PART I
Certain matters discussed
or incorporated by reference in this Annual Report of Form 10-KSB/A including,
but not limited to, those described in Item 6 - Managements Discussion and
Analysis of Financial Condition and Results of Operations, are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others, (1) competitive
pressure in the banking industry increasing significantly; (2) changes in the interest
rate environment reduces margins; (3) general economic conditions, either
nationally or regionally, are less favorable than expected, resulting in, among
other things, a deterioration in credit quality; (4) changes in the regulatory
environment; (5) changes in business conditions and inflation; and (6) changes
in securities markets. Therefore, the information set forth therein should be
carefully considered when evaluating the business prospects of the Corporation.
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 Corporations sources of revenues at this time are dividends on
investments, gains on securities transactions and potential dividends,
management fees and tax equalization payments, if any, from the Bank.
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 Banks 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 Banks deposits are insured by the Federal
Deposit Insurance Corporation 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 Department of Financial
Institutions.
The Banks activities are
conducted at its principal offices, 601 Munras Ave., Monterey, California and
at its three branch offices in Carmel-By-The-Sea, Carmel Valley and Pacific
Grove, California and a loan production office in Monterey, California.
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At December 31, 2006 the
Bank had total assets, deposits and shareholders equity of approximately
$188,375,900, $131,770,800 and $18,522,100, respectively.
Northern California Bancorp, Inc.
Trust I
On March 27, 2003,
Northern California Bancorp, Inc. Trust I, a newly formed Delaware statutory
business trust and a wholly owned subsidiary of the Company (Trust I), issued
an aggregate of $3.0 million of principal amount of Floating Rate TRUPS
â
(Capital Trust Pass-through Securities of the Trust) (the Trust Preferred
Securities). Bear Stearns & Co., Inc. acted as placement agent in
connection with the offering of the Trust Preferred Securities. The securities
issued by Trust I are fully guaranteed by the Company with respect to
distributions and amounts payable upon liquidation, redemption or repayment. The
entire proceeds to Trust I from the sale of the Trust Preferred Securities were
used by Trust I in order to purchase $3.0 million in principal amount of the
Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033
issued by the Company (the Subordinated Debt Securities).
Pursuant
to Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation
of Variable Interest Entities (VIEs) (FIN 46), this trust is not reflected on
a consolidated basis in our financial statements.
The Subordinated Debt
Securities bear a variable interest rate equal to the three-month LIBOR plus
3.25%. The effective rate at December 31, 2006 was 8.62%. Total broker and
legal costs associated with the issuance of $115,000 are being amortized over a
30 year period.
Northern
California Bancorp, Inc. Trust II
On November 13, 2003, Northern California
Bancorp, Inc. Trust II, a newly formed Delaware statutory business trust and a
wholly owned subsidiary of the Company (Trust II), issued an aggregate of $5.0
million of principal amount of Floating Rate TRUPS
â
(Capital Trust Pass-through Securities of the Trust) (the Trust Preferred
Securities). Citigroup Global Markets, Inc. acted as placement agent in
connection with the offering of the Trust Preferred Securities. The securities
issued by Trust II are fully guaranteed by the Company with respect to
distributions and amounts payable upon liquidation, redemption or repayment. The
entire proceeds to Trust II from the sale of the Trust Preferred Securities
were used by Trust II in order to purchase $5.0 million in principal amount of
the Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033
issued by the Company (the Subordinated Debt Securities).
Pursuant
to Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation
of Variable Interest Entities (VIEs) (FIN 46), this trust is not reflected on
a consolidated basis in our financial statements.
The Subordinated Debt
Securities bear a variable interest rate equal to the three-month LIBOR plus
2.85%. The effective rate at December 31, 2006 was 8.22%. Total broker and
legal costs associated with the issuance of $54,000 are being amortized over a
30 year period.
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EMPLOYEES
At
December 31, 2006 the Northern California Bancorp, Inc. and its subsidiary
Monterey County Bank employed a total of 53 full time equivalent persons.
COMPETITION
All
phases of the Banks 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
banks 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 Banks
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 Banks officers, directors and employees. If there are customers whose
loan demands exceed the Banks 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 Banks efforts to
compete with other financial institutions in its primary service area will be
successful.
The
Bank provides a range of competitive retail and commercial banking services. The
deposit services offered include various types of personal and business
checking accounts, savings accounts, money market investment accounts,
certificates of deposit, and retirement accounts. Lending services include
consumer loans, various type of mortgage loans for residential and commercial
real estate, personal lines of credit, home equity loans, real estate
construction, accounts receivable financing, commercial loans to small and
medium size businesses and professionals. The Bank also provides drive-through
facilities, at its Monterey and Carmel offices, and night depository facilities
for customer convenience. The Bank offers safe deposit box facilities, cashiers
checks, travelers checks, U.S. Savings Bonds, and wire transfers. The Bank
does not provide trust services.
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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 entered into an agreement with Genesis Financial Solutions, a purchaser of
charged-off consumer credit card balances, to market a MasterCard credit card
program. The Bank will be issuing the cards, but the credit card balances will
be 100 percent owned by Genesis Financial Solutions. The program was
implemented in the first quarter of 2005 with the initial card solicitations
being mailed in February 2005 resulting in 14,741 active cards on file at December
31, 2005. The Banks 2006 and 2005 fee revenue from the program were
approximately $71,400 and $95,400, respectively. Genesis Financial Solutions
maintains deposits with the Bank equal to the sum of the total available credit
of the portfolio plus the total of five (5) days average settlement activity
for the prior month. The average deposits maintained during 2006 and 2005 were
$648,400 and $275,800, respectively.
The
Bank entered into an agreement in February 2006 with GC Acquisitions, LLC (GCA), the owner of a portfolio of consumer credit card contracts and
receivables, under which the Bank will offer MasterCard® credit cards to
qualifying GCA credit card contract holders. GCA will, through its affiliates, agents and vendors, establish new
credit card accounts with the Bank for certain of its existing credit card
contract holders, service the credit card accounts and own the receivables
generated from the accounts. A total of approximately 252,000 cards were issued
during March and April 2006, as a result of GCAs purchase of a credit card
portfolio. GCA requested and the Bank granted permission for GCA to transfer a
total of approximately 87,000 accounts from the portfolio to another card
issuer. In consideration the Banks granting permission to transfer the
accounts GCA paid one time transfer fees totaling approximately $381,700. The
Banks 2006 fee revenue from the program was approximately $1,209,400 including
the on time transfer fees. GCA maintained average reserve deposits with the
Bank of $7,488,400. The Banks future revenues from the program and reserve
balances maintained will be diminished as result of 87,000 accounts transferred
from the portfolio.
The
Bank has implemented a pre-paid debit card program. The program is marketed by
third parties through employer payroll programs and check cashing facilities,
through Internet websites for purchasers of the websites products and services.
Holders of the pre-paid cards will be able to have additional funds added to
the card balance, make point of sale purchases and withdraw cash through
automated teller machines. The Bank will be issuing the pre-paid cards and
maintaining the funds held on the cards. The Banks revenues from the program
will be in the form of transaction fees and earnings from investing the funds
held on the cards. Revenues from the program were $75,300, $13,800 and $8,300
in 2006, 2005 and 2004, respectively.
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 Banks portfolio, comprise the major portion of the
Banks 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.
6
Monetary
and fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Federal Reserve Board, also impact on the Banks
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 Banks 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 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
FRBs Regulation Y sets out the non-banking activities that are permissible
for bank holding companies under the law, subject to the FRBs 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
7
investment
banks, 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 by banks. 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 Department of Financial
Institutions.
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
Banks capital, in the case of any one affiliate, and will be limited to 20% of
the Banks 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 customers 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.
Sarbanes-Oxley Act
The
Sarbanes-Oxley Act of 2002 (the Act) was enacted into law on July 30, 2002. The
Act was in response to recent issues in corporate governance and accountability.
Key provisions of the Act provide for:
Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such services to be
pre-approved by the audit committee.
Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the Chief
Executive Officer and Chief Financial Officer, and making issuer interference
with an audit a crime.
Enhanced financial disclosures, including periodic reviews for the
largest issuers and real time disclosure of material company information.
Enhanced criminal penalties for a board array of white-collar crimes
and increases in the statute of limitations for securities fraud lawsuits.
Provides for mandated internal control report and assessment with the
annual report and an attestation and a report on such report by the companys
auditor.
8
The
effect of the Act upon corporations is uncertain; however, it is likely that
compliance costs may increase as corporations modify procedures if required to
conform to the provisions of the Act. The Company does not currently anticipate
that compliance with the Act will have a material effect upon its financial
position or results or its operations or its cash flows.
Subsidiary
Bank
Both
federal and state laws provide extensive regulation of the banking business. State
and federal statutes and regulations apply to many aspects of the Banks
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 Banks deposits,
currently up to a maximum of $100,000 per depositor, except that individual
retirement accounts are insured up to a maximum of $250,000 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 banks 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
banks 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 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 Banks 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.
9
Capital Adequacy 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.
A
banking organizations 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.
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 organizations qualifying total capital consists of two components:
Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier
1 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. Trust preferred
securities qualify as Tier 1 capital up to a maximum of 25% of capital. Any
additional portion will qualify as Tier 2 capital. 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 organizations
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 is 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.
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 banks capital adequacy. Management of the
Company does not believe that the Banks 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 banks 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 is 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 Banks portfolio would not exceed the amounts so provided.
Future
changes in regulations or practices could further reduce the amount of capital
recognized for purposes of capital adequacy. Such a change could affect the
ability of the Bank to grow and could restrict the amount of profits, if any,
available for the payment of dividends.
Prompt Corrective Action and Other
Enforcement Mechanisms
Under
Section 38 of the FDIA, as added by the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective
11
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, 2006, 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 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.
12
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 2006 were
$.00 to $.27.
On
February 8, 2006, the President signed The Federal Deposit Insurance Reform Act
of 2005 (the Reform Act) into law. The Federal Deposit Insurance Reform
Conforming Amendments Act of 2005, which the President signed into law on
February 15, 2006, contains necessary technical and conforming changes to
implement deposit insurance reform, as well as a number of study and survey
requirements.
The
Reform Act provides for the following changes:
Merging the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF). This
change was made effective March 31, 2006.
Increasing the coverage limit for retirement accounts to $250,000 and
indexing the coverage limit for retirement accounts to inflation as with the
general deposit insurance coverage limit. This change was made effective April
1, 2006.
Establishing a range of 1.15 percent to 1.50 percent within which the
FDIC Board of Directors may set the Designated Reserve Ratio (DRR).
Allowing the FDIC to manage the pace at which the reserve ratio varies
within this range.
1.
If the reserve ratio falls below 1.15
percentor is expected to within 6 monthsthe FDIC must adopt a restoration
plan that provides that the DIF will return to 1.15 percent generally within 5
years.
2.
If the reserve ratio exceeds 1.35 percent,
the FDIC must generally dividend to DIF members half of the amount above the
amount necessary to maintain the DIF at 1.35 percent, unless the FDIC Board,
considering statutory factors, suspends the dividends.
3.
If the reserve ratio exceeds 1.5 percent, the
FDIC must generally dividend to DIF members all amounts above the amount
necessary to maintain the DIF at 1.5 percent.
13
Eliminating the restrictions on premium rates based on the DRR and
granting the FDIC Board the discretion to price deposit insurance according to
risk for all insured institutions regardless of the level of the reserve ratio.
Granting a one-time initial assessment credit (of approximately $4.7
billion) to recognize institutions past contributions to the fund.
The Federal Deposit Insurance Reform Conforming Amendments Act of 2005
requires the FDIC to conduct studies of three issues: (1) further potential
changes to the deposit insurance system, (2) the appropriate deposit base in
designating the reserve ratio, and (3) the Corporations contingent loss
reserving methodology and accounting for losses.
The 2005 act requires the Comptroller General to conduct studies of (1)
federal bank regulators administration of the prompt corrective action program
and recent changes to the FDIC deposit insurance system, and (2) the
organizational structure of the FDIC.
The final rule consolidates the existing nine risk
categories into four and names them Risk Categories I, II, III and IV. Risk
Category I replaces the 1A risk category.
Within Risk Category I, the final rule combines
supervisory ratings with other risk measures to differentiate risk. For most
institutions, the final rule combines CAMELS component ratings with financial
ratios to determine an institutions assessment rate. For large institutions
that have long-term debt issuer ratings, the final rule differentiates risk by
combining CAMELS component ratings with these ratings. For large institutions
within Risk Category I, initial assessment rate determinations may be modified
within limits upon review of additional relevant information.
The final rule defines a large institution as an
institution that has $10 billion or more in assets. With certain exceptions,
beginning in 2010, the final rule treats new institutions (those established
for less than five years) in Risk Category I the same, regardless of size, and
assesses them at the maximum rate applicable to Risk Category I institutions.
The final rule sets actual
rates beginning January 1, 2007, as follows:
|
|
Risk Category
|
|
|
|
I*
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Maximum
|
|
II
|
|
III
|
|
IV
|
|
Annual Rates (in
basis points)
|
|
5
|
|
7
|
|
10
|
|
28
|
|
43
|
|
*
Rates for institutions that do not pay the minimum or maximum rate vary between
these rates.
These rates are three basis
points above the base rate schedule adopted in the final rule:
|
|
Risk Category
|
|
|
|
I*
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Maximum
|
|
II
|
|
III
|
|
IV
|
|
Annual Rates (in
basis points)
|
|
2
|
|
4
|
|
7
|
|
25
|
|
40
|
|
*
Rates for institutions that do not pay the minimum or maximum rate vary between
these rates.
14
The final rule continues to allow the FDIC Board to
adjust rates uniformly from one quarter to the next, except that no single
adjustment can exceed three basis points. In addition, cumulative adjustments
cannot exceed a maximum of three basis points higher or lower than the base
rates without further notice-and-comment rulemaking.
The
billing for deposit insurance is now quarterly and in the arrears. Payment for
the first quarter 2007 deposit insurance premiums will be collected in June
2007. The Banks portion of the one-time initial assessment credit is estimated
to be approximately $49,000, which will be used to offset deposit insurance
premiums; the assessment credit cannot be used to offset FICO premiums.
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 FICOs 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 FDICs 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.
The
FICO assessment rate is adjusted quarterly to reflect changes in the assessment
basis of the respective funds based on the quarterly Call Report and the Thrift
Financial Report submissions. The FICO quarterly rates for 2006 were 1.32,
1.28, 1.26 and 1.24. The FICO quarterly rate for the first quarter of 2007 is
1.22.
Interstate Banking and Branching
On September 29, 1994,
the President signed into law the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the Interstate Act). Under the Interstate Act,
beginning one year after the date of enactment, a bank holding company that is
adequately capitalized and managed may obtain regulatory approval to acquire an
existing bank located in another state without regard to state law. A bank
holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of
deposits of insured depository institutions in the United States or (b) 30% or
more of the deposits in the state in which the bank is located. A state may
limit the percentage of total deposits that may be held in that state by any
one bank or bank holding company if application of such limitation does not
discriminate against out-of-state banks. An out-of-state bank holding company
may not acquire a state bank in existence for less than a minimum length of
time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.
15
The Interstate Act also
permitted affective 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 states 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 Banks 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 Act 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 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 banks 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 Banks most recent CRA examination, the Banks rating was satisfactory.
16
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
banks total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors, trustees and officers liability
insurance coverage or bankers blanket bond group insurance coverage for
insured depository institutions, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met.
FDIC regulations
implementing Section 24 of the FDIA provide that an insured state-chartered
bank may not, directly, or indirectly through a subsidiary, engage as principal
in any activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease
the impermissible activity.
Financial Modernization Act
Effective March 11,
2000, the Gramm-Leach-Bliley Act eliminated most barriers to affiliations among
banks and securities firms, insurance companies, and other financial service
providers, and enabled full affiliations to occur between such entities. This
new legislation permits bank holding companies to become financial holding
companies and thereby acquire securities firms and insurance companies and
engage in other activities that are financial in nature. A bank holding company
may become a financial holding company if each of its subsidiary banks is well
capitalized under the prompt corrective action provisions discussed above, is
well managed, and has at least a satisfactory rating under the Community
Reinvestment Act by filing a declaration that the bank holding company wishes
to become a financial holding company. No regulatory approval will be required
for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve Board. The Bank has no current intention of becoming a
financial holding company, but may do so at some point in the future if deemed
appropriate in view of opportunities or circumstances at the time.
The Gramm-Leach-Bliley
Act defines financial in nature to include securities underwriting, dealing
and market making; sponsoring mutual funds and investment companies; insurance
underwriting and agencies; merchant banking activities; and activities that the
Federal Reserve Board has determined to be closely related to banking. A
national bank (and therefore, a state bank as well) may also engage, subject to
limitations on investment, in activities that are financial in nature, other
than insurance underwriting, insurance company portfolio investment, real
17
estate development and real estate investment, through
a financial subsidiary of the bank, if the bank is well capitalized, well
managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary
banks of a financial holding company or national banks with financial
subsidiaries must continue to be well capitalized and well managed in order to
continue to engage in activities that are financial in nature without
regulatory actions or restrictions, which could include divestiture of the
financial in nature subsidiary or subsidiaries. In addition, a financial
holding company or a bank may not acquire a company that is engaged in activities
that are financial in nature unless each of the subsidiary banks of the
financial holding company or the bank has a Community Reinvestment Act rating
of satisfactory or better.
The Gramm-Leach-Bliley
Act also imposes significant new requirements on financial institutions with
respect to the privacy of customer information, and modifies other existing
laws, including those related to community reinvestment.
USA Patriot Act of 2001
On October 26, 2001,
President Bush signed the USA Patriot Act of 2001. Enacted in response to the
terrorist attacks in New York, Pennsylvania and Washington, D.C. on
September 11, 2001, the USA Patriot Act is intended to strengthen U.S. law
enforcements and the intelligence communities ability to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the USA
Patriot Act on financial institutions of all kinds is significant and wide
ranging. The USA Patriot Act contains sweeping anti-money laundering and
financial transparency laws and requires various regulations applicable to
financial institutions, including:
due
diligence requirements for financial institutions that administer, maintain, or
manage private bank accounts or correspondent accounts for non-U.S. persons;
standards
for verifying customer identification at account opening; and
rules
to promote cooperation among financial institutions, regulators, and law
enforcement entities in identifying parties that may be involved in terrorism
or money laundering.
The Bank implemented the
requirements under the USA Patriot Act during 2001 and 2002. Compliance with
such requirements has all been accomplished with existing staff, so the
financial impact on the Bank has been negligible.
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.
18
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 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.
19
DEPENDENCE UPON A SINGLE CUSTOMER
Neither the Corporation
nor the Bank is dependent upon a single customer or very few customers. The
Banks 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.
ITEM 2.
PROPERTIES
The main office of the
Bank, which also serves as the principal office of the Corporation, is located
at 601 Munras Ave., Monterey, California 93940. This facility contains a lobby,
executive and customer service offices, teller stations, safe deposit boxes and
related non-vault area, vault, operations area, lounge and miscellaneous areas.
A drive-through facility and adequate paved parking are also on the premises. Both
the land and all improvements thereto are owned by the Bank
.
The
Bank currently operates three branch offices in Carmel-By-The-Sea, Carmel
Valley and Pacific Grove, California, all within approximately 10 miles from
the Banks main office. The Bank also has a loan production office located in
Monterey, California. The land and improvements dedicated to the
Carmel-By-The-Sea, Carmel Valley and Pacific Grove branch offices. See Footnote
12 to the Corporations financial statements included herewith. In March 2005
the Bank purchased a building located at 556 Abrego St., Monterey, CA 93940. This
facility located within a city block of the Banks main office will be utilized
for additional office space, when renovations are completed.
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
There are no known pending legal proceedings to which the Corporation or its subsidiary is a party, or to which any of their properties is subject, other than ordinary litigation arising in the normal course of business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, any such liability will not have a material effect on the consolidated financial position of the Corporation and its subsidiary.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted
to a vote of security holders during the fourth quarter.
PART II
ITEM 5.
MARKET FOR THE CORPORATIONS COMMON STOCK AND RELATED
STOCKHOLDER
MATTERS.
The
Corporations stock, which is held by approximately 530 persons, began trading
on the National Association of
Securities Dealers Automated Quotations (NASDAQ) system in May 2005.
20
In
addition to the limited trading on the NASDAQ, stock symbol NRLB; the
Corporation also has knowledge of a limited number of transactions conducted
between individual shareholders.
The
Corporation repurchased 3,795 shares of common stock at $4.00 per share in
2005; no shares were repurchased in 2006 or 2004.
The
following table sets forth, according to information known to the Corporation,
the price paid per share in, and volume of, transactions in the Corporations
stock during the quarters ended March 31, 2004 to December 31, 2006.
Quarter/Year
|
|
Price
|
|
Volume
(1)
|
|
|
|
|
|
|
|
1st quarter of 2004
|
|
3.00
|
|
1,438
|
|
2nd quarter of 2004
|
|
3.00-4.00
|
|
3,795
|
|
3rd quarter of 2004
|
|
3.00
|
|
166
|
|
4th quarter of 2004
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter of 2005
|
|
|
|
|
|
2nd quarter of 2005
|
|
3.00-6.75
|
|
2,913
|
|
3rd quarter of 2005
|
|
4.00-5.35
|
|
6,873
|
|
4th quarter of 2005
|
|
4.00-8.15
|
|
8,083
|
|
|
|
|
|
|
|
1st quarter of 2006
|
|
7.70-10.70
|
|
13,941
|
|
2nd quarter of 2006
|
|
8.00-12.15
|
|
902
|
|
3rd quarter of 2006
|
|
8.00-13.05
|
|
1,593
|
|
4th quarter of 2006
|
|
8.00-13.25
|
|
5,452
|
|
(1)
For the
period presented, the information indicated might 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 interest and
dividends on investments and tax benefit payments and dividends from the Bank. There
are statutory and regulatory limitations on the payment of dividends by the
Bank to the Corporation, as well as by the Corporation to its shareholders.
If
in the opinion of the applicable federal and/or state regulatory authority, a
depository institution or holding company is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition
of the depository institution or holding company, could include the payment of
dividends), such authority may require, after notice and hearing (except in the
case of an emergency proceeding where there is 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.
21
The
Banks 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 Banks
net income for its last three fiscal years (less any distributions to the
stockholders made during such period). As of December 31, 2006 the Bank had
$10,913,400 in retained earnings. The Banks net income for the last three
fiscal years less distributions to stockholders was $7,312,900.
In
December 2006, 2005 and 2004 the Corporation paid cash dividends of $0.35,
$0.20 and $0.165 per share, respectively. The Bank paid cash dividends totaling
$625,000 to the Corporation during 2006; no dividends were paid in 2004 or
2005.
ITEM 6.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Statements Regarding Forward-Looking Information
Except
for historical information contained herein, the matters discussed or
incorporated by reference in this report contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities
Act), and Section 21E of the Securities Exchange Act of 1934 (the Exchange
Act), that involve substantial risks and uncertainties. When used in
this report, or in the documents incorporated by reference herein, the words anticipate,
believe, estimate, may, intend, expect, and similar expressions
identify certain of such forward-looking statements. Actual results of
Monterey County Bank could differ materially from such forward-looking
statements contained herein. Factors that could cause future results to
vary from current expectations include, but are not limited to, the following:
changes in economic conditions (both generally and more specifically in the
markets in which the Bank operates); changes in interest rates, deposit flows,
loan demand, real estate values and competition; changes in accounting
principles, policies or guidelines and in government legislation and regulation
(which change from time to time and over which the Bank has no control); other
factors affecting the Banks operations, markets, products and services; and
other risks detailed in this Form 10-KSB and in the Banks other reports filed
with the Comptroller of the Currency pursuant to the rules and regulations of
the Securities and Exchange Commission. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
managements analysis only as of the date hereof. The Bank undertakes no
obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date thereof.
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 $3,837,200 in 2006, $1,929,300 in
2005, and $1,065,200 in 2004. The primary net income per share for each of the
last three years was $2.31, $1.20, and $.68 respectively. The diluted net
income per share for the same time periods was $2.09, $1.00 and $.56,
respectively. Return on average shareholders equity was 34.94%, 24.15% and
22
15.35%
in 2006, 2005 and 2004, respectively. Return on average assets was 2.24%,
1.24%, and 0.88% in 2006, 2005 and 2004, respectively.
The
increase in earnings in 2006 was due to increases of $1,283,800 in net interest
income after provision for loan losses, $2,815,200 in non-interest income,
$814,300 in non-interest expense and $1,376,800 in income tax expense.
The
increase in earnings in 2005 was due to increases of $2,134,500 in net interest
income after provision for loan losses, $135,200 in non-interest income,
$696,800 in non-interest expense and $708,800 in income tax expense.
The
increase in earnings in 2004 was due to increases of $1,240,700 in net interest
income after provision for loan losses; partially offset by a decrease of
$181,500 in non-interest income and increases of $711,700 in non-interest
expense and $122,100 in income tax expense.
23
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.
|
|
As of and for the years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Dollars in thousands except per share data)
|
|
Summary of
Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
$
|
13,760
|
|
$
|
10,691
|
|
$
|
7,355
|
|
$
|
5,569
|
|
$
|
4,876
|
|
Total interest
expense
|
|
5,197
|
|
3,672
|
|
2,435
|
|
1,920
|
|
1,948
|
|
Net interest
income
|
|
8,563
|
|
7,019
|
|
4,920
|
|
3,649
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
possible loan losses
|
|
410
|
|
150
|
|
185
|
|
155
|
|
117
|
|
Net interest
income after provision for loan loss
|
|
8,153
|
|
6,869
|
|
4,735
|
|
3,494
|
|
2,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
income
|
|
7,177
|
|
4,362
|
|
4,227
|
|
2,403
|
|
1,805
|
|
Total other
expenses
|
|
8,627
|
|
7,813
|
|
7,116
|
|
4,399
|
|
3,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
6,703
|
|
3,419
|
|
1,846
|
|
1,498
|
|
863
|
|
Provision for
income tax
|
|
2,866
|
|
1,489
|
|
781
|
|
659
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,837
|
|
$
|
1,929
|
|
$
|
1,065
|
|
$
|
840
|
|
$
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income -
Basic (1)
|
|
$
|
2.313
|
|
$
|
1.195
|
|
$
|
0.676
|
|
$
|
0.550
|
|
$
|
0.343
|
|
Net income -
Diluted (2)
|
|
$
|
2.094
|
|
$
|
1.003
|
|
$
|
0.555
|
|
$
|
0.480
|
|
$
|
0.292
|
|
Book value, end
of period (3)
|
|
7.71
|
|
5.55
|
|
4.55
|
|
4.09
|
|
3.77
|
|
Avg shares
outstanding (4)
|
|
1,658,675
|
|
1,614,196
|
|
1,576,589
|
|
1,528,268
|
|
1,483,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
of unearned income (5)
|
|
130,050
|
|
107,300
|
|
95,036
|
|
76,908
|
|
60,257
|
|
Total assets
|
|
190,570
|
|
162,645
|
|
134,039
|
|
107,872
|
|
86,279
|
|
Total deposits
|
|
131,628
|
|
118,120
|
|
97,263
|
|
78,132
|
|
67,616
|
|
Stockholders
equity
|
|
12,402
|
|
8,931
|
|
7,321
|
|
6,411
|
|
5,639
|
|
24
|
|
As of and for the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Selected
Financial Ratios (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on
average assets (5)
|
|
2.24
|
%
|
1.24
|
%
|
0.88
|
%
|
0.88
|
%
|
0.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on
average stockholders equity (5)
|
|
34.94
|
%
|
24.15
|
%
|
15.35
|
%
|
13.84
|
%
|
10.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
spread
|
|
4.82
|
%
|
4.68
|
%
|
4.02
|
%
|
3.92
|
%
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
margin
|
|
5.58
|
%
|
5.12
|
%
|
4.47
|
%
|
4.30
|
%
|
3.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg
shareholders equity to average assets
|
|
6.40
|
%
|
5.15
|
%
|
5.75
|
%
|
6.35
|
%
|
5.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Risked-Based
capital ratios
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
|
|
9.50
|
%
|
9.50
|
%
|
8.22
|
%
|
9.00
|
%
|
8.10
|
%
|
Total
|
|
14.90
|
%
|
14.90
|
%
|
14.83
|
%
|
17.30
|
%
|
9.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans to
total deposits at end of period
|
|
98.80
|
%
|
90.84
|
%
|
97.71
|
%
|
98.43
|
%
|
89.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to
total loans at end of period
|
|
1.07
|
%
|
1.02
|
%
|
1.00
|
%
|
1.00
|
%
|
1.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans to total Loans at end of period
|
|
0.12
|
%
|
0.00
|
%
|
0.04
|
%
|
0.04
|
%
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
to average loans
|
|
0.09
|
%
|
0.01
|
%
|
0.00
|
%
|
0.03
|
%
|
0.18
|
%
|
(1)
Basic
earnings 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 1,658,675 for 2006, 1,614,196 for 2005,
1,576,589 for 2004, 1,528,268 for 2003 and 1,483,493 for 2002.
(2)
Fully
diluted earnings 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
1,831,982, 1,923,532, 1,919,512, 1,796,859 and 1,744,082 in 2006, 2005, 2004,
2003 and 2002, respectively.
(3)
Weighted average common shares.
(4)
Includes loans being held for
sale.
(5)
Averages are of daily balances.
Critical
Accounting Policies
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
a number of judgments, estimates and assumptions that affect the reported
amount of assets, liabilities, income and expenses in the Banks financial
statements and accompanying notes. Management believes that the
judgments, estimates and assumptions used in preparation of the Banks financial
statements are appropriate given the factual circumstances as of December 31,
2006.
25
Various
elements of the Banks accounting policies, by their nature, are inherently
subject to estimation techniques, valuation assumptions and other subjective
assessments. Critical accounting policies are those that involve the most
complex and subjective decisions and assessments and have the greatest
potential impact of the Banks results of operation. In particular,
management has identified one accounting policy that, due to judgments,
estimates and assumptions inherent in this policy, and the sensitivity of the
Banks financial statements to those judgments, estimates and assumptions, are
critical to an understanding of the Banks financial statements. This
policy relates to the methodology that determines the allowance for loan and
lease losses. Management has discussed the development and selection of
this critical accounting policy with the Audit Committee of the Board of
Directors. Although Management believes the level of the allowance at
December 31, 2006 is adequate to absorb losses inherent in the loan portfolio,
a decline in the regional economy may result in increasing losses that cannot reasonably
be predicted at this time. For further information regarding the
allowance for loan losses see Provision and Allowance for Loan Losses, and
Note 6 to the Banks audited financial statements included elsewhere herein.
Recently
Issued Accounting Standards
Refer
to Note 1 to the Financial Statements Summary of Significant Accounting
Policies for discussion of the recently issued accounting standards.
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 Banks 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 Corporations net interest income.
|
|
|
|
Increase (Decrease)
|
|
|
|
Years Ended
|
|
From Prior Year
|
|
|
|
December 31,
|
|
2006/2005
|
|
2005/2004
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Amt
|
|
%
|
|
Amt
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
Interest Income
|
|
$
|
13,760
|
|
$
|
10,691
|
|
$
|
7,355
|
|
$
|
3,069
|
|
28.7
|
|
$
|
3,336
|
|
45.4
|
|
Interest Expense
|
|
5,197
|
|
3,672
|
|
2,435
|
|
1,525
|
|
41.6
|
|
1,237
|
|
50.8
|
|
Net Interest
Income
|
|
$
|
8,563
|
|
$
|
7,019
|
|
$
|
4,920
|
|
$
|
1,543
|
|
22.0
|
|
$
|
2,099
|
|
42.7
|
|
Net interest income
increased $1,543,800 or 22.0% from 2005 to 2006. Average interest bearing
assets increased 10.61%, while the average rate earned increased 115 basis
points, resulting in an increase of $3,069,200 in total interest income. Interest
expense increased $1,525,400 the result of a 6.56% increase in average interest
bearing liabilities, while the average rate paid increased 100 basis points.
26
Net interest income
increased $2,099,500 or 42.68% from 2004 to 2005. Average interest bearing
assets increased 28.21%, while the average rate earned increased 72 basis
points, resulting in an increase of $3,335,900 in total interest income. Interest
expense increased $1,236,400 the result of a 29.72% increase in average
interest bearing liabilities, while the average rate paid increased 43 basis
points.
The following table shows
the components of net interest income, setting forth, for each of the three
years ended December 31, 2006, 2005 and 2004 (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 $148,700, $137,900 and $70,200 in 2006,
2005 and 2004, respectively. Non-accrual loans and overdrafts are included in
average loan balances. Average loans are presented net of unearned income.
27
INTEREST SPREAD ANALYSIS:
|
|
As of and for the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Avg
Bal
|
|
Int
Earn
Paid
|
|
Avg
%
Rate
|
|
Avg
Bal
|
|
Int
Earn
Paid
|
|
Avg
%
Rate
|
|
Avg
Bal
|
|
Int
Earn
Paid
|
|
Avg
%
Rate
|
|
|
|
(Dollars in
thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
118,699
|
|
$
|
11,954
|
|
10.07
|
|
$
|
108,963
|
|
$
|
9,561
|
|
8.77
|
|
$
|
86,870
|
|
$
|
6,756
|
|
7.78
|
|
Time deposits -
in other banks
|
|
1,000
|
|
50
|
|
4.97
|
|
1,000
|
|
29
|
|
2.92
|
|
|
|
|
|
|
|
Invest securities
- taxable
|
|
15,145
|
|
730
|
|
4.82
|
|
13,237
|
|
441
|
|
3.33
|
|
10,755
|
|
301
|
|
2.80
|
|
Invest securities
- nontaxable
|
|
7,019
|
|
480
|
|
6.83
|
|
7,026
|
|
445
|
|
6.33
|
|
3,456
|
|
226
|
|
6.55
|
|
Federal funds
sold
|
|
14,745
|
|
721
|
|
4.89
|
|
10,481
|
|
352
|
|
3.36
|
|
10,479
|
|
141
|
|
1.35
|
|
Total
interest-earning assets
|
|
156,607
|
|
13,933
|
|
8.90
|
|
140,707
|
|
10,828
|
|
7.75
|
|
111,561
|
|
7,425
|
|
6.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
credit losses
|
|
(1,162
|
)
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
(1,101
|
)
|
|
|
|
|
Non-interest
bearing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
|
5,187
|
|
|
|
|
|
5,523
|
|
|
|
|
|
3,282
|
|
|
|
|
|
Premises and
equipment
|
|
4,441
|
|
|
|
|
|
4,362
|
|
|
|
|
|
2,223
|
|
|
|
|
|
Accrued interest
receivable
|
|
797
|
|
|
|
|
|
699
|
|
|
|
|
|
422
|
|
|
|
|
|
Other assets
|
|
5,725
|
|
|
|
|
|
5,822
|
|
|
|
|
|
4,314
|
|
|
|
|
|
Total average
assets
|
|
171,596
|
|
|
|
|
|
156,090
|
|
|
|
|
|
120,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
13,243
|
|
$
|
42
|
|
0.31
|
|
$
|
12,584
|
|
$
|
32
|
|
0.26
|
|
$
|
13,099
|
|
$
|
33
|
|
0.25
|
|
Money market
savings
|
|
3,589
|
|
27
|
|
0.75
|
|
4,818
|
|
32
|
|
0.66
|
|
3,894
|
|
32
|
|
0.81
|
|
Savings deposits
|
|
7,355
|
|
74
|
|
1.00
|
|
7,476
|
|
80
|
|
1.07
|
|
7,924
|
|
81
|
|
1.02
|
|
Time deposits
>$100M
|
|
32,372
|
|
1,479
|
|
4.57
|
|
29,908
|
|
990
|
|
3.31
|
|
18,795
|
|
562
|
|
2.99
|
|
Time deposits
<$100M
|
|
33,174
|
|
1,370
|
|
4.13
|
|
31,981
|
|
971
|
|
3.04
|
|
24,264
|
|
711
|
|
2.93
|
|
Other Borrowing
|
|
37,894
|
|
2,207
|
|
5.82
|
|
32,998
|
|
1,567
|
|
4.75
|
|
24,347
|
|
1,018
|
|
4.18
|
|
Total
interest-bearing liabilities
|
|
127,626
|
|
5,198
|
|
4.07
|
|
119,765
|
|
3,672
|
|
3.07
|
|
92,324
|
|
2,436
|
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
checking
|
|
30,155
|
|
|
|
|
|
24,857
|
|
|
|
|
|
20,029
|
|
|
|
|
|
Accrued interest
payable
|
|
995
|
|
|
|
|
|
664
|
|
|
|
|
|
363
|
|
|
|
|
|
Other liabilities
|
|
1,838
|
|
|
|
|
|
2,816
|
|
|
|
|
|
1,042
|
|
|
|
|
|
Total liabilities
|
|
160,614
|
|
|
|
|
|
148,102
|
|
|
|
|
|
113,758
|
|
|
|
|
|
Total
shareholders equity
|
|
10,982
|
|
|
|
|
|
7,988
|
|
|
|
|
|
6,941
|
|
|
|
|
|
Total average
liabilities and shareholders equity
|
|
$
|
171,596
|
|
|
|
|
|
$
|
156,090
|
|
|
|
|
|
$
|
120,700
|
|
|
|
|
|
Interest income
as a percentage of average earning assets
|
|
|
|
|
|
8.90
|
|
|
|
|
|
7.75
|
|
|
|
|
|
6.66
|
|
Interest expense
as a percentage of average earning assets
|
|
|
|
|
|
3.32
|
|
|
|
|
|
2.63
|
|
|
|
|
|
2.18
|
|
Net yield on
interest earning assets
|
|
|
|
|
|
5.58
|
|
|
|
|
|
5.12
|
|
|
|
|
|
4.47
|
|
28
|
|
Increase (decrease) in the twelve months ended
|
|
|
|
December 31, 2006 compared with December 31, 2005
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
Loans
|
|
$
|
854
|
|
$
|
1,538
|
|
$
|
2,392
|
|
Time deposits -
in other banks
|
|
|
|
20
|
|
20
|
|
Invest
securities - taxable
|
|
63
|
|
225
|
|
289
|
|
Invest
securities - nontaxable
|
|
(0
|
)
|
35
|
|
35
|
|
Federal funds
sold
|
|
144
|
|
225
|
|
369
|
|
Total
interest-earning assets
|
|
1,061
|
|
2,044
|
|
3,105
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in interest expense:
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
2
|
|
$
|
7
|
|
$
|
9
|
|
Money market
savings
|
|
(8
|
)
|
3
|
|
(5
|
)
|
Savings deposits
|
|
(1
|
)
|
(5
|
)
|
(6
|
)
|
Time deposits
>$100M
|
|
82
|
|
407
|
|
489
|
|
Time deposits
<$100M
|
|
36
|
|
363
|
|
399
|
|
Other borrowing
|
|
232
|
|
408
|
|
640
|
|
Total
interest-bearing liabilities
|
|
342
|
|
1,183
|
|
1,525
|
|
Increase in net
interest expense:
|
|
$
|
718
|
|
$
|
861
|
|
$
|
1,580
|
|
|
|
Increase (decrease) in the twelve months ended
|
|
|
|
December 31, 2005 compared with December 31, 2004
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,718
|
|
$
|
1,087
|
|
$
|
2,805
|
|
Time deposits -
in other banks
|
|
29
|
|
|
|
29
|
|
Invest
securities - taxable
|
|
69
|
|
70
|
|
140
|
|
Invest
securities - nontaxable
|
|
234
|
|
(15
|
)
|
218
|
|
Federal funds
sold
|
|
0
|
|
211
|
|
211
|
|
Total
interest-earning assets
|
|
2,051
|
|
1,353
|
|
3,403
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in interest expense:
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
(1
|
)
|
$
|
1
|
|
$
|
(0
|
)
|
Money market
savings
|
|
7
|
|
(7
|
)
|
0
|
|
Savings deposits
|
|
(5
|
)
|
5
|
|
(0
|
)
|
Time deposits
>$100M
|
|
332
|
|
96
|
|
428
|
|
Time deposits
<$100M
|
|
226
|
|
34
|
|
260
|
|
Other borrowing
|
|
362
|
|
187
|
|
549
|
|
Total
interest-bearing liabilities
|
|
922
|
|
316
|
|
1,237
|
|
Increase in net
interest expense:
|
|
$
|
1,129
|
|
$
|
1,037
|
|
$
|
2,166
|
|
29
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 Banks loan portfolio.
The allowance for loan
losses reflects managements 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 Banks
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 Banks 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.
Loan Category
|
|
Reserve %
|
|
|
|
|
|
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%
|
|
0.70
|
%
|
Real Estate -
Construction
|
|
0.25
|
%
|
Loans to
Individuals
|
|
3.00
|
%
|
Commercial
|
|
2.00
|
%
|
SBA Loans
Unguaranteed portion
|
|
2.00
|
%
|
Unfunded Loan
Commitments
|
|
.10
|
%
|
Concentration
Risk Factor Real Estate
|
|
.10
|
%
|
Economic Risk
Factor
|
|
.20
|
%
|
SBA Loans -
Guaranteed portion
|
|
0.00
|
%
|
Cash Secured
Loans
|
|
0.00
|
%
|
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 2006, 2005 and 2004, the Banks allowance stood at 1.07%, 1.02%, and 1.00%
of gross loans, respectively. Provisions were made to the allowance for loan
losses in 2006, 2005 and 2004 of $410,000, $150,000, and $185,000, respectively.
Loans charged off in 2006 and 2005 totaled $108,900 and $14,200, respectively;
no loans were charged off in 2004. Recoveries for these same periods were
$7,100, $1,900, and $3,200, respectively.
30
The Banks non-performing
(delinquent 90 days or more and on non-accrual) loans as a percentage of total
loans were 0.12 percent 0.00 percent and 0.04 percent as of the end of 2006,
2005 and 2004, 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 Banks
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 Banks strong performance on these measures of credit
quality. However, no assurance can be given that the Banks 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 Banks non-interest income:
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Service charges
on deposit accounts
|
|
$
|
547
|
|
$
|
564
|
|
$
|
517
|
|
Gain on sale of
Pacific Coast Bankers Bank Stock
|
|
1,313
|
|
|
|
|
|
Other service
charges, commissions
and
fees
|
|
4,627
|
|
2,807
|
|
2,994
|
|
Income from
sales and servicing
of
SBA loans
|
|
690
|
|
991
|
|
716
|
|
|
|
|
|
|
|
|
|
Total non-interest
income
|
|
$
|
7,177
|
|
$
|
4,362
|
|
$
|
4,227
|
|
Total non-interest income
increased $2,815,200 or 64.84% in 2006 when compared with 2005. The increase
resulted from the gain on sale of the Banks investment in Pacific Coast
Bankers Bank of $1,313,400, an increase in income from other service charges,
commissions and fees of $1,819,900, and decreases of $301,700 in income from
sales and servicing of Small Business Administration Loans and $16,400 in
service charges on deposit accounts. The increase in other service charges,
commissions and fees was due primarily to a $50,000 mark to market gain on
trading assets compared with a $427,300 mark to market loss in 2005, and
increases of $1,099,800 in fee income from credit card programs, $271,700 in
merchant discount fees and $29,800 from stored value card programs, while
commercial banking origination fees decreased $287,200.
Total non-interest income
increased $135,200 or 3.20% in 2005 when compared with 2004. Income from sales
and servicing of SBA loans increased $275,000 and service charges on deposit
accounts increased $47,300; while other income decreased $187,100. The decrease
in other income was due primarily to a mark to market loss of $427,300 in
trading asset activities; partially offset by increases of $102,100 in credit
card program fees and $138,100 in commercial banking origination fees.
Total non-interest income
decreased $181,500 or 3.03% in 2004 when compared with 2003. Income from sales
and servicing of SBA loans increased $55,800 and service charges on deposit
accounts increased $10,800; while other income decreased $248,100. The decrease
in other income was due primarily to decreases of $265,400 in commercial
banking origination fees.
31
The sale of Small
Business Administration (SBA) guaranteed loans is a significant contributor to
the Banks 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 up to 85 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. The Small Business Administration has recently increased the
guarantee fees borrowers must pay. 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 following table
presents a summary of the activity in SBA loans for the years ended 2006, 2005
and 2004:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
SBA loans
authorized
|
|
$
|
3,645,000
|
|
$
|
6,274,000
|
|
$
|
15,844,000
|
|
SBA loans sold
|
|
$
|
4,428,400
|
|
$
|
7,944,900
|
|
$
|
4,669,100
|
|
Summary of Income
from sales and Servicing of SBA Loans
|
|
2006
|
|
2005
|
|
2004
|
|
Income from
premium
|
|
$
|
349,800
|
|
$
|
665,400
|
|
$
|
412,400
|
|
Income from
servicing
|
|
339,800
|
|
326,000
|
|
304,000
|
|
Total income
from sales and
servicing
of SBA loans
|
|
$
|
689,700
|
|
$
|
991,400
|
|
$
|
716,400
|
|
Non-Interest Expense
The following table
presents a summary of the Banks other non-interest expense:
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Salaries and
benefits
|
|
$
|
3,854
|
|
$
|
3,282
|
|
$
|
3,004
|
|
Occupancy and
equipment expense
|
|
790
|
|
664
|
|
597
|
|
Professional
fees
|
|
149
|
|
141
|
|
113
|
|
Data processing
|
|
322
|
|
356
|
|
364
|
|
Other expenses
|
|
3,511
|
|
3,370
|
|
3,038
|
|
Total other
expenses
|
|
$
|
8,626
|
|
$
|
7,813
|
|
$
|
7,115
|
|
32
Salary
and benefits expense increased $572,000 in 2006 as a result the addition of a
Marketing Officer, Business Development Officer and a Credit Analyst, increased
commission paid due to increased credit card and stored value card program
revenues, and merit increases and bonus payments. Salary and benefits expense
increased $278,200 in 2005 as a result merit increases and bonus payments. Salary
and benefits expense increased $437,600 in 2004 as a result of the first full
year of salary expense related to the hiring of an Executive Vice
President/Chief Lending Officer during the fourth quarter of 2003, merit
increases and bonus payments.
Occupancy
and equipment expenses increased $125,700 in 2006, due to increases of net
merchant terminal expense $41,900, $16,000 in depreciation expense, $11,100 in
premises rent and $6,000 in property taxes; while sublease rental income
decreased $45,100. Occupancy and equipment expenses increased $67,800 in 2005,
due to increases of $48,300 in depreciation expense, $18,000 in property taxes,
$11,100 in premises rent, $10,000 in premises other expense and $8,800 in
janitorial expense; while net merchant terminal decreased $30,800. Occupancy and
equipment expenses increased $86,000 in 2004, due to increases of $19,800 in
depreciation expense, $22,700 in merchant terminal expense, $14,100 in repairs
and maintenance expense, $7,800 in janitorial expense and $4,700 in premises
rent.
Data
processing expense decreased $33,400 in 2006, the result of continued efforts
to implement more cost effective programs. Data processing expense decreased
$8,100 in 2005, the result of renegotiation of the data services contract
during the fourth quarter of 2004. Data processing expense increased $6,800 in
2004.
In
2005, professional fees increased $8,700 due to increased legal fees. In 2005,
professional fees increased $27,000 due to accounting/audit fees increasing
$21,600 while legal fees increased $5,400. In 2004, professional fees increased
$24,400 due to accounting/audit fees increasing $19,500 while legal fees
increased $4,900.
Other
expenses for 2006 totaled $3,511,200 compared with $3,369,900 for 2005, an
increase of $141,300. Significant changes occurred in the following categories
with increases in merchant processing expense of $104,400, advertising of
$82,900, operational losses of $61,900, business development of $61,100,
stationary/supplies of $42,400, loan expense of $36,500, travel expense of $22,800,
bank fees of $20,700, dues and memberships of $13,000, and collection expense
of $9,600; while decreases occurred in provision for debt securities losses of
$229,400, provision for loss unfunded loan commitments of $71,000, director
fees of $13,300, and meals of $10,400.
Other
expenses for 2005 totaled $3,369,900 compared with $3,038,000 for 2004, an
increase of $331,900. Significant changes occurred in the following categories
with the recording of the provision for debt securities losses of $119,500 and
provision for loss unfunded loan commitments of $52,000; increases in director
fees of $53,400, donations of $49,900, merchant processing expense of $44,500
telephone expense of $17,200, entertainment and meals of $16,100, bank fees of
$15,200, stationary/supplies of $14,900, advertising of $13,600, insurance of
$10,900, miscellaneous expense of $8,800, subscription/publication expense of
$8,600, dues and memberships of $8,600; while decreases occurred in loan
expense of $41,300, operational losses of $30,600, collection expense of
$21,300, postage expense of $9,100 and business development of $9,000.
33
Income Taxes
In 2006, the Banks
provision for federal and state income taxes was $6.7 million, while the
provision was $3.4 million and $1.8 million for 2005 and 2004, respectively. This
represents 42.76% of income before taxes in 2006, 43.57% in 2005, and 42.30% in
2004. The increase in the tax provision from 2005 to 2006 was due to a $591,000
provision related to the gain on sale of the Banks investment in Pacific Coast
Bankers Bank and increased income. The increase in the tax provision from 2005
to 2006 was due to an increase in volume of taxable income.
The
amount of the tax provision is determined by applying the Banks statutory
income tax rates to pre-tax book income, adjusted for permanent differences
between pre-tax book income and actual taxable income. Such permanent
differences include but are not limited to tax-exempt interest income, increases
in the cash surrender value of life insurance, and certain other expenses that
are not allowed as tax deductions.
LOANS
Loans,
the largest component of earning assets, represented 76.28% of average earning
assets, and 69.46% of average total assets during 2006, compared with 77.46%
and 70.53%, respectively during 2005. In 2006, average loans increased 8.94%
from $108,962,800 in 2005 to $118,699,100. Average real estate loans increased
$10,892,600 or 15.72%, average construction loans increased $2,062,900 or
20.73% while average commercial loans decreased $3,210,100 or 11.12%, and
average installment loans decreased $9,100 or 1.06%.
Loan
policies and procedures provide the overall direction to the administration of
the loan portfolio. The Banks loan underwriting process is intended to
encourage sound and consistent credit decisions are made. Emphasis is placed
upon credit quality, the borrowers ability to repay through cash flow,
secondary and (occasionally tertiary) repayment sources, and the value of
collateral.
The
Banks commercial and industrial loans are generally made for the purpose of
providing working capital, financing the purchase of equipment or inventory,
and other business purposes. Such loans generally have maturities ranging from
one year to several years. Short-term business loans are generally intended to
finance current transactions and typically provide for monthly interest
payments with principal being payable at maturity or at 90-day intervals. Term
loans (usually for a term of two to five years) normally provide for monthly
installments of principal and interest. The Bank from time to time utilizes
accounts receivable and inventory as security for loans.
The Bank is the
recognized leader for Small Business Administration lending in Monterey County,
and holds SBAs coveted Preferred Lender Status. Generally, SBA loans are
guaranteed by the SBA for up to 85 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 Banks 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.
34
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 Banks 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 Banks consumer installment loans are generally
secured by the personal property being purchased. The Bank generally makes
consumer loans to those customers with a prior banking relationship with the
Bank.
The following table
presents the composition of the loan portfolio, including loans held for sale,
at December 31 for the last five years.
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Dollars in thousands)
|
|
Commercial and
industrial
|
|
$
|
27,543
|
|
$
|
26,236
|
|
$
|
23,854
|
|
$
|
18,607
|
|
$
|
14,432
|
|
Real estate,
construction
|
|
17,326
|
|
10,456
|
|
7,373
|
|
5,934
|
|
4,066
|
|
Real estate,
mortgage
|
|
86,207
|
|
71,006
|
|
64,339
|
|
52,698
|
|
42,000
|
|
Installment
|
|
694
|
|
942
|
|
622
|
|
580
|
|
462
|
|
Government
guaranteed
loans
purchased
|
|
39
|
|
45
|
|
51
|
|
57
|
|
63
|
|
|
|
131,809
|
|
108,685
|
|
96,239
|
|
77,876
|
|
61,024
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
possible loan losses
|
|
(1,409
|
)
|
(1,101
|
)
|
(963
|
)
|
(775
|
)
|
(637
|
)
|
Deferred
origination fees, net
|
|
(350
|
)
|
(284
|
)
|
(240
|
)
|
(193
|
)
|
(130
|
)
|
Net loans
|
|
$
|
130,050
|
|
$
|
107,300
|
|
$
|
95,036
|
|
$
|
76,908
|
|
$
|
60,257
|
|
The following table shows
the maturity distribution and repricing intervals of the Banks outstanding
loans at December 31, 2006. Balances of fixed rate loans are displayed in the
column representative of the loans stated maturity date. Balances for variable
rate loans are displayed in the column representative of the loans next
interest rate change.
|
|
Loan Maturities and Repricing Schedule
|
|
|
|
($ in thousands)
|
|
|
|
Within One
Year
|
|
After One
But Within
Five Years
|
|
After Five
Years
|
|
Total
|
|
Construction
|
|
$
|
16,525
|
|
$
|
801
|
|
$
|
|
|
$
|
17,326
|
|
Commercial
|
|
24,081
|
|
2,501
|
|
1,000
|
|
27,582
|
|
Real estate
|
|
40,819
|
|
27,999
|
|
17,389
|
|
86,207
|
|
Installment
|
|
429
|
|
168
|
|
97
|
|
694
|
|
Total gross
loans
|
|
$
|
81,854
|
|
$
|
31,469
|
|
$
|
18,488
|
|
$
|
131,809
|
|
Loans with
variable (floating) interest rates
|
|
$
|
78,030
|
|
$
|
7,203
|
|
$
|
|
|
$
|
85,233
|
|
Loans with
predetermined (fixed) interest rates
|
|
$
|
3,824
|
|
$
|
24,266
|
|
$
|
18,488
|
|
$
|
46,576
|
|
Non-performing and Non-accrual
Loans
The Banks 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.
35
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):
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Dollars in thousands)
|
|
Accruing,
past
due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Commercial
|
|
155
|
|
|
|
43
|
|
28
|
|
24
|
|
Installment
|
|
|
|
|
|
|
|
|
|
10
|
|
Total nonaccrual
|
|
155
|
|
|
|
43
|
|
28
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming
|
|
$
|
155
|
|
$
|
|
|
$
|
43
|
|
$
|
28
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans end
of period
|
|
$
|
131,809
|
|
$
|
108,685
|
|
$
|
96,239
|
|
$
|
77,876
|
|
$
|
61,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of
nonperforming loans
to
total loans at end of period
|
|
0.12
|
%
|
0.00
|
%
|
0.04
|
%
|
0.04
|
%
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of
nonperforming loans to allowance for loan losses at end of period
|
|
909.37
|
%
|
N/A
|
|
2259.14
|
%
|
4421.35
|
%
|
1862.78
|
%
|
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.
36
Summary of Loan Loss Experience
|
|
For the Years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Average loans
outstanding
|
|
$
|
118,699
|
|
$
|
108,963
|
|
$
|
86,870
|
|
$
|
67,949
|
|
$
|
11,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance,
beginning of period
|
|
$
|
1,101
|
|
$
|
963
|
|
$
|
775
|
|
$
|
637
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged
off during period:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
0
|
|
0
|
|
0
|
|
0
|
|
58
|
|
Commercial
|
|
109
|
|
14
|
|
0
|
|
18
|
|
1
|
|
Installment
|
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
Other
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Total charge
offs
|
|
109
|
|
14
|
|
0
|
|
18
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
during period:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Commercial
|
|
7
|
|
2
|
|
3
|
|
1
|
|
13
|
|
Installment
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Total recoveries
|
|
7
|
|
2
|
|
3
|
|
1
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
charged off during the period
|
|
102
|
|
12
|
|
(3
|
)
|
17
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
allowance for possible loan losses
|
|
410
|
|
150
|
|
185
|
|
155
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance, end
of period
|
|
$
|
1,409
|
|
$
|
1,101
|
|
$
|
963
|
|
$
|
775
|
|
$
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net
loans charged off to average loans outstanding during the period
|
|
0.09
|
%
|
0.01
|
%
|
0.00
|
%
|
0.03
|
%
|
0.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of
allowance to total loans at end of period
|
|
1.07
|
%
|
1.02
|
%
|
1.00
|
%
|
1.00
|
%
|
1.04
|
%
|
37
Funding Sources
Average deposits
increased 8.30% to $119,887,300 in 2006 from $110,699,800 in 2005. In 2006
average demand deposits increased 26.00% and average certificates of deposit
increased 5.91% while average interest checking, money market and savings
accounts as a group decreased 2.78%. Average certificates of deposit
represented 54.54% of average deposits in 2006 compared with 55.91% in 2005. Average
interest checking, money market and savings accounts as a group were 20.13% of
average deposits in 2006 compared with 22.47% in 2005. Average demand deposits
represented 25.09% of average deposits in 2006 compared with 21.62% in 2005.
The following table
summarizes the distribution of average daily deposits and the average daily
rates paid for the years ended December 31, 2006, 2005, 2004, respectively.
|
|
For the year ended
December 31, 2006
|
|
Average deposits
For the year ended
December 31, 2005
|
|
For the year ended
December 31, 2004
|
|
|
|
($ in thousands)
|
|
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Non-interest-bearing
checking
|
|
$
|
30,155
|
|
|
|
$
|
24,857
|
|
|
|
$
|
20,029
|
|
|
|
Interest-bearing
demand
|
|
13,243
|
|
0.31
|
%
|
12,584
|
|
0.26
|
%
|
13,099
|
|
0.25
|
%
|
Money market
savings
|
|
3,589
|
|
0.75
|
%
|
4,818
|
|
0.66
|
%
|
3,894
|
|
0.81
|
%
|
Savings deposits
|
|
7,355
|
|
1.00
|
%
|
7,476
|
|
1.07
|
%
|
7,924
|
|
1.02
|
%
|
Time certificate
deposits in denominations of $100,000 or more
|
|
32,372
|
|
4.57
|
%
|
29,908
|
|
3.31
|
%
|
18,795
|
|
2.99
|
%
|
Other time
deposits
|
|
33,174
|
|
4.13
|
%
|
31,981
|
|
3.04
|
%
|
24,264
|
|
2.93
|
%
|
Total Deposits
|
|
$
|
119,887
|
|
2.50
|
%
|
$
|
111,624
|
|
1.89
|
%
|
$
|
88,006
|
|
1.61
|
%
|
The
following table sets forth the scheduled maturities of the Companys time
deposits in denominations of $100,000 or greater which amounted to $35,825,800
at December 31, 2006:
Maturities of Time Deposits
of $100,000 or more
At December 31, 2006
($ in thousands)
Three months or
less
|
|
$
|
9,750
|
|
Over three
months through six months
|
|
7,922
|
|
Over six months
through twelve months
|
|
13,019
|
|
Over twelve
months
|
|
5,135
|
|
|
|
$
|
35,826
|
|
The Bank has lines of
credit from the Federal Home Loan Bank (FHLB) of San Francisco, Bank of the
West, Pacific Coast Bankers Bank and The Independent Bank with remaining
available borrowing capacity on December 31, 2006 of $1,065,800 (based on
pledged collateral), $4,500,000, $6,000,000 and $5,000,000, respectively. The
Federal Home Loan Bank line of credit has a
38
maximum borrowing capacity of twenty five
percent (25%) of the Banks total assets, adjusted quarterly. The Federal Home
Loan Bank line of credit is secured by a portion of the Banks real estate
secured loans and securities at December 31, 2006. The total principal balance
of pledged loans was $33,463,500 and securities of $15,364,900. The following
table provides information on thirteen FHLB advances totaling $34,750,000 and
outstanding at December 31, 2006.
Advance
Amount
|
|
Fixed Interest
Rate
|
|
Funding
Date
|
|
Maturity
Date
|
|
$
|
2,750,000
|
|
3.44
|
%
|
09/27/02
|
|
09/27/07
|
|
3,000,000
|
|
4.30
|
%
|
06/17/05
|
|
06/17/10
|
|
5,000,000
|
|
4.96
|
%
|
11/14/05
|
|
11/15/10
|
|
2,250,000
|
|
4.75
|
%
|
01/26/06
|
|
01/26/11
|
|
1,750,000
|
|
4.72
|
%
|
01/26/06
|
|
01/26/11
|
|
1,500,000
|
|
5.52
|
%
|
07/17/06
|
|
07/18/11
|
|
3,500,000
|
|
5.49
|
%
|
07/17/06
|
|
07/18/11
|
|
1,000,000
|
|
5.22
|
%
|
08/25/06
|
|
08/25/11
|
|
1,000,000
|
|
7.72
|
%
|
06/01/00
|
|
06/03/30
|
|
4,000,000
|
|
5.96
|
%
|
08/02/04
|
|
07/28/34
|
|
5,000,000
|
|
5.63
|
%
|
12/24/04
|
|
12/22/34
|
|
2,000,000
|
|
5.13
|
%
|
05/04/05
|
|
05/01/35
|
|
2,000,000
|
|
5.31
|
%
|
11/17/06
|
|
11/17/36
|
|
$
|
34,750,000
|
|
|
|
|
|
|
|
The
Bank of the West,
Pacific Coast Bankers Bank and The Independent Bank lines of credit are unsecured. The Bank did not utilize any overnight
borrowings in 2006, 2005 or 2004.
The Bank has a $330,000
letter of credit issued by the Federal Home Loan Bank of San Francisco to
secure the uninsured portion of local agency deposits maintained with the Bank.
The letter of credit matures April 17, 2011.
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, 2006, stockholders equity was
$12,401,900 versus $8,930,900 at December 31, 2005. The Corporation paid cash
dividends of $0.35, $0.20 and $0.165 per share in 2006, 2005 and 2004,
respectively. The Bank paid cash dividends totaling $625,000 to the Corporation
in 2006, no cash dividends were paid in 2005 and 2004.
The FDIC and Federal
Reserve Board have adopted capital adequacy guidelines for use in their
examination and regulation of banks and bank holding companies. If the capital
of a bank or bank holding company falls below the minimum levels established by
these guidelines, it may be denied approval to acquire or establish additional
banks or non-bank businesses, or the FDIC or Federal Reserve Board may take
other administrative actions. The guidelines employ two measures of capital: (1) risk-based capital and (2) leverage
capital.
In general, the
risk-based capital guidelines provide detailed definitions of which obligations
will be treated as capital, and assign different weights to various assets and
off-balance sheet items,
39
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 12.40% and 12.07%
at December 31, 2006 and 2005, respectively. The Banks Tier 1 capital exceeds
the minimum regulatory requirement by $12,291,000. The Bank had a Total
Risk-Based capital ratio of 13.40% and 12.48% at December 31, 2006 and 2005,
respectively. The Banks Total Risk-Based capital exceeds the minimum
regulatory requirement by $7,907,000.
The Tier 1 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 10.20% and 9.60% at December 31, 2006 and 2005, respectively. The Banks
Tier 1 leverage capital exceeds the minimum regulatory requirement by
$10,980,000.
The significant increase
in each of the Banks risk-based capital ratios from December 31, 2002 to
December 31, 2003 was the result of $4,000,000 in capital contributions from
the Corporation. The Corporation utilized a portion of the proceeds from two
trust preferred security issuances to make the capital contributions.
As of the end of 2006, the
Bank was considered to be well capitalized by regulatory standards. We do not
foresee any circumstances that would cause either the Corporation or the Bank
to be less than well capitalized, although no assurance can be given that
this will not occur.
On
March 27, 2003, the Companys wholly owned special-purpose trust subsidiary,
Northern California Bancorp, Inc. Trust I (Trust I) issued $3 million in
cumulative Trust Prefe
rred
Securities.
The securities bear a floating rate of interest of 3.25% over the three month
LIBOR rate, payable quarterly. The effective rate at December 31, 2006 was
8.62%. Concurrent with the issuance of the Trust Preferred Securities, Trust I
used the proceeds from the Trust Preferred Securities offering to purchase a
like amount of Junior Subordinated Debentures of the Company. The Subordinated
Debentures are the sole assets of Trust I and are eliminated, along with
the related income statement effects, in the consolidated financial statements.
The Company will pay interest on the Junior Subordinated Debentures to Trust I,
which represents the sole revenue and sole source of dividend distributions to
the holders of the Trust Preferred Securities. The Company has the right,
assuming no default has occurred, to defer payments of interest on the Junior
Subordinated Debentures at any time for a period not to exceed 20 consecutive
quarters. The Trust Preferred Securities will mature on April 7, 2033, but can
be redeemed under certain circumstances at a premium prior to April 7, 2008,
and can be redeemed, in whole or in part, on any January 7, April 7, July 7 or
October 7 on or after April 7, 2008 at par. The Company fully and
unconditionally guarantees the obligations Trust I, on a subordinated basis.
The Company received $2.91 million from Trust I upon issuance of the
Junior Subordinated Debentures, of which $1 million was contributed by the
Company to the Bank to increase its capital, $1.14 million was used to retire
existing Company debt and the remainder held as working capital.
40
On November 13, 2003, the Companys wholly owned special-purpose trust
subsidiary, Northern California Bancorp, Inc. Trust II (Trust II) issued $5
million in cumulative Trust Preferred Securities. The securities bear a
floating rate of interest of 2.85% over the three month LIBOR rate, payable
quarterly.
The effective rate at
December 31, 2006 was 8.22%. Concurrent
with the issuance of the Trust Preferred Securities, Trust II used the proceeds
from the Trust Preferred Securities offering to purchase a like amount of
Junior Subordinated Debentures of the Company. The Subordinated Debentures are
the sole assets of Trust II and are eliminated, along with the related income
statement effects, in the consolidated financial statements. The Company will
pay interest on the Junior Subordinated Debentures to Trust II, which
represents the sole revenue and sole source of dividend distributions to the
holders of the Trust Preferred Securities. The Company has the right, assuming
no default has occurred, to defer payments of interest on the Junior
Subordinated Debentures at any time for a period not to exceed 20 consecutive
quarters. The Trust Preferred Securities will mature on August 8, 2033, but can
be redeemed under certain circumstances at a premium prior to August 8, 2008,
and can be redeemed, in whole or in part, on any February 8, May 8, August 8 or
November 8 on or after August 8, 2008 at par. The Company fully and
unconditionally guarantees the obligations of Trust II, on a subordinated
basis.
The Company received $4.96 million from Trust II upon issuance of the
Junior Subordinated Debentures, of which $2.5 million was contributed by the
Company to the Bank to increase its capital and the remainder held as working
capital.
Under applicable regulatory guidelines, a portion of the Trust Preferred
Securities will qualify as Tier I Capital, and the remainder as Tier II
Capital.
Liquidity
Liquidity represents a
banks 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 Banks business, funds are generated
from the repayment of loans, maturities within the investment securities
portfolio and the acquisition of deposit balances and short-term borrowings. In
addition, the Bank has a line of credit from the Federal Home Loan Bank of San
Francisco of approximately $46,174,500, based on twenty five per cent of the
Banks total assets as reported in the most recent quarterly Consolidated
Reports of Condition and Income for A bank with Domestic Offices Only, The line
of credit is subject to pledging of acceptable collateral. Additionally the
Bank has unsecured federal funds lines of credit with
Bank of the West $4,500,000, Pacific Coast
Bankers Bank $6,000,000 and The Independent Bank $5,000,000 to meet
temporary liquidity requirements. Available
borrowing capacities on December 31, 2006 were $1,065,800, $4,500,000,
$6,000,000 and $5,000,000, respectively.
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 Banks total
liquidity at December 31, 2006, 2005 and 2004 was 24.31%, 27.09%, and 22.70%,
respectively, while its average loan to deposit ratio for such years was
99.76%, 90.84% and 97.71%, respectively.
41
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 Banks brokered deposits totaled approximately
$5,046,000 or 3.83% at December 31, 2006, $12,849,300 or 10.82% at December 31,
2005 and $14,385,800 or 14.54% of total deposits at December 31, 2004. None of
the Banks brokered deposits paid an interest rate significantly higher than
prevailing rates.
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 Banks 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 Banks 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 Banks 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 banks net interest margin based on the
banks actual repricing over a one year period, assuming that maturities are
reinvested in instruments identical to those maturing during the period. The
following table shows the affect on net interest income of a 100 and a 200
basis point rate shock at December 31, 2006.
42
Rate Shock Increase(Decrease)
in Basis Points
|
|
Percent Increase(Decrease) in
Net Interest Income
|
|
100
|
|
8.0%
|
|
(100)
|
|
(8.4)%
|
|
200
|
|
16.1%
|
|
(200)
|
|
(16.9)%
|
|
The Corporations sources
of revenues and liquidity are the dividends, tax equalization payments or
management fees from the Bank and gains on securities held in a trading account
and other investments. The ability of the Bank to pay such items to the
Corporation is subject to limitations under state and Federal law.
Investment Securities
The
Corporation maintains a trading account, at fair value, consisting of
marketable securities. At December 31, 2006 and 2005 the account value was
$1,762,300 and $1,027,500, respectively. The Corporation has investments of
$20,100 in AT Service LLC, which provides title insurance services for
commercial, industrial and residential properties, as well as other real estate
related financial and informational services, including escrow, real estate
information, trustee sale guarantees and real estate tax exchanges, and $10,000
in Metrocities Mortgage, LLC. In addition the Corporation has investments in
Northern California Bancorp Trust I ($93,000) and Northern California Bancorp
Trust II ($155,000), these are special-purpose trust subsidiaries which were
formed to facilitate the issuance of trust preferred securities.
43
The following table sets
forth the book and market value of the Banks investment securities as of
December 31, 2006 and 2005:
|
|
INVESTMENT PORTFOLIO MIX
|
|
|
|
(Dollars in thousands)
|
|
|
|
2006
|
|
2005
|
|
|
|
Book
value
|
|
Market
value
|
|
Book
value
|
|
Market
value
|
|
Available for
sale:
|
|
|
|
|
|
|
|
|
|
Corporate Debt
Securities
|
|
$
|
|
|
$
|
|
|
$
|
631
|
|
$
|
631
|
|
Government
National Mortgage Association
|
|
641
|
|
626
|
|
857
|
|
837
|
|
U.S. Government
Agencies
|
|
14,724
|
|
14,660
|
|
9,714
|
|
9,597
|
|
Total
|
|
15,365
|
|
15,286
|
|
11,202
|
|
11,065
|
|
|
|
|
|
|
|
|
|
|
|
Held to
maturity:
|
|
|
|
|
|
|
|
|
|
State/Local
Agency Securities
|
|
$
|
7,012
|
|
$
|
7,281
|
|
$
|
7,025
|
|
$
|
7,162
|
|
|
|
|
|
|
|
|
|
|
|
Other Securities:
|
|
|
|
|
|
|
|
|
|
Federal Home
Loan Bank Stock
|
|
$
|
1,633
|
|
$
|
1,633
|
|
$
|
1,183
|
|
$
|
1,183
|
|
Pacific Coast
Bankers Bank Stock
|
|
|
|
|
|
440
|
|
1,757
|
|
AT Services, LLC
|
|
20
|
|
20
|
|
40
|
|
40
|
|
Metrocities
Mortgage, LLC
|
|
10
|
|
10
|
|
10
|
|
10
|
|
Pan Pacific Bank
|
|
|
|
|
|
100
|
|
100
|
|
The Independent
Bankers Financial Corp.
|
|
50
|
|
50
|
|
|
|
|
|
MasterCard Inc
Class B Stock
|
|
5
|
|
5
|
|
|
|
|
|
Northern
California Bancorp, Inc. Trust I
|
|
93
|
|
93
|
|
93
|
|
93
|
|
Northern
California Bancorp, Inc. Trust II
|
|
155
|
|
155
|
|
155
|
|
155
|
|
Total
|
|
$
|
1,967
|
|
$
|
1,967
|
|
$
|
2,021
|
|
$
|
3,338
|
|
The following tables
summarize the maturity of the Banks investment securities at December 31,
2006:
|
|
INVESTMENT PORTFOLIO MATURITIES
|
|
|
|
(Dollars in thousands)
|
|
|
|
Available for Sale
|
|
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Due within one
year
|
|
$
|
3,741,700
|
|
$
|
3,713,400
|
|
Due between one
and five years
|
|
993,700
|
|
978,800
|
|
Due between five
and ten years
|
|
9,988,900
|
|
9,968,100
|
|
GNMA - Mortgage
Backed Securities
|
|
640,600
|
|
625,600
|
|
|
|
$
|
15,364,900
|
|
$
|
15,285,900
|
|
|
|
Held to Maturity
|
|
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Due in over ten
years
|
|
$
|
7,012,300
|
|
$
|
7,280,700
|
|
|
|
|
|
|
|
|
|
44
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:
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 2006, 2005 or
2004.
ITEM 8A.
CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
Northern California
Bancorp, Inc.s Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of Northern California Bancorp, Inc.s disclosure
controls and procedures as of December 31, 2006 have concluded that Northern
California Bancorp, Inc.s disclosure controls and procedures were adequate and
effective to ensure that material information relating to Northern California
Bancorp, Inc. and its consolidated subsidiaries would be made known to them by
others within those entities, particularly during the period in which this
annual report was being prepared.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
45
summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
Changes in Internal Controls
There were no
significant changes in Northern California Bancorp, Inc.s internal controls or
in other factors that could significantly affect Northern California Bancorp,
Inc.s internal controls subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such controls requiring corrective
actions. As a result, no corrective actions were taken.
ITEM 8B.
OTHER INFORMATION
Not Applicable
46
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Code of Ethics
The
Bank has adopted a code of ethics applicable to all of its officers, directors
and employees, including its principal executive officer, principal financial
officer, principal accounting officer and persons performing similar functions.
The name, age, title and
five-year business background of each director, executive officers and
significant employees of the Corporation (including the Bank) as of December
31, 2006, are as follows:
Name & Position with Bank
|
|
Age
|
|
Principal Occupation During Past Five Years
|
|
|
|
|
|
Charles T. Chrietzberg,
Jr.
|
|
65
|
|
Chairman of the Board
& Chief Executive Officer
|
Director
since 1985,
|
|
|
|
Monterey County Bank
since 3/87
|
Chairman
of the Board &
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
Sandra G. Chrietzberg
|
|
63
|
|
Formerly President and
CEO Queen of Chardonnay, Inc.,
|
Director, 1988
to 1994 and since 1995
|
|
|
|
dba La Reina Winery
8/84-12/93
|
|
|
|
|
|
Peter J. Coniglio, Esq.
|
|
77
|
|
Partner - Hudson,
Martin, Ferrante & Street, Monterey, CA
|
Director
since 1976
|
|
|
|
|
|
|
|
|
|
Carla S. Hudson, CPA
|
|
53
|
|
Partner Bianchi,
Lorinez, Huey, Hudson and Company, LLP
|
Director
since 1994
|
|
|
|
|
|
|
|
|
|
John
M. Lotz
Director since 1991
|
|
65
|
|
Chairman, Chief
Executive Officer & President Del Monte
Aviation, Inc. dba. Monterey Bay Aviation, President and
Chief Executive Officer, of Couroc of Monterey 1996-2001.
|
|
|
|
|
|
Mark A. Briant
|
|
59
|
|
Owner Fashion Streaks
Screenprinting, Embroidery, Signs and
|
Director
since 2006
|
|
|
|
Banners, Sand City, CA
|
|
|
|
|
Owner, Sandy Creek
Olive Ranch, Carmel Valley, CA
|
|
|
|
|
|
David A. Bernahl
|
|
28
|
|
Chief Executive Officer
& President, Pacific Tweed, Inc.
|
Director
since 2006
|
|
|
|
Carmel, CA
|
|
|
|
|
|
Timothy M. Leveque
|
|
63
|
|
Executive Vice
President, Chief Lending Officer of Monterey
|
Executive
Vice President
|
|
|
|
County Bank since
11/03, Senior Executive Vice President,
|
Chief
Lending Officer
|
|
|
|
Chief Lending Officer,
Pacific Coast Bankers Bank 1997-2003
|
47
Bruce N. Warner
Executive Vice President,
Chief Financial Officer
and Chief Operating Officer
|
|
59
|
|
Executive Vice
President, Chief Financial Officer and Chief Operating Officer of Monterey
County Bank since 2002; Senior Vice President, Chief Financial Officer and
Chief Operating Officer of Monterey County Bank since 1993-2002.
|
|
|
|
|
|
Mary Ellen Stanton
Senior Vice President
|
|
68
|
|
Senior Vice President,
Loan Administration, Monterey County Bank Since 10/98.
|
|
|
|
|
|
Andre G. Herrera
Senior Vice President
|
|
41
|
|
Senior Vice President,
Chief Information Officer, Manager BankCard Service 12/04, Vice President,
Chief Information Officer 11/01.
|
|
|
|
|
|
Patricia D. Weber
Senior Vice President
Senior Operations Manager
|
|
46
|
|
Senior Vice President,
Senior Operations Manager 12/04, Vice President, Operations Manager 6/97.
|
Directors of the
Corporation serve in similar capacities with the Bank. The Chairman of the
Board, Chief Executive Officer and Executive Vice President, Chief Financial
Officer of the Corporation serve in similar capacities with the Bank, although
the limited operations of the Corporation do not require significant amounts of
their time. There is no family relationships among the persons listed above,
except that Mr. and Mrs. Chrietzberg are spouses.
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 2006. The following late
reports on Form 3 were filed; Messrs. Bernahl and Briant, one report.
48
ITEM 10.
EXECUTIVE COMPENSATION
The following table sets forth certain
information regarding the compensation paid to the Chief Executive Officer,
Executive Officers and the next two highest compensated officer of the
Corporation/Bank whose total compensation exceeded $100,000 for 2006.
Name & Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Nonquailified
Deferred
Compensation
Earnings
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles T.
Chrietzberg, Jr.
|
|
2006
|
|
307,730
|
|
300,000
|
|
None
|
|
None
|
|
None
|
|
56,054
|
(1)
|
663,784
|
|
Chairman,
President & CEO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy M.
Leveque
|
|
2006
|
|
173,287
|
|
75,000
|
|
None
|
|
None
|
|
None
|
|
27,577
|
(2)
|
275,864
|
|
Executive Vice
President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Lending
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce N. Warner
|
|
2006
|
|
152,515
|
|
75,000
|
|
None
|
|
None
|
|
None
|
|
13,831
|
(3)
|
241,346
|
|
Executive Vice
President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Operating
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andre G. Herrera
|
|
2006
|
|
218,970
|
|
None
|
|
None
|
|
None
|
|
None
|
|
13,518
|
(4)
|
232,488
|
|
Senior Vice
President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Information Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manager BankCard
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patricia D.
Weber
|
|
2006
|
|
98,058
|
|
30,000
|
|
None
|
|
None
|
|
None
|
|
7,796
|
(5)
|
135,854
|
|
Senior Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Operations Manager
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes $28,896 in
expense accrued in the Salary Continuation Plan net of earnings on life
insurance policies as more fully described in the Long Term Incentive Plan
Table, $15,000 in matching 401K plan contributions, health insurance premiums
$6,510, $4,088 personal use of a Bank owned automobile and $1,560 in life
insurance premiums.
|
(2)
|
|
Includes $11,180 in
matching 401K plan contributions, health insurance premiums $9,134, $6,000
automobile and $1,263 in life insurance premiums.
|
(3)
|
|
Includes $12,271 in
matching 401K plan contributions and $1,560 in life insurance premiums.
|
(4)
|
|
Includes $12,488 in
matching 401K plan contributions and $1,030 in life insurance premiums.
|
(5)
|
|
Includes $6,788 in
matching 401K plan contributions and $1,008 in life insurance premiums.
|
The
Bank furnishes, on a non-discriminatory basis, to the employees: (i) insurance
benefits; and (ii) other benefits. The value of these benefits for the
respective persons is included in the table if the aggregate of value of the
benefits exceeded $10,000.
The
Board of Directors authorized the Bank to enter into a three year employment
contract with Mr. Chrietzberg, effective January 1, 2005. It provides for a
base salary of $240,000 per year, a Bank furnished automobile or automobile
allowance, and a bonus based on profits. The bonus, not to exceed $250,000
annually, will equal $10,000 for each 0.1 percent that the Banks profits
exceed 1.0 percent return on average assets plus $10,000 for each 1 percent
that the Banks 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
49
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, 2008); 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
Board of Directors authorized the Bank to execute Addendum 1 to the three year
employment contract with Mr. Chrietzberg effective January 1, 2006. Addendum 1
provides for a base salary of $300,000 and a bonus not to exceed $300,000. All
other terms of the employment contract remain the same.
The
following table sets forth certain information regarding the long term
incentive plan provided for Mr. Chrietzberg.
|
|
Number of
Shares, Units
|
|
Performance or
Other Period
Until
|
|
Estimated Future Payouts under
Non-Stock Price-Based Plans
|
Name
|
|
or Other Rights
(#)
|
|
Maturation or
Payment
|
|
Threshold
($ or #)
|
|
Target
($ or #)
|
|
Maximum
($ or #)
|
Charles
T. Chrietzberg, Jr
|
|
Salary
Continuation Agreement
|
|
Retirement
at age 65, subject to provisions for earlier payout described below
|
|
None
|
|
None
|
|
$
|
90,000/yr. lifetime
|
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 Banks 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.
In
August, 2001, the Board of Directors amended the Salary Continuation Agreement
for the benefit of Mr. Chrietzberg which was approved in December, 1993 and
amended in August 1999. The amended Salary Continuation Agreement provides for
payments of $90,000 per year, for Mr. Chrietzbergs 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
(65
th
) birthday; his beneficiary(ies) shall be entitled to an amount
equal to $2,940,000 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 (65
th
) birthday, his beneficiary(ies) shall be
entitled to an amount equal to $1,000,000 plus the present value of the
remaining retirement benefits due to Mr. Chrietzberg 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
Banks 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
net of earnings on life insurance policies in 2006,
50
2005
and 2004 was $28,900, $47,200, and $76,800, respectively. Based upon the
current projected earnings of the insurance used to informally fund the Banks
obligations under the Agreement, and the anticipated salary continuation
expense to be booked, net of tax benefits, the Bank anticipates (based upon
current tax laws and assumptions regarding the yield on alternative
investment(s)) that the cost of the benefits to be provided under the agreement
will not have a material adverse impact on the Banks net income after taxes in
the future, although no assurance can be given in this regard. The Surviving
Income Agreement was terminated upon adoption of the amended Salary
Continuation Agreement.
The
Corporation did not grant any stock options under the Corporations 1998 Amended
Stock Option Plan during the year ended December 31, 2006.
The following table sets
forth the number of shares of Common stock represented by outstanding stock
options and stock awards held by each of the named executive officers as of
December 31, 2006 under the Coporations 1998 Amended Stock Option Plan.
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unerercised
Unearned
Options (#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or
Units of
Stock
That
Have
Not
Vested
(#)
|
|
Market
Value of
Shares of
Stock That
Have Not
Vested
(#)
|
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($)
|
|
Charles T.
Chrietzberg, Jr.
|
|
30,000
|
(1)
|
NONE
|
|
NONE
|
|
99,000
|
|
3/20/08
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
|
|
25,000
|
(1)
|
NONE
|
|
NONE
|
|
110,000
|
|
2/2/09
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
Timothy Leveque
|
|
60,000
|
(2)
|
NONE
|
|
NONE
|
|
240,000
|
|
2/2/09
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
Bruce N. Warner
|
|
10,000
|
(3)
|
NONE
|
|
NONE
|
|
40,000
|
|
6/16/10
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
Andre G. Herrera
|
|
|
|
NONE
|
|
NONE
|
|
N/A
|
|
N/A
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
Patricia D. Weber
|
|
2,200
|
(4)
|
NONE
|
|
NONE
|
|
6,000
|
|
2/23/07
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
|
|
1,500
|
(4)
|
NONE
|
|
NONE
|
|
4,500
|
|
3/20/08
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
|
|
2,500
|
(4)
|
NONE
|
|
NONE
|
|
10,000
|
|
2/2/09
|
|
NONE
|
|
NONE
|
|
NONE
|
|
NONE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The vesting dates for
Mr. Chrietzbergs options were March 20, 2003 and February 2, 2004.
|
(2)
|
|
The vesting dates for
Mr. Leveques options were 20,000 options on February 2, 2004, 20,000 on
January 1, 2005 and 20,000 on January 1, 2006.
|
(3)
|
|
The vesting date for
Mr. Warners options was June 16, 2005.
|
(4)
|
|
The vesting dates for
Ms. Webers options were February 23, 2002, March 20, 2003 and February 2,
2004.
|
51
The following table sets forth certain
information regarding the compensation paid to each director during 2006.
Name
|
|
Fees
Earned
or Paid
in Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings
|
|
All Other
Compensation
($)
|
|
Charles T.
Chrietzberg, Jr.
|
|
16,875
|
(1)
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Sandra G.
Chrietzberg
|
|
16,875
|
(2)
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Peter J.
Coniglio
|
|
17,325
|
(3)
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Carla S. Hudson
|
|
18,075
|
(4)
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
John M. Lotz
|
|
17,475
|
(5)
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Mark A. Briant
|
|
4,375
|
(6)
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
1.
Includes a retainer
of $10,000 and $6,875 in fees for monthly Board of Director meetings.
2.
Includes a retainer
of $10,000 and $6,875 in fees for monthly Board of Director meetings.
3.
Includes a retainer
of $10,000, $6,875 in fees for monthly Board of Director meetings and $450 in
meeting fees for attendance as a member
of the Audit Committee.
4.
Includes a retainer
of $10,000, $6,875 in fees for monthly Board of Director meetings and $1,200 in
meeting fees for attendance as chair of the Audit Committee.
5.
Includes a retainer
of $10,000, $6,875 in fees for monthly Board of Director meetings and $600 in
meeting fees for attendance as a member of the Audit Committee.
6.
Includes a retainer
of $2,500 (elected to the Board in October 2006) and $1,875 in fees for monthly
Board of Director meetings.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND RELATED STOCKHOLDER MATTERS
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.
Name and Address
|
|
Amount and Nature of
Beneficial Ownership
|
|
Percent of
Class
|
|
Charles T.
Chrietzberg, Jr.
|
|
768,874
|
(1)
|
44.72
|
|
P.O. Box 1344
|
|
|
|
|
|
Carmel, CA 93921
|
|
|
|
|
|
|
|
|
|
|
|
David S. Lewis
Trust
|
|
153,863
|
|
8.94
|
|
30500 Aurora del
Mar
|
|
|
|
|
|
Carmel, CA 93923
|
|
|
|
|
|
|
|
|
|
|
|
Bruce N. Warner
|
|
114,530
|
(2)
|
6.61
|
|
601 Munras Ave.
|
|
|
|
|
|
Monterey, CA
93940
|
|
|
|
|
|
(1)
Includes 55,000 shares
subject to employee stock options and 18,414 shares held beneficially for Mr.
Chrietzberg and Mrs. Chrietzberg in Individual Retirement Accounts where voting
power is shared with the custodian of the account. 400,000 shares of the Common
stock owned by Mr. Chrietzberg are pledged to secure a loan from an
unaffiliated bank.
(2)
Includes 10,000 shares
subject to employee stock options.
The following table sets
forth similar information regarding the beneficial ownership, both
52
by numerical holding and percentage
interest of each of the Companys 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.
|
|
Amount and
|
|
|
|
Shares
|
|
|
|
|
|
Nature of
|
|
|
|
Subject to
|
|
Percent of
|
|
|
|
Beneficial
|
|
Percent of
|
|
Purchase
|
|
Class without
|
|
Name
|
|
Ownership
|
|
Class
|
|
Options
|
|
Option Shares
|
|
Charles T.
Chrietzberg, Jr.
|
|
768,874
|
(1) (2) (3)
|
43.28
|
%
|
55,000
|
|
41.46
|
%
|
Sandra G.
Chrietzberg
|
|
768,874
|
(2) (3)
|
43.28
|
%
|
55,000
|
|
41.46
|
%
|
Peter J.
Coniglio
|
|
80,354
|
(4) (5)
|
4.61
|
%
|
21,213
|
|
3.44
|
%
|
Carla S. Hudson
|
|
39,899
|
(6)
|
2.31
|
%
|
2,500
|
|
2.17
|
%
|
John M. Lotz
|
|
11,395
|
|
0.66
|
%
|
10,500
|
|
0.05
|
%
|
Mark A. Briant
|
|
2,534
|
(7)
|
0.15
|
%
|
|
|
0.15
|
%
|
All Directors
and Executive Officers as a group
|
|
1,079,597
|
(8)
|
57.40
|
%
|
159,213
|
|
53.46
|
%
|
(1)
|
|
Includes
88,000 shares subject to his employee stock options. 400,000 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 18,414 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 Californias community property laws.
|
|
|
|
(4)
|
|
Sole voting power.
|
|
|
|
(5)
|
|
Includes 21,213 shares
subject to the respective directors stock options. Of the remaining shares,
24,158 are held by Mr. Coniglio, 26,530 are held in a family trust controlled
by Mr. Coniglio, as to which he has sole voting and investment power, while
8,453 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 2,500 shares
subject to the respective directors stock options. The remaining shares are
held jointly with family members, other than 1,610 shares held in a corporate
pension, as to which Ms. Hudson has voting and investment power.
|
|
|
|
(7)
|
|
Shares are held in a
profit sharing plan, as to which Mr. Briant has voting and investment power.
|
|
|
|
(8)
|
|
Includes 176,541 shares
held by executive officers who are not also directors, 70,000 shares are
subject to employee stock options.
|
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.
|
|
|
|
Outstanding as of
|
|
|
|
Maximum
|
|
December 31, 2006
|
|
|
|
|
|
Percent of
|
|
|
|
Percent of
|
|
|
|
|
|
Equity
|
|
|
|
Equity
|
|
Name
|
|
Amount
|
|
Capital
|
|
Amount
|
|
Capital
|
|
Peter J.
Coniglio
|
|
$
|
1,160,700
|
(1)
|
11.78
|
%
|
$
|
1,128,900
|
|
9.10
|
%
|
Carla S. Hudson
|
|
105,600
|
(2)
|
1.07
|
%
|
|
|
|
|
John M. Lotz
|
|
2,500
|
|
0.03
|
%
|
2,500
|
|
0.02
|
%
|
Mark A. Briant
|
|
538,700
|
|
5.47
|
%
|
497,100
|
|
4.01
|
%
|
Directors,
Principal Shareholder, and Officers as a Group
(7 in number)
|
|
$
|
1,807,500
|
|
18.34
|
%
|
$
|
1,628,500
|
|
22.65
|
%
|
(1)
Included in the
extensions of credit to Mr. Coniglio is a loan to the Coniglio Family
Partnership, which had an outstanding balance of $1,024,800 on December 31,
2006.
(2)
The extension of credit
to Ms. Hudson is a loan to a corporation which is a related party.
53
Item 13.
EXHIBITS AND REPORTS
A.
EXHIBITS
Item
|
|
Description
|
2
|
|
Plan of Merger and
Merger Agreement, Monterey County Bank with Monterey County Merger
Corporation un the Charter of Monterey County Bank under the Title of
Monterey County Bank, joined in by Northern California Bancorp, Inc. dated
November 1, 1995. Filed as exhibit to Form 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
|
|
(1) Lease agreement
Carmel Branch Office
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 1995.
|
|
|
(2) Lease agreement
Carmel By The Sea Office
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 2002.
|
|
|
(3) Lease agreement 301
Webster Street, Monterey, CA 93924
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 2004.
|
10 (ii) A
|
|
(1)
First Addendum to Employment Contract of Charles T.
Chrietzberg, Jr.
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 2005.
|
|
|
(2) Employment Contract
of Charles T. Chrietzberg, Jr., dated January 1, 2005
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 2004.
|
|
|
(3) Deferred
Compensation Agreement, dated December 31, 1993
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 1995.
|
|
|
(4) Northern California
Bancorp, Inc. 1998 Stock Option Plan and Stock Option Agreements
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 1998.
|
|
|
(5) Amendment to the
Salary Continuation Agreement Dated December 31, 1993
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 1999.
|
|
|
(6) Life Insurance
Endorsement Method Split Dollar Plan Agreement
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 1999.
|
|
|
(7) Amendment to the
Life Insurance Endorsement Method Split Dollar Plan Agreement Dated January 5, 2000
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 2001
|
|
|
(8) Amendment to the
Life Insurance Endorsement Method Split Dollar Plan
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 2001
|
|
|
(9) Amendment to the
Salary Continuation Agreement Dated December 31, 1993
|
|
|
Filed as exhibit to
Form 10KSB dated December 31, 2001
|
|
|
(10) Monterey County
Bank Supplemental Life Insurance Agreement Dated October 26, 2006
|
|
|
(11) First Amendment to
the Monterey County Bank Supplemental Life Insurance Agreement Dated October
31, 2006
|
11
|
|
Statement Reference
Computation of Per Share Earnings
|
21
|
|
Subsidiaries
|
23.1
|
|
Consent of Hutchinson
and Bloodgood, LLP
|
31.1
|
|
Certification
of the Chief Executive Officer of Northern California Bancorp, Inc. pursuant
to Section 302 of the Sarbannes-Oxley Act of 2002.
|
54
31.2
|
|
Certification
of the Chief Financial Officer of Northern California Bancorp, Inc. pursuant
to Section 302 of the Sarbannes-Oxley Act of 2002.
|
32.1
|
|
Certification
of the Chief Executive Officer of Northern California Bancorp, Inc. pursuant
to Section 906 of the Sarbannes-Oxley Act of 2002.
|
32.2
|
|
Certification
of the Chief Financial Officer of Northern California Bancorp, Inc. pursuant
to Section 906 of the Sarbannes-Oxley Act of 2002.
|
B.
REPORTS
None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
Audit Fees.
Aggregate fees billed
by Hutchinson and Bloodgood for professional services rendered in connection
with the audit of the Banks annual financial statements for the fiscal year
ended December 31, 2006 and for the required review of the Banks financial
statements included in its Form 10-QSBs for that same year totaled
$71,700.
Financial
Information System Design and Implementation Fees.
No fees were paid to Hutchinson and Bloodgood
for financial information system design and implementation services rendered
for the 2006 fiscal year.
All Other
Fees.
$2,800 was paid
to Hutchinson & Bloodgood for all tax services rendered for the 2006 fiscal
year.
55
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:
November 19, 2007
|
By:
|
/s/
Charles T. Chrietzberg, Jr.
|
|
|
|
Charles
T. Chrietzberg, Jr.
|
|
|
Chief
Executive Officer
|
|
|
and
President
|
Date:
November 19, 2007
|
By:
|
/s/
Bruce N. Warner
|
|
|
|
Bruce
N. Warner
|
|
|
Chief
Financial Officer
|
|
|
and
Principal Accounting Officer
|
In accordance with the
Exchange Act, this report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Name
|
|
Position
|
|
Date
|
|
|
|
|
|
/s/
Charles T. Chrietzberg, Jr.
|
|
|
|
|
November 19, 2007
|
Charles T.
Chrietzberg, Jr.
|
|
Director
|
|
|
|
|
|
|
|
/s/ Sandra G. Chrietzberg
|
|
|
|
|
November 19, 2007
|
Sandra G. Chrietzberg
|
|
Director
|
|
|
|
|
|
|
|
/s/ Peter J. Coniglio
|
|
|
|
|
November 19, 2007
|
Peter J. Coniglio
|
|
Director
|
|
|
|
|
|
|
|
/s/ Carls S. Hudson
|
|
|
|
|
November 19, 2007
|
Carla S. Hudson
|
|
Director
|
|
|
|
|
|
|
|
/s/ John M. Lotz
|
|
|
|
|
November
19, 2007
|
John M. Lotz
|
|
Director
|
|
|
|
|
|
|
|
/s/ Mark A. Briant
|
|
|
|
|
November
19, 2007
|
Mark A. Briant
|
|
Director
|
|
|
|
|
|
|
|
/s/ David Bernahl
|
|
|
|
|
November
19, 2007
|
David Bernahl
|
|
Director
|
|
|
|
|
|
|
|
/s/ Stephanie G. Chrietzberg
|
|
|
|
|
November
19, 2007
|
Stephanie G. Chrietzberg
|
|
Director
|
|
|
56
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
Years Ended December 31, 2006 and 2005
|
HUTCHINSON and
BLOODGOOD LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
|
17 Aspen Way
Watsonville, CA 95076
t 831.724.2441 f 831.761.2136
www.hbllp.com
|
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, Monterey County Bank, as of December 31, 2006 and 2005 and the
related consolidated statements of income, changes in shareholders equity, and
cash flows for each of the years in the three-year period ended December 31,
2006. These consolidated financial statements are the responsibility of the
Corporations management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board (United States).
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, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.
Hutchinson and
Bloodgood LLP
Watsonville, California
February 14, 2007
1
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
December
31, 2006 and 2005
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
4,979,200
|
|
$
|
5,830,600
|
|
Federal funds sold
|
|
17,455,000
|
|
18,300,000
|
|
Total cash and cash equivalents
|
|
22,434,200
|
|
24,130,600
|
|
Time deposits with other financial
institutions
|
|
1,000,000
|
|
1,000,000
|
|
Trading assets
|
|
1,762,300
|
|
1,027,500
|
|
Investment securities available for sale
|
|
15,285,900
|
|
11,065,300
|
|
Investment securities held to maturity, at cost
(fair value approximates $7,281,000 in 2006; $7,161,900 in 2005)
|
|
7,012,300
|
|
7,025,000
|
|
Other investments
|
|
1,966,800
|
|
2,020,500
|
|
Loans held for sale
|
|
1,182,100
|
|
5,315,000
|
|
Loans, net of allowance for loan losses of
$1,408,800 in 2006; $1,100,700 in 2005
|
|
128,867,600
|
|
101,985,000
|
|
Premises and equipment, net
|
|
4,613,000
|
|
4,362,300
|
|
Cash surrender value of life insurance
|
|
3,671,000
|
|
2,466,700
|
|
Interest receivable and other assets
|
|
2,774,700
|
|
2,247,200
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
190,569,900
|
|
$
|
162,645,100
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
Non interest-bearing demand
|
|
$
|
30,079,100
|
|
$
|
30,814,900
|
|
Interest-bearing demand
|
|
17,261,800
|
|
17,824,500
|
|
Savings
|
|
5,326,400
|
|
7,659,300
|
|
Time less than $100,000
|
|
43,134,600
|
|
32,143,200
|
|
Time in denominations of $100,000 or more
|
|
35,825,800
|
|
29,678,200
|
|
|
|
|
|
|
|
|
Total deposits
|
|
131,627,700
|
|
118,120,100
|
|
|
|
|
|
|
|
Federal Home Loan Bank borrowed funds
|
|
34,750,000
|
|
24,750,000
|
|
Junior subordinated debt securities
|
|
8,248,000
|
|
8,248,000
|
|
Interest payable and other liabilities
|
|
3,542,300
|
|
2,596,100
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
178,168,000
|
|
153,714,200
|
|
|
|
|
|
|
|
Commitments (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
Common stock, no stated par value,
authorized: 2,500,000 shares, issued and outstanding: 1,721,715 and 1,631,439
shares at December 31, 2006 and 2005, respectively
|
|
5,059,700
|
|
4,771,800
|
|
Retained earnings
|
|
7,363,100
|
|
4,128,600
|
|
Accumulated other comprehensive income
(loss)
|
|
(20,900
|
)
|
30,500
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
12,401,900
|
|
8,930,900
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
190,569,900
|
|
$
|
162,645,100
|
|
|
|
|
|
|
|
|
|
|
|
|
The notes to consolidated financial statements are an integral part of
these statements.
2
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
Years Ended December 31, 2006,
2005, and 2004
|
|
2006
|
|
2005
|
|
2004
|
|
Interest income
|
|
|
|
|
|
|
|
Loans
|
|
$
|
11,953,600
|
|
$
|
9,561,100
|
|
$
|
6,756,100
|
|
Time deposits with other financial
institutions
|
|
49,700
|
|
29,200
|
|
|
|
Investment securities
|
|
1,035,800
|
|
748,100
|
|
457,500
|
|
Federal funds sold
|
|
720,900
|
|
352,400
|
|
141,300
|
|
Total interest income
|
|
13,760,000
|
|
10,690,800
|
|
7,354,900
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Interest-bearing transaction accounts
|
|
68,300
|
|
64,400
|
|
64,400
|
|
Savings and time deposit accounts
|
|
1,442,800
|
|
1,050,500
|
|
791,300
|
|
Time deposits in denominations of $100,000
or more
|
|
1,478,700
|
|
989,900
|
|
561,600
|
|
Notes payable and other borrowings
|
|
2,207,200
|
|
1,566,800
|
|
1,017,900
|
|
Total interest expense
|
|
5,197,000
|
|
3,671,600
|
|
2,435,200
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
8,563,000
|
|
7,019,200
|
|
4,919,700
|
|
Provision for loan losses
|
|
410,000
|
|
150,000
|
|
185,000
|
|
Net interest income, after provision for
loan losses
|
|
8,153,000
|
|
6,869,200
|
|
4,734,700
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
547,400
|
|
563,800
|
|
516,500
|
|
Income from sales and servicing of Small Business
Administration loans
|
|
689,700
|
|
991,400
|
|
716,400
|
|
Gain on sale of Pacific Coast Bankers Bank
Stock
|
|
1,313,400
|
|
|
|
|
|
Other income
|
|
4,626,700
|
|
2,806,800
|
|
2,993,900
|
|
Total non-interest income
|
|
7,177,200
|
|
4,362,000
|
|
4,226,800
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
3,853,800
|
|
3,281,800
|
|
3,003,600
|
|
Occupancy and equipment expense
|
|
790,200
|
|
664,500
|
|
596,700
|
|
Professional fees
|
|
149,200
|
|
140,500
|
|
113,500
|
|
Data processing
|
|
322,400
|
|
355,800
|
|
363,900
|
|
Other general and administrative
|
|
3,511,200
|
|
3,369,900
|
|
3,038,000
|
|
Total non-interest expenses
|
|
8,626,800
|
|
7,812,500
|
|
7,115,700
|
|
|
|
|
|
|
|
|
|
Income before tax provision
|
|
6,703,400
|
|
3,418,700
|
|
1,845,800
|
|
Income tax provision
|
|
2,866,200
|
|
1,489,400
|
|
780,600
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,837,200
|
|
$
|
1,929,300
|
|
$
|
1,065,200
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.31
|
|
$
|
1.20
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.09
|
|
$
|
1.00
|
|
$
|
0.56
|
|
The notes to consolidated financial statements are an integral part of
these statements.
3
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
Years Ended December 31, 2006, 2005, and 2004
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Number of
|
|
Common
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
Shares
|
|
Stock
|
|
Earnings
|
|
Income (loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
1,566,658
|
|
$
|
4,630,900
|
|
$
|
1,725,700
|
|
$
|
53,900
|
|
$
|
6,410,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
1,065,200
|
|
|
|
1,065,200
|
|
Change in net unrealized gain on securities
and other assets, net of tax effect
|
|
|
|
|
|
|
|
21,700
|
|
21,700
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
1,086,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ .165 per share cash dividend
|
|
|
|
|
|
(265,300
|
)
|
|
|
(265,300
|
)
|
Exercise of stock options
|
|
41,361
|
|
89,000
|
|
|
|
|
|
89,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
1,608,019
|
|
4,719,900
|
|
2,525,600
|
|
75,600
|
|
7,321,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
1,929,300
|
|
|
|
1,929,300
|
|
Change in net unrealized gain on securities
and other assets, net of tax effect
|
|
|
|
|
|
|
|
(45,100
|
)
|
(45,100
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
1,884,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ .20 per share cash dividend
|
|
|
|
|
|
(326,300
|
)
|
|
|
(326,300
|
)
|
Repurchase of stock options
|
|
(3,795
|
)
|
(15,200
|
)
|
|
|
|
|
(15,200
|
)
|
Exercise of stock options
|
|
27,215
|
|
67,100
|
|
|
|
|
|
67,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
1,631,439
|
|
4,771,800
|
|
4,128,600
|
|
30,500
|
|
8,930,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
3,837,200
|
|
|
|
3,837,200
|
|
Change in net unrealized gain on securities
and other assets, net of tax effect
|
|
|
|
|
|
|
|
(51,400
|
)
|
(51,400
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
3,785,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ .35 per share cash dividend
|
|
|
|
|
|
(602,700
|
)
|
|
|
(602,700
|
)
|
Stock based compensation
|
|
|
|
17,800
|
|
|
|
|
|
17,800
|
|
Exercise of stock options
|
|
90,276
|
|
270,100
|
|
|
|
|
|
270,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
1,721,715
|
|
$
|
5,059,700
|
|
$
|
7,363,100
|
|
$
|
(20,900
|
)
|
$
|
12,401,900
|
|
The notes to consolidated financial statements are an integral part of
these statements.
4
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended December 31, 2006, 2005, and 2004
|
|
2006
|
|
2005
|
|
2004
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,837,200
|
|
$
|
1,929,300
|
|
$
|
1,065,200
|
|
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
276,900
|
|
240,700
|
|
208,500
|
|
Provision for loan losses
|
|
410,000
|
|
150,000
|
|
185,000
|
|
Realized (gain) loss on sales of available
for sale securities, net
|
|
(1,311,700
|
)
|
91,800
|
|
(50,600
|
)
|
Amortization of deferred loan costs
|
|
333,800
|
|
224,000
|
|
126,300
|
|
Net amortization (accretion) of securities
|
|
(3,000
|
)
|
7,300
|
|
28,100
|
|
Stock based compensation
|
|
17,800
|
|
|
|
|
|
(Gain) loss on sale of equipment
|
|
11,900
|
|
(800
|
)
|
(2,100
|
)
|
Increase in deferred tax asset
|
|
(74,300
|
)
|
(178,800
|
)
|
(75,900
|
)
|
Increase in trading assets
|
|
(734,800
|
)
|
(223,800
|
)
|
(640,400
|
)
|
(Increase) decrease in loans held for sale
|
|
4,132,900
|
|
(775,500
|
)
|
(2,191,700
|
)
|
Increase in interest receivable
|
|
(186,700
|
)
|
(209,700
|
)
|
(175,300
|
)
|
(Increase) decrease in other assets
|
|
(1,626,500
|
)
|
9,200
|
|
(388,600
|
)
|
Increase in interest payable
|
|
589,300
|
|
376,000
|
|
24,100
|
|
Increase in other liabilities
|
|
356,900
|
|
663,100
|
|
201,800
|
|
Net cash provided (used) by operating
activities
|
|
6,029,700
|
|
2,302,800
|
|
(1,685,600
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Net change in time deposits with other
financial institutions
|
|
|
|
(1,000,000
|
)
|
|
|
Proceeds from maturity of investment
securities
|
|
5,830,700
|
|
597,300
|
|
8,557,800
|
|
Purchase of investments
|
|
(8,570,500
|
)
|
(6,020,000
|
)
|
(15,643,400
|
)
|
Net increase in loans
|
|
(43,118,300
|
)
|
(60,466,800
|
)
|
(35,517,000
|
)
|
Loan purchases
|
|
(19,150,000
|
)
|
(13,448,200
|
)
|
(11,043,300
|
)
|
Proceeds from loan sales
|
|
34,641,900
|
|
62,052,300
|
|
30,313,300
|
|
Proceeds from sale of equipment
|
|
48,600
|
|
500
|
|
3,200
|
|
Additions to bank premises and equipment
|
|
(583,500
|
)
|
(2,378,800
|
)
|
(223,600
|
)
|
Net cash used by investing activities
|
|
(30,901,100
|
)
|
(20,663,700
|
)
|
(23,553,000
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
13,507,600
|
|
20,856,900
|
|
19,130,800
|
|
Proceeds from FHLB borrowings
|
|
12,000,000
|
|
10,000,000
|
|
13,900,000
|
|
Repayments of FHLB borrowings
|
|
(2,000,000
|
)
|
(4,900,000
|
)
|
(8,000,000
|
)
|
Proceeds from exercise of stock options
|
|
270,100
|
|
67,100
|
|
89,000
|
|
Repurchase of common stock and stock
options
|
|
|
|
(15,200
|
)
|
|
|
Cash dividends paid on common stock
|
|
(602,700
|
)
|
(326,300
|
)
|
(265,300
|
)
|
Net cash provided by financing activities
|
|
23,175,000
|
|
25,682,500
|
|
24,854,500
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(1,696,400
|
)
|
7,321,600
|
|
(384,100
|
)
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING
|
|
24,130,600
|
|
16,809,000
|
|
17,193,100
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, ENDING
|
|
$
|
22,434,200
|
|
$
|
24,130,600
|
|
$
|
16,809,000
|
|
The
notes to consolidated financial statements are an integral part of these
statements.
5
|
|
2006
|
|
2005
|
|
2004
|
|
OTHER CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
4,607,700
|
|
$
|
3,295,600
|
|
$
|
2,411,500
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
3,090,400
|
|
$
|
1,519,500
|
|
$
|
815,400
|
|
The notes to consolidated financial
statements are an integral part of these statements.
6
NORTHERN CALIFORNIA BANCORP, INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006 and 2005
Note
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Business
The Bank
provides a variety of financial services to individuals and small businesses
through its four offices on the Monterey Peninsula. Its primary deposit
products are demand and term certificate accounts. Its primary lending products
are residential, commercial, and Small Business Administration (SBA) loans.
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
inter-company balances and transactions have been eliminated in consolidation.
The
Corporation determines whether it has a controlling financial interest in an
entity by first evaluating whether the entity is a voting interest entity or a
variable interest entity under accounting principles generally accepted in the
United States of America. Voting interest entities are entities in which the
total equity investment at risk is sufficient to enable the entity to finance
itself independently and provides the equity holders with the obligation to
absorb losses, the right to receive residual returns and the right to make
decisions about the entitys activities. The Corporation consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest. As defined in applicable accounting standards, variable interest
entities (VIEs) are entities that lack one or more of the characteristics of a
voting interest entity. A controlling financial interest in an entity is
present when an enterprise has a variable interest, or a combination of
variable interests, that will absorb a majority of the entitys expected
losses, receive a majority of the entitys expected residual returns, or both. The
enterprise with a controlling financial interest, known as the primary
beneficiary, consolidates the VIE. The Corporations wholly owned subsidiaries,
Northern California Bancorp, Inc. Trust I and Northern California Bancorp, Inc.
Trust II, are VIEs for which the Corporation is not the primary beneficiary. Accordingly,
the accounts of these entities are not included in the Corporations
consolidated financial statements at December 31, 2006 and 2005.
7
Use of Estimates
In preparing
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, 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, and the valuation of deferred tax assets.
Cash and Cash Equivalents
For purposes
of reporting cash flows, cash and cash equivalents include cash, amounts due
from banks and Federal funds sold on a daily basis, all of which mature within
ninety days.
Time Deposits with Other Financial
Institutions
Interest-bearing
deposits in banks mature within one year and are carried at cost.
Trading Activities
The
Corporation engages in trading activities consisting of securities that are held
principally for resale in the near term. The securities 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 the fair values
are estimated using pricing models, quoted prices of instruments with similar
characteristics, or discounted cash flows.
8
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.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of
held-to-maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers (1)
the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and
(3) the intent and ability of the Bank to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value. 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 85% of each loan. The
Bank generally sells the guaranteed portion of each loan to a third party and
retains only the non-guaranteed 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.
9
The Banks
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 that 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, construction, 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 Banks debtors to honor their contracts is dependent upon the
real estate and general economic conditions in the area.
Loans, as
reported, have been reduced by
undisbursed
loan funds, net deferred loan fees, and the allowance for loan losses.
Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or cost on originated loans. Interest income is accrued on
the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.
10
The accrual of
interest on mortgage and commercial loans is discontinued at the time the loan
is 90 days past due unless the credit is well-secured and in process of
collection. Credit card loans and other personal loans are typically charged
off no later than 180 days past due. Past due status is based on contractual
terms of the loan. In all cases, loans are placed on nonaccrual or charged-off
at an earlier date if collection of principal or interest is considered
doubtful.
All interest
accrued but not collected for loans that are placed on nonaccrual or charged
off is reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Allowance for Loan Losses
The allowance
for loan losses is established through a provision for loan losses charged to
earnings and is maintained at a level considered adequate to provide for
reasonably foreseeable loan losses.
The provision
and the level of the allowance are evaluated on a regular basis by management
and are based upon managements 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
borrowers 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 Banks 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.
11
The allowance
consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than that of the
carrying value of that loan. The general component covers non-classified loans
and is based on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect
managements estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general
losses in the portfolio.
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 borrowers 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 loans effective interest rate, the loans
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent. Substantially, all of the Banks loans that 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.
Loan Servicing
Rights to
service 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 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.
12
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.
Capitalized
mortgage servicing rights are reported in other assets and 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.
Premises and Equipment
The Banks
premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided for in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service lives. Leasehold
improvements are amortized over the term of the lease or the service lives of
the improvements, whichever is shorter. The straight-line method of
depreciation is followed for financial reporting purposes, while both
accelerated and straight-line methods are followed for income tax purposes.
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
income taxes are recognized for estimated future tax effects attributable to
income tax carry forwards as well as temporary differences between income tax
and financial reporting purposes. Valuation allowances are established when
necessary to reduce the deferred tax asset to the amount expected to be
realized. 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.
13
Transfers of Financial Assets
Transfers of
financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when 1) the assets have been isolated from the Bank, 2) the transferee (buyer)
obtains the right to pledge or exchange the transferred assets, free of
conditions that would constrain it from taking advantage of that right, and 3)
the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Stock Option Plan
Under the
Corporations Stock Option Plan, the Bank may grant incentive stock options and
non-qualified stock options to directors, officers, and employees of the
Corporation and its subsidiary, so long as the Corporation owns a majority of
the equity interest of such subsidiary. Incentive Stock Options are granted at
fair 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 Corporations
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 exceeding 10 years from the date
of grant. Under the Plan, 211,081 shares of common stock have been reserved for
the granting of these options. At December 31, 2006, 202,864 options were
outstanding. During 2006, no options were granted, and 90,276 options were
exercised by officers, employees, and board members. As of December 31, 2006,
all options have been vested.
14
In December
2004, the Financial Accounting Standards Board (FASB) issued Statement No.
123 (revised 2004),
Share-Based Payment.
SFAS
No. 123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. SFAS No.
123(R) covers a wide range of share-based compensation arrangements including
stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No. 123(R) is a
replacement of SFAS No. 123,
Accounting for
Stock-Based Compensation,
and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees,
and
its related interpretive guidance. The effect of the Statement will be to
require entities to measure the cost of employee services received in exchange
for stock options based on the grant-date fair value of the award, and to
recognize the cost over the period the employee is required to provide services
for the award. SFAS No. 123(R) permits entities to use any option-pricing model
that meets the fair value objective in the Statement.
The
Corporation elected to adopt SFAS No. 123(R) on January 1, 2006 under the
modified prospective method. Compensation cost has been measured using the fair
value of an award on the grant dates and is recognized over the service period,
which is usually the vesting period. Compensation cost related to the
non-vested portion of awards outstanding as of that date was based on the
grant-date fair value of those awards as calculated under the original provisions
of SFAS No. 123; that is, the Corporation was not required to re-measure the
grant-date fair value estimate of the unvested portion of awards granted prior
to the effective date of SFAS No. 123(R).
The
Corporation had applied Accounting Principles Board Opinion No. 25 and related
Interpretations, in accounting for the stock option plan prior to January 1,
2006. Under APB Opinion No. 25, stock options issued under the Corporations
stock option plan have no intrinsic value at the grant date, and therefore, no
compensation cost is recognized for them.
The following
table illustrates the effect on the Corporations reported net income and
earnings per share if the Company had applied the fair value recognition
provision of SFAS No. 123 to stock-based employee compensation prior to the
adoption date:
15
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Reported net earnings
|
|
$
|
1,929,300
|
|
$
|
1,065,200
|
|
Additional expense had the Corporation adopted
SFAS No. 123
|
|
(52,400
|
)
|
(60,300
|
)
|
Related income tax benefit
|
|
22,000
|
|
|
|
Pro forma net earnings
|
|
$
|
1,898,900
|
|
$
|
1,004,900
|
|
|
|
|
|
|
|
Earnings per share as reported:
|
|
|
|
|
|
Basic
|
|
$
|
1.20
|
|
$
|
0.68
|
|
Diluted
|
|
$
|
1.00
|
|
$
|
0.56
|
|
Pro forma earnings per share:
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
$
|
0.64
|
|
Diluted
|
|
$
|
1.11
|
|
$
|
0.64
|
|
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 2005 and
2004: risk-free interest rate of 4.6% and 4.8%, respectively; dividend yield of
1.3% and 1.0%, respectively; expected option life of 4 years and 8 years,
respectively; and volatility of 20% for both years.
The expected
volatility is based on historical volatility. The risk-free interest rates for
periods within the contractual life of the awards are based on the U.S.
Treasury yield curve in effect at the time of the grant. The expected life is
based on historical exercise experience. The dividend yield assumption is based
on the Companys history and expectation of dividend payouts.
16
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 1,658,675 for 2006, 1,614,196 for 2005, and 1,576,589 for 2004. The
weighted average number of shares used in the computation of earnings per share
assuming dilution of stock options was 1,831,892 for 2006, 1,923,532 for 2005,
and 1,919,512 for 2004. The Corporation paid cash dividends of $.35, $.20, and
$.165 per share in 2006, 2005 and 2004, respectively.
Recent Accounting Pronouncements
In March of
2006, the FASB published SFAS No. 156,
Accounting
for Servicing of Financial Assets
, which amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,
with respect to the
accounting for servicing of financial assets. SFAS No. 156 requires that all
separately recognized servicing rights be initially measured at fair value, if
practicable. For each class of separately recognized servicing assets and
liabilities, SFAS No. 156 permits an entity to choose either of the following
subsequent measurement methods: (1) the amortization of servicing assets or
liabilities in proportion to and over the period of estimated net servicing
income or net servicing loss or (2) the reporting of servicing assets or
liabilities at fair value at each reporting date and reporting changes in fair
value in earnings in the period in which the changes occur. SFAS No. 156 also
requires additional disclosures for all separately recognized servicing rights.
Early adoption is permitted as of the beginning of an entitys fiscal year,
provided the entity has not yet issued financial statements, including interim
financial statements, for any period of that fiscal year. SFAS No. 156 is
effective the earlier of the date an entity adopts the requirements of SFAS No.
156, or as of the beginning of its first fiscal year beginning after September
15, 2006. An entity should apply the requirements for recognition and initial
measurement of servicing assets and servicing liabilities prospectively to all
transactions after the effective date of SFAS No. 156. The Bank is currently
evaluating the impact of the adoption of this standard.
17
In September 2006,
the FASB issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes
, an
interpretation of FASB Statement No. 109,
Accounting
for Income Taxes
, effective for the Company beginning after
December 15, 2006 with earlier adoption encouraged. FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Bank is currently assessing the impact of this
guidance on its financial statements.
In September
2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS
157),
Fair Value Measurements
,
effective for the Company beginning on January 1, 2008, with earlier adoption
permitted. This Statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This statement
establishes a fair value hierarchy that distinguishes between valuations
obtained from sources independent of the entity and those from the entitys own
unobservable inputs that are not corroborated by observable market data. SFAS
157 expands disclosures about the use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial recognition. The
disclosures focus on the inputs used to measure fair value and for recurring
fair value measurements using significant unobservable inputs, the effect of
the measurements on earnings or changes in net assets for the period. This
statement encourages an entity to combine the fair value information disclosed
under this statement with the fair value information disclosed under other
accounting pronouncements, including SFAS 107, Disclosures about Fair Value of
Financial Instruments, where practicable. The Bank is currently assessing the
impact of this guidance on its financial statements.
18
In September
2006, the EITF reached a consensus on EITF Issue 06-5, Accounting for Purchases
of Life Insurance-Determining the Amount That Could Be Realized in Accordance
with FASB Technical Bulletin No. 85-4 (EITF 06-5). EITF 06-5 requires that a
policyholder should consider any additional amounts included in the contractual
terms of the policy in determining the amount that could be realized under the
insurance contract on a policy by policy basis. EITF
06-5 is effective for fiscal years beginning after December 15, 2006 and it
requires that recognition of the effects of adoption should be either by (a) a
change in accounting principle through a cumulative-effect adjustment to
retained earnings as of the beginning of the year of adoption or (b) a change
in accounting principle through retrospective application to all prior periods.
The Bank is currently evaluating what effect, if any, adoption of EITF 06-5
will have on its Financial Statements.
Comprehensive Income (Loss)
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 (loss) and related tax effects for the years
ended December 31, are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Unrealized holding gains (losses) on
available for sale securities and other assets, net
|
|
$
|
(93,500
|
)
|
$
|
(81,900
|
)
|
$
|
39,300
|
|
Tax effect
|
|
42,100
|
|
36,800
|
|
(17,600
|
)
|
|
|
|
|
|
|
|
|
Net-of-tax amount
|
|
$
|
(51,400
|
)
|
$
|
(45,100
|
)
|
$
|
21,700
|
|
19
The components
of accumulated other comprehensive income (loss) and related tax effects for
the years ended December 31, 2006 and 2005 are as follows:
|
|
2006
|
|
2005
|
|
Unrealized holding losses on available for
sale securities
|
|
$
|
(79,000
|
)
|
$
|
(136,600
|
)
|
Unrealized holding gains on available for
sale asset strip receivable
|
|
40,900
|
|
192,000
|
|
Tax effect
|
|
17,200
|
|
(24,900
|
)
|
|
|
|
|
|
|
Net-of-tax amount
|
|
$
|
(20,900
|
)
|
$
|
30,500
|
|
Advertising Costs
Advertising
costs are charged to operations when incurred. The amount expensed for
advertising as of December 31, 2006, 2005, and 2004 was $223,800, $140,900, and
$127,300, respectively.
Reclassification
Certain
amounts have been reclassified in the 2005 and 2004 financial statements to
conform to the 2006 presentation.
Note
2.
CASH
AND DUE FROM BANKS
The
Corporation is required to maintain aggregate reserves (in the form of cash and
deposits with the Federal Reserve Bank) to satisfy federal regulatory
requirements. At December 2006 and 2005, these reserve balances amounted to
$1,184,000 and $800,000, respectively.
Note
3.
TRADING
ASSETS
At December
31, 2006 and 2005, the Corporations trading assets consisted of marketable
equity securities in the amount of $1,762,300 and $1,027,500, respectively.
20
Note
4. INVESTMENT SECURITIES AND
OTHER INVESTMENTS
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses, follows:
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
GNMA - Mortgage Backed Securities
|
|
$
|
640,600
|
|
$
|
|
|
$
|
(15,000
|
)
|
$
|
625,600
|
|
Government Agency Securities
|
|
14,724,300
|
|
1,800
|
|
(65,800
|
)
|
14,660,300
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
15,364,900
|
|
$
|
1,800
|
|
$
|
(80,800
|
)
|
$
|
15,285,900
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
State/Local Agency Securities
|
|
$
|
7,012,300
|
|
$
|
268,400
|
|
$
|
|
|
$
|
7,280,700
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments, at cost
|
|
|
|
|
|
|
|
|
|
AT Services LLC
|
|
$
|
20,100
|
|
$
|
|
|
$
|
|
|
$
|
20,100
|
|
Federal Home Loan Bank stock, restricted
|
|
1,633,300
|
|
|
|
|
|
1,633,300
|
|
Metrocities Mortgage, LLC
|
|
10,000
|
|
|
|
|
|
10,000
|
|
Northern California Bancorp, Inc. Trust I
|
|
93,000
|
|
|
|
|
|
93,000
|
|
Northern California Bancorp, Inc. Trust II
|
|
155,000
|
|
|
|
|
|
155,000
|
|
The Independent Bankers Financial Corporation
|
|
50,000
|
|
|
|
|
|
50,000
|
|
MasterCard Inc. Class B Stock
|
|
5,400
|
|
|
|
|
|
5,400
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
$
|
1,966,800
|
|
$
|
|
|
$
|
|
|
$
|
1,966,800
|
|
21
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
GNMA - Mortgage Backed Securities
|
|
$
|
857,300
|
|
$
|
|
|
$
|
(19,500
|
)
|
$
|
837,800
|
|
Government Agency Securities
|
|
9,714,100
|
|
|
|
(117,100
|
)
|
9,597,000
|
|
Corporate Debt Securities
|
|
630,500
|
|
|
|
|
|
630,500
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
11,201,900
|
|
$
|
|
|
$
|
(136,600
|
)
|
$
|
11,065,300
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity
|
|
|
|
|
|
|
|
|
|
State/Local Agency Securities
|
|
$
|
7,025,000
|
|
$
|
151,500
|
|
$
|
(14,600
|
)
|
$
|
7,161,900
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments, at cost
|
|
|
|
|
|
|
|
|
|
AT Services LLC
|
|
$
|
40,000
|
|
$
|
|
|
$
|
|
|
$
|
40,000
|
|
Federal Home Loan Bank stock, restricted
|
|
1,182,600
|
|
|
|
|
|
1,182,600
|
|
Metrocities Mortgage, LLC
|
|
10,000
|
|
|
|
|
|
10,000
|
|
Northern California Bancorp, Inc. Trust I
|
|
93,000
|
|
|
|
|
|
93,000
|
|
Northern California Bancorp, Inc. Trust II
|
|
155,000
|
|
|
|
|
|
155,000
|
|
Pacific Coast Bankers Bank Stock
|
|
439,900
|
|
1,317,100
|
|
|
|
1,757,000
|
|
Pan Pacific Bank
|
|
100,000
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
$
|
2,020,500
|
|
$
|
1,317,100
|
|
$
|
|
|
$
|
3,337,600
|
|
22
The amortized cost and fair value of debt securities by contractual
maturity date at December 31, 2006 follows:
|
|
Available for Sale
|
|
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
3,741,700
|
|
3,713,400
|
|
Due after one year through five years
|
|
993,700
|
|
978,800
|
|
Due after five years through ten years
|
|
9,988,900
|
|
9,968,100
|
|
GNMA - Mortgage Backed Securities
|
|
640,600
|
|
625,600
|
|
|
|
|
|
|
|
|
|
$
|
15,364,900
|
|
$
|
15,285,900
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
Due after ten years
|
|
$
|
7,012,300
|
|
$
|
7,280,700
|
|
|
|
|
|
|
|
|
|
Proceeds from maturity and sales of investment securities for the years
ended December 31, 2006, 2005, and 2004 were $5,830,700, $597,300, and
$8,557,800, respectively. Realized gains (losses) for the years ended December 31,
2006, 2005, and 2004 were $1,311,700, $(91,800), and $50,600, respectively.
On January 31, 2006, Monterey County Bank, a wholly owned subsidiary of
Northern California Bancorp, Inc., sold its shares of common stock in Pacific
Coast Bankers Bancshares (PCBB). The gross sales proceeds were $1,757,025.
After subtracting the book value of $439,900, the resulting pretax gain was
$1,313,426. The after tax gain will approximate $790,000. Monterey County Bank
owned 3,699 shares of PCBB that sold for $475.00 per share less a $3,699 sales
charge.
23
As a member of
the Federal Home Loan Bank (FHLB) system, the Bank is required to maintain an
investment in FHLB stock in an amount equal to the greater of 1% of its
outstanding mortgage loans or 5% of advances from the FHLB. As of December 31,
2006 and 2005, the Bank had advances from the FHLB totaling $34,750,000 and
$24,750,000, respectively. No ready market exists for FHLB stock, and it has no
quoted market value. FHLB stock is evaluated for impairment based on an
estimate of the ultimate recoverability of par value.
At December
31, 2006 and 2005, U.S. Government obligations with a carrying value of
$15,364,900 and $11,201,900, respectively, were pledged to secure advances from
the FHLB.
Information
pertaining to securities with gross unrealized losses at December 31, 2006,
aggregated by investment category and length of time that individual securities
have been in a continuous loss position follows:
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Carrying
|
|
Unrealized
|
|
Carrying
|
|
Unrealized
|
|
Carrying
|
|
Unrealized
|
|
|
|
Amount
|
|
Loss
|
|
Amount
|
|
Loss
|
|
Amount
|
|
Loss
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agencies
|
|
$
|
5,988,900
|
|
$
|
(5,500
|
)
|
$
|
5,735,400
|
|
$
|
(60,300
|
)
|
$
|
11,724,300
|
|
$
|
(65,800
|
)
|
GNMA - Mortgage Backed Security
|
|
640,200
|
|
(15,000
|
)
|
|
|
|
|
640,200
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,629,100
|
|
$
|
(20,500
|
)
|
$
|
5,735,400
|
|
$
|
(60,300
|
)
|
$
|
12,364,500
|
|
$
|
(80,800
|
)
|
There were no
unrealized losses at December 31, 2006 pertaining to securities held to
maturity.
24
Information
pertaining to securities with gross unrealized losses at December 31, 2005,
aggregated by investment category and length of time that individual securities
have been in a continuous loss position follows:
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Carrying
|
|
Unrealized
|
|
Carrying
|
|
Unrealized
|
|
Carrying
|
|
Unrealized
|
|
|
|
Amount
|
|
Loss
|
|
Amount
|
|
Loss
|
|
Amount
|
|
Loss
|
|
Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agencies
|
|
$
|
8,715,000
|
|
$
|
(95,800
|
)
|
$
|
999,100
|
|
$
|
(21,300
|
)
|
$
|
9,714,100
|
|
$
|
(117,100
|
)
|
GNMA - Mortgage Backed Security
|
|
857,300
|
|
(19,500
|
)
|
|
|
|
|
857,300
|
|
(19,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,572,300
|
|
$
|
(115,300
|
)
|
$
|
999,100
|
|
$
|
(21,300
|
)
|
$
|
10,571,400
|
|
$
|
(136,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Local Agency Securities
|
|
$
|
604,700
|
|
$
|
(14,600
|
)
|
$
|
|
|
$
|
|
|
$
|
604,700
|
|
$
|
(14,600
|
)
|
Management
evaluates securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability
of the Bank to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
On December
31, 2006, 7 securities have an unrealized loss with aggregate depreciation of
0.65% from the Banks amortized cost basis. The unrealized losses relate to a
mortgage backed security issued by federally sponsored agencies, which are
fully secured by conforming residential loans and securities issued by agencies
of the United States. Since the Bank has the ability to hold these securities
until estimated maturity, no decline is deemed to be other than temporary.
25
Note
5.
SALES
AND SERVICING OF SBA LOANS
A summary of the activity of SBA loans follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
SBA loans originated
|
|
$
|
3,645,000
|
|
$
|
6,274,000
|
|
$
|
15,844,000
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans sold
|
|
$
|
4,428,400
|
|
$
|
7,944,900
|
|
$
|
4,669,100
|
|
A summary of income from SBA loans sold is as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Income from premiums
|
|
$
|
349,800
|
|
$
|
665,400
|
|
$
|
412,400
|
|
Income from servicing
|
|
339,900
|
|
326,000
|
|
304,000
|
|
|
|
|
|
|
|
|
|
Total SBA sales and servicing income
|
|
$
|
689,700
|
|
$
|
991,400
|
|
$
|
716,400
|
|
26
Note
6.
LOANS
AND ALLOWANCE FOR LOAN LOSSES
A summary of loan balances follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
26,361,000
|
|
$
|
20,920,900
|
|
Construction
|
|
17,325,900
|
|
10,455,900
|
|
Real estate, mortgage
|
|
86,207,200
|
|
71,005,800
|
|
Installment
|
|
693,900
|
|
942,300
|
|
Government guaranteed loans purchased
|
|
38,900
|
|
45,300
|
|
|
|
130,626,900
|
|
103,370,200
|
|
Allowance for loan losses
|
|
(1,408,800
|
)
|
(1,100,700
|
)
|
Deferred origination fees, net
|
|
(350,500
|
)
|
(284,500
|
)
|
|
|
|
|
|
|
Loans, net
|
|
$
|
128,867,600
|
|
$
|
101,985,000
|
|
An analysis of the allowance for loan losses follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,100,700
|
|
$
|
963,000
|
|
$
|
774,800
|
|
Recoveries
|
|
7,000
|
|
1,900
|
|
3,200
|
|
Loans charged off
|
|
(108,900
|
)
|
(14,200
|
)
|
|
|
Provision for loan losses
|
|
410,000
|
|
150,000
|
|
185,000
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,408,800
|
|
$
|
1,100,700
|
|
$
|
963,000
|
|
27
As of December
31, 2006 there were $154,900 in impaired loans; at December 31, 2005 there were
no impaired loans. No additional amounts are committed to be advanced in
connection with impaired loans.
During the
years ended December 31, 2006, 2005, and 2004 the average recorded investment
in impaired loans amounted to approximately $142,200, $82,400, and $617,100,
respectively. At December 31, 2006 there was $154,900 in impaired loans with an
allowance of $31,000. If interest on non-accrual loans had been accrued, such
income would have approximated $10,700 and $8,200 for 2006 and 2004,
respectively. There were no non-accrual loans at December 31, 2005.
As of December
31, 2006 and 2005, there were no loans past due ninety days or more and still
accruing interest.
Loans serviced
for others are not included in the accompanying balance sheets. The unpaid
principal balance of loans serviced for others was $101,138,400 and $85,033,900
at December 31, 2006 and 2005, respectively.
Note 7.
PREMISES AND EQUIPMENT
A summary of
the cost and accumulated depreciation of banking premises and equipment and
their estimated useful lives follows:
|
|
|
|
|
|
Estimated
|
|
|
|
2006
|
|
2005
|
|
Useful Lives
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,173,700
|
|
$
|
1,173,700
|
|
|
|
Building
|
|
1,807,800
|
|
1,807,800
|
|
40 years
|
|
Building improvements
|
|
897,100
|
|
484,500
|
|
40 years
|
|
Leasehold improvements
|
|
833,500
|
|
877,300
|
|
Lease term
|
|
Furniture and equipment
|
|
1,932,000
|
|
1,787,700
|
|
3-8 years
|
|
|
|
6,644,100
|
|
6,131,000
|
|
|
|
Accumulated depreciation
|
|
(2,031,100
|
)
|
(1,768,700
|
)
|
|
|
|
|
$
|
4,613,000
|
|
$
|
4,362,300
|
|
|
|
28
Depreciation
and amortization expense for the years ending December 31, 2006, 2005, and 2004
amounted to $276,900, $240,700, and $208,500, respectively.
Included in
building improvements is $241,000 in costs related to remodeling of a building
that was purchased in March 2005. The estimated total cost of the remodeling is
$400,000. The project is expected to be completed in April 2007.
Note
8.
DEPOSITS
At December 31, 2006, the scheduled maturities of time deposits are as
follows:
2007
|
|
$
|
60,855,900
|
|
2008
|
|
5,502,500
|
|
2009
|
|
10,917,300
|
|
2010
|
|
529,900
|
|
2011
|
|
1,080,300
|
|
Thereafter
|
|
74,500
|
|
|
|
|
|
|
|
$
|
78,960,400
|
|
Note
9.
JUNIOR
SUBORDINATED DEBT SECURITIES
On March 27,
2003, the Companys wholly owned special-purpose trust subsidiary, Northern
California Bancorp, Inc. Trust I (Trust I) issued $3 million in cumulative
Trust Preferred Securities. The securities bear a floating rate of interest of
3.25% over the three month LIBOR rate, payable quarterly. The effective rate at
December 31, 2006 was 8.62%. Concurrent with the issuance of the Trust
Preferred Securities, Trust I used the proceeds from the Trust Preferred
Securities offering to purchase a like amount of Junior Subordinated Debentures
of the Company. The Company will pay interest on the Junior Subordinated
Debentures to Trust I, which represents the sole revenue and sole source of
dividend distributions to the holders of the Trust Preferred Securities. The
Company has the right, assuming no default has occurred, to defer payments of
interest on the Junior Subordinated Debentures at any time for a period not to
exceed 20 consecutive quarters.
29
The Trust
Preferred Securities will mature on April 7, 2033, but can be redeemed under
certain circumstances at a premium prior to April 7, 2008, and can be redeemed,
in whole or in part, on any January 7, April 7, July 7 or October 7 occurring
after April 7, 2008 at par. The Company fully and unconditionally guarantees
the obligations of Trust I, on a subordinated basis.
The Company
received $2.91 million from Trust I upon issuance of the Junior Subordinated
Debentures, of which $1 million was contributed by the Company to the Bank to
increase its capital, $1.14 million was used to retire existing Company debt
and the remainder held as working capital. Under applicable regulatory
guidelines, a portion of the Trust Preferred Securities will qualify as Tier I
Capital, and the remainder as Tier II Capital.
On November
13, 2003, the Companys wholly owned special-purpose trust subsidiary, Northern
California Bancorp, Inc. Trust II (Trust II) issued $5 million in cumulative
Trust Preferred Securities. The securities bear a floating rate of interest of
2.85% over the three month LIBOR rate, payable quarterly. The effective rate at
December 31, 2006 was 8.22%. Concurrent with the issuance of the Trust
Preferred Securities, Trust II used the proceeds from the Trust Preferred
Securities offering to purchase a like amount of Junior Subordinated Debentures
of the Company. The Company will pay interest on the Junior Subordinated
Debentures to Trust II, which represents the sole revenue and sole source of
dividend distributions to the holders of the Trust Preferred Securities. The
Company has the right, assuming no default has occurred, to defer payments of
interest on the Junior Subordinated Debentures at any time for a period not to
exceed 20 consecutive quarters. The Trust Preferred Securities will mature on
November 8, 2033, but can be redeemed under certain circumstances at a premium
prior to November 8, 2008, and can be redeemed, in whole or in part, on any
February 8, May 8, August 8 or November 8 occurring after November 8, 2008 at
par. The Company fully and unconditionally guarantees the obligations of Trust
II, on a subordinated basis.
The Company
received $4.96 million from Trust II upon issuance of the Junior Subordinated
Debentures, of which $2.5 million was contributed by the Company to the Bank to
increase its capital and the remainder held as working capital.
Issuance costs
of $115,800 and $54,000 related to Trust I and Trust II, respectively have been
deferred and will be amortized over the 30-year life of the securities.
During the
years ended December 31, 2006, 2005 and 2004 interest expense on Junior
Subordinated Debentures totaled $675,600, $526,200, and $372,500, respectively.
The amortization of the issuance cost totaled $5,700 for each year ended
December 31, 2006, 2005 and 2004, respectively.
30
Note
10.
FUNDING
SOURCES
The Bank has
lines of credit from the Federal Home Loan Bank (FHLB) of San Francisco, Bank
of the West, Pacific Coast Bankers Bank and The Independent Bank with
remaining available borrowing capacity on December 31, 2006 of $1,065,800,
$4,500,000, $6,000,000 and $5,000,000, respectively. The Federal Home Loan Bank
line of credit has a maximum borrowing capacity of twenty five percent (25%) of
the Banks total assets, adjusted quarterly. The Federal Home Loan Bank line of
credit is secured by a portion of the Banks real estate secured loans and
securities at December 31, 2006. The total principal balance of pledged loans
was $33,463,500 and securities of $15,364,900. The following table provides
information on thirteen FHLB advances outstanding at December 31, 2006.
|
|
Fixed
|
|
|
|
|
|
Advance
|
|
Interest
|
|
Funding
|
|
Maturity
|
|
Amount
|
|
Rate
|
|
Date
|
|
Date
|
|
$
|
2,750,000
|
|
3.44
|
%
|
09/27/02
|
|
09/27/07
|
|
3,000,000
|
|
4.30
|
%
|
06/17/05
|
|
06/17/10
|
|
5,000,000
|
|
4.96
|
%
|
11/14/05
|
|
11/15/10
|
|
2,250,000
|
|
4.75
|
%
|
01/26/06
|
|
01/26/11
|
|
1,750,000
|
|
4.72
|
%
|
01/26/06
|
|
01/26/11
|
|
1,500,000
|
|
5.52
|
%
|
07/17/06
|
|
07/18/11
|
|
3,500,000
|
|
5.49
|
%
|
07/17/06
|
|
07/18/11
|
|
1,000,000
|
|
5.22
|
%
|
08/25/06
|
|
08/25/11
|
|
1,000,000
|
|
7.72
|
%
|
06/01/00
|
|
06/03/30
|
|
4,000,000
|
|
5.96
|
%
|
08/02/04
|
|
07/28/34
|
|
5,000,000
|
|
5.63
|
%
|
12/24/04
|
|
12/22/34
|
|
2,000,000
|
|
5.13
|
%
|
05/04/05
|
|
05/01/35
|
|
2,000,000
|
|
5.31
|
%
|
11/17/06
|
|
11/17/36
|
|
$
|
34,750,000
|
|
|
|
|
|
|
|
The Bank of
the West, Pacific Coast Bankers Bank and The Independent Bank lines of credit
are unsecured. The Bank did not utilize any overnight borrowings in 2006 or
2005.
The Bank has a
$330,000 letter of credit issued by the Federal Home Loan Bank of San Francisco
to secure the uninsured portion of local agency deposits maintained with the
Bank. The letter of credit matures April 17, 2011.
31
Note
11.
INCOME
TAXES
Allocation of
federal and California income taxes between current and deferred portions is as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Current tax provision:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,129,700
|
|
$
|
1,218,100
|
|
$
|
619,800
|
|
California
|
|
768,300
|
|
450,100
|
|
236,700
|
|
|
|
2,898,000
|
|
1,668,200
|
|
856,500
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
Federal
|
|
(116,900
|
)
|
(212,800
|
)
|
(146,700
|
)
|
California
|
|
(49,900
|
)
|
(41,000
|
)
|
(36,200
|
)
|
Increase in valuation allowance
|
|
135,000
|
|
75,000
|
|
107,000
|
|
|
|
(31,800
|
)
|
(178,800
|
)
|
(75,900
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
2,866,200
|
|
$
|
1,489,400
|
|
$
|
780,600
|
|
The
differences between the statutory federal income tax rate and the effective tax
rates are summarized as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Statutory federal tax rate
|
|
34.00
|
%
|
34.00
|
%
|
34.00
|
%
|
California taxes, net of federal tax
benefit
|
|
7.20
|
|
7.20
|
|
7.20
|
|
Other, net
|
|
1.56
|
|
2.37
|
|
1.10
|
|
|
|
|
|
|
|
|
|
Effective tax rates
|
|
42.76
|
%
|
43.57
|
%
|
42.30
|
%
|
32
The components
of the net deferred tax asset, included in other assets, are as follows:
|
|
2006
|
|
2005
|
|
Deferred tax asset
|
|
|
|
|
|
Federal
|
|
$
|
842,400
|
|
$
|
692,900
|
|
California
|
|
232,000
|
|
172,200
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
1,074,400
|
|
865,100
|
|
Valuation allowance
|
|
(545,000
|
)
|
(410,000
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
529,400
|
|
$
|
455,100
|
|
The tax
effects of each type of income and expense item that give rise to deferred
taxes are as follows:
|
|
2006
|
|
2005
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
Net unrealized gain (loss) on securities
|
|
$
|
7,900
|
|
$
|
(27,800
|
)
|
California franchise tax
|
|
182,400
|
|
211,600
|
|
Allowance for loan losses
|
|
600,500
|
|
465,800
|
|
Accrued salary continuation liability
|
|
383,300
|
|
323,000
|
|
Depreciation
|
|
(99,700
|
)
|
(107,500
|
)
|
|
|
|
|
|
|
Total deferred tax asset
|
|
1,074,400
|
|
865,100
|
|
Valuation allowance
|
|
(545,000
|
)
|
(410,000
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
529,400
|
|
$
|
455,100
|
|
The Bank
establishes a valuation allowance if, based on the weight of evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
33
Note
12.
COMMITMENTS
In the normal
course of business, there are outstanding commitments that are not reflected in
the consolidated financial statements.
Operating lease commitments
The Bank
leases its branch offices in Carmel By-The-Sea, Carmel Valley, and Pacific
Grove. The Carmel By-The-Sea office has a five and one half year lease with
four, five year options and commenced in April 2002. The Carmel Valley building
has a twenty-five year lease which commenced in March 1981 and an addendum to
the lease executed in 2005 provides for two options to renew the lease for an
additional 10 years each, 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 leases
approximately 1,000 square feet at 321 Webster Street, Monterey, CA. The 321
Webster Street lease has a term of three years commencing September 2000, with
a three-year option. An addendum to the lease was executed in 2004 and provided
for two, five year options to extend the lease, which commenced in September
2006. 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 $275,200, $286,400, and $275,200 in 2006, 2005, and 2004,
respectively.
Effective
April 1, 2000, the Bank entered into a 5 year sublease agreement to rent one of
the units in the Carmel Valley branch, upon expiration of the sublease in 2005
the Bank elected to retain the space for its own use. Sublease rental income
for the years ending 2005 and 2004 was approximately $26,500 and $37,400,
respectively.
Effective July
1, 2002, the Bank entered into a 5 year and 3 months sublease agreement to rent
one of the units in the Carmel-By-The-Sea branch. The sublease was terminated
in 2006 due to default for non-payment of rent. Sublease rental income for the
yeas ending 2006, 2005, and 2004 was approximately $24,100, $40,200, and
$37,200, respectively. The Bank has decided to retain the subleased portion of
the facility for its own use.
34
Future minimum
lease commitments for all non-cancelable operating leases are as follows:
Year Ending
|
|
Minimum Lease
|
|
December 31
|
|
Commitments
|
|
2007
|
|
$
|
270,700
|
|
2008
|
|
270,700
|
|
2009
|
|
270,700
|
|
2010
|
|
270,700
|
|
2011
|
|
156,200
|
|
Thereafter
|
|
475,700
|
|
|
|
$
|
1,714,700
|
|
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 Banks
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, 2006 and 2005, such commitments to extend credit were $35,368,500 and
$25,950,100, respectively, of undisbursed lines of credit, undisbursed loans in
process, and commitment letters.
35
Note
13.
CONCENTRATION
OF RISK
The Bank
grants commercial, construction, real estate and installment loans to
businesses and individuals primarily in the Monterey Peninsula area of Northern
California. Most loans are secured by business assets, and commercial and
residential real estate. Real estate and construction loans held for investment
represented 79% of total loans held for investment at December 31, 2006 and
2005. The Bank has no concentration of loans with any one customer.
The Bank does
have concentrations of loans in the real estate and accommodation and food
services industries. Loans held for investment in the real estate industry
represented 35.65% and 31.13% of total loans held for investment at December
31, 2006 and 2005, respectively. Loans held for investment in the accommodation
and food services industry represented 16.58% and 20.57% of total loans held
for investment at December 31, 2006 and 2005, respectively.
Note
14.
OTHER
INCOME AND OTHER GENERAL AND ADMINISTRATIVE EXPENSES
Other income
for the years ended December 31, 2006, 2005, and 2004 totaled $4,626,700,
$2,806,800, and $2,993,900, respectively. Significant categories comprising
other income in the years ending December 31, 2006, 2005, and 2004 were net
merchant discount fees of $2,614,300, $2,342,600, and $2,343,400, commercial
banking broker fees of $125,000, $412,200, and $274,000, life insurance cash
surrender value earnings of $108,200, $79,900, and $65,200, credit card
marketing program income of $1,308,300, $222,100 and $120,000, and trading
asset activities of $283,100, ($392,400) and $53,200, respectively.
Other general
and administrative expenses for the years ended December 31, 2006, 2005, and
2004 totaled $3,511,200, $3,369,900, and $3,038,000, respectively.
Significant categories
comprising other general and administrative expenses in the years ending
December 31, 2006, 2005, and 2004 were merchant credit processing expense of
$2,153,900, $2,049,500, and $2,005,000, advertising of $223,800, $140,900, and
$127,300, business development of $124,200, $63,100 and 72,100, insurance of
$110,700, $117,300, and $106,400 and stationary and supplies of $123,100,
$80,700 and $80,700, respectively.
36
Note 15.
MINIMUM REGULATORY CAPITAL 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 Corporations and Banks
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 judgments by the regulators about components, risk weightings,
and other factors. Under applicable regulatory guidelines, a portion of the
Trust Preferred Securities qualify as Tier I Capital, and the remainder as Tier
II Capital. 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, 2006 and 2005, that the Corporation and the Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 2006, 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 Banks category. The Corporations and the
Banks actual capital amounts and ratios as of December 31, 2006 and 2005
are also presented in the tables.
37
December 31, 2006
|
|
|
|
|
|
|
|
Well Capitalized
|
|
|
|
|
|
|
|
|
|
Under Prompt
|
|
|
|
|
|
|
|
Minimum
|
|
Corrective
|
|
|
|
|
|
|
|
Capital
|
|
Action
|
|
|
|
Actual
|
|
Requirement
|
|
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(All dollars in thousands)
|
|
Total
Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
21,439
|
|
14.5
|
%
|
$
|
11,812
|
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Monterey
County Bank
|
|
$
|
19,559
|
|
13.4
|
%
|
$
|
11,652
|
|
8.0
|
%
|
$
|
14,565
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
15,097
|
|
10.2
|
%
|
$
|
5,906
|
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Monterey
County Bank
|
|
$
|
18,117
|
|
12.4
|
%
|
$
|
5,826
|
|
4.0
|
%
|
$
|
8,739
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital to Average Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
15,097
|
|
8.8
|
%
|
$
|
6,882
|
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Monterey
County Bank
|
|
$
|
18,117
|
|
10.2
|
%
|
$
|
7,137
|
|
4.0
|
%
|
$
|
8,921
|
|
5.0
|
%
|
38
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
Under Prompt
|
|
|
|
|
|
|
|
Minimum
|
|
Corrective
|
|
|
|
|
|
|
|
Capital
|
|
Action
|
|
|
|
Actual
|
|
Requirement
|
|
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(All dollars in thousands)
|
|
Total
Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
17,751
|
|
14.3
|
%
|
$
|
9,899
|
|
8.0
|
%
|
N/A
|
|
N/A
|
|
Monterey
County Bank
|
|
$
|
15,958
|
|
13.1
|
%
|
$
|
9,772
|
|
8.0
|
%
|
$
|
12,215
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital to Risk Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
10,763
|
|
8.7
|
%
|
$
|
4,949
|
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Monterey
County Bank
|
|
$
|
14,738
|
|
12.1
|
%
|
$
|
4,886
|
|
4.0
|
%
|
$
|
7,329
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
Capital to Average Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
10,763
|
|
6.9
|
%
|
$
|
6,224
|
|
4.0
|
%
|
N/A
|
|
N/A
|
|
Monterey
County Bank
|
|
$
|
14,738
|
|
9.6
|
%
|
$
|
6,139
|
|
4.0
|
%
|
$
|
7,674
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16.
OTHER 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
Department of Financial Institutions and the Federal Deposit Insurance
Corporation. The regulations of these agencies affect most aspects of the
Corporations business and prescribe permissible types of loans and
investments, the amount of required reserves, requirements for branch offices,
the permissible scope of the Corporations 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).
39
Note 17.
STOCK OPTIONS AND STOCK DIVIDENDS
At December 31, 2006, options for the purchase of 202,864 shares
of the Corporations common stock were outstanding and exercisable at prices
ranging from $1.86 - $ 4.40. The status of all stock options is as follows:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Shares
|
|
Exercise Price Range
|
|
Contractual Life
|
|
Outstanding
at December 31, 2004
|
|
318,717
|
|
$2.75 -
$4.40
|
|
5.1 Years
|
|
|
|
|
|
|
|
|
|
Granted
|
|
10,000
|
|
$4.00
|
|
|
|
Exercised
|
|
(27,215
|
)
|
$1.86 -
$3.00
|
|
|
|
Cancelled
|
|
(8,362
|
)
|
$2.25 -
$4.00
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
293,140
|
|
$1.71 -
$4.40
|
|
4 Years
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(90,276
|
)
|
$1.71 -
$4.00
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
202,864
|
|
$1.86 -
$4.40
|
|
2.3 Years
|
|
The weighted average exercise price was
$3.19, $2.47, and $2.15 for the years ending December 31, 2006, 2005, and
2004, respectively. No options were granted in 2006, the weighted average fair
value of options granted during the years ending December 31, 2005 and
2004 were $4.00 and $2.89, respectively. All of the options are exercisable as
of December 31, 2006.
40
Information pertaining to options outstanding at December 31, 2006
is as follows:
|
|
|
|
Weighted Average
|
|
|
|
Number
|
|
Grant Date Fair
|
|
|
|
of Shares
|
|
Value
|
|
Non-vested
options, December 31, 2005
|
|
20,000
|
|
$
|
0.89
|
|
Vested
|
|
(20,000
|
)
|
0.89
|
|
|
|
|
|
|
|
Non-vested
options, December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 18.
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:
Balance as
of December 31, 2004
|
|
$
|
1,207,900
|
|
Advances on
lines of credit
|
|
11,700
|
|
Repayments
|
|
(43,400
|
)
|
|
|
|
|
Balance as
of December 31, 2005
|
|
1,176,200
|
|
New Director
loans
|
|
497,100
|
|
Advances on
lines of credit
|
|
70,600
|
|
Repayments
|
|
(115,400
|
)
|
|
|
|
|
Balance as
of December 31, 2006
|
|
$
|
1,628,500
|
|
Related party deposits totaled $258,800 and $167,700 at December 31,
2006 and 2005, respectively.
41
Note 19.
EMPLOYEE BENEFIT PLANS
During 1995, the Corporation established an employee stock ownership
plan (ESOP) to invest in the Corporations common stock for the benefit of
eligible employees. The Board of Directors determines the Corporations
contribution to the plan. Shares in the plan generally vest after seven years. The
Corporation did not contribute to the ESOP trust in 2006, 2005, or 2004. There
were no shares in the plan as of December 31, 2006.
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 Banks contribution
policy is discretionary. The Bank initiated a matching contribution in 2001 of
100% of each employees contribution up to 6% of the employees compensation. The
Banks matching contributions in 2006, 2005, and 2004 totaled $128,500,
$107,200, and $87,200, respectively.
Note 20.
RESTRICTION ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Corporation. The
total amount of dividends which may be paid at any date is generally
limited to the lesser of: (i) retained earnings; or (ii) the Banks
net income for its last three fiscal years (less any distributions to the
stockholders made during such period), and loans or advances are limited to 25%
of the Banks primary capital plus the allowance for loan losses on a secured
basis and 15% on an unsecured basis.
Note 21.
SALARY CONTINUATION PLANS
The Corporation has established salary continuation plans, which
provide for payments to a certain officer at retirement. Included in other
liabilities at December 31, 2006 and 2005, respectively, is $854,700 and
$720,300 of deferred compensation related to the continuation plans. The plans
are funded through life insurance policies that generate value to fund the
future benefits.
42
Note 22.
NON-CASH TRANSACTION
The Bank had a non-cash transaction relating to the trade in of a
vehicle of $12,700 and $0 for the years ended December 31, 2006 and 2005,
respectively.
Note 23.
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 non-financial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The Corporation in estimating fair value disclosures for financial
instruments used the following methods and assumptions:
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 and Pacific Coast Bankers
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.
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 Corporations current offering rate
for loans with similar characteristics. The fair value of performing
adjustable-rate loans is considered the same as book value. The fair value of
non-performing loans is estimated at the fair value of the related collateral
or, when in managements opinion foreclosure upon the collateral is unlikely,
by discounting future cash flows using rates which take into account managements
estimate of credit risk.
43
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.
Cash Surrender Value
of Life Insurance:
The carrying amount of life
insurance approximate fair value.
Short-term
borrowing:
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 borrowings are estimated using discounted cash flow analyses
based on the Corporations current incremental borrowing rates for similar
types of borrowing arrangements.
Long-term borrowing:
The fair values of the Corporations long-term borrowings are estimated using
discounted cash flow analyses based on the Corporations current incremental
borrowing rates for similar types of borrowing arrangements
44
The estimated
fair values, and related carrying amounts, of the Corporations financial
instruments as of December 31, 2006 and 2005 are as follows:
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
22,434,200
|
|
$
|
22,434,200
|
|
$
|
24,130,600
|
|
$
|
24,130,600
|
|
Time
deposits with other financial institutions
|
|
1,000,000
|
|
1,000,000
|
|
1,000,000
|
|
1,000,000
|
|
Trading
assets
|
|
1,762,300
|
|
1,762,300
|
|
1,027,500
|
|
1,027,500
|
|
Securities,
available for sale
|
|
15,285,900
|
|
15,285,900
|
|
11,065,300
|
|
11,065,300
|
|
Securities,
held to maturity
|
|
7,012,300
|
|
7,280,700
|
|
7,025,000
|
|
7,161,900
|
|
Other
investments
|
|
1,966,800
|
|
1,966,800
|
|
2,020,500
|
|
3,337,600
|
|
Loans, held
for sale
|
|
1,182,100
|
|
1,182,100
|
|
5,315,000
|
|
5,315,000
|
|
Loans, net
|
|
128,867,600
|
|
122,346,000
|
|
101,985,000
|
|
98,569,000
|
|
Accrued
interest receivable
|
|
963,800
|
|
963,800
|
|
773,900
|
|
773,900
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
131,627,700
|
|
131,436,800
|
|
118,120,200
|
|
117,890,600
|
|
Long-term
debt
|
|
42,998,000
|
|
43,463,600
|
|
32,998,000
|
|
32,460,800
|
|
Accrued
interest payable
|
|
1,346,100
|
|
1,346,100
|
|
649,400
|
|
649,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Note 24.
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, 2006 and
2005:
Balance Sheets
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
143,200
|
|
$
|
581,100
|
|
Investment
in common stock of Monterey County Bank
|
|
18,522,100
|
|
15,139,000
|
|
Investment
securities - trading account
|
|
1,762,300
|
|
1,027,500
|
|
Investment
in Metrocities Mortgage, LLC Stock
|
|
10,000
|
|
10,000
|
|
Investment
in Pan Pacific Bank Stock
|
|
|
|
100,000
|
|
Investment
in AT Services LLC Acquisition Corp.
|
|
20,100
|
|
40,000
|
|
Northern California
Bancorp, Inc. Trust I
|
|
93,000
|
|
93,000
|
|
Northern
California Bancorp, Inc. Trust II
|
|
155,000
|
|
155,000
|
|
Debt issue
costs, net
|
|
149,900
|
|
155,600
|
|
Accounts
receivable
|
|
3,800
|
|
5,000
|
|
|
|
|
|
|
|
|
|
$
|
20,859,400
|
|
$
|
17,306,200
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
125,300
|
|
$
|
107,900
|
|
Dividend
payable
|
|
74,600
|
|
16,600
|
|
Deferred tax
liability
|
|
9,600
|
|
2,800
|
|
Junior
subordinated debt securities
|
|
8,248,000
|
|
8,248,000
|
|
Total
liabilities
|
|
8,457,500
|
|
8,375,300
|
|
Shareholders
equity
|
|
12,401,900
|
|
8,930,900
|
|
|
|
|
|
|
|
|
|
$
|
20,859,400
|
|
$
|
17,306,200
|
|
46
Statements of Income
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Equity in
income of subsidiary
|
|
$
|
4,059,600
|
|
$
|
2,588,300
|
|
$
|
1,290,100
|
|
Investment
income from AT Services LLC
|
|
|
|
100
|
|
|
|
Gain on sale
of securities
|
|
233,100
|
|
34,900
|
|
27,400
|
|
Gain (loss)
on trading asset
|
|
50,000
|
|
(427,300
|
)
|
25,900
|
|
Dividend
income
|
|
26,100
|
|
24,000
|
|
13,200
|
|
Interest &
Fees on Loans
|
|
|
|
23,700
|
|
|
|
Miscellaneous
income
|
|
600
|
|
300
|
|
100
|
|
Investment
income from Metrocities Mortgage LLC
|
|
31,000
|
|
59,000
|
|
|
|
Operating
expenses
|
|
(738,200
|
)
|
(579,000
|
)
|
(421,200
|
)
|
Applicable
tax benefit
|
|
175,000
|
|
205,300
|
|
129,700
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,837,200
|
|
$
|
1,929,300
|
|
$
|
1,065,200
|
|
47
Statements of Cash Flows
|
|
2006
|
|
2005
|
|
2004
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,837,200
|
|
$
|
1,929,300
|
|
$
|
1,065,200
|
|
Adjustments
to reconcile net income to net cash used by operating activities:
|
|
|
|
|
|
|
|
Equity in
undistributed income of Monterey County Bank
|
|
(4,059,500
|
)
|
(2,588,300
|
)
|
(1,290,100
|
)
|
Increase in
trading securities
|
|
(734,800
|
)
|
(223,800
|
)
|
(640,400
|
)
|
Decrease in
other assets
|
|
6,900
|
|
2,700
|
|
18,000
|
|
Increase in
accrued expenses
|
|
17,500
|
|
30,500
|
|
18,700
|
|
Increase
(decrease) in other liabilities
|
|
64,700
|
|
(4,800
|
)
|
9,400
|
|
Net cash
used by operating activities
|
|
(868,000
|
)
|
(854,400
|
)
|
(819,200
|
)
|
Cash flows
from investing activities:
|
|
|
|
|
|
|
|
Cash
dividends received from subsidiary
|
|
625,000
|
|
|
|
|
|
Decrease in
investments
|
|
119,900
|
|
52,100
|
|
25,000
|
|
Net cash
provided by investing activities
|
|
744,900
|
|
52,100
|
|
25,000
|
|
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
Cash
dividends paid on common stock
|
|
(602,700
|
)
|
(326,300
|
)
|
(265,300
|
)
|
Exercise of
stock options
|
|
287,900
|
|
67,100
|
|
89,000
|
|
Stock
repurchase
|
|
|
|
(15,200
|
)
|
|
|
Net cash
used by financing activities
|
|
(314,800
|
)
|
(274,400
|
)
|
(176,300
|
)
|
|
|
|
|
|
|
|
|
Net decrease
in cash and cash equivalents
|
|
(437,900
|
)
|
(1,076,700
|
)
|
(970,500
|
)
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents, beginning of year
|
|
581,100
|
|
1,657,800
|
|
2,628,300
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents, end of year
|
|
$
|
143,200
|
|
$
|
581,100
|
|
$
|
1,657,800
|
|
48
Northern California Banc... (CE) (USOTC:NRLB)
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