<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
X Quarterly report under Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the quarterly period ended JUNE 30, 2000
--- Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) for the period from______to_______
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (831) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of August 4, 2000, the Corporation had 1,112,641 shares of common stock
outstanding.
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
----------------- --------------------
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents 3,507,800 10,745,200
Due From Bank - Time Deposits 100,000 200,000
Investment Securities, available for sale (Note 1) 5,527,600 1,723,100
Investment Securities, held to maturity (Note 1) 11,552,000 9,290,300
Trading Account 185,800 135,000
Federal Funds Sold 3,110,000 0
Other Investments 40,000 40,000
Loans Held for Sale 1,444,100 665,300
Gross Loans (Note 2) 39,675,700 38,601,500
Allowance for Possible Loan Losses (Note 3) (419,400) (400,000)
Deferred Origination Fees (34,500) (49,400)
----------------- --------------------
Net Loans 39,221,800 38,152,100
Bank Premises and Equipment, Net 1,804,900 1,849,100
Interest Receivable and Other Assets 3,201,200 2,414,300
----------------- --------------------
Total Assets 69,655,200 65,214,400
================= ====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Total Deposits (Note 4) 59,724,200 55,562,600
Borrowed Funds 4,800,000 4,750,000
Interest Payable and Other Liabilities 832,000 908,800
----------------- --------------------
Total Liabilities 65,356,200 61,221,400
----------------- --------------------
Shareholders' Equity:
Common Stock - No Par Value
Authorized: 2,500,000 in 2000 and 1999
Outstanding:1,112,641 in 2000 and 1999 3,395,400 3,395,400
Retained Earnings 936,700 659,600
Accumulated Other Comprehensive Income (Loss) (33,100) (62,000)
----------------- --------------------
Total Shareholders' Equity 4,299,000 3,993,000
----------------- --------------------
Total Liabilities & Shareholders' Equity 69,655,200 65,214,400
================= ====================
</TABLE>
Page 2
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- --------------------------
2000 1999 2000 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans 1,063,000 541,200 2,083,800 1,562,000
Interest on Time Deposits with
Financial Institutions 1,500 900 4,500 3,900
Interest on Investment Securities 233,400 49,600 408,900 225,100
Interest on Federal Funds 61,800 135,100 103,500 176,800
------------ ------------- ------------ -------------
Total Interest Income 1,359,700 726,800 2,600,700 1,967,800
------------ ------------- ------------ -------------
INTEREST EXPENSE:
Interest on Interest-Bearing
Transaction Accounts 29,000 27,500 56,000 54,500
Interest on Savings Accounts 14,600 25,000 28,000 38,400
Interest on Time Deposits 448,600 159,700 877,200 588,300
Interest on Other Borrowed Funds 83,300 45,600 163,800 126,100
------------ ------------- ------------ -------------
Total Interest Expense 575,500 257,800 1,125,000 807,300
------------ ------------- ------------ -------------
Net Interest Income 784,200 469,000 1,475,700 1,160,500
------------ ------------- ------------ -------------
PROVISION FOR POSSIBLE LOAN LOSSES 50,000 55,000 75,000 80,000
------------ ------------- ------------ -------------
Net Interest Income After
Provision for Possible Loan Losses 734,200 414,000 1,400,700 1,080,500
------------ ------------- ------------ -------------
NONINTEREST INCOME:
Service Charges on Deposit Accounts 101,400 78,400 208,900 185,900
SBA Loan Sales & Servicing Income 88,600 107,500 157,900 176,800
Other Operating Income 491,200 296,300 934,400 739,500
------------ ------------- ------------ -------------
Total Noninterest Income 681,200 482,200 1,301,200 1,102,200
------------ ------------- ------------ -------------
NONINTEREST EXPENSE:
Salaries and Employee Benefits 471,600 332,500 938,500 799,400
Occupancy and Equipment Expense 70,400 66,800 143,700 140,100
Professional Fees 24,100 14,800 43,500 34,200
Data Processing 61,800 37,200 123,900 99,300
FDIC & State Assessments 4,800 2,000 9,700 6,900
Other Operating Expenses 547,400 352,000 1,049,800 854,400
Income Tax Expense 81,500 23,800 117,400 59,700
------------ ------------- ------------ -------------
Total Noninterest Expense 1,261,600 829,100 2,426,500 1,994,000
------------ ------------- ------------ -------------
NET INCOME (LOSS) 153,800 67,100 275,400 188,700
============ ============= ============ =============
Earnings Per Common Share
Primary 0.16 0.07 0.25 0.18
Diluted 0.13 0.06 0.21 0.15
</TABLE>
Page 3
<PAGE>
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------------- -----------------
<S> <C> <C>
NET INCOME 275,400 188,700
Adjustments to net income:
Depreciation and amortization expense 57,600 76,000
Amortization/Accretion on investments 1,100 1,900
(Gain) loss on sale of securities (5,300) (6,800)
Provision for possible loan losses 75,000 80,000
Amortization of deferred servicing premium (22,600) (7,700)
Amortization of deferred income (1,100) (2,000)
Increase (decrease) in accrued expenses (105,300) (173,200)
(Increase) decrease in prepaid expenses (694,200) 183,900
Increase (decrease) in interest payable 29,500 (93,600)
(Increase) decrease in interest receivable (62,000) (65,500)
(Increase) decrease in loans held for sale (778,800) (666,561)
----------------- -----------------
Total adjustments to net income (1,506,100) (673,561)
================= =================
Net cash provided (used) by operations (1,230,700) (484,861)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of due from time 0 (100,000)
Pprceeds from maturity of due from time 100,000 0
Proceeds from maturity of investments 2,330,500 0
Principal payments on investments 0 160,600
Purchase of securities (8,977,000) (3,220,200)
Net (increase) decrease in loans (1,144,700) (5,111,800)
Stock repurchase 0 (10,200)
Capital expenditures (13,400) (22,300)
----------------- -----------------
Net cash provided (used) in investing activities (7,704,600) (8,203,900)
================= =================
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 4,161,700 4,009,600
Net increase (decrease) in borrowed funds 50,000 357,500
----------------- -----------------
Net cash provided (used) by financing activities 4,211,700 4,367,100
================= =================
Net increase (decrease) in cash & cash equivalents (4,227,400) (4,400,900)
Cash & cash equivalents - beginning of year 10,945,200 12,529,900
================= =================
Cash & cash equivalents - end of period 6,717,800 8,129,000
</TABLE>
See Note 5 for supplemental disclosures
Page 4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------------ ---------------------
<S> <C> <C>
(NOTE 1) INVESTMENT SECURITIES:
Available for sale:
U. S. Government Agencies 4,917,600 967,600.0
Other Securities 610,000 755,500
================== =====================
Total Securities Available for Sale 5,527,600 1,723,100
Held to maturity:
US Government Securities 2,499,400 2,499,400
State and Local Agency Securities 9,052,600 6,790,900
------------------ ---------------------
11,552,000 9,290,300
================== =====================
(NOTE 2) GROSS LOANS:
Commercial and Industrial 10,694,500 10,718,500
Construction 3,643,000 3,459,000
Real Estate - Mortgage 24,548,700 23,787,600
Installment 648,800 491,500
Government Guaranteed Loans Purchased 140,700 144,900
------------------ ---------------------
Gross Loans 39,675,700 38,601,500
(NOTE 3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at Beginning of Period 400,000 336,200
Recoveries 2,500 18,100
Provision for Possible Loan Losses 75,000 174,200
Loans Charged Off (58,100) (128,500)
------------------ ---------------------
Balance at End of Period 419,400 400,000
(NOTE 4) DEPOSITS:
Demand 14,405,500 11,792,700
Interest-Bearing Transaction 9,778,900 9,519,200
Savings 3,198,700 2,470,900
Time Under $100,000 19,509,100 19,143,100
Time Equal to or Greater than $100,000 12,832,000 12,636,700
------------------ ---------------------
59,724,200 55,562,600
(NOTE 5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period ending: 6/30/00 6/30/99
------------------ ---------------------
Interest 465,300 681,200
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Income Taxes 117,400 59,700
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion reviews and analyzes the operating results
and financial condition of the Corporation, focusing on the Bank. It should
be read in conjunction with the financial statements and the other
financial data presented elsewhere herein. The Corporation has had no
activities other than its organization.
For the six months, ended June 30, 2000 net income was $275,400,
an increase of $86,700 when compared to the same period in 1999. The
increase in earnings during this period was the result of a $320,200
increase in net interest income after provision for loan losses and a
$199,000 increase in non-interest income, partially offset by a $432,500
increase in non-interest expense.
Page 6
<PAGE>
The following table sets forth certain selected financial ratios of the
Corporation at and for the six months ended, June 30, 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2000 ENDED JUNE 30, 1999
------------------- -------------------
(Dollars in thousands except per share data)
<S> <C> <C>
Summary of Operating Results:
Total interest income 2,601 1,968
Total interest expense 1,125 807
-------------------- ---------------
Net interest income 1,476 1,160
Provision for
possible loan losses 75 80
-------------------- ---------------
Net interest income
after provision for loan loss 1,401 1,080
Total other income 1,301 1,102
Total other expense 2,309 1,934
-------------------- ---------------
Income (loss) before taxes 393 248
Provision for income tax 117 60
-------------------- ---------------
Net income (loss) 275 189
Per Common Share
Data:
Net income - Primary (1) 0.25 0.18
Net income - Diluted (2) 0.21 0.15
Book value, end of period 3.86 3.47
Avg shares outstanding (3) 1,112,641 1,037,922
Balance Sheet
Data:
Total loans, net
of unearned income (4) 41,085 33,953
Total assets 69,695 55,312
Total deposits 59,724 46,854
Stockholders' equity 4,299 3,606
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2000 ENDED JUNE 30, 1999
------------------- --------------------
<S> <C> <C>
Selected Financial Ratios (4):
Return on average assets(5) 0.82% 0.71%
Return on average
stockholders' equity(6) 15.48% 10.72%
Net interest spread 4.66% 4.61%
Net interest margin 5.42% 5.32%
Avg shareholders' equity
to average assets 5.32% 6.65%
Risked-Based capital ratios
Tier 1 9.90% 9.37%
Total 10.77% 10.22%
Total loans to total deposits
at end of period 68.79% 72.47%
Allowance to total loans
at end of period 1.01% 1.00%
Non-performing loans to total
loans at end of period 0.06% 0.23%
Net charge-offs to
average loans 0.13% 0.25%
</TABLE>
(1) Primary earnings per share amounts were computed on the basis of the
weighted average number of shares of common stock outstanding during the
year. The weighted average number of common shares used for this
computation was 1,112,641 and 1,037,922 for June 30, 2000 and 1999,
respectively.
(2) Diluted earnings (loss) per share amounts were computed on the basis of the
weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents include
director/employee stock options. The weighted average number of shares used
for this computation was 1,297,248 and 1,288,828 for June 30, 2000 and
1999, respectively.
(3) Weighted average common shares.
(4) Includes loans being held for sale.
(5) Averages are of daily balances.
(6) June 30, 2000 calculated on an annualized basis.
Page 8
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between (a) interest and fees
earned on interest-earning assets and (b) interest paid on interest-bearing
liabilities, is the most significant component of the Bank's earnings. Changes
in net interest income from period to period result from increases or decreases
in the average balances of interest earning assets portfolio, the availability
of particular sources of funds and changes in prevailing interest rates.
Net interest income for the six-month period ended June 30, 2000 was
$1,475,000 compared to $1,160,500 for the same period in 1999. The increase of
$315,200 resulted from total interest income increasing $623,900, while total
interest expense increased $317,700. Average interest earning assets increased
$12,061,000 (26.06%) with average loans increasing $11,165,000 and investments
increasing $896,000, while the average rate earned increased 47 basis points.
The average interest rate earned on investments increased 143 basis points while
the average interest rated earned on loans decreased 25 basis points. Average
interest bearing liabilities increased $10,177,000 (26.41%), while the average
rate paid increased 42 basis points.
The following table shows the components of the Bank's net interest
income, setting forth, for each the six months ended June 30, 2000 and 1999 and
for the twelve months ended December 31, 1999, (i) average assets, liabilities
and investments, (ii) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (iii) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (iv) the net interest spread (i.e., the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities) and (v)the net interest yield on average interest-earning assets
(i. e., net interest income divided by average interest-earning assets). Yields
are computed on a tax-equivalent basis, resulting in adjustments to interest
earned on non-taxable securities of $104,500 and $68,700 for the six months
ended June 30, 2000 and 1999, respectively. Non-accrual loans and overdrafts are
included in average loan balances. Average loans are presented net of unearned
income.
Page 9
<PAGE>
INTEREST SPREAD ANALYSIS:
<TABLE>
<CAPTION>
The Six Months The Twelve Months
Ended June 30, Ended December 31,
2000 1999 1999
---------------------- --------------------- ---------------------------
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 140 5 6.50 166 4 4.70 183 9 5.08
Invest securities - Taxable 5,647 206 7.29 2,878 92 6.37 3,434 221 6.45
Invest securities - Non-Taxable 7,651 307 8.04 5,322 202 7.60 6,063 463 7.63
Federal funds sold 3,325 104 6.23 7,500 177 4.72 5,627 278 4.94
-------------- -------------- --------------------------
Total investments 16,762 622 7.42 15,866 475 5.99 15,307 971 6.35
Loans
Construction 3,526 179 10.14 1,193 78 13.02 1,977 175 8.86
Real estate 25,220 1,207 9.57 15,935 804 10.09 18,727 1,668 8.91
Installment 449 27 12.22 354 25 14.06 407 53 13.05
Commercial 12,379 671 10.84 12,927 655 10.14 13,004 1,317 10.12
-------------- -------------- --------------------------
Total loans 41,575 2,084 10.02 30,410 1,562 10.27 34,115 3,213 9.42
Total Interest
earning assets 58,337 2,705 9.27 46,276 2,037 8.80 49,422 4,184 8.47
============== ============== ==========================
Interest Bearing Liabilities:
Int-bearing demand 8,406 42 0.99 7,717 40 1.03 7,785 79 1.01
Money market savings 1,580 14 1.81 1,577 15 1.90 1,634 31 1.88
Savings deposits 2,832 28 1.98 3,846 38 2.00 3,463 68 1.95
Time deposits GREATER THAN $100M 11,893 337 5.67 8,374 232 5.53 9,404 524 5.57
Time deposits LESS THAN $100M 19,197 540 5.62 12,920 357 5.52 14,682 815 5.55
Other Borrowing 4,805 162 6.74 4,103 126 6.14 4,438 273 6.14
-------------- -------------- --------------------------
Total interest
bearing liabilities 48,714 1,123 4.61 38,537 807 4.19 41,404 1,788 4.32
============== ============== ==========================
Net interest income 1,582 1,161 2,396
Net interest spread 4.66 4.61 4.15
Net yield on interest
earning assets 5.42 5.32 4.85
</TABLE>
Page 10
<PAGE>
INTEREST SPREAD ANALYSIS (CONTINUED):
<TABLE>
<CAPTION>
Six Months Twelve Months
Ended June 30, Ended December 31,
2000 VS 1999 1999 VS 1998
------------ ------------
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 0 1 1 5 (2) 3
Invest securities - Taxable 88 26 85 (279) 19 (260)
Invest securities - Non-Taxable 88 17 76 0 463 463
Federal funds sold (98) 25 (73) (8) (28) (36)
------------------------------- -------------------------------
Total investments 78 69 147 73 97 170
Loans
Contruction 152 (51) 101 0 175 175
Real estate 468 (65) 403 434 (320) 114
Installment 7 (4) 3 (7) 0 (7)
Commercial (28) 43 15 71 (95) (24)
------------------------------- -------------------------------
Total loans 196 65 261 717 (460) 257
Total Interest Earning Assets 363 375 738 719 (293) 426
=============================== ===============================
Interest Bearing Deposits:
Int-bearing demand 4 (1) 2 19 (12) 6
Money market savings 0 (1) (1) 0 (7) (7)
Savings deposits (10) (0) (10) 14 (9) 4
Time deposits GREATER THAN $100M 97 9 106 80 (28) 52
Time deposits LESS THAN $100M 173 10 183 156 (53) 102
Other Borrowing 22 14 36 27 0 27
------------------------------- -------------------------------
Total interest bearing deposits 213 103 316 295 (110) 185
=============================== ===============================
Net change in net interest 150 272 422 424 (184) 241
</TABLE>
Page 11
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan losses
represents amounts, which have been set aside for the specific purpose of
absorbing losses, which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation of
the risks inherent in the loan portfolio, both generally and with respect to
specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the California Department of Financial Institutions and FDIC
examinations, independent accountants' observations, and the Bank's internal
review as additional indicators to determine if the amount in the allowance for
loan losses is adequate to protect against estimated future losses. It is the
Bank's current practice, which could change in accordance with the factors
mentioned above, to maintain an allowance which is at least equal to the sum of
the following percentage of loan balances by loan category.
<TABLE>
<CAPTION>
Loan Category Reserve %
<S> <C>
Classified Loans:
Loans classified loss 100.00%
Loans classified doubtful 50.00%
Loans classified substandard
Real Estate Secured 5.00%
Non Real Estate Secured 20.00%
Unclassified Loans:
Real Estate - Loan to value 80% or less 0.10%
Real Estate - Loan to value over 80% 0.50%
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%
</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 June 30, 2000 and 1999 the Bank's allowance stood at 1.01
and 1.00 percent, respectively. A provision of $75,000 was made to the allowance
during the six months ended June 30, 2000 compared with $80,000 in the same
period in 1999. Charged off loans during the six months ended June 30, 2000 and
1999 totaled $58,000 and $87,400 respectively. Recoveries for the same periods
were $2,500 and $12,200, respectively.
Page 12
<PAGE>
The Bank's non-performing (delinquent 90 days or more and non-accrual)
loans as a percentage of total loans was .06 percent at June 30, 2000 compared
with .23 percent at June 30, 1999.
Based upon statistics released by Federal and state banking authorities
regarding banks of similar size or otherwise located in California, Management
believes that the Bank 's ratios of delinquent and non performing loans to total
loans are far better than average. Prudent collection efforts, and tighter
lending controls, are responsible for the Bank's strong performance on these
measures of credit quality. However, no assurance can be given that the Bank's
loan portfolio will continue to measure well against its peers on these ratios
and quality measures, or that losses will not otherwise occur in the future.
NON-INTEREST INCOME
Total non-interest income for the six months ended June 30, 2000 was
$1,301,200, compared with $1,102,200 for the same period in 1999. The increase
of $199,000 was the result of a $194,900 increase in income from other service
charges and an increase of $23,000 increase in service charges on deposit
accounts while income from SBA loan sales and servicing decreased $18,900.
Merchant credit card discount fees increased $173,100 the primary factor in the
increase in other service charges, commissions and fees.
The sale of Small Business Administration (SBA) guaranteed loans is a
significant contributor to the Bank's income. SBA guaranteed loans yield up to 3
3/4% over the New York prime rate, and the guaranteed portions can be sold at
premiums, which vary with market conditions. SBA loans are guaranteed by the
full faith of the United States Government from 75 to 80 percent of the
principal amount. The guaranteed portion has risks comparable for an investor to
a U. S. Government security and can usually be sold in the secondary financial
market, either at a premium or at a yield which allows the Bank to maintain a
significant spread for itself.
There can be no assurance that the gains on sale will continue at, or
above, the levels realized in the past three years. In addition, increasing
competition among lenders for qualified SBA borrowers makes it difficult for the
Bank to continually expand its program in this area, and may limit the level of
premium that can be earned with regard thereto. The level of premium income on
longer-term loans has been significantly reduced due to the volume of loans that
have been paid off early.
Page 13
<PAGE>
NON-INTEREST EXPENSE
Salary and benefits expense for the six months ended June 30, 2000
increased $139,100 compared with the same period in 1999. The increase was due
primarily to employee merit pay increases, bonus accruals, and an increase of
two full time equivalent staff positions.
Total occupancy and equipment expense for the six months ended June 30,
2000 was $143,700 compared to $140,100 for the same period in 1999.
For the six months ended June 30, 2000 professional fees were $43,500
compared with $34,200 the same period in 1999.
Data processing for the six months ended June 30, 2000 increased $24,600
compared to the same period in 1999. The increase was due to increased numbers
of accounts and transactions and fees associated with implementing a debit card
program.
Other expenses for the six months ended June 30, 2000 totaled $1,049,800
compared with $854,400 for the same period in 1999. Significant changes occurred
in the following categories with increases in merchant expense of $165,800,
advertising expense $24,400, automobile expense $3,000, donations $6,500,
entertainment & meals expense $10,100, loan expense $3,000, postage $8,800 and
income tax $57,700 and decreases in collection expense $5,500, due and
memberships $2,000, Year 2000 expense $17,900, insurance expense $5,400 and
operational losses $8,400.
LOANS
Loans represented 71.27% of average earning assets, and 62.15% of average
total assets for the six months ended June 30, 2000, compared with 65.71% and
57.52%, respectively during 1999. For the six months ended June 30, 2000 average
loans increased 36.71% from $30,410,000 for the same period in 1999 to
$41,575,000. Average installment loans increased $95,000 (26.72%), average
construction loans increased $2,332,000 (195.33), average real estate loans
increased $9,285,000 (58.27%); while commercial loans decreased $548,000
(4.24%).
The Bank's commercial and industrial loans are generally made for the
purpose of providing working capital, financing the purchase of equipment or
inventory, and other business purposes. Such loans generally have terms ranging
from one year to several years. Short-term business loans are generally intended
to finance current transactions and typically provide for monthly interest
payments with principal being payable at maturity or at 90-day intervals. Term
loans (usually for a term of two to five years) normally provide for monthly
installments of principal and interest. The Bank from time to time utilizes
accounts receivable and inventory as security for loans.
Page 14
<PAGE>
The Bank is a recognized leader for Small Business Administration lending
in Monterey County, and holds SBA's coveted Preferred Lender Status. Generally,
the SBA guarantees SBA loans for 75 to 80 percent of their principal amount,
which can be retained in portfolio or sold to investors. Such loans are made at
floating interest rates, but generally for longer terms (up to 25 years) than
are available on a conventional basis to small businesses. The unguaranteed
portion of the loans, although generally supported by collateral, is considered
to be more risky than conventional commercial loans because they may be based
upon credit standards the Bank would not otherwise apply, such as lower cash
flow coverage, or longer repayment terms.
The Bank's real estate loan portfolio consists both of real estate
construction loans and real estate mortgage loans. The Bank has initiated a
program to generate more commercial and industrial real estate loans, which
generally yield higher returns than normal commercial loans. The Bank has also
developed a broker program for generating residential real estate loans. The
Bank does not make real estate development loans. Real estate construction loans
are made for a much shorter term, and often at higher interest rates, than
conventional single-family residential real estate loans. The cost of
administering such loans is often higher than for other real estate loans, as
principal is drawn on periodically as construction progresses.
The Bank also makes real estate loans secured by a first deed of trust on
single family residential properties and commercial and industrial real estate.
California commercial banks are permitted, depending on the type and maturity of
the loan, to lend up to 90 percent of the fair market value of real property (or
more if the loan is insured either by private mortgage insurers or governmental
agencies). In certain instances, the appraised value may exceed the actual
amount, which could be realized on foreclosure, or declines in market value
subsequent to making the loan can impair the Bank's security.
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, auto loans and other
personal loans. Consumer installment loans generally provide for monthly
payments of principal and interest, at a fixed rate. Most of the Bank's consumer
installment loans are generally secured by the personal property being
purchased. The Bank generally makes consumer loans to those customers with a
prior banking relationship with the Bank.
Page 15
<PAGE>
NONPERFORMING AND NONACCRUAL LOANS
The Bank's present policy is to cease accruing interest on loans which are
past due as to principal or interest 90 days or more, except for loans which are
well secured or when collection of interest and principal is deemed likely. When
a loan is placed on non-accrual, previously accrued and unpaid interest is
generally reversed out of income unless adequate collateral from which to
collect the principal of, and interest on, the loan appears to be available.
The following table presents information with respect to loans which, as of
the dates indicated, were past due 90 days or more or were placed on non-accrual
status (referred to collectively as "non-performing loans"):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Accruing, PAST DUE 90 DAYS OR MORE:
Real Estate 0 68
Commercial 0 0
Installment 0 0
Other 0 0
------------ -----------
Total accruing 0 68
NONACCRUAL LOANS:
Real Estate 0 0
Commercial 25 9
Installment 0 0
Other 0 0
------------ -----------
Total non-accrual 25 9
Total non-performing 25 77
Total loans end of period 40,666 33,953
Ratio of non-performing loans
to total loans at end of period 0.06% 0.23%
</TABLE>
Page 16
<PAGE>
These ratios have been maintained as a result of a strengthening of
underwriting criteria, frequent review of new and delinquent loans and a firm
collection policy (with the assistance of outside legal counsel). The Bank
does not have any foreign loans or loans for highly leveraged transactions.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding 41,575 30,410
Allowance, beginning of period 400 336
Loans charged off during period:
Commercial 56 87
Installment 2 0
Real Estate 0 0
Other 0 0
---------------- -----------------
Total charge offs 58 87
Recoveries during period:
Commercial 2 7
Installment 0 5
Other 0 0
---------------- -----------------
Total recoveries 2 12
Net Loans charged off
during the period 56 75
Additions to allowance for
possible loan losses 75 80
Allowance, end of period 419 341
Ratio of net loans charged off to
average Loans outstanding
during the period 0.13% 0.25%
Ratio of allowance to total
loans at end of period 1.01% 1.00%
</TABLE>
Page 17
<PAGE>
FUNDING SOURCES
Average deposits for the six months ended June 30, 2000 were $57,090,000 an
increase of 27.73% compared with the average balance for 1999. Average
certificates of deposit represented 54.46% of average deposits for the six
months ended June 30, 2000. Average interest bearing checking, money market and
savings accounts as a group were 22.45% of average deposits. Average demand
deposits represented 23.09% of average deposits.
The Company has a $200,000 revolving line of credit and an $800,000 term
loan with the Pacific Coast Bankers' Bank which mature in May 2001 and May 2005,
respectively. The interest rates are floating rates based on the prime lending
rate plus seventy five (75) basis points. At June 30, 2000 the Company had not
drawn any funds under the line of credit.
The Bank has a line of credit from the Federal Reserve Bank of San
Francisco with a borrowing limit on June 30, 2000 of approximately $4,750,000.
The line of credit is secured by certain of the Bank's loans and investment
securities.
The Bank has a line of credit from the Federal Home Loan Bank of San
Francisco with a maximum borrowing limit on June 30, 2000 of approximately
$7,275,000. The line of credit is secured by certain of the Bank's real
estate secured loans and investment securities. At June 30, 2000 the Bank had
four $1,000,000 advances which bear interest at 4.83%, 6.81%, 6.36% and
7.71%, respectively. The advances mature in October 2003, June 2004, January
2028 and June 2030, respectively. Management believes that these advances
provide funds at a lower cost than comparable deposits. The Bank did not
utilize any short-term borrowings in 2000, 1999 or 1998.
CAPITAL RESOURCES
The Bank maintains capital to comply with legal requirements, to provide
a margin of safety for its depositors and stockholders, and to provide for
future growth and the ability to pay dividends. At June 30, 2000,
stockholders' equity was $4,299,000 versus $3,993,000 at December 31, 1999.
The Company paid a ten (10%) percent stock dividend in 1999 and 1998 and a
cash dividend of $0.12 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.
The FDIC and Federal Reserve Board have adopted capital adequacy
guidelines for use in their examination and regulation of banks and bank
holding companies. If the capital of a bank or bank holding company falls
below the minimum levels established by these guidelines, it may be denied
approval to acquire or establish additional banks or non-bank businesses, or
the FDIC or Federal Reserve Board may take other administrative actions. The
guidelines employ two measures of capital: (1) risk-based capital and (2)
leverage capital.
Page 18
<PAGE>
Under current rules, all banks were required to maintain Tier 1 capital
of at least 4 percent and total capital of 8.0% of risk-adjusted assets. The
Bank had a Tier 1 risk-based capital ratio of 9.90% and a total risk-based
capital ratio of 10.77% at June 30, 2000 well above the minimum regulatory
requirements.
The leverage capital ratio guidelines require a minimum leverage capital
ratio of 3% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 7.77% at June 30, 2000.
LIQUIDITY
Liquidity represents a bank's ability to provide sufficient cash flows
or cash resources in a manner that enables it to meet obligations in a timely
fashion and adequately provides for anticipated future cash needs. For the
Bank, liquidity considerations involve the capacity to meet expected and
potential requirements of depositors seeking access to balances and to
provide for the credit demands of borrowing customers. In the ordinary course
of the Bank's business, funds are generated from the repayment of loans,
maturities within the investment securities portfolio and the acquisition of
deposit balances and short-term borrowings. The Bank has a lines of credit
from the Federal Reserve Bank of San Francisco of approximately $4,750,000,
the Federal Home Loan Bank of San Francisco of approximately $7,275,000 and a
$1,000,000 unsecured Federal Funds Purchased line 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 total liquidity at June 30, 2000 was 33.14
percent; while its average loan to deposit ratio for the six months ended
June 30, 2000 was 72.82 percent.
INTEREST RATE RISK
Management of interest rate sensitivity (asset/liability management)
involves matching and repricing rates of interest-earning assets with
interest-bearing liabilities in a manner designed to optimize net interest
income within the constraints imposed by regulatory authorities, liquidity
determinations and capital considerations. The Bank instituted formal
asset/liability policies at the end of 1989.
Page 19
<PAGE>
The purpose for asset/liability management is to provide stable net
interest income growth by protecting the Bank's earnings from undue interest
rate risk. The Bank expects to generate earnings from increasing loan volume,
appropriate loan pricing and expense control and not from trying to
accurately forecast interest rates. Another important function of
asset/liability management is managing the risk/return relationships between
interest rate risk, liquidity, market risk and capital adequacy. The Bank
gives priority to liquidity concerns followed by capital adequacy, then
interest rate risk and market risk in the investment portfolio. The policy of
the Bank will be to control the exposure of the Bank's earnings to changing
interest rates by generally maintaining a position within a narrow range
around an "earnings neutral position." An earnings neutral position is
defined as the mix of assets and liabilities that generate a net interest
margin that is not affected by interest rate changes. However, Management
does not believe that the Bank can maintain a totally earnings neutral
position. Further, the actual timing of repricing of assets and liabilities
does not always correspond to the timing assumed by the Bank for analytical
purposes. Therefore, changes in market rates of interest will generally
impact on the Bank's net interest income and net interest margin for long or
short periods of time.
The Bank monitors its interest rate risk on a quarterly basis through
the use of a model which calculates the effect on earnings of changes in the
fed funds rate. The model converts a fed funds rate change into rate changes
for each major class of asset and liability, then simulates the bank's net
interest margin based on the bank's actual repricing over a one year period,
assuming that maturities are reinvested in instruments identical to those
maturing during the period. At June 30, 2000 the affect of a 2% increase in
the federal funds sold rate would result in a 1.5% increase in equity. A 2%
decrease in the federal funds sold rate would result in a 3.5% decrease in
equity.
Page 20
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the book and market value of the Bank's
investment securities at June 30, 2000:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX
Book Market
Value value
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Available for sale:
Federal Home Loan Bank Stock 260 260
Pacific Coast Bankers' Bank Stock 350 350
Community Bankers' Insurance Agency, LLC 40 40
U.S. Government Agencies 4,884 4,918
----------- -----------
Total 5,534 5,568
=========== ===========
Held to maturity:
State and Local Agencies 9,053 8,601
U.S. Government Agencies 2,499 2,367
----------- -----------
Total 11,552 10,968
=========== ===========
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities at June 30, 2000:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
over 1 over 3 over 5
1 year through through through over
or less 3 years 5 years 15 years 15 years
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Agency securities --- --- --- 7,383 ---
State/Local Agencies --- --- --- --- 9,053
Equity Securities 650 --- --- --- ---
----------- ----------- ---------- ---------- ----------
Total 650 --- --- 7,383 9,053
</TABLE>
Page 21
<PAGE>
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following proposals were presented to shareholders at the
Corporation's annual shareholders' meeting held on May 11, 2000.
Proposal Number 1: Election of Directors
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AFFIRMATIVE VOTES VOTES WITHHELD
<S> <C> <C>
Charles T. Chrietzberg, Jr. 875,738 5,234
Sandra G. Chrietzberg 875,738 5,234
Peter J. Coniglio 874,976 5,996
Carla S. Hudson 876,649 4,323
John M. Lotz 871,674 9,298
</TABLE>
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTHERN CALIFORNIA BANCORP, INC.
Date: AUGUST 9, 2000 By: /s/ Charles T. Chrietzberg, Jr.
------------------ ------------------------------------
Charles T. Chrietzberg, Jr.
Chief Executive Officer
and President
Date: AUGUST 9, 2000 By: /s/ Bruce N. Warner
--------------------- ------------------------------------
Bruce N. Warner
Chief Financial Officer and
Principal Accounting Officer
Page 22
