Table of Contents
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 2008
o
Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (No fee required) for the period from
to
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address:
601 Munras Avenue, Monterey, CA
93940
Telephone: (831) 649-4600
Check whether the
issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant is an accelerated filer, a non-accelerated
filer, or a smaller reporting company (as defined in Rule 12b-2 of the
Act).
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
x
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act. Yes
o
No
x
As of August 4,
2008, the Corporation had 1,815,908 shares of common stock outstanding.
Table of Contents
PART I-FINANCIAL
INFORMATION
Item 1. FINANCIAL STATEMENTS
NORTHERN
CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
June 30
|
|
December 31
|
|
(in thousands except share data)
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS:
|
|
|
|
|
|
Cash and Due
From Banks
|
|
$
|
6,769
|
|
$
|
8,063
|
|
Federal Funds
Sold
|
|
10,345
|
|
12,090
|
|
Total Cash and
Cash Equivalents
|
|
17,114
|
|
20,153
|
|
Trading Assets
|
|
744
|
|
1,224
|
|
Investment
Securities, available for sale (Note 5)
|
|
69,037
|
|
36,801
|
|
Investment Securities,
held to maturity at cost (fair value approximates $8,052 in 2007) (Note 5)
|
|
|
|
7,869
|
|
Other
Investments (Note 6)
|
|
3,788
|
|
2,824
|
|
Loans Held for
Sale, at lower of cost or market
|
|
251
|
|
1,887
|
|
Loans, net of
allowance for loan losses of $2,029 in 2008; $2,028 in 2007 (Note 7)
|
|
158,937
|
|
166,861
|
|
Bank Premises
and Equipment, Net
|
|
5,087
|
|
4,874
|
|
Cash Surrender
Value of Life Insurance
|
|
3,906
|
|
3,845
|
|
Other Real
Estate Owned
|
|
2,668
|
|
|
|
Interest
Receivable and Other Assets
|
|
5,301
|
|
7,527
|
|
Total Assets
|
|
$
|
266,833
|
|
$
|
253,865
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand
|
|
$
|
25,521
|
|
$
|
24,814
|
|
Interest-bearing
demand
|
|
16,230
|
|
15,600
|
|
Savings
|
|
5,005
|
|
5,487
|
|
Time less than
$100,000
|
|
71,224
|
|
58,812
|
|
Time in
denominations of $100,000 or more
|
|
58,911
|
|
62,620
|
|
Total Deposits
|
|
176,891
|
|
167,333
|
|
|
|
|
|
|
|
Federal Home
Loan Bank Borrowed Funds
|
|
60,500
|
|
52,500
|
|
Junior
Subordinated Debt Securities
|
|
8,248
|
|
8,248
|
|
Revolving Line
of Credit
|
|
250
|
|
|
|
Payable for
investment securities purchased
|
|
285
|
|
5,225
|
|
Interest Payable
and Other Liabilities
|
|
7,628
|
|
6,125
|
|
Total
Liabilities
|
|
253,802
|
|
239,431
|
|
|
|
|
|
|
|
Shareholders
Equity:
|
|
|
|
|
|
Common Stock -
No Par Value, authorized 2,500,000 Outstanding:1,815,908 in 2008 and
1,845,918 in 2007
|
|
5,220
|
|
5,502
|
|
Retained
Earnings
|
|
9,325
|
|
8,831
|
|
Accumulated
Other Comprehensive Income (Loss) (Note 8)
|
|
(1,514
|
)
|
101
|
|
Total
Shareholders Equity
|
|
13,031
|
|
14,434
|
|
Total
Liabilities & Shareholders Equity
|
|
$
|
266,833
|
|
$
|
253,865
|
|
3
Table of Contents
NORTHERN
CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
THREE-MONTH PERIOD
ENDING
|
|
SIX-MONTH PERIOD
ENDING
|
|
|
|
June 30
|
|
June 30
|
|
(in thousands except share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
2,963
|
|
$
|
3,443
|
|
$
|
6,711
|
|
$
|
6,733
|
|
Time deposits
with other financial institutions
|
|
|
|
14
|
|
12
|
|
28
|
|
Investment
securities
|
|
965
|
|
435
|
|
1,722
|
|
835
|
|
Federal funds
sold
|
|
47
|
|
110
|
|
151
|
|
234
|
|
Total Interest
Income
|
|
3,975
|
|
4,002
|
|
8,596
|
|
7,830
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
|
12
|
|
13
|
|
24
|
|
26
|
|
Savings and time
deposit accounts
|
|
831
|
|
655
|
|
1,673
|
|
1,185
|
|
Time deposits in
denominations of $100,000 or more
|
|
711
|
|
525
|
|
1,482
|
|
997
|
|
Notes payable
and other
|
|
863
|
|
628
|
|
1,727
|
|
1,253
|
|
Total Interest
Expense
|
|
2,417
|
|
1,821
|
|
4,906
|
|
3,461
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Income
|
|
1,558
|
|
2,181
|
|
3,690
|
|
4,369
|
|
Provision for
loan losses
|
|
|
|
275
|
|
|
|
275
|
|
Net interest
income, after provision for loan losses
|
|
1,558
|
|
1,906
|
|
3,690
|
|
4,094
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
Service charges
on deposit accounts
|
|
241
|
|
142
|
|
404
|
|
307
|
|
Income from
sales and servicing of Small Business Administration Loans
|
|
51
|
|
173
|
|
216
|
|
355
|
|
Other income
|
|
403
|
|
714
|
|
1,865
|
|
1,692
|
|
Total
non-interest income
|
|
695
|
|
1,029
|
|
2,485
|
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
Salaries and
Employee Benefits
|
|
899
|
|
983
|
|
2,004
|
|
2,060
|
|
Occupancy and
Equipment Expense
|
|
234
|
|
221
|
|
472
|
|
427
|
|
Professional
Fees
|
|
63
|
|
50
|
|
117
|
|
88
|
|
Data Processing
|
|
90
|
|
90
|
|
191
|
|
178
|
|
Other general
and administrative
|
|
963
|
|
916
|
|
1,691
|
|
1,709
|
|
Total
non-interest expenses
|
|
2,249
|
|
2,260
|
|
4,475
|
|
4,462
|
|
|
|
|
|
|
|
|
|
|
|
Income before
tax provision
|
|
4
|
|
675
|
|
1,700
|
|
1,986
|
|
Income tax
provision
|
|
68
|
|
364
|
|
844
|
|
865
|
|
Net income
(loss)
|
|
$
|
(64
|
)
|
$
|
311
|
|
$
|
856
|
|
$
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
common share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.035
|
)
|
$
|
0.179
|
|
$
|
0.465
|
|
$
|
0.644
|
|
Diluted
|
|
$
|
(0.034
|
)
|
$
|
0.173
|
|
$
|
0.461
|
|
$
|
0.622
|
|
4
Table of Contents
NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Other Compre-
|
|
|
|
|
|
Number of
|
|
Common
|
|
Retained
|
|
hensive Income
|
|
|
|
(in thousands except share data)
|
|
Shares
|
|
Stock
|
|
Earnings
|
|
(Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2006
|
|
1,721,715
|
|
$
|
5,060
|
|
$
|
7,363
|
|
$
|
(21
|
)
|
$
|
12,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
1,929
|
|
|
|
1,929
|
|
Change in net
unrealized gain on securities and other assets net of reclassification
adjustment and tax effects
|
|
|
|
|
|
|
|
122
|
|
122
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
2,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25 per share
dividend
|
|
|
|
|
|
(461
|
)
|
|
|
(461
|
)
|
Exercise of
stock options, net of tax benefit
|
|
124,203
|
|
442
|
|
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2007 (audited)
|
|
1,845,918
|
|
5,502
|
|
8,831
|
|
101
|
|
14,434
|
|
Cumulative
effect application of new accounting standard EITF 06-4 and EITF 06-10
|
|
|
|
|
|
(362
|
)
|
|
|
(362
|
)
|
|
|
1,845,918
|
|
5,502
|
|
8,469
|
|
101
|
|
14,072
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
856
|
|
|
|
856
|
|
Change in net
unrealized loss on securities and other assets net of reclassification
adjustment and tax effects
|
|
|
|
|
|
|
|
(1,615
|
)
|
(1,615
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
(759
|
)
|
Repurchase of
common stock
|
|
(34,010
|
)
|
(294
|
)
|
|
|
|
|
(294
|
)
|
Exercise of
stock options, net of tax benefit
|
|
4,000
|
|
12
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2008 (unaudited)
|
|
1,815,908
|
|
$
|
5,220
|
|
$
|
9,325
|
|
$
|
(1,514
|
)
|
$
|
13,031
|
|
5
Table of
Contents
NORTHERN
CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 2008 AND 2007
(in thousands except share data)
|
|
2008
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
|
$
|
856
|
|
$
|
1,121
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization expense
|
|
154
|
|
141
|
|
Realized gain on
sales of available-for-sale securities, net
|
|
(449
|
)
|
|
|
Amortization of
deferred loan costs
|
|
243
|
|
159
|
|
Accretion of
discounts and premiums on investment securities, net
|
|
(93
|
)
|
(10
|
)
|
Gain on sale of
equipment
|
|
|
|
(1
|
)
|
Provision for
loan losses
|
|
|
|
275
|
|
Increase in cash
surrender value of life insurance
|
|
(61
|
)
|
(62
|
)
|
(Increase)
decrease in assets:
|
|
|
|
|
|
Trading assets
|
|
480
|
|
54
|
|
Loans held for
sale
|
|
1,636
|
|
186
|
|
Interest
receivable
|
|
(685
|
)
|
(161
|
)
|
Other assets
|
|
2,920
|
|
483
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
Interest payable
|
|
(327
|
)
|
235
|
|
Other
liabilities
|
|
1,468
|
|
1,405
|
|
Net cash
provided by operating activities
|
|
6,142
|
|
3,825
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Proceeds from
maturity/sale of investment securities
|
|
36,763
|
|
9,904
|
|
Purchase of
investments
|
|
(68,119
|
)
|
(22,383
|
)
|
Net increase in
loans
|
|
(9,239
|
)
|
(32,369
|
)
|
Loan purchases
|
|
|
|
(1,462
|
)
|
Loan sales
|
|
14,252
|
|
21,474
|
|
Proceeds from
sale of equipment
|
|
|
|
1
|
|
Additions to
bank premises and equipment
|
|
(364
|
)
|
(414
|
)
|
Net cash used by
investing activities
|
|
(26,707
|
)
|
(25,249
|
)
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net increase in
deposits
|
|
9,558
|
|
17,747
|
|
Proceeds from
borrowings
|
|
8,250
|
|
5,000
|
|
Repurchase of
common stock
|
|
(294
|
)
|
|
|
Proceeds from
exercise of stock options
|
|
12
|
|
269
|
|
Net cash
provided by financing activities
|
|
17,526
|
|
23,016
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
(3,039
|
)
|
1,592
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING
|
|
20,153
|
|
22,434
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, ENDING
|
|
$
|
17,114
|
|
$
|
24,026
|
|
6
Table of Contents
SUMMARY OF ACCOUNTING POLICIES
(NOTE 1) NATURE OF
BUSINESS AND
BASIS OF
PRESENTATION
Nature of Business
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
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.
The Corporation owns 100%
of Monterey County Bank (the Bank) which operates five full service branches
in Monterey County, California. The Corporation owns 100% of the common stock
of two unconsolidated special purpose business trusts, Northern California
Bancorp, Inc. Trust I and Northern California Bancorp, Inc. Trust
II.
Basis
of Presentation
The
interim condensed financial statements of Northern California Bancorp, Inc.
and subsidiary (Corporation) are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation, in all material respects, of the
financial position and operating results of the Corporation for the interim
periods. The results of operations for the six months ended June 30,
2008 are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 2008. The year-end
balance sheet data at December 31, 2007 was derived from the audited
financial statements. All material
intercompany balances and transactions have been eliminated in consolidation.
This
financial information should be read in conjunction with the audited financial
statements and notes thereto included in the Corporations Form 10-KSB for
the fiscal year ended December 31, 2007.
(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements,
which defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS No. 157 does not require
any new fair value measurements, but applies under other existing accounting
pronouncements that require or permit fair value measurements. SFAS No. 157
emphasizes that fair value is a market-based measurement, not an
entity-specific measurement and, therefore, should be determined based on the
assumptions that market participants would use in pricing that asset or
liability. SFAS No. 157 also establishes a fair value hierarchy that
distinguishes between market participant assumptions developed based on market
data obtained from independent sources and the Corporations own assumptions
about market participant assumptions based on the best information available.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years with earlier adoption permitted. The adoption of SFAS
7
Table of Contents
No. 157
did not have an impact on the Corporations consolidated financial statements
and results of operations.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement No. 115
which is effective for financial statements issued for fiscal years beginning
after November 15, 2007.
The Corporation adopted SFAS 159 on January 1,
2008. The Corporation did not elect the fair value option, under
SFAS 159, for any of our existing financial assets or financial liabilities as
of January 1, 2008, nor have we elected the fair value option for any new
financial assets or financial liabilities originated or entered into during the
first two quarters of 2008.
On
September 7, 2006, the Task Force reached a consensus on EITF Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4) and on March 15,
2007, the Task Force reached a consensus on EITF Issue No. 06-10,
Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements(EITF
06-10). The scope of these two issues relates to the recognition of a
liability and related compensation costs for endorsement split-dollar life
insurance arrangements and for collateral assignment split-dollar life
insurance arrangements, respectively. EITF
06-4 and EITF 06-10 are both effective for fiscal years beginning after December 15,
2007, although early adoption is permitted.
The Corporation adopted EITF 06-4 and EITF 06-10 effective as of January 1,
2008 as a change in accounting principle through a $362,000 cumulative-effect
adjustment to retained earnings. Beginning January 1, 2008, a monthly
charge to expense of approximately $9,143 is made to recognize the liability
for future benefits.
(NOTE
3) STOCK BASED COMPENSATION
The
Corporation records compensation expense associated with stock-based awards in
accordance with Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004),
Share-Based Payment
(SFAS No. 123R) as interpreted by SEC Staff Accounting Bulletin No. 107.
SFAS No. 123R supersedes APB No. 25, and amends SFAS No. 95
Statement of Cash Flows
. Generally, the
approach in SFAS No. 123R is similar to the approach described in SFAS No. 123,
Accounting for Stock Based Compensation
(SFAS
No. 123). However, SFAS No. 123R requires all stock-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values at the date of
grant. No stock-based compensation expense was recorded for the six months
ended June 30, 2008 and 2007, respectively. The Corporation selected
to use the modified prospective method of adopting SFAS 123R. Thus, stock
option expense is recognized only for options that vested after January 1,
2006. Future compensation expense may be greater if additional stock
options are granted by the Corporation.
Under
the Corporations 1998 Stock Option Plan, the Corporation 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
8
Table of Contents
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 June 30, 2008, 64,661 options were
outstanding. During 2008, no options
were granted, and 4,000 options were exercised by officers, employees, and
board members. As of June 30, 2008,
all options have been vested and all related compensation expense has been
formerly expensed.
Under
the Corporations 2007 Stock Option Plan, the Corporation 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.
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, 300,000 shares of common
stock have been reserved for the granting of these options. At June 30, 2008, no options were
granted or outstanding.
Pre-tax stock-based
compensation expense was $0 for the six months ended June 30, 2008 and
2007, respectively. There were no options granted during the six months ended June 30,
2008 or 2007.
(NOTE 4) EARNINGS PER SHARE
Basic
earnings per share represents income available to common stockholders 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
potential dilutive 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 Bank relate to outstanding stock options and warrants and are determined
using the treasury stock method.
The
weighted-average number of shares used in computing basic and diluted earnings
per share is as follows:
|
|
Earnings per share Calculation
|
|
|
|
For the six months ended June 30
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Net
|
|
Average
|
|
Per Share
|
|
Net
|
|
Average
|
|
Per Share
|
|
|
|
Income
|
|
Shares
|
|
Amount
|
|
Income
|
|
Shares
|
|
Amount
|
|
Basic earnings
per share
|
|
$
|
856
|
|
1,840,880
|
|
$
|
0.465
|
|
$
|
1,121
|
|
1,739,254
|
|
$
|
0.644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
dilutive shares assumed exercise of outstanding options
|
|
|
|
14,365
|
|
(0.004
|
)
|
|
|
61,794
|
|
(0.022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per share
|
|
$
|
856
|
|
1,855,245
|
|
$
|
0.461
|
|
$
|
1,121
|
|
1,801,048
|
|
$
|
0.622
|
|
9
Table of Contents
|
|
June 30
|
|
December 31
|
|
(in thousands)
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
(NOTE 5)
INVESTMENT SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Available for
sale:
|
|
|
|
|
|
Government
National Mortgage Association
|
|
$
|
|
|
$
|
385
|
|
State/Local
Agency
|
|
16,917
|
|
225
|
|
U.S. government
Agencies
|
|
52,120
|
|
36,191
|
|
|
|
$
|
69,037
|
|
$
|
36,801
|
|
|
|
|
|
|
|
Held to
maturity:
|
|
|
|
|
|
State/Local
Agency
|
|
$
|
|
|
$
|
7,869
|
|
|
|
|
|
|
|
(NOTE 6) OTHER
INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
AT Services LLC
|
|
$
|
20
|
|
$
|
20
|
|
Federal Home
Loan Bank stock, restricted
|
|
2,881
|
|
2,495
|
|
Independent
Bankers Financial Corporation
|
|
51
|
|
51
|
|
Metrocities
Mortgage, LLC
|
|
10
|
|
10
|
|
Northern
California Bancorp, Inc. Trust I
|
|
93
|
|
93
|
|
Northern
California Bancorp, Inc. Trust II
|
|
155
|
|
155
|
|
Visa, Inc.
|
|
578
|
|
|
|
|
|
$
|
3,788
|
|
$
|
2,824
|
|
|
|
|
|
|
|
(NOTE 7) LOANS
AND ALLOWANCE FOR POSSIBLE LOAN LOSSES:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
Industrial
|
|
$
|
27,595
|
|
$
|
28,310
|
|
Construction
|
|
22,062
|
|
23,396
|
|
Real Estate -
Mortgage
|
|
110,694
|
|
116,625
|
|
Installment
|
|
903
|
|
876
|
|
Government
Guaranteed Loans Purchased
|
|
28
|
|
32
|
|
|
|
161,282
|
|
169,239
|
|
Allowance for
loan losses
|
|
(2,029
|
)
|
(2,028
|
)
|
Deferred
origination fees, net
|
|
(316
|
)
|
(350
|
)
|
Net Loans
|
|
$
|
158,937
|
|
$
|
166,861
|
|
|
|
|
|
|
|
Balance at
Beginning of Period
|
|
$
|
2,028
|
|
$
|
1,409
|
|
Recoveries
|
|
1
|
|
4
|
|
Provision for
Possible Loan Losses
|
|
|
|
865
|
|
Loans Charged
Off
|
|
|
|
(250
|
)
|
Balance at End
of Period
|
|
$
|
2,029
|
|
$
|
2,028
|
|
10
Table of Contents
(NOTE 8) COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) and related tax
effects for the six month period ended June 30, 2008 and the year ended December 31,
2007 are as follows:
|
|
June 30
|
|
December 31
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Unrealized
holding gains (losses) on available for sale securities and other assets, net
|
|
$
|
(3,386
|
)
|
$
|
438
|
|
Reclassification
for (gains) losses realized in income
|
|
449
|
|
(216
|
)
|
Net unrealized
gains (losses)
|
|
(2,937
|
)
|
222
|
|
Tax effect
|
|
1,322
|
|
(100
|
)
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
$
|
(1,615
|
)
|
$
|
122
|
|
The components of
accumulated
other
comprehensive income (loss) and related tax effects are as follows:
|
|
June 30
|
|
December 31
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
Unrealized
holding gains (losses) on available for sale securities
|
|
$
|
(2,787
|
)
|
$
|
163
|
|
Unrealized
holding gains on available for sale asset strip receivable
|
|
34
|
|
21
|
|
Tax effect
|
|
1,239
|
|
(83
|
)
|
|
|
|
|
|
|
Net-of-tax
amount
|
|
$
|
(1,514
|
)
|
$
|
101
|
|
(NOTE 9)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
June 30
|
|
|
|
2008
|
|
2007
|
|
Payments during
the period ending:
|
|
|
|
|
|
Interest
|
|
$
|
5,000
|
|
$
|
1,295
|
|
Income Taxes
|
|
$
|
1,064
|
|
$
|
279
|
|
ITEM
2:
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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
11
Table of Contents
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-Q and in the Banks other reports filed with the Federal
Deposit Insurance Corporation and 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 Corporation
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date thereof.
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 Corporations financial statements and
accompanying notes. Management believes
that the judgments, estimates and assumptions used in preparation of the
Corporations financial statements are appropriate given the factual
circumstances as of June 30, 2008.
Various elements of the Corporations 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 on
the Corporations 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 Corporations financial statements to those judgments,
estimates and assumptions, is critical to an understanding of the Corporations
financial statements. This policy
relates to the methodology that determines the Corporations allowance for loan
losses. Management has discussed the
development and selection of this critical accounting policy with the
Corporations Audit Committee of the Board of Directors. Although Management believes the level of the
allowance at June 30, 2008 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
included elsewhere herein.
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.
For the six months
ended June 30, 2008 net income was $856,000, compared to $1,121,000 for
the same period in 2007. For the six
months ended June 30, 2008 net interest income decreased $679,000, total
non-interest income increased $131,000, non-interest expense increased $13,000
and the income tax provision decreased $21,000.
12
Table of Contents
The following
table sets forth certain selected financial ratios of the Corporation for the
three and six months ended June 30, 2008 and 2007.
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Summary of
Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
$
|
3,975
|
|
$
|
4,002
|
|
$
|
8,596
|
|
$
|
7,830
|
|
Total interest
expense
|
|
2,417
|
|
1,821
|
|
4,906
|
|
3,461
|
|
Net interest
income
|
|
1,558
|
|
2,181
|
|
3,690
|
|
4,369
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
possible loan losses
|
|
|
|
275
|
|
|
|
275
|
|
Net interest
income after provision for loan losses
|
|
1,558
|
|
1,906
|
|
3,690
|
|
4,094
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
695
|
|
1,029
|
|
2,485
|
|
2,354
|
|
Total
non-interest expenses
|
|
2,249
|
|
2,260
|
|
4,475
|
|
4,462
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
4
|
|
675
|
|
1,700
|
|
1,986
|
|
Provision for
income taxes
|
|
68
|
|
364
|
|
844
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(64
|
)
|
$
|
311
|
|
$
|
856
|
|
$
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income -
Primary (1)
|
|
$
|
(0.035
|
)
|
$
|
0.179
|
|
$
|
0.465
|
|
$
|
0.644
|
|
Net income -
Diluted (2)
|
|
(0.034
|
)
|
0.173
|
|
0.461
|
|
0.622
|
|
Book value, end
of period
|
|
7.18
|
|
8.36
|
|
7.18
|
|
8.36
|
|
Avg shares
outstanding (3)
|
|
1,835,038
|
|
1,792,238
|
|
1,840,880
|
|
1,739,254
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
of unearned income (4)
|
|
$
|
159,188
|
|
$
|
141,785
|
|
$
|
159,188
|
|
$
|
141,785
|
|
Total assets
|
|
266,833
|
|
216,220
|
|
266,833
|
|
216,220
|
|
Total deposits
|
|
176,891
|
|
149,375
|
|
176,891
|
|
149,375
|
|
Stockholders
equity
|
|
13,031
|
|
13,665
|
|
13,031
|
|
13,665
|
|
13
Table of Contents
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Selected
Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on
average assets (5) (6)
|
|
(0.10
|
)%
|
0.63
|
%
|
0.43
|
%
|
1.16
|
%
|
Return on
average stockholders equity (5) (6)
|
|
(1.77
|
)%
|
9.17
|
%
|
7.86
|
%
|
16.96
|
%
|
Net interest
spread
|
|
2.12
|
%
|
4.14
|
%
|
2.57
|
%
|
4.28
|
%
|
Net yield on
interest earning assets (5)
|
|
2.63
|
%
|
4.86
|
%
|
3.11
|
%
|
4.97
|
%
|
Avg
shareholders equity to average assets (5)
|
|
5.40
|
%
|
6.82
|
%
|
5.51
|
%
|
6.83
|
%
|
Risked-Based
capital ratios
|
|
|
|
|
|
|
|
|
|
Tier 1
|
|
9.25
|
%
|
10.29
|
%
|
9.25
|
%
|
10.29
|
%
|
Total
|
|
13.70
|
%
|
14.04
|
%
|
13.70
|
%
|
14.04
|
%
|
Total loans to
total deposits at end of period (4)
|
|
89.99
|
%
|
94.92
|
%
|
89.99
|
%
|
94.92
|
%
|
Allowance for
loan losses to total loans at end of period (4)
|
|
1.26
|
%
|
1.00
|
%
|
1.26
|
%
|
1.00
|
%
|
Nonperforming
loans to total loans at end of period (4)
|
|
2.60
|
%
|
0.11
|
%
|
2.60
|
%
|
0.11
|
%
|
Net charge-offs
to average loans (4)
|
|
0.00
|
%
|
0.18
|
%
|
0.00
|
%
|
0.18
|
%
|
(1)
Basic earnings per share amounts were computed on the
basis of the weighted average number of shares of common stock outstanding
during the year. The weighted average
number of common shares used for this computation was 1,840,880 and 1,739,254
for June 30, 2008 and 2007, respectively.
(2)
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 director/employee stock options. The
weighted average number of shares used for this computation was 1,855,245 and
1,801,048 for June 30, 2008 and 2007, respectively.
(3)
Weighted average common shares.
(4)
Includes loans being held for sale.
(5)
Averages are of daily balances.
(6)
June 30, 2008 calculated on an annualized basis.
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 and interest-earning liabilities, the availability of
particular sources of funds and changes in prevailing interest rates.
14
Table
of Contents
Net
interest income for the six months ended June 30, 2008 was $3,690,000
compared to $4,369,000 for the same period in 2007. The decrease of $679,000
resulted primarily from a reduction in interest income of $142,000 on loans
placed on non-accrual status during the period and the decline in loan rates as
shown on page 18 in the rate and volume analysis table.
The
following tables show the components of the Banks net interest income, setting
forth, for each of the six months ended June 30, 2008 and 2007, (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 municipal
bonds of $135,000 and $70,000 for the six months ended June 30, 2008 and
2007, respectively. Non-accrual loans and overdrafts are included in average
loan balances. Average loans are presented net of unearned income.
DISTRIBUTION,
RATE AND YIELD ANALYSIS OF NET INTEREST INCOME:
The
following tables show the consolidated average balances of earning assets, and
interest-bearing liabilities; the amount of interest income and interest
expense; the average yield or rate for each category of average
interest-earning assets and average interest-bearing liabilities; and the net
interest income and the net interest spread for the periods indicated:
15
Table
of Contents
|
|
Three Months Ended June 30, 2008
|
|
Three Months Ended June 30, 2007
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
166,770
|
|
$
|
2,963
|
|
7.11
|
%
|
$
|
139,026
|
|
$
|
3,443
|
|
9.91
|
%
|
Time deposits -
in other banks
|
|
|
|
|
|
|
|
1,000
|
|
14
|
|
5.73
|
%
|
Invest
securities - taxable
|
|
58,725
|
|
796
|
|
5.42
|
%
|
26,923
|
|
360
|
|
5.34
|
%
|
Invest
securities - nontaxable
|
|
14,000
|
|
246
|
|
7.02
|
%
|
7,007
|
|
112
|
|
6.39
|
%
|
Federal funds
sold
|
|
9,076
|
|
47
|
|
2.08
|
%
|
8,698
|
|
110
|
|
5.07
|
%
|
Total
interest-earning assets
|
|
248,571
|
|
4,051
|
|
6.52
|
%
|
182,654
|
|
4,039
|
|
8.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
credit losses
|
|
(2,097
|
)
|
|
|
|
|
(1,306
|
)
|
|
|
|
|
Non-interest
bearing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
5,348
|
|
|
|
|
|
6,566
|
|
|
|
|
|
Premises and
equipment
|
|
4,983
|
|
|
|
|
|
4,886
|
|
|
|
|
|
Accrued interest
receivable
|
|
1,639
|
|
|
|
|
|
1,061
|
|
|
|
|
|
Other assets
|
|
7,656
|
|
|
|
|
|
5,172
|
|
|
|
|
|
Total average
assets
|
|
$
|
266,100
|
|
|
|
|
|
$
|
199,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
14,022
|
|
$
|
9
|
|
0.25
|
%
|
$
|
14,740
|
|
$
|
10
|
|
0.25
|
%
|
Money market
savings
|
|
1,822
|
|
3
|
|
0.73
|
%
|
1,870
|
|
3
|
|
0.73
|
%
|
Savings deposits
|
|
5,528
|
|
14
|
|
1.05
|
%
|
4,388
|
|
11
|
|
1.01
|
%
|
Time deposits
>$100M
|
|
60,032
|
|
711
|
|
4.74
|
%
|
40,817
|
|
525
|
|
5.14
|
%
|
Time deposits
<$100M
|
|
71,304
|
|
816
|
|
4.58
|
%
|
49,898
|
|
644
|
|
5.16
|
%
|
Other Borrowing
|
|
66,983
|
|
864
|
|
5.16
|
%
|
43,108
|
|
633
|
|
5.84
|
%
|
Total
interest-bearing liabilities
|
|
219,691
|
|
2,417
|
|
4.40
|
%
|
154,821
|
|
1,826
|
|
4.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
checking
|
|
25,188
|
|
|
|
|
|
26,271
|
|
|
|
|
|
Accrued interest
payable
|
|
2,102
|
|
|
|
|
|
1,501
|
|
|
|
|
|
Other
liabilities
|
|
4,753
|
|
|
|
|
|
2,857
|
|
|
|
|
|
Total
Liabilities
|
|
251,734
|
|
|
|
|
|
185,450
|
|
|
|
|
|
Total
shareholders equity
|
|
14,366
|
|
|
|
|
|
13,583
|
|
|
|
|
|
Total average
liabilities and shareholders equity
|
|
$
|
266,100
|
|
|
|
|
|
$
|
199,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
|
$
|
1,634
|
|
|
|
|
|
$
|
2,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
as a percentage of average earning assets
|
|
|
|
|
|
6.52
|
%
|
|
|
|
|
8.85
|
%
|
Interest expense
as a percentage of average earning assets
|
|
|
|
|
|
3.89
|
%
|
|
|
|
|
3.99
|
%
|
Net yield on
interest earning assets
|
|
|
|
|
|
2.63
|
%
|
|
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
spread
|
|
|
|
|
|
2.12
|
%
|
|
|
|
|
4.14
|
%
|
16
Table
of Contents
|
|
Six Months Ended June 30, 2008
|
|
Six Months Ended June 30, 2007
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
169,528
|
|
$
|
6,711
|
|
7.92
|
%
|
$
|
134,895
|
|
$
|
6,733
|
|
9.98
|
%
|
Time deposits -
in other banks
|
|
739
|
|
12
|
|
3.34
|
%
|
1,072
|
|
28
|
|
5.23
|
%
|
Invest
securities - taxable
|
|
52,311
|
|
1,422
|
|
5.44
|
%
|
25,029
|
|
638
|
|
5.10
|
%
|
Invest
securities - nontaxable
|
|
12,530
|
|
435
|
|
6.94
|
%
|
7,009
|
|
227
|
|
6.48
|
%
|
Federal funds
sold
|
|
10,977
|
|
151
|
|
2.75
|
%
|
8,943
|
|
234
|
|
5.23
|
%
|
Total
interest-earning assets
|
|
246,085
|
|
8,731
|
|
7.10
|
%
|
176,948
|
|
7,860
|
|
8.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
credit losses
|
|
(2,063
|
)
|
|
|
|
|
(1,357
|
)
|
|
|
|
|
Non-interest
bearing assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
6,361
|
|
|
|
|
|
6,529
|
|
|
|
|
|
Premises and
equipment
|
|
4,940
|
|
|
|
|
|
4,807
|
|
|
|
|
|
Accrued interest
receivable
|
|
1,407
|
|
|
|
|
|
1,039
|
|
|
|
|
|
Other assets
|
|
6,562
|
|
|
|
|
|
5,046
|
|
|
|
|
|
Total average
assets
|
|
$
|
263,292
|
|
|
|
|
|
$
|
193,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
13,804
|
|
$
|
17
|
|
0.25
|
%
|
$
|
14,588
|
|
$
|
18
|
|
0.25
|
%
|
Money market
savings
|
|
1,759
|
|
6
|
|
0.73
|
%
|
1,935
|
|
7
|
|
0.73
|
%
|
Savings deposits
|
|
5,902
|
|
31
|
|
1.06
|
%
|
4,555
|
|
23
|
|
1.00
|
%
|
Time deposits
>$100M
|
|
60,862
|
|
1,482
|
|
4.87
|
%
|
39,279
|
|
997
|
|
5.08
|
%
|
Time deposits
<$100M
|
|
69,094
|
|
1,642
|
|
4.75
|
%
|
46,929
|
|
1,163
|
|
4.96
|
%
|
Other Borrowing
|
|
65,297
|
|
1,728
|
|
5.29
|
%
|
43,053
|
|
1,253
|
|
5.82
|
%
|
Total
interest-bearing liabilities
|
|
216,718
|
|
4,906
|
|
4.53
|
%
|
150,339
|
|
3,461
|
|
4.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
checking
|
|
25,690
|
|
|
|
|
|
25,791
|
|
|
|
|
|
Accrued interest
payable
|
|
2,060
|
|
|
|
|
|
1,442
|
|
|
|
|
|
Other
liabilities
|
|
4,313
|
|
|
|
|
|
2,225
|
|
|
|
|
|
Total
Liabilities
|
|
248,781
|
|
|
|
|
|
179,798
|
|
|
|
|
|
Total
shareholders equity
|
|
14,511
|
|
|
|
|
|
13,214
|
|
|
|
|
|
Total average
liabilities and shareholders equity
|
|
$
|
263,292
|
|
|
|
|
|
$
|
193,012
|
|
|
|
|
|
Net interest
income
|
|
|
|
$
|
3,825
|
|
|
|
|
|
$
|
4,399
|
|
|
|
Interest income
as a percentage of average earning assets
|
|
|
|
|
|
7.10
|
%
|
|
|
|
|
8.88
|
%
|
Interest expense
as a percentage of average earning assets
|
|
|
|
|
|
3.99
|
%
|
|
|
|
|
3.91
|
%
|
Net yield on
interest earning assets
|
|
|
|
|
|
3.11
|
%
|
|
|
|
|
4.97
|
%
|
Net interest
spread
|
|
|
|
|
|
2.57
|
%
|
|
|
|
|
4.28
|
%
|
17
Table
of Contents
Rate and
Volume Analysis:
The
following tables show the increase or decrease in interest income, interest
expense and net interest income, resulting from changes in rates and volumes,
for the six months ended June 30, 2008 compared with the same period in
2007.
|
|
Increase (decrease) in the three months ended
|
|
|
|
June 30, 2008 compared with June 30, 2007
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
Loans
|
|
$
|
687
|
|
$
|
(1,168
|
)
|
$
|
(481
|
)
|
Time deposits -
in other banks
|
|
(14
|
)
|
|
|
(14
|
)
|
Invest
securities - taxable
|
|
425
|
|
11
|
|
436
|
|
Invest
securities - nontaxable
|
|
112
|
|
22
|
|
134
|
|
Federal funds
sold
|
|
5
|
|
(68
|
)
|
(63
|
)
|
|
|
1,215
|
|
(1,203
|
)
|
12
|
|
|
|
|
|
|
|
|
|
Increase (decrease)
in interest expense:
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
$
|
|
|
$
|
(1
|
)
|
$
|
(1
|
)
|
Money market
savings
|
|
|
|
(1
|
)
|
(1
|
)
|
Savings deposits
|
|
2
|
|
2
|
|
4
|
|
Time deposits
>$100M
|
|
247
|
|
(60
|
)
|
187
|
|
Time deposits
<$100M
|
|
276
|
|
(104
|
)
|
172
|
|
Other Borrowing
|
|
351
|
|
(121
|
)
|
230
|
|
|
|
876
|
|
(285
|
)
|
591
|
|
Increase
(decrease) in net interest income:
|
|
$
|
339
|
|
$
|
(918
|
)
|
$
|
(579
|
)
|
|
|
Increase (decrease) in the six months ended
|
|
|
|
June 30, 2008 compared with June 30, 2007
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,729
|
|
$
|
(1,751
|
)
|
$
|
(22
|
)
|
Time deposits -
in other banks
|
|
(9
|
)
|
(7
|
)
|
(16
|
)
|
Invest
securities - taxable
|
|
695
|
|
89
|
|
784
|
|
Invest
securities - nontaxable
|
|
179
|
|
29
|
|
208
|
|
Federal funds
sold
|
|
53
|
|
(136
|
)
|
(83
|
)
|
|
|
2,647
|
|
(1,776
|
)
|
871
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in interest expense:
|
|
|
|
|
|
|
|
Interest-bearing
demand
|
|
(1
|
)
|
|
|
(1
|
)
|
Money market
savings
|
|
(1
|
)
|
|
|
(1
|
)
|
Savings deposits
|
|
7
|
|
2
|
|
9
|
|
Time deposits
>$100M
|
|
548
|
|
(63
|
)
|
485
|
|
Time deposits
<$100M
|
|
549
|
|
(71
|
)
|
478
|
|
Other Borrowing
|
|
647
|
|
(172
|
)
|
475
|
|
|
|
1,749
|
|
(304
|
)
|
$
|
1,445
|
|
Increase
(decrease) in net interest expense:
|
|
$
|
898
|
|
$
|
(1,472
|
)
|
$
|
(574
|
)
|
18
Table of Contents
Provision
and Allowance for Loan Losses
The Company maintains a detailed, systematic
analysis and procedural discipline to determine the amount of the allowance for
loan losses (ALL). The ALL is based on estimates and is intended
to be adequate to provide for probable losses inherent in the loan
portfolio. This process involves deriving probable loss estimates
that are based on individual loan loss estimation, historical loss rates and
managements judgment.
The Company employs several methodologies for
estimating probable losses. Methodologies are determined based on a
number of factors, including type of asset, risk rating, concentrations, and
collateral value.
The Company calculates the required ALL on a monthly
basis and makes adjusting entries quarterly. The review of the adequacy of
the allowance takes into consideration such factors as concentrations of
credit, changes in the growth, size and composition of the loan portfolio,
overall and individual portfolio quality, review of specific problem loans,
collateral, guarantees and economic conditions that may affect the borrowers
ability to pay and/or the value of the underlying
collateral. Additional factors considered include: geographic
location of borrowers, changes in the Companys product-specific credit policy
and lending staff experience. These estimates depend on subjective
factors and, therefore, contain inherent uncertainties.
The Companys ALL is maintained at a level believed
adequate by management to absorb known and inherent probable losses on existing
loans. A provision for loan losses is charged to
expense. The allowance is charged for losses when management
believes that full recovery on the loan is unlikely. Generally, the
Company charges off any loan classified as a loss; portions of loans which
are deemed to be uncollectible; overdrafts which have been outstanding for more
than 90 days; and, all other unsecured loans past due 120 or more
days. Subsequent recoveries, if any, are credited to the ALL.
Although
no assurance can be given that actual losses will not exceed the amount
provided for in the allowance, Management believes that the allowance is
adequate to provide for all estimated credit losses in light of all known
relevant factors. At
June 30,
2008 and 2007 the Banks allowance stood at 1.26 percent and 1.00
percent, respectively.
No
provisions were made to the allowance during the six months ended June 30,
2008 compared to $275,000 for the same period in 2007. No loans were charged
off during the six months ended June 30, 2008 compared to $246,000 for the
same period in 2007. Recoveries of $1,000 were made in each year.
The
Banks non-performing (delinquent 90 days or more and on non-accrual) net loans
as a percentage of total loans were 2.60 percent and 0.11 percent as of the end
of June 30, 2008 2007, respectively. The significant increase in
non-accrual loans is primarily attributable to the continued economic slowdown
and the softening of the real estate market.
Non-Interest
Income
Total
non-interest income for the six months ended
June 30, 2008 was $2,485,000
compared with $2,354,000 for the same period in 2007. The increase of $131,000
primarily resulted from income of $694,000 related to the Visa, Inc.
initial public stock offering and increases in gains on sale of securities of
$449,000, an increase in merchant credit card discount
19
Table
of Contents
fees of $178,000; partially offset by a charge of $532,000 to establish
an evaluation allowance on other real estate owned, a mark to market loss of
$585,000 in the trading assets compared with a $135,000 gain during the same
period in 2007 and decreases in sales and servicing of Small Business
Administration Loans of $139,000 and a decrease in credit card/stored value
card revenue of $104,000.
The
Bank will reduce its sponsorship of credit card and stored value card programs
over the next six months by terminating sponsorship agreements on all programs
except a drug manufactures rebate card program. The heightened monitoring
required for third party relationships to ensure compliance with various laws
and regulations applicable to these types of programs makes it imprudent for
the Bank to continue with these programs. The characteristics of the drug
manufactures rebate card program significantly reduces the same level of
required monitoring.
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 from 75 to 85 percent of the principal amount.
There
can be no assurance that the gains on sale will continue at, or above, the
levels realized in the past three years. In addition, increasing competition
among lenders for qualified SBA borrowers makes it difficult for the Bank to
continually expand its program in this area, and may limit the level of premium
that can be earned with regard thereto.
Non-Interest
Expense
Salary
and benefits expense for the six months ended
June 30, 2008 decreased $56,000
compared with the same periods in 2007. The decrease was due to reduced bonus
accruals and staff vacancies partially offset by merit pay increases and the
hiring in March 2008 of four employees to staff the Salinas branch office
which opened during the second quarter of 2008.
Total
occupancy and equipment expense for the six months ended
June 30, 2008 was $472,000
compared to $427,000 for the same period in 2007. The increase was primarily
due to rental expense for the Salinas branch office.
Professional
fees for the six months ended
June 30, 2008 were $117,000 compared to $88,000 for the
same period in 2007. The increase was primarily due to an increase in loan
collection expense.
Data
processing expense for the six months ended
June 30, 2008 was $191,000
compared to $178,000 for the same period in 2007. The increase of $13,000 was
due primarily to growth in deposit accounts.
Other
general and administrative expenses for the six months ended
June 30, 2008 totaled $1,691,000
compared with $1,709,000 for the same period in 2007, which is a decrease of
$18,000. Significant changes occurred in the following categories; increases occurred in merchant credit
card processing expense of $131,000, FDIC insurance premiums of $22,000, ATM expense of $18,000, insurance expense of
$14,000 and postage expense of $14,000; while decreases occurred in
director fees of $18,000, advertising expense of $31,000, donations of
20
Table
of Contents
$26,000, business development of $23,000 and shareholder expense of
$18,000. Included in the Visa, Inc. initial public offering transaction
was the reversal of a litigation reserve, established in 2007, of $110,000
representing the Banks share of the liability associated with the settlement
by VISA of litigation brought by American Express and Discover.
Provision
for Income Taxes
The tax provision was $844,000 for the six months
ended June 30, 2008 compared to tax provision of $865,000 for the same
period in 2007, representing 51.38% and 44.87% of pre-tax income for those
periods. The amount of the tax provision is determined by applying the
Corporations 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 bank-owned life insurance,
certain other expenses that are not allowed as tax deductions, and tax credits.
Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the periods
in which the deferred tax asset or liability is expected to be realized or
settled. The Bank maintains a valuation allowance with respect to deferred tax
assets due to the uncertainty surrounding the realization of certain net
deferred tax assets.
LOANS
Loans
represented 68.89% of average earning assets, and 64.39% of average total
assets for the six months ended
June 30, 2008 compared with 76.23% and 69.95%, respectively
during 2007. For the six months ended June 30,
2008, average loans increased 25.67% from $134,895,000 for the same
period in 2007 to $169,528,000. Average real estate loans increased $26,950,000
(30.55%), average construction loans increased $3,545,000 (18.34%), average
commercial loans increased $3,879,000 (14.52%), and average installment loans
increased $259,000 (40.07%).
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 of one year or longer. 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 a 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 75 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, generally with longer terms (up to 25 years)
than are available on a conventional loan 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.
21
Table
of Contents
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.
The
Bank also makes real estate loans secured by a first deed of trust on single
family residential properties and commercial and industrial real estate. California
commercial banks are permitted, depending on the type and maturity of the loan,
to lend up to 90 percent of the fair market value of real property (or more if
the loan is insured either by private mortgage insurers or governmental
agencies). In certain instances, the appraised value may exceed the actual
amount that could be realized on foreclosure, or declines in market value
subsequent to making the loan can impair the 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.
Non-performing
and Non-accrual Loans Net
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.
The
Bank generally repurchases from the secondary market the guaranteed portion of
Small Business Administration (SBA) guaranteed loans when those loans are
placed on non-accrual status. After the foreclosure and collection process is
complete, the SBA reimburses the Bank for this principal balance. Therefore,
although these balances do not earn interest during this period, they generally
do not result in a loss of principal to the Bank. The information provided in
the following table is net of the amounts guaranteed by the Small Business
Administration.
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):
22
Table
of Contents
|
|
Six months as of
|
|
Twelve months as of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Accruing, past
due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Commercial
|
|
|
|
|
|
|
|
Installment
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Total accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
2,640
|
|
|
|
3,200
|
|
Commercial
|
|
1,394
|
|
|
|
41
|
|
Installment
|
|
155
|
|
155
|
|
155
|
|
Other
|
|
|
|
|
|
|
|
Total nonaccrual
|
|
4,189
|
|
155
|
|
3,396
|
|
|
|
|
|
|
|
|
|
Total
nonperforming
|
|
$
|
4,189
|
|
$
|
155
|
|
$
|
3,396
|
|
|
|
|
|
|
|
|
|
Total loans end
of period
|
|
$
|
161,217
|
|
$
|
141,785
|
|
$
|
171,126
|
|
|
|
|
|
|
|
|
|
Ratio of
non-performing loans to total loans at end of period
|
|
2.60
|
%
|
0.11
|
%
|
1.98
|
%
|
23
Table of Contents
Summary of Loan Loss
Experience
|
|
|
|
|
|
As of the
|
|
|
|
As of the period
|
|
Year ended
|
|
|
|
Ended June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Average loans
outstanding
|
|
$
|
169,528
|
|
$
|
134,895
|
|
$
|
146,944
|
|
|
|
|
|
|
|
|
|
Allowance,
beginning of period
|
|
$
|
2,028
|
|
$
|
1,409
|
|
$
|
1409
|
|
|
|
|
|
|
|
|
|
Loans charged
off during period:
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
245
|
|
249
|
|
Installment
|
|
|
|
1
|
|
1
|
|
Real Estate
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Total charge
offs
|
|
|
|
246
|
|
250
|
|
|
|
|
|
|
|
|
|
Recoveries
during period:
|
|
|
|
|
|
|
|
Commercial
|
|
1
|
|
1
|
|
|
|
Installment
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
4
|
|
Total recoveries
|
|
1
|
|
1
|
|
4
|
|
|
|
|
|
|
|
|
|
Net loans
charged off during the period
|
|
(1
|
)
|
245
|
|
246
|
|
|
|
|
|
|
|
|
|
Additions to
allowance for possible loan losses
|
|
|
|
275
|
|
865
|
|
|
|
|
|
|
|
|
|
Allowance, end
of period
|
|
$
|
2,029
|
|
$
|
1,439
|
|
$
|
2,028
|
|
Ratio of net
loans charged off to average loans outstanding during the period
|
|
0.00
|
%
|
0.18
|
%
|
0.17
|
%
|
Ratio of
allowance to total loans at end of period
|
|
1.26
|
%
|
1.00
|
%
|
1.19
|
%
|
Ratio of
allowance for loan losses to non-performing loans at end of period
|
|
48.44
|
%
|
928.39
|
%
|
59.72
|
%
|
Non-performing
Assets
Non-performing
assets net totaled $6,857,000 or 2.57% of total assets at June 30, 2008
compared with $155,000 or 0.07% of total assets at June 30, 2007. The June 30,
2008 total non-performing assets consisted of $4,189,000 in non-accrual loans
and $2,668,000 in other real estate owned, while the June 30, 2007 total
consisted of one non-accrual loan. The non-accrual loans are net of the
guaranteed portion of Small Business Administration loans and the other real
24
Table
of Contents
estate owned was acquired through foreclosure. The other real estate
owned was recorded at fair value on the date of acquisition. Subsequent to
acquisition a write down of $532,000 was recorded based on a current appraisal
less estimated selling costs.
Deposits
Average
interest bearing and non-interest bearing deposits for the six months ended
June 30, 2008 were $177,110,000
an increase of 33.09% compared with the same period in 2007. Average
certificates of deposit represented 73.38% of average deposits for the six
months ended June 30, 2008
compared with 64.78% for the same period in 2007. Average interest bearing
checking, money market and savings accounts as a group were 12.12% of average
deposits for the six months ended June 30,
2008 compared with 15.84% for the same period in 2007. Average demand
deposits represented 14.50% of average deposits for the six months ended June 30, 2008 compared with
19.38% for the same period in 2007.
The
following table sets forth the scheduled maturities of the Companys time
deposits in denominations of $100,000 or greater at June 30, 2008:
Maturities of Time Deposits of
$ 100,000 or More
(Dollars in Thousands)
Three months or
less
|
|
$
|
12,190
|
|
Over three
months through six months
|
|
9,350
|
|
Over six months
through twelve months
|
|
14,499
|
|
Over twelve
months
|
|
22,872
|
|
Total
|
|
$
|
58,911
|
|
Borrowing
The Corporation has a
$3,000,000 revolving line of credit from Marshall & Ilsley Bank with a
variable interest rate based on the one month LIBOR Rate plus 2.25% with a
minimum rate of 4.50% and maturity date of March 31, 2009. The line of
credit is collateralized by 100% of the outstanding shares of Monterey County
Bank stock. At June 30, 2008, $250,000 was outstanding on the line and the
interest rate was 4.71%.
The Bank has lines of credit
from the Federal Home Loan Bank (FHLB) of San Francisco, Bank of the West,
Marshall & Ilsley Bank, Pacific Coast Bankers Bank and The
Independent Bank with remaining available borrowing capacity on
June 30, 2008
of $6,164,000 (based on pledged collateral), $4,500,000,
$5,000,000, $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 June 30, 2008. The total principal balance of pledged loans
was $39,843,000 and securities of $54,348,000. The following table provides
information on twenty FHLB advances totaling $60,500,000 and outstanding at
June 30, 2008
.
25
Table
of Contents
|
|
|
|
Funding
|
|
Maturity
|
|
Amount
|
|
Rate
|
|
Date
|
|
Date
|
|
$
|
1,000,000
|
|
7.72
|
%
|
6/1/00
|
|
6/3/30
|
|
4,000,000
|
|
5.96
|
%
|
8/2/04
|
|
7/28/34
|
|
5,000,000
|
|
5.63
|
%
|
12/24/04
|
|
12/22/34
|
|
2,000,000
|
|
5.13
|
%
|
5/4/05
|
|
5/1/35
|
|
3,000,000
|
|
4.30
|
%
|
6/17/05
|
|
6/17/10
|
|
5,000,000
|
|
4.96
|
%
|
11/14/05
|
|
11/15/10
|
|
2,250,000
|
|
4.75
|
%
|
1/26/06
|
|
1/26/11
|
|
1,750,000
|
|
4.72
|
%
|
1/26/06
|
|
1/26/11
|
|
1,500,000
|
|
5.52
|
%
|
7/17/06
|
|
7/18/11
|
|
3,500,000
|
|
5.49
|
%
|
7/17/06
|
|
7/18/11
|
|
1,000,000
|
|
5.22
|
%
|
8/25/06
|
|
8/25/11
|
|
2,000,000
|
|
5.31
|
%
|
11/17/06
|
|
11/17/36
|
|
5,000,000
|
|
5.88
|
%
|
6/29/07
|
|
6/29/37
|
|
5,000,000
|
|
5.20
|
%
|
7/30/07
|
|
7/30/12
|
|
2,500,000
|
|
4.88
|
%
|
8/20/07
|
|
8/20/10
|
|
5,000,000
|
|
5.00
|
%
|
9/18/07
|
|
9/18/14
|
|
3,000,000
|
|
4.84
|
%
|
10/1/07
|
|
10/1/12
|
|
4,000,000
|
|
2.70
|
%
|
1/24/08
|
|
1/24/11
|
|
2,000,000
|
|
2.23
|
%
|
5/14/08
|
|
11/14/08
|
|
2,000,000
|
|
3.32
|
%
|
5/14/08
|
|
5/16/11
|
|
$
|
60,500,000
|
|
|
|
|
|
|
|
The
Bank of the West, Marshall & Ilsley Bank, Pacific
Coast Bankers Bank and The Independent Bank federal funds
lines of credit are unsecured. The
Bank did not utilize any overnight borrowings in 2008 or 2007.
The Bank has a letter of credit
in the amount of $330,000, expiring April 17, 2011, issued by Federal Home
Loan Bank of San Francisco, which is used to secure local agency deposits. The
beneficiary of the letter of credit is the Administrator of Local Agency
Security, Department of Financial Institutions.
Capital
Resources
The Corporation maintains capital to comply with regulatory
requirements, to provide a margin of safety for its depositors and
stockholders, and to provide for future growth and the ability to pay dividends.
At
June 30, 2008,
stockholders equity was $13,031,000 versus $14,434,000 at December 31,
2007. The Corporation paid cash dividends to shareholders of $0 and $461,000
for the six months ended June 30,
2008 and for the year ended December 31, 2007, respectively. The
Bank paid cash dividends to the Corporation of $0 and $800,000 for the six
months ended June 30, 2008
and for the year ended December 31, 2007, respectively.
The
FDIC and Federal Reserve Board have adopted capital adequacy guidelines for use
in their examination and regulation of banks and bank holding companies. If the
capital of a bank or bank holding company falls below the minimum levels
established by these guidelines, it may be denied approval to acquire or
establish additional banks or non-bank businesses, or the FDIC or Federal
Reserve Board may take other administrative actions. The guidelines employ two
measures of capital: (1) risk-based
capital and (2) leverage capital.
26
Table
of Contents
In
general, the risk-based capital guidelines provide detailed definitions of
which obligations will be treated as capital, and assign different weights to
various assets and off-balance sheet items, depending upon the perceived degree
of credit risk associated with each asset. Each asset is assigned to one of
four risk-weighted categories. For example, 0 percent for cash and
unconditionally guaranteed government securities; 20 percent for deposits with
other banks and fed funds; 50 percent for state bonds and certain residential
real estate loans; and 100 percent for commercial loans and other assets. Capital
is categorized as either Tier 1 capital, consisting of common stock and
retained earnings (or deficit), or Tier 2 capital, which includes limited-life
preferred stock and allowance for loan losses (subject to certain limitations).
The guidelines also define and set minimum capital requirements (risk-based
capital ratios), which increased over a transition period, ended December 31,
1992. Under the final 1992 rules, all banks were required to maintain Tier 1
capital of at least 4 percent and total capital of 8.0% of risk-adjusted
assets. The Bank had a Tier 1 capital to total risk-adjusted assets capital
ratio of 11.30% and 11.83% at June 30, 2008 and 2007, respectively. The
Banks Tier 1 capital exceeds the minimum regulatory requirement by $13,831,000.
The Bank had a Total Risk-Based capital to risk-adjusted assets ratio of 12.42%
and 12.73% at June 30, 2008 and 2007, respectively. The Banks Total
Risk-Based capital exceeds the minimum regulatory requirement by $8,369,000.
The
Tier 1 leverage capital ratio guidelines require a minimum leverage capital
ratio of 4% of Tier 1 capital to total assets less goodwill. The Bank had a
leverage capital ratio of 8.10% and 9.87% at June 30, 2008 and 2007,
respectively. The Banks Tier 1 leverage capital exceeds the minimum regulatory
requirement by $12,017,000.
Under
regulatory guidelines, the $8 million in Trust Preferred Securities outstanding
qualify as Tier 1 capital up to 25% of Tier 1 capital. Any additional Trust
Preferred Securities will qualify as Tier 2 capital.
The
Corporations Board of Directors approved a stock repurchase program pursuant
to which the Corporation, from time to time and at managements discretion, may
repurchase up to $500,000 of the Corporations outstanding shares. At
prevailing market prices on the date of the approval, approximately 62,500
shares (or about 3.38% of its 1,849,918 shares of common stock currently
outstanding) could be purchased pursuant to the Boards approval. No time limit
was set for completion of the program.
The
Corporation repurchased 34,010 shares of common stock at an average cost of
$8.73 per share in open market transactions during the six months ended June 30,
2008.
Subsequent
Event
The
Corporation contributed $2,000,000 in additional capital to Monterey County
Bank in July 2008. The funding of the capital contribution was advanced
from the Corporations revolving line of credit with Marshall & Ilsley
Bank.
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
27
Table
of Contents
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 secured
borrowing arrangement with the Federal Home Loan Bank of San Francisco of
approximately $66
,994,000,
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, Marshall &
Ilsley Bank,
Pacific Coast Bankers Bank and The Independent Bank of $4,500,000,
$5,000,000, $6,000,000 and $5,000,000, respectively; to meet temporary
liquidity requirements. Available borrowing capacities on June 30, 2008
were $4,500,000, $5,000,000, $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 (total liquidity). Additionally the Bank maintains secondary
sources of liquidity (borrowing lines from other institutions) equal to at
least an additional 10 percent of assets. 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
June 30, 2008 and 2007
was 33.04% and 28.10%, respectively, while its average loan to average deposit
ratio for such years was 95.88% and 95.75%, respectively.
Brokered
deposits are deposit instruments, such as certificates of deposit, deposit
notes, bank investment contracts and certain municipal investment contracts
that are issued through brokers and dealers who then offer and/or sell these
deposit instruments to one or more investors. Additionally, deposits on which a
financial institution pays an interest rate significantly higher than
prevailing rates are considered to be brokered deposits. Federal law and
regulation restricts banks from soliciting or accepting brokered deposits,
unless the bank is well capitalized under Federal guidelines. The Bank had no
brokered deposits at June 30, 2008 or at
June 30, 2007.
Interest Rate Risk
Management of interest
rate sensitivity (asset/liability management) involves matching and repricing
rates of interest-earning assets with interest-bearing liabilities in a manner
designed to optimize net interest income within the constraints imposed by
regulatory authorities, liquidity determinations and capital considerations. The
Bank instituted formal asset/liability policies at the end of 1989.
The
purpose for asset/liability management is to provide stable net interest income
growth by protecting the 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.
28
Table
of Contents
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 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 an upward or downward 100 and a 150 basis
point rate shocks at June 30, 2008.
Rate Shock
Increase(Decrease) in Basis
Points
|
|
Percent
Increase(Decrease) in Net
Interest Income
|
|
Asset/Liability Policy Limits
for Increase(Decrease) in Net
Interest Income
|
|
100
|
|
6.0
|
%
|
10.0
|
%
|
(100
|
)
|
(7.3
|
)%
|
(10.0
|
)%
|
150
|
|
12.0
|
%
|
20.0
|
%
|
(150
|
)
|
(10.9
|
)%
|
(20.0
|
)%
|
Investment
Securities
The Corporation maintains a trading account, at fair value, consisting of marketable securities. At June 30, 2008 and 2007 the account value was $744,000 and $1,708,000, respectively. The Corporation has investments of $20,000 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 of $93,000 and Northern California Bancorp Trust II of $155,000. These are special-purpose trust subsidiaries which were formed to facilitate the issuance of trust preferred securities.
The following table sets forth the book and market
value of the investment securities at June 30, 2008:
|
|
INVESTMENT PORTFOLIO MIX
|
|
|
|
JUNE 30, 2008
|
|
(in thousands)
|
|
Book Value
|
|
Market Value
|
|
Investment
Securities, Available for Sale
|
|
|
|
|
|
State/Local
Agency Bonds
|
|
$
|
17,628
|
|
$
|
16,917
|
|
U.S. Government
Agency Securities
|
|
54,348
|
|
52,120
|
|
Total
|
|
$
|
71,976
|
|
$
|
69,037
|
|
29
Table of Contents
|
|
INVESTMENT PORTFOLIO MIX
|
|
|
|
JUNE 30, 2008
|
|
|
|
Book Value
|
|
Market Value
|
|
Other
Investments, at cost
|
|
|
|
|
|
AT Services LLC
|
|
$
|
20
|
|
$
|
20
|
|
Metrocities
Mortgage, LLC
|
|
10
|
|
10
|
|
Federal Home
Loan Bank stock, restricted
|
|
2,881
|
|
2,881
|
|
Northern
California Bancorp, Inc. Trust I
|
|
93
|
|
93
|
|
Northern
California Bancorp, Inc. Trust II
|
|
155
|
|
155
|
|
Independent
Bankers Financial Corporation
|
|
51
|
|
51
|
|
Visa, Inc.
Stock
|
|
426
|
|
578
|
|
|
|
$
|
3,636
|
|
$
|
3,788
|
|
The following table
summarizes the maturity of the investment securities at
June 30, 2008:
INVESTMENT PORTFOLIO MATURITIES
(Dollars in thousands)
|
|
Amortized Cost
|
|
Fair Value
|
|
Available for
Sale
|
|
|
|
|
|
Due between five
and ten years
|
|
$
|
417
|
|
$
|
415
|
|
Due between ten
and fifteen years
|
|
50,894
|
|
48,918
|
|
Due over fifteen
years
|
|
20,665
|
|
19,704
|
|
|
|
$
|
71,976
|
|
$
|
69,037
|
|
Item 4T. Controls and
Procedures
(a)
The Banks Chief Executive Officer and its
Chief Financial Officer, after evaluating the effectiveness of the Banks
disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) promulgated
under the Exchange Act as of the end of the period covered by this report (the Evaluation
Date) have concluded that as of the Evaluation Date, the Banks disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Bank would be made known to them by others within
the Bank, particularly during the period in which this 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, 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: In the quarter ended
June 30, 2008
,
the Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factor that could
significantly affect these controls.
30
Table of
Contents
PART II-OTHER INFORMATION
Item 1. 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 2. Unregistered
Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults
of Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders.
The following proposal was presented to shareholders at the
Corporations annual shareholders meeting held on May 29, 2008.
Proposal Number 1:
Election
of Directors
|
|
Number of
Affirmative Votes
|
|
Number of
Votes Withheld
|
|
Mark A. Briant
|
|
1,454,576
|
|
2,014
|
|
Charles T.
Chrietzberg, Jr.
|
|
1,453,772
|
|
2,818
|
|
Sandra G.
Chrietzberg
|
|
1,450,442
|
|
6,148
|
|
Stephanie G.
Chrietzberg
|
|
1,450,442
|
|
6,148
|
|
Peter J.
Coniglio
|
|
1,454,576
|
|
2,014
|
|
Carla S. Hudson
|
|
1,454,576
|
|
2,014
|
|
John M. Lotz
|
|
1,454,576
|
|
2,014
|
|
Item 5. Other Information.
None
31
Table
of Contents
Item 6. Exhibits and Reports on Form 8-K.
A.
|
|
EXHIBITS
|
|
|
|
|
|
31.1
|
Certification of the
Chief Executive Officer of Northern California Bancorp, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
31.2
|
Certification of the Chief Financial Officer of Northern California
Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
32.1
|
Certification of the Chief Executive Officer of Northern California
Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
32.2
|
Certification of the Chief Financial Officer of Northern California
Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
B.
|
|
Reports on
Form 8-K
|
|
|
|
|
|
|
None
|
|
|
|
|
|
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
NORTHERN
CALIFORNIA BANCORP, INC.
|
|
|
Date:
August 12, 2008
|
By:
|
/s/
Charles T. Chrietzberg, Jr.
|
|
|
Charles
T. Chrietzberg, Jr.
|
|
|
Chairman
of the Board &
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
Date:
August 12, 2008
|
By:
|
/s/
Bruce N. Warner
|
|
|
Bruce
N. Warner
|
|
|
Chief Financial Officer and
|
|
|
Principal Accounting Officer
|
32
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