $ 483,100 $ 485,300 $ 237,600
Gain on sale of securities 9,500 -- --
Miscellaneous income 500 -- --
Operating expenses 55,200 29,700 16,100
Applicable taxes (benefit) (15,900) (8,600) (4,400)
--------------- -------------- ---------------
Net income $ 453,800 $ 464,200 $ 225,900
=============== ============== ===============
STATEMENTS OF CASH FLOWS
1999 1998 1997
Cash flows from operating activities:
Net income $ 453,800 $ 464,200 $ 225,900
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in undistributed income of
Monterey County Bank (483,100) (485,300) (237,600)
Decrease in other assets 1,500 1,500 5,900
Decrease in accrued expenses (600) (700) 700
Decrease in other liabilities (3,800) (6,700) (3,900)
--------------- -------------- ---------------
Net cash used by operating activities (32,200) (27,000) (9,000)
--------------- -------------- ---------------
Cash flows from financing activities:
Cash dividends received from subsidiary 50,000 50,000 170,000
Increase in borrowed funds 750,000 -- --
Cash dividends paid on common stock (700) (700) (103,000)
Increase in investments (899,700) -- --
Exercise of stock options 169,500 -- --
Stock repurchase (34,200) (10,400) (62,800)
--------------- -------------- ---------------
Net cash provided by financing activities 34,900 38,900 4,200
--------------- -------------- ---------------
Net change in cash and cash equivalents 2,700 11,900 (4,800)
Cash and cash equivalents, beginning of year 47,100 35,200 40,000
--------------- -------------- ---------------
Cash and cash equivalents, end of year $ 49,800 $ 47,100 $ 35,200
=============== ============== ===============
</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.
FS-33
<PAGE>
EXHIBIT
ITEM 10(ii)A(1)
Employment Contract of Charles T. Chrietzberg, Jr. date January 1, 2000
<PAGE>
EMPLOYMENT CONTRACT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 1st
day of January 2000, between MONTEREY COUNTY BANK, a California corporation
(Bank"), and CHARLES T. CHRIETZBERG, JR. ("Executive")
W I T N E S S E T H
WHEREAS, Executive has served as the Chairman and Chief
Executive Officer of Bank since 1987 with distinction, leading the Bank to a
"Premier Performing" rating in 1992, reducing the level of non--performing
loans from one far in excess of state averages to one which is far below
state averages, and becoming the only Chief Executive Officer in the Bank's
history whose tenure generated net profits; and
WHEREAS, the latest Employment Agreement between Executive and
Bank expired as of December 31, 1999; and
WHEREAS, Bank desires that Executive continue to be employed
as Bank's Chairman, President and Chief Executive Officer, and to document
the terms of such employment; and
WHEREAS, Executive is willing to be employed as Bank's
Chairman, President and Chief Executive Officer under the terms and
conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
A. TERM OF EMPLOYMENT
1. TERM. Bank hereby agrees to continue to employ
Executive, and Executive hereby accepts employment with Bank, for the period
of three (3) years, commencing on January 1, 2000, subject however, to prior
termination of this Agreement as hereinafter provided (the "Term"). When used
herein, "Term" shall refer to the entire period of employment of Executive by
Bank hereunder commencing January 1, 2000 (the "Effective Date"), whether for
the period provided above, or whether terminated earlier as hereinafter
provided.
B. DUTIES OF EXECUTIVE
1. DUTIES. Executive shall perform the duties of
Chairman of the Board, President and Chief Executive Officer of Bank, subject
to the powers by law vested in the Board of Directorsof Bank and in Bank's
shareholders, and shall serve as a Director of Bank if elected by the
shareholders. During the Term, Executive shall perform exclusively the
services herein contemplated to be performed by Executive with due care,
faithfully, diligently, to the best of Executive's ability and in compliance
with all applicable laws, policies adopted by the Board of Directors, and
Bank's Articles of Incorporation and Bylaws.
<PAGE>
2. EXCLUSIVITY. Executive shall devote Executive's
entire productive time, ability and attention to the business of Bank during
the Term. Executive shall not directly or indirectly render any services of a
business, commercial or professional nature to any other person, firm or
corporation, whether for compensation or otherwise, without prior consent
evidenced by a resolution duly adopted by the Board of Directors of the Bank,
or the Executive Committee thereof. Notwithstanding the foregoing, Executive
may make investments of a passive nature in any business or venture, provided
however, that such business or venture is neither in competition or conflict,
3. UNIQUENESS OF EXECUTIVE'S SERVICES. The Executive
hereby represents that the services to be performed by him under the terms of
this contract are of a special, unique, unusual, extraordinary, and
intellectual character, which give them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in an action at
law. The Executive therefore expressly agrees that the Bank, in addition to
any other rights or remedies which the Bank may possess, shall be entitled to
injunctive and other equitable relief to prevent a breach of this contract by
the Executive.
4. PHYSICAL EXAMINATION. Executive shall take an
annual physical examination during each year during the Term of this
contract. Said physical examination(s) shall be conducted at the expense of
the Bank.
C. COMPENSATION
1. SALARY. For Executive's services hereunder, Bank
shall pay or cause to be paid as annual gross base salary to Executive the
amount of not less than $180,000 during each of the years of the Term,
beginning with the Effective Date. Executive shall also, so long as he serves
on the Board of Directors, be entitled to director's fees on the same basis
as paid to outside directors, if the Board of Directors does not exclude him
from such directors fees. The Board of Directors shall also, from time to
time, and at least once each calendar year grant such additional "merit"
increases, if any, in the base salary as are determined after review to be
appropriate in the discretion of the Board of Directors. Executive's salary
shall be payable in equal installments in conformity with Bank's normal
payroll periods as in effect from time to time.
D. EXECUTIVE BENEFITS
1. VACATION. Executive shall be entitled to a vacation
leave of four (4) weeks during each year of the Term, of which two (2) weeks
must be taken consecutively in each calendar year. Executive shall be
entitled to vacation pay, in lieu of up to two (2) weeks of vacation during
each calendar year, with the consent of the Board of Directors.
2. AUTOMOBILE ALLOWANCE. During the term hereunder,
Bank shall provide Executive, for Executive's sole use, a suitable full--size
automobile, or if the Executive desires to use his own automobile, Bank shall
pay Executive a comparable auto allowance (NOT LESS THAN $750 PER MONTH) as
determined by the Board of Directors. Bank shall pay all operating expenses
of any nature whatsoever with regard to such automobile.
<PAGE>
Executive shall use reasonable efforts to furnish to Bank substantially
adequate records and other documentary evidence required by federal and state
statutes and regulations issued by the appropriate taxing authorities
substantiating the extent to which such payments are deductible business
expenses of Bank and not deductible additional compensation to Executive.
Bank shall also procure, pay for and maintain in force adequate insurance
coverage for such automobile. Bank and Executive agree that the value of
Executive's personal use of the automobile is twenty (20%) of the annual cost
of the automobile lease, repairs, and gasoline which shall be treated for tax
purposes as additional compensation to Executive, subject to appropriate
withholding.
3. GROUP MEDICAL AND LIFE INSURANCE BENEFITS. Bank
shall provide for Executive, at Bank's expense to the extent permitted by
Bank policy, participation in a comprehensive major medical, dental, and
optical plan, with accident benefits, equivalent to either (i) the maximum
available from time to time under the California Bankers Association Group
Insurance Program for an employee of Executive's salary level; or (ii) the
benefits under an insurance program adopted on a non--discriminatory basis
for the employees of the Bank generally. Life insurance benefits shall be
provided to Executive, at Bank's expense to the extent not prohibited by Bank
policy during the term hereof in an amount not less than $200,000, with
Executive to designate beneficiary thereunder.
4. SALARY CONTINUATION PLAN. Bank shall provide for
Executive a Salary Continuation Plan that provides for payments of $75,000
per year, for Mr. Chrietzberg's lifetime, if he remains with the Bank until
normal retirement, commencing age 65. The Salary Continuation Plan shall
provide the following with regard to the division of death proceeds should
Mr. Chrietzberg die before his sixty-fifth (65th) birthday; his
beneficiary(ies) shall be entitled to an amount equal to $1,440,000 or the
net at risk insurance portion of the proceeds, whichever amount is less. The
net at risk insurance portion is the total proceeds less the cash value of
the policy. Should Mr. Chrietzberg die on or subsequent to his sixty-fifth
(65th) birthday, his beneficiary(ies) shall be entitled to an amount equal to
$1,000,000 or the net at risk insurance portion of the proceeds, whichever is
less, and the Bank shall be entitled to the remainder of such proceeds.
5. BONUS. For the calendar year 2000, and for each full
calendar year of the Term completed by Executive pursuant to this Agreement,
he shall be entitled to an Incentive Bonus determined in accordance with this
paragraph. The Incentive Bonus shall equal the lesser of (i) $160,000, or
(ii) the sum of the ROA Bonus and the ROE Bonus, determined in accordance
with the Exhibit D-4. This bonus shall be payable in January of the year
following completion of the year on which it is based, or as soon thereafter
as is practical after the Bank's certified public accountants have delivered
their report on the Bank's condition and results of operations for the year.
6. SICK LEAVE. Executive shall be entitled to days of
paid sick leave in accordance with Bank policy.
<PAGE>
E. BUSINESS EXPENSES AND REIMBURSEMENT.
1. BUSINESS EXPENSES. Executive shall be entitled to
reimbursement by Bank for any ordinary and necessary business expenses
incurred by Executive in the performance of Executive's duties and in acting
for Bank during the Term. Types of expenses qualifying for such reimbursement
shall be determined by the Board of Directors. Executive shall furnish to
Bank adequate records and other documentary evidence required by federal and
state statutes and regulations issued by the appropriate taxing authorities
for the substantiation of such payments as deductible business expenses of
Bank and not as deductible compensation to Executive; provided, however, that
reimbursement of such expenses shall not be dependent on proving
deductibility of such expenses for tax purposes if such expenses are
otherwise determined by the Board of Directors, in its sole discretion, to be
appropriate.
F. TERMINATION.
1. TERMINATION WITH CAUSE. Except as otherwise provided
herein, this Agreement may be terminated by Bank, at Bank's option with
notice to Executive, upon the occurrence of any of the following events:
(a) A material breach by Executive of any of the
terms or provisions of this Agreement;
(b) Executive is convicted of illegal activity by a
court of competent jurisdiction or pleads guilty to or nolo contendere to,
illegal activity, which activity materially adversely affects Bank's
reputation in the community or which evidences the lack of Executive's
fitness or ability to perform Executive's duties, as determined by the Board
of Directors in good faith; or
(c) Executive has committed any illegal or
dishonest act which would cause termination of coverage under Bank's Bankers
Blanket Bond as to Employee, as distinguished from termination of coverage as
to Bank as a whole; or
(d) Executive materially fails to perform or
habitually neglects Executive's duties or commits a material act of
malfeasance or misfeasance in connection therewith; or
(e) Executive becomes permanently disabled as such
is defined in his or Bank's disability insurance policy and such disability
makes Executive eligible for benefits thereunder (or if no such definition,
as defined by federal law or regulation pursuant to the Social Security Act
or a rebated statute). Any controversy concerning Executive's disability
shall be settled by arbitration in accordance with the rules of the American
Arbitration Association. Any termination pursuant to this subsection (d)
shall not affect the continued operation of any disability income
continuation plan, which may be established for the benefit of Executive;
(f) An order under 12 U.S.C. 1818(b) or (e) or any
similar statute is issued against Executive or Bank which calls for his
suspension or
<PAGE>
removal from office; or
(g) The Superintendent of Banks, or other
supervisory or regulatory authority having jurisdiction takes possession of
the property and business of Bank pursuant to applicable statute or
regulation.
2. TERMINATION WITHOUT CAUSE.
(a) During the Term, this Agreement may be
terminated by Bank without cause upon written notice to Executive.
(b) During the Term, this Agreement may be
terminated by Executive without cause upon sixty (60) days' prior written
notice to Bank. Executive and Bank agree that it would be impractical or
extremely difficult to fix the actual damage caused by Executive's breach of
this Section F.2(b). Accordingly, the amount of damage suffered and
recoverable by Bank in the event of Executive's breach of this provision
shall be equal to the amount of Base Salary for Executive for two months.
Bank and Executive agree such sum is a reasonable estimate of damage under
the circumstances at the date this Agreement is made.
3. COMPENSATION UPON TERMINATION. (a) If Executive's
employment with Bank is terminated by Bank pursuant to Section F.1. hereof or
by Executive pursuant to Section F.2. hereof, Executive shall then only be
entitled to receive salary through the effective date of such termination
(without pro-ration of the Incentive Bonus described in Section D.4 above)
and shall receive any incurred but not reimbursed business expenses (subject
to the provisions of Section E.1. hereof).
(b) If Executive's employment is terminated by Bank
pursuant to Section F.2. hereof, Executive shall be entitled to receive
Executive's salary through the effective date of such termination; any
incurred but not reimbursed business expenses (subject to the provisions of
Section E.1. hereof); plus Executive's salary (as in effect immediately prior
to termination) for the "Severance Period", which shall be the greater of two
(2) years from the effective date of termination or the remainder of the Term
to be paid in equal installments in conformity with Bank's normal payroll
periods as in effect from time to time. However, if Executive's employment is
terminated by the Bank pursuant to Section F.2 within one year (1) after the
announcement or consummation, or during the pendency, of a Change in Control
Transaction, the Severance Period shall be the greater of 24 months from the
effective date of termination, or the remainder of the Term. A "Change in
Control Transaction" shall be limited to an acquisition by a person, or group
of persons acting in concert, of shares having the power to elect a majority
of the directors of the Bank, or a merger or other acquisition of the Bank or
its assets and business, in which the power to elect a majority of the
directors of the surviving corporation is in the hands of persons who were
not shareholders of the Bank as of one of the date hereof or a date two years
prior to such merger or other acquisition. In addition to compensation for
the Severance Period, Executive shall be entitled to a lump sum payment of
his Incentive Bonus (when calculated in accordance with the timing set forth
in Section D.4) for any calendar year in which his employment is terminated
by the Bank pursuant Section F.2 in an amount equal to a pro-rated portion
of the Incentive Bonus provided in Section D.4 above (calculated as though
the period from the beginning of the year until the end of the
<PAGE>
month prior to the termination were a full year)
G. GENERAL PROVISIONS.
1. OWNERSHIP OF BOOKS AND RECORDS; CONFIDENTIALITY. (a)
All records or copies thereof of the accounts of customers, and any other
records and books relating in any manner whatsoever to the customers of Bank,
and all other files, books and records and other materials owned by Bank or
used by it in connection with the conduct of its business, whether prepared
by Executive or otherwise coming into his possession, shall be the exclusive
property of Bank regardless of who actually prepared the original material,
book or record. All such books and records and other materials, together with
all copies thereof, shall be immediately returned to Bank by Executive on any
termination of his employment.
(b) During the Term, Executive will have access to
and become acquainted with what Executive and Bank acknowledge are trade
secrets, to wit, knowledge or data concerning Bank, including its operations
and business, and the identity of customers of Bank, including knowledge of
their financial condition, their financial needs, as well as their methods of
doing business. Executive shall not disclose any of the aforesaid trade
secrets, directly or indirectly, or use them in any way, either during the
Term or thereafter, except as required in the course of Executive's
employment with Bank. Executive shall not solicit any employee or customer of
Bank to become an employee or customer of another institution until the later
of six (6) months following the end of the Term or the end of the Severance
Period.
2. ASSIGNMENT AND MODIFICATION. This Agreement, and the
rights and duties hereunder, may not be assigned by either party hereto
without the prior written consent of the other, and the parties expressly
agree that any attempt to assign the rights of any party hereunder without
such consent will be null and void; provided, however, that Bank's rights and
obligations hereunder shall be assignable without consent by operation of law
in the event of a merger or similar transaction involving the Bank.
3. FURTHER ASSURANCE. From time to time each party will
execute and deliver such further instruments and will take such other action
as the other party reasonably may request in order to discharge and perform
the obligations and agreements hereunder.
4. ARBITRATION. If the Parties hereto shall be unable
to reach an agreement on material provisions of this Agreement or on other
issues then such disputes shall be submitted to the American Arbitration
Association ("AAA") of closest to Monterey, California for resolution, in
accordance with the Commercial Arbitration Rules of the AAA (or by some other
arbitrator mutually agreed to by the parties). Such arbitration shall be
conducted in the following manner:
a. The Party desiring to resolve the dispute
through arbitration shall serve upon the Party a written notice of intent to
exercise rights under this arbitration provision. One arbitrator shall be
required, and that arbitrator shall be selected
<PAGE>
by the arbitration service, in a manner determined by the AAA. The arbitrator
shall be furnished with a statement of issues in dispute and a summary of
each party's position.
b. The arbitrator shall set a date for a hearing
which shall be no less than thirty (30) days and no more than one hundred
twenty (120) days after the arbitrator is selected. At the arbitration, each
party shall present to the arbitrator the reasons why the respective
positions of the parties should be upheld. In considering such arguments, the
arbitrator may consider any evidence reasonably believed by him to be
credible and relevant to the determination which he is called upon to make.
The arbitrator may consider such hearsay and opinions of the parties as he
desires and may consider copies of any writings. The best evidence rule will
not apply nor any formal prerequisites required by the California Evidence
Code for the introduction of documents. Nothing contained herein shall
prevent either party from arguing about the weight to be given any evidence
under the Evidence Code or otherwise. The arbitrator shall not be bound by
either the Evidence Code, or the Code of Civil Procedure in determining the
evidence to be presented, admitted by him, or the method by which evidence
and arguments may be presented. All methods of discovery permitted by the
Code of Civil Procedure shall be permitted except use of requests for
admissions. Furthermore, a party shall only have fifteen (15) days from
receipt of interrogatories, or request for production to respond to the
propounding party. Each party shall have the right to take the deposition of
the other on twenty (20) days notice. The arbitrator shall determine a method
for resolution of any discovery dispute, which may include selecting one
arbitrator to resolve disputes by telephone conference. The arbitrator may
establish such rules as he deems reasonable for the conduct of the
arbitration, including requirements for the filing of memoranda supporting
the parties' positions.
c. The decision of the arbitrator shall be binding
upon the Parties and shall constituted a complete determination of the issues
considered by the arbitrator. The provisions this Section shall constitute a
binding arbitration agreement between the Parties pursuant to Code of Civil
Procedure Section 1321 et seq.
d. Each party shall be responsible for one-half of
all costs of the arbitration. Each party shall deposit with the AAA,
one--half (1/2) of all required deposits. The failure of either party to make
such deposit within thirty (30) days of notice of such cost shall
automatically entitle the other party to an arbitration determination
favorable to the party making the required deposit. Each party shall pay
their own fees and attorneys' fees and costs for the arbitration.
e. No arbitrator shall have ever been employed by
either party or their successors in interest or any of their Shareholders,
officers, directors, partners nor shall they be related to any of such
individuals by any relationship closer than consanguinity in the third degree.
NOTICE. BY INITIALING IN THE SPACE BELOW YOU ARE
AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISIONS DECIDED BY NEUTRAL ARBITRATION, AS
PROVIDED HEREIN AND BY CALIFORNIA LAW, AND YOU HEREBY AGREE TO WAIVE ANY
RIGHTS YOU MAY
<PAGE>
POSSESS TO HAVE SUCH DISPUTE LITIGATED AND RESOLVED IN A COURT OR JURY TRIAL.
BY INITIALING IN THE SPACE BELOW YOU HEREBY WAIVE
YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE INCLUDED
IN THIS ARBITRATION OF DISPUTES PROVISION.
IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER
AGREEING TO THISPROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR EXECUTION OF THIS
AGREEMENT AND YOUR APPROVAL, SPECIFICALLY OF THIS PARAGRAPH 16, ACKNOWLEDGES
THAT YOUR EXECUTION OF THIS PROVISION IS VOLUNTARY AND THAT PRIOR TO SUCH
EXECUTION YOU HAVE CONSULTED WITH INDEPENDENT COUNSEL CONCERNING THE EFFECTS
OF SUCH PROVISION TO THE EXTENT YOU HAVE DEEMED NECESSARY, PRIOR TO YOUR
EXECUTION OF THIS PROVISION.
THE PARTIES HEREBY ACKNOWLEDGE, UNDERSTAND AND AGREE
TO, THE TERMS HEREOF AND TO THE SUBMISSION OF ANY DISPUTES TO ARBITRATION BY
THE AAA, AS SET FORTH HEREIN.
/S/ BW /S/ CTC
-------------------- --------------------
Bank's Initials Executive's Initials
4. NOTICES. All notices required or permitted
hereunder shall be in writing and shall be delivered in person or sent by
certified or registered mail, return receipt requested, postage prepaid as
follows:
To Bank: Monterey County Bank
601 Munras Ave
Monterey, California 93940
Attn: Board of Directors
To Executive: Charles T. Chrietzberg, Jr.
P.O. Box 1344
Carmel, CA 93921
or to such other party or address as either of the parties may designate in a
written notice served upon the other party in the manner provided herein. All
notices required or permitted hereunder shall be deemed duly given and
received on the date of delivery if delivered in person or on the second day
next succeeding the date of mailing if sent by certified or registered mail,
postage prepaid.
<PAGE>
5. SUCCESSORS. This Agreement shall be binding
upon, and shall inure to the benefit of, the successors and assigns of the
parties.
6. ENTIRE AGREEMENT. Except as provided herein,
this Agreement constitutes the entire agreement between the parties, and all
prior negotiations, representations, or agreements between the parties,
whether oral or written, are merged into this Agreement. This Agreement may
only be modified by an agreement in writing executed by both of the parties
hereto.
7. GOVERNING LAW. This Agreement shall be construed
in accordance with the laws of the State of California.
8. EXECUTED COUNTERPARTS. This Agreement may be
executed in one or more counterparts, all of which together shall constitute
a single agreement and each of which shall be an original for all purposes.
9. SECTION HEADINGS. The various section headings are
inserted for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement or any section hereof.
10. CALENDAR DAYS/CLOSE OF BUSINESS. Unless the context
so requires, all periods terminating on a given day, period of days or date
shall terminate on the close of business on that day or date and references
to "days" shall refer to calendar days.
11. SEVERABILITY. In the event that any of the
provisions, or portions thereof, of this Agreement are held to be
unenforceable or invalid by any court of competent jurisdiction, the validity
and enforceability of the remaining provisions or portions thereof, shall not
be affected thereby.
<PAGE>
12. ATTORNEYS' FEES. In the event that any party shall
bring an action or arbitration in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action as determined
by the court or other body having jurisdiction shall be entitled to recover
from the losing party in such action, as determined by the court or other
body having jurisdiction, all reasonable costs and expenses of litigation or
arbitration, including reasonable attorneys' fees, court costs, costs of
investigation and other costs reasonably related to such proceeding, in such
amounts as may be determined in the discretion of the court or other body
having jurisdiction.
IN WITNESS WHEREOF, this Agreement is executed as of the day and
year first above written.
BANK: MONTEREY COUNTY BANK
BY: /S/ BRUCE N. WARNER
-----------------------------
BRUCE WARNER
SENIOR VICE PRESIDENT AND
CHIEF OPERATING OFFICER
EXECUTIVE: /S/ CHARLES T. CHRIETZBERG, JR.
--------------------------------
CHARLES T. CHRIETZBERG, JR.
<PAGE>
EXHIBIT D-4
CALCULATION OF BONUS
The ROA and ROE Bonuses shall be based on the Bank's pretax return
on average assets and beginning equity using the following amounts.
<TABLE>
<CAPTION>
ROA ROA BONUS ROE ROE BONUS
--- --------- --- ---------
<S> <C> <C> <C>
1.0% $ 10,000 10% $ 10,000
1.1% $ 20,000 11% $ 20,000
1.2% $ 30,000 12% $ 30,000
1.3% $ 40,000 13% $ 40,000
1.4% $ 50,000 14% $ 50,000
1.5% $ 60,000 15% $ 60,000
1.6% $ 70,000 16% $ 70,000
1.7% $ 80,000 17% $ 80,000
1.8% $ 90,000 18% $ 90,000
1.9% $ 100,000 19% $ 100,000
2.0% $ 110,000 20% $ 110,000
2.1% $ 120,000 21% $ 120,000
2.2% $ 130,000 22% $ 130,000
2.3% $ 140,000 23% $ 140,000
2.4% $ 150,000 24% $ 150,000
2.5% $ 160,000 25% $ 160,000
</TABLE>
MAXIMUM COMBINED--$160,000, OR $340,000 MINUS NON-BONUS SALARY EXCLUDING
COMPENSATION, IF ANY, FOR VACATION NOT TAKEN) FOR THE YEAR. THE RETURN'S
SHALL BE CALCULATED BEFORE DEDUCTION FOR ANY ANNUAL PERFORMANCE BONUSES, BUT
AFTER DEDUCTION FOR COMMISSIONS AND BONUSES PAID ON A MONTHLY BASIS.
<PAGE>
EXHIBIT
ITEM 10(ii)A(4)
Amendment to the Salary Continuation Agreement dated December 31, 1993
<PAGE>
AMENDMENT
TO THE SALARY CONTINUATION
AGREEMENT
DATED DECEMBER 31, 1993
This Amendment, made and entered into this 6th day of January, 2000,
by and between Monterey County Bank, a Bank organized and existing under the
laws of the State of California, hereinafter referred to as the, "Bank", and
Charles T. Chrietzberg, Jr., a Key Employee and Executive of the Bank,
hereinafter referred to as the, "Executive", shall effectively amend the
Salary Continuation Agreement dated December 31, 1993 as specifically set
forth herein pursuant to ARTICLE XII, MISCELLANEOUS, paragraph 12.01,
AMENDMENT, of said agreement. The Salary Continuation Agreement shall be
amended as follows:
1.) ARTICLE II, BENEFITS, paragraph 2.01, DEATH BEFORE RETIREMENT, shall be
deleted in its entirety and replaced with the following: "Upon the death of
the Executive, there shall be no benefits due and payable and this agreement
shall automatically terminate."
2.) ARTICLE II, BENEFITS, paragraph 2.02, DISABILITY BEFORE RETIREMENT, shall
be deleted in its entirety and replaced with the following:
" The Bank shall account for this benefit using the regulatory accounting
principles of the Bank's primary federal regulator. The Bank shall establish
an accrued liability retirement account for the Executive into which
appropriate reserves shall be accrued. If, prior to retirement of the
Executive, the Executive becomes so disabled as to have his employment
terminated pursuant to ss. F.1(e) of the Employment Agreement referred to in
the recital hereof (or under the comparable provision of the employment
agreement then in effect), the corporation agrees to pay to the Executive,
the amount accrued in the Executive's liability retirement account up to and
including the date of said termination, in lieu of any amounts to which he
would be due hereunder at retirement. The lump sum payment shall be paid to
the Executive within six months after the date the Executive becomes totally
and permanently disabled."
3.) ARTICLE II, BENEFITS, subparagraph 2.03(a), RETIREMENT, shall be amended
to delete the annual sum of Thirty-seven Thousand Five Hundred Dollars ($
37,500.00) and replace it with the annual sum of Seventy-five Thousand
Dollars ($ 75,000.00).
Said subparagraph shall also be amended to delete the language in the sixth
line of the subparagraph, "...period of fifteen (15) years," and replace it
with the language, "until the death of the Executive."
THIS AMENDMENT SHALL HAVE THE EFFECT OF INCREASING THE BENEFIT TO $ 75,000.00
PER YEAR UNTIL THE DEATH OF THE EXECUTIVE. UPON DEATH THE EXECUTIVE SHALL NOT
BE ENTITLED TO ANY FURTHER BENEFIT UNDER THE TERMS OF THIS AGREEMENT AND THE
AGREEMENT SHALL TERMINATE. UPON DISABILITY, THE EXECUTIVE SHALL BE ENTITLED
TO A LUMP SUM PAYMENT AS SET FORTH HEREINABOVE.
1
<PAGE>
This Amendment shall be effective the 12th day of August, 1999, and
the terms set forth hereinabove shall supercede the specific terms of the
December 31, 1993 agreement. To the extent that any terms of said agreement
are not specifically amended herein, or in any other amendment thereto, said
terms shall remain in full force and effect as set forth in said December 31,
1993 agreement.
IN WITNESS WHEREOF, the parties hereto acknowledge that each has
carefully read this Amendment and executed the original thereof on the 6th
day of January, 2000, and that, upon execution, each has received a
conforming copy.
MONTEREY COUNTY BANK
Monterey, California
/S/ DORINA CHAN By: /S/ BRUCE N. WARNER SR.V.P.
- ------------------------- ---------------------------------
Witness Title
/S/ DORINA CHAN /S/ CHARLES T. CHRIETZBERG, JR.
- ------------------------- ---------------------------------
Witness Charles T. Chrietzberg, Jr.
2
<PAGE>
EXHIBIT
ITEM 10(ii)A(5)
Life Insurance Endorsement Method Split Dollar Plan Agreement
PAGE 53
<PAGE>
LIFE INSURANCE
ENDORSEMENT METHOD SPLIT DOLLAR PLAN
AGREEMENT
Insurer: Union Central Life and Southland Life Insurance Company
Policy Number: U200000615, U200000513, 0600087068
Bank: Monterey County Bank
Insured: Charles T. Chrietzberg, Jr.
Relationship of
Insured to Bank: Executive
The respective rights and duties of the Bank and the Insured in the
above-referenced policy shall be pursuant to the terms set forth below:
I. DEFINITIONS
Refer to the policy contract for the definition of all terms in this
Agreement.
II. POLICY TITLE AND OWNERSHIP
Title and ownership shall reside in the Bank for its use and for the
use of the Insured all in accordance with this Agreement. The Bank
alone may, to the extent of its interest, exercise the right to borrow
or withdraw on the policy cash values. Where the Bank and the Insured
(or assignee, with the consent of the Insured) mutually agree to
exercise the right to increase the coverage under the subject Split
Dollar policy, then, in such event, the rights, duties and benefits of
the parties to such increased coverage shall continue to be subject to
the terms of this Agreement.
<PAGE>
III. BENEFICIARY DESIGNATION RIGHTS
The Insured (or assignee) shall have the right and power to designate a
beneficiary or beneficiaries to receive the Insured's share of the
proceeds payable upon the death of the Insured, and to elect and change
a payment option for such beneficiary, subject to any right or interest
the Bank may have in such proceeds, as provided in this Agreement.
IV. PREMIUM PAYMENT METHOD
The Bank shall pay an amount equal to the planned premiums and any
other premium payments that might become necessary to keep the policy
in force.
V. TAXABLE BENEFIT
Annually the Insured will receive a taxable benefit equal to the
assumed cost of insurance as required by the Internal Revenue Service.
The Bank (or its administrator) will report to the Insured the amount
of imputed income each year on Form W-2 or its equivalent.
VI. DIVISION OF DEATH PROCEEDS
Subject to Paragraphs VII and IX herein, the division of the death
proceeds of the policy is as follows:
A. Should the Insured die before his sixty-fifth (65th) birthday,
the Insured's beneficiary(ies), designated in accordance with
Paragraph III, shall be entitled to an amount equal to One
Million Four Hundred Forty Thousand Dollars and No/00ths ($
1,440,000.00) or the net at risk insurance portion of the
proceeds, whichever amount is less. The net at risk insurance
portion is the total proceeds less the cash value of the
policy.
B. Should the Insured die on or subsequent to his sixty-fifth
(65th) birthday, the Insured's beneficiary(ies), designated in
accordance with Paragraph III, shall be entitled to an amount
equal to One Million Dollars and No/00ths ($ 1,000,000.00) or
the net at risk insurance portion of the proceeds, whichever
amount is less. The net at risk insurance portion is the total
proceeds less the cash value of the policy.
C. The Bank shall be entitled to the remainder of such proceeds.
D. The Bank and the Insured (or assignees) shall share in any
interest due on the death proceeds on a pro rata basis as the
proceeds due each respectively bears to the total proceeds,
excluding any such interest.
<PAGE>
VII. DIVISION OF THE CASH SURRENDER VALUE OF THE POLICY
The Bank shall at all times be entitled to an amount equal to the
policy's cash value, as that term is defined in the policy contract,
less any policy loans and unpaid interest or cash withdrawals
previously incurred by the Bank and any applicable surrender charges.
Such cash value shall be determined as of the date of surrender or
death as the case may be.
VIII. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS
In the event the policy involves an endowment or annuity element, the
Bank's right and interest in any endowment proceeds or annuity
benefits, on expiration of the deferment period, shall be determined
under the provisions of this Agreement by regarding such endowment
proceeds or the commuted value of such annuity benefits as the policy's
cash value. Such endowment proceeds or annuity benefits shall be
considered to be like death proceeds for the purposes of division under
this Agreement.
IX. TERMINATION OF AGREEMENT
This Agreement shall terminate upon the occurrence of any one of the
following:
1. The Insured shall be discharged from employment with the Bank
for cause. The term for "cause" shall mean any of the
following that result in an adverse effect on the Bank: (i)
gross negligence or gross neglect; (ii) the commission of a
felony or gross misdemeanor involving moral turpitude, fraud,
or dishonesty; (iii) the willful violation of any law, rule,
or regulation (other than a traffic violation or similar
offense); (iv) an intentional failure to perform stated
duties; or (v) a breach of fiduciary duty involving personal
profit.
2. Surrender, lapse, or other termination of the Policy by the
Bank.
Upon such termination, the Insured (or assignee) shall have a fifteen
(15) day option to receive from the Bank an absolute assignment of the
policy in consideration of a cash payment to the Bank, whereupon this
Agreement shall terminate. Such cash payment referred to hereinabove
shall be the greater of:
1. The Bank's share of the cash value of the policy on the date of such
assignment, as defined in this Agreement; or
2. The amount of the premiums which have been paid by the Bank prior to
the date of such assignment.
3
<PAGE>
If, within said fifteen (15) day period, the Insured fails to exercise
said option, fails to procure the entire aforestated cash payment, or
dies, then the option shall terminate, and the Insured (or assignee)
agrees that all of the Insured's rights, interest and claims in the
policy shall terminate as of the date of the termination of this
Agreement.
The Insured expressly agrees that this Agreement shall constitute
sufficient written notice to the Insured of the Insured's option to
receive an absolute assignment of the policy as set forth herein.
Except as provided above, this Agreement shall terminate upon
distribution of the death benefit proceeds in accordance with Paragraph
VI above.
X. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS
The Insured may not, without the written consent of the Bank, assign to
any individual, trust or other organization, any right, title or
interest in the subject policy nor any rights, options, privileges or
duties created under this Agreement.
XI. AGREEMENT BINDING UPON THE PARTIES
This Agreement shall bind the Insured and the Bank, their heirs,
successors, personal representatives and assigns.
XII. ERISA PROVISIONS
The following provisions are part of this Agreement and are intended to
meet the requirements of the Employee Retirement Income Security Act of
1974 ("ERISA"):
A. NAMED FIDUCIARY AND PLAN ADMINISTRATOR.
The "Named Fiduciary and Plan Administrator" of this
Endorsement Method Split Dollar Agreement shall be Monterey
County Bank until resignation or removal by the Board of
Directors. As Named Fiduciary and Plan Administrator, the Bank
shall be responsible for the management, control, and
administration of this Split Dollar Plan as established
herein. The Named Fiduciary may delegate to others certain
aspects of the management and operation responsibilities of
the Plan, including the employment of advisors and the
delegation of any ministerial duties to qualified individuals.
B. FUNDING POLICY.
The funding policy for this Split Dollar Plan shall be to
maintain the subject policy in force by paying, when due, all
premiums required.
4
<PAGE>
C. BASIS OF PAYMENT OF BENEFITS.
Direct payment by the Insurer is the basis of payment of
benefits under this Agreement, with those benefits in turn
being based on the payment of premiums as provided in this
Agreement.
D. CLAIM PROCEDURES.
Claim forms or claim information as to the subject policy can
be obtained by contacting The Benefit Marketing Group, Inc.
(770-952-1529). When the Named Fiduciary has a claim which may
be covered under the provisions described in the insurance
policy, they should contact the office named above, and they
will either complete a claim form and forward it to an
authorized representative of the Insurer or advise the named
Fiduciary what further requirements are necessary. The Insurer
will evaluate and make a decision as to payment. If the claim
is payable, a benefit check will be issued in accordance with
the terms of this Agreement.
In the event that a claim is not eligible under the policy, the Insurer
will notify the Named Fiduciary of the denial pursuant to the
requirements under the terms of the policy. If the Named Fiduciary is
dissatisfied with the denial of the claim and wishes to contest such
claim denial, they should contact the office named above and they will
assist in making inquiry to the Insurer. All objections to the
Insurer's actions should be in writing and submitted to the office
named above for transmittal to the Insurer.
XIII. GENDER
Whenever in this Agreement words are used in the masculine or neuter
gender, they shall be read and construed as in the masculine, feminine
or neuter gender, whenever they should so apply.
XIV. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT
The Insurer shall not be deemed a party to this Agreement, but will
respect the rights of the parties as herein developed upon receiving an
executed copy of this Agreement. Payment or other performance in
accordance with the policy provisions shall fully discharge the Insurer
for any and all liability.
XV. CHANGE OF CONTROL
Change of Control shall be deemed to be the cumulative transfer of more
than fifty percent (50%) of the voting stock of the Bank from the date
of this Agreement. For the purposes of this Agreement, transfers on
account of deaths or gifts, transfers between family members, or
transfers to a qualified retirement plan
5
<PAGE>
maintained by the Bank shall not be considered in determining
whether there has been a Change of Control. Upon a Change of
Control, if the Insured's employment is subsequently terminated,
except for cause, then the Insured shall be one hundred percent
(100%) vested in the benefits promised in this Agreement and,
therefore, upon the death of the Insured, the Insured's
beneficiary(ies) (designated in accordance with Paragraph III) shall
receive the death benefit provided herein as if the Insured had died
while employed by the Bank [See Subparagraphs VI (A) & (B)].
XVI. AMENDMENT OR REVOCATION
It is agreed by and between the parties hereto that, during the
lifetime of the Insured, this Agreement may be amended or revoked at
any time or times, in whole or in part, by the mutual written consent
of the Insured and the Bank.
XVII. EFFECTIVE DATE
The Effective Date of this Agreement shall be October 12, 1999.
XVIII. SEVERABILITY AND INTERPRETATION
If a provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions shall nonetheless be
enforceable according to their terms. Further, in the event that any
provision is held to be over broad as written, such provision shall be
deemed amended to narrow its application to the extent necessary to
make the provision enforceable according to law and enforced as
amended.
XIX. APPLICABLE LAW
The validity and interpretation of this Agreement shall be governed by
the laws of the State of California.
XX. SUPERSEDE AND REPLACE
The parties are currently parties to a COLLATERAL SECURITY ASSIGNMENT
date the 6th day of June, 1991. This ENDORSEMENT METHOD SPLIT DOLLAR
AGREEMENT and the benefits provided hereby shall supersede and replace
the COLLATERAL SECURITY ASSIGNMENT and the benefits provided thereby.
6
<PAGE>
Executed at Monterey, California this 6th day of January, 2000.
MONTEREY COUNTY BANK
Monterey, California
/S/ DORINA CHAN By: /S/ BRUCE N. WARNER SR. V.P
- ------------------------ -------------------------------
Witness Title
/S/ DORINA CHAN /S/ CHARLES T. CHRIETZBERG, JR.
- ------------------------ -------------------------------
Witness Charles T. Chrietzberg, Jr.
7
<PAGE>
BENEFICIARY DESIGNATION FORM
FOR LIFE INSURANCE ENDORSEMENT METHOD
SPLIT DOLLAR PLAN AGREEMENT
PRIMARY DESIGNATION:
NAME ADDRESS RELATIONSHIP
TRUST OF CHARLES T. CHRIETZBERG, JR. AND SANDRA GAIL CHRIETZBERG
- -------------------------------------------------------------------------------
SECONDARY (CONTINGENT) DESIGNATION:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
All sums payable under the Life Insurance Endorsement Method Split Dollar Plan
Agreement by reason of my death shall be paid to the Primary Beneficiary, if he
or she survives me, and if no Primary Beneficiary shall survive me, then to the
Secondary (Contingent) Beneficiary.
/S/ CHARLES T. CHRIETZBERG, JR. JANUARY 20, 2000
- ---------------------------------- ------------------
Charles T. Chrietzberg, Jr. Date
8
<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 1,055,350 for
1999, 1,042,286 for 1998 and 1,055,180 for 1997, and 1,064,045 1996, and 1995.
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 1,269,623, 1,211,083, 1,253,593, 1,249,033 and
1,263,944, in 1999, 1998, 1997, 1996, and 1995, respectively.
PAGE 54
<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 ENTIRIETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,745,200
<INT-BEARING-DEPOSITS> 200,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 135,000
<INVESTMENTS-HELD-FOR-SALE> 1,723,100
<INVESTMENTS-CARRYING> 9,290,300
<INVESTMENTS-MARKET> 8,576,800
<LOANS> 39,217,400
<ALLOWANCE> 400,000
<TOTAL-ASSETS> 65,214,400
<DEPOSITS> 55,562,600
<SHORT-TERM> 1,750,000
<LIABILITIES-OTHER> 908,800
<LONG-TERM> 3,000,000
0
0
<COMMON> 3,395,400
<OTHER-SE> 597,600
<TOTAL-LIABILITIES-AND-EQUITY> 3,993,000
<INTEREST-LOAN> 3,474,100
<INTEREST-INVEST> 821,600
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,295,700
<INTEREST-DEPOSIT> 1,515,800
<INTEREST-EXPENSE> 1,761,100
<INTEREST-INCOME-NET> 2,534,600
<LOAN-LOSSES> 174,200
<SECURITIES-GAINS> 600
<EXPENSE-OTHER> 2,986,300
<INCOME-PRETAX> 600,800
<INCOME-PRE-EXTRAORDINARY> 600,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453,800
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 8.47
<LOANS-NON> 124,700
<LOANS-PAST> 62,900
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 93,300
<ALLOWANCE-OPEN> 336,200
<CHARGE-OFFS> 128,600
<RECOVERIES> 18,200
<ALLOWANCE-CLOSE> 400,000
<ALLOWANCE-DOMESTIC> 39,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 360,300
</TABLE>
