Attached files
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EX-31.2 - EX-31.2 - NORTHERN CALIFORNIA BANCORP INC | a11-5565_1ex31d2.htm |
EX-31.1 - EX-31.1 - NORTHERN CALIFORNIA BANCORP INC | a11-5565_1ex31d1.htm |
EX-32.1 - EX-32.1 - NORTHERN CALIFORNIA BANCORP INC | a11-5565_1ex32d1.htm |
EX-32.2 - EX-32.2 - NORTHERN CALIFORNIA BANCORP INC | a11-5565_1ex32d2.htm |
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
x |
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Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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for the quarterly period ended September 30, 2010 | ||
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o |
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Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required) |
for the period from to
Commission File Number 0-27666
NORTHERN CALIFORNIA BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 77-0421107
Address: 601 Munras Avenue, Monterey, CA 93940
Telephone: (831) 649-4600
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 |
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Accelerated filer o |
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Non-accelerated filer o |
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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 February 4, 2011, the Corporation had 1,785,891 shares of common stock outstanding.
Northern California Bancorp amends its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010 (filed on November 15, 2010), as set forth in this Form 10-Q/A (Amendment No. 1), to expand and clarify certain disclosures relating to the composition of, and changes in, the Companys non-accrual loans, the regulatory orders applicable to the Company and/or the Companys subsidiary bank in Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations and certain legal proceedings in Item 1: Legal Proceedings of Part II of this Amendment No. 1. This amendment also includes an updated exhibit table to include references to these regulatory orders and to reflect the certifications attached hereto as Exhibits 31.1, 31.2, 32.1 and 32.2. The disclosures contained in the other Items of Form 10-Q are not amended and this Amendment No. 1 does not reflect events occurring after the original filing of the Quarterly Report on Form 10-Q, and does not modify or update those disclosures as presented in the Form 10-Q except to the extent set forth herein.
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2 | ||
3-8 | ||
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3 | |
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4-5 | |
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6 | |
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7-8 | |
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9-20 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
21-47 | |
Item 3 |
(Not Applicable) |
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48 | ||
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48-49 | ||
49 | ||
49 | ||
49 | ||
50 | ||
50 | ||
Signatures |
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51 |
Certifications |
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52-55 |
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
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September 30, |
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December 31, |
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(in thousands except share data) |
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2010 |
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2009 |
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(Unaudited) |
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(Audited) |
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ASSETS: |
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Cash and Due From Banks |
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$ |
34,769 |
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$ |
12,251 |
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Trading Assets |
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106 |
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153 |
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Time Deposits with other Financial Institutions |
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5,000 |
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Investment Securities, available for sale |
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42,934 |
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62,413 |
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Other Investments |
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3,835 |
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4,085 |
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Loans Held for Sale, at lower of cost or market |
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1,598 |
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2,216 |
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Loans, net of allowance for loan losses of $3,253 in 2010; $3,529 in 2009 |
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153,931 |
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160,997 |
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Bank Premises and Equipment, Net |
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4,891 |
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4,909 |
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Cash Surrender Value of Life Insurance |
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4,192 |
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4,097 |
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Other Real Estate Owned |
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27,575 |
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14,333 |
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Interest Receivable and Other Assets |
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8,814 |
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7,841 |
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Total Assets |
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$ |
287,645 |
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$ |
273,295 |
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LIABILITIES AND SHAREHOLDERS EQUITY: |
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Non interest-bearing demand |
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$ |
33,363 |
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$ |
25,781 |
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Interest-bearing demand |
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17,152 |
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16,984 |
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Savings |
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8,399 |
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6,270 |
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Time less than $100,000 |
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89,185 |
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94,686 |
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Time in denominations of $100,000 or more |
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70,716 |
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58,701 |
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Total Deposits |
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218,815 |
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202,422 |
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Revolving line of credit |
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2,850 |
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2,850 |
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Federal Home Loan Bank Borrowed Funds |
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34,000 |
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29,000 |
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Federal Reserve Bank Borrowed Funds |
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10,000 |
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Junior Subordinated Debt Securities |
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8,248 |
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8,248 |
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Secured Borrowings SBA Loans |
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3,047 |
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Interest Payable and Other Liabilities |
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5,325 |
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4,625 |
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Total Liabilities |
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272,285 |
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257,145 |
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Shareholders Equity: |
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Common Stock - No Par Value Authorized: 10,000,000 in 2010 and 2009 Outstanding:1,785,891 in 2010 and 1,783,230 in 2009 |
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5,094 |
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5,088 |
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Retained Earnings |
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9,740 |
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11,092 |
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Accumulated Other Comprehensive Income (Loss) |
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526 |
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(30 |
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Total Shareholders Equity |
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15,360 |
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16,150 |
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Total Liabilities & Shareholders Equity |
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$ |
287,645 |
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$ |
273,295 |
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The accompanying notes are an integral part of these consolidated financial statements.
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE-MONTH |
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NINE-MONTH |
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PERIOD ENDING |
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PERIOD ENDING |
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September 30 |
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September 30 |
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(in thousands except share data) |
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2010 |
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2009 |
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2010 |
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2009 |
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INTEREST INCOME: |
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Loans |
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$ |
2,347 |
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$ |
2,550 |
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$ |
7,412 |
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$ |
8,239 |
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Time deposits with other financial institutions |
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21 |
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4 |
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41 |
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14 |
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Investment securities |
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630 |
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1,037 |
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2,179 |
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3,795 |
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Federal funds sold |
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1 |
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Total Interest Income |
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2,998 |
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3,591 |
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9,632 |
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12,049 |
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INTEREST EXPENSE: |
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Interest-bearing transaction accounts |
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5 |
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5 |
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15 |
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17 |
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Savings and time deposit accounts |
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525 |
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862 |
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1,673 |
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2,698 |
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Time deposits in denominations of $100,000 or more |
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430 |
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532 |
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1,243 |
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1,600 |
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Notes payable and other |
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526 |
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531 |
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1,538 |
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2,080 |
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Total Interest Expense |
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1,486 |
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1,930 |
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4,469 |
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6,395 |
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Net Interest Income |
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1,512 |
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1,661 |
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5,163 |
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5,654 |
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Provision for loan losses |
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1,272 |
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1,918 |
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Net interest income, after provision for loan losses |
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1,512 |
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389 |
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5,163 |
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3,736 |
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NON-INTEREST INCOME: |
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Service charges on deposit accounts |
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99 |
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148 |
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337 |
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493 |
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Income from sales and servicing of Small Business Administration Loans |
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136 |
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219 |
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257 |
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316 |
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Gain on sales of investment securities |
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518 |
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2,018 |
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936 |
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3,153 |
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Other income |
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1,473 |
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1,687 |
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3,747 |
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4,413 |
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Total non-interest income |
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2,226 |
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4,072 |
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5,277 |
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8,375 |
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NON-INTEREST EXPENSE: |
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Salaries and Employee Benefits |
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882 |
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828 |
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2,678 |
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2,398 |
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Occupancy and Equipment Expense |
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259 |
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254 |
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777 |
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769 |
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Foreclosed assets, net |
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916 |
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163 |
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1,997 |
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792 |
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Professional Fees |
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403 |
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172 |
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1,239 |
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699 |
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Prepayment fees on borrowings |
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457 |
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888 |
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Data Processing |
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56 |
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67 |
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192 |
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247 |
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FDIC Settlement - Card Programs |
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1,800 |
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1,800 |
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Litigation Settlement |
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158 |
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1,038 |
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Other general and administrative |
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1,310 |
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1,479 |
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3,523 |
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4,025 |
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Total non-interest expenses |
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5,784 |
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3,420 |
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13,244 |
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9,818 |
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NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE-MONTH |
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NINE-MONTH |
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PERIOD ENDING |
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PERIOD ENDING |
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September 30 |
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September 30 |
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(in thousands except share data) |
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2010 |
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2009 |
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2010 |
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2009 |
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Income (loss) before income tax provision (benefit) |
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(2,046 |
) |
1,041 |
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(2,804 |
) |
2,293 |
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Income tax provision (benefit) |
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(1,031 |
) |
297 |
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(1,452 |
) |
470 |
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Net income (loss) |
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$ |
(1,015 |
) |
$ |
744 |
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$ |
(1,352 |
) |
$ |
1,823 |
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Earnings (loss) per common share |
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Basic |
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$ |
(0.57 |
) |
$ |
0.42 |
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$ |
(0.76 |
) |
$ |
1.02 |
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Diluted |
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$ |
(0.57 |
) |
$ |
0.42 |
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$ |
(0.76 |
) |
$ |
1.01 |
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The accompanying notes are an integral part of these consolidated financial statements.
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
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Accumulated |
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Other Comprehensive |
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Number of |
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Common |
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Retained |
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Income |
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(in thousands except share data) |
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Shares |
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Stock |
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Earnings |
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(Loss) |
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Total |
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Balance at December 31, 2008 |
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1,803,908 |
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$ |
5,173 |
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$ |
9,481 |
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$ |
(302 |
) |
$ |
14,352 |
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Comprehensive income: |
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Net income for the year |
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1,611 |
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1,611 |
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Change in net unrealized loss on AFS securities and other assets, net of tax reclassification adjustment and tax effect |
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272 |
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272 |
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Total comprehensive income |
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1,883 |
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Stock repurchase |
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(20,678 |
) |
(85 |
) |
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(85 |
) | ||||
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Balance at December 31, 2009 (Audited) |
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1,783,230 |
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5,088 |
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11,092 |
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(30 |
) |
16,150 |
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Comprehensive loss: |
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|
|
|
|
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Net loss for the year |
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(1,352 |
) |
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|
(1,352 |
) | ||||
Change in net unrealized loss on AFS securities and other assets, net of tax reclassification adjustment and tax effect |
|
|
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556 |
|
556 |
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Total comprehensive loss |
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|
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|
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(796 |
) | ||||
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|
|
|
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Exercise of stock options, Including tax benefit |
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2,661 |
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6 |
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6 |
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|
|
|
|
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Balance at September 30, 2010 (Unaudited) |
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1,785,891 |
|
$ |
5,094 |
|
$ |
9,740 |
|
$ |
526 |
|
$ |
15,360 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
NINE MONTH PERIOD ENDED |
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|
|
SEPTEMBER 30, |
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(in thousands) |
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2010 |
|
2009 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) |
|
$ |
(1,352 |
) |
$ |
1,823 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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|
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Depreciation and amortization expense |
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278 |
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255 |
| ||
Realized gain on sales of available-for-sale securities, net |
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(936 |
) |
(3,153 |
) | ||
Amortization of deferred loan fees, net |
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28 |
|
75 |
| ||
Amortization (accretion) of discounts and premiums on investment securities, net |
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(58 |
) |
(272 |
) | ||
Provision for loan losses |
|
|
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1,918 |
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Provision for foreclosed asset losses |
|
1,050 |
|
522 |
| ||
Loss on sale of foreclosed assets |
|
136 |
|
67 |
| ||
Increase in cash surrender value of life insurance |
|
(95 |
) |
(95 |
) | ||
Deferred income tax expense (benefit) |
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(1,453 |
) |
(322 |
) | ||
(Increase) decrease in assets: |
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|
|
|
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Trading assets |
|
47 |
|
85 |
| ||
Loans held for sale |
|
618 |
|
1,174 |
| ||
Interest receivable |
|
339 |
|
326 |
| ||
Other assets |
|
132 |
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(1,546 |
) | ||
Increase (decrease) in liabilities: |
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|
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Interest payable |
|
334 |
|
(541 |
) | ||
Other liabilities |
|
3,488 |
|
463 |
| ||
Net cash provided by operating activities |
|
2,556 |
|
859 |
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|
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|
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CASH FLOWS FROM INVESTING ACTIVITIES |
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|
|
|
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Net change in time deposits with other financial institutions |
|
(5,000 |
) |
(27,416 |
) | ||
Activity in available-for sale securities |
|
|
|
|
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Sales |
|
24,235 |
|
129,868 |
| ||
Maturities, prepayments, and calls |
|
1,604 |
|
4,324 |
| ||
Purchases |
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(4,554 |
) |
(83,824 |
) | ||
Net increase in loans |
|
(4,919 |
) |
(11,313 |
) | ||
Proceeds from loan sales |
|
1,830 |
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|
| ||
Proceeds from sale of other real estate owned |
|
2,566 |
|
2,491 |
| ||
Investment in other real estate owned |
|
(6,942 |
) |
(1,111 |
) | ||
Proceeds from sale of equipment |
|
34 |
|
|
| ||
Additions to bank premises and equipment |
|
(291 |
) |
(73 |
) | ||
Net cash provided by investing activities |
|
8,563 |
|
12,946 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
| ||
Net increase in deposits |
|
16,393 |
|
28,162 |
| ||
Proceeds from borrowings |
|
5,000 |
|
5,000 |
| ||
Repayments on borrowing, net |
|
(10,000 |
) |
(57,500 |
) | ||
Proceeds from exercise of stock options |
|
6 |
|
|
| ||
Repurchase of common stock |
|
|
|
(85 |
) | ||
Net cash provided (used) by financing activities |
|
11,399 |
|
(24,423 |
) | ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
|
22,518 |
|
(10,618 |
) | ||
NORTHERN CALIFORNIA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
NINE MONTH PERIOD ENDED |
| ||||
|
|
SEPTEMBER 30, |
| ||||
(in thousands) |
|
2010 |
|
2009 |
| ||
CASH AND CASH EQUIVALENTS, BEGINNING |
|
12,251 |
|
16,348 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, ENDING |
|
$ |
34,769 |
|
$ |
5,730 |
|
Non-cash transaction during the nine months ended September 30, 2010 and 2009 included the transfer of $10,375,000 and $8,851,000, respectively of loans to other real estate owned.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Monterey County Bank (the Bank).
The Corporation owns 100% of 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 consolidated financial statements of Northern California Bancorp, Inc. and Monterey County Bank 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 consolidated financial position and operating results of the Corporation for the interim periods. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2010. The year-end consolidated balance sheet data at December 31, 2009 was derived from the audited consolidated 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-K for the fiscal year ended December 31, 2009.
(NOTE 2) 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 September 30, 2010.
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 the following 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 and lease 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 September 30, 2010 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 and Lease Losses included elsewhere herein.
Another critical accounting policy relates to the valuation of other real estate owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan and lease losses. Property is evaluated regularly to ensure that the recorded amount is supported by its current fair value and that valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary. Revenue and expenses from operations of OREO and changes in the valuation allowance are included in net expenses from OREO.
(NOTE 3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) : Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the periods beginning after October 1, 2009. The adoption of ASU 2009-05 did not have a material impact on the Corporations consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. These new disclosure requirements became effective on January 1, 2010, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. There was no significant effect to the Corporations financial statement disclosures upon adoption of this ASU.
In June 2009, the FASB issued ASU 2009-16 (formerly Statement of Financial Accounting Standards (SFAS) No. 166), Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. ASU 2009-16 amends the de-recognition accounting and disclosure guidance relating to SFAS No. 140. ASU 2009-16 eliminates the exemption from consolidation for qualifying special purpose entities (QSPEs), and requires a transferor to evaluate all existing QSPEs to determine whether they must be consolidated in accordance with ASU 2009-16. It also amends the sale recognition rules for sales of participating interests in loans. ASU 2009-16 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. As a result of the adoption of ASU 2009-16, the Corporation delays the accounting recognition of sales of the guaranteed portion of SBA loans for 90 days. The Corporation also ensures the proportionate sharing of cash flows prior to recognizing the sale of participation interests in loans.
In June 2009, the FASB issued ASU 2009-17 (formerly SFAS No. 167), Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Statement amends ASC Topic 810, Consolidation to require an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity, and amends certain guidance for determining whether an entity is a variable interest entity. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement in a variable interest entity. This Statement, which became effective for the Corporation on January 1, 2010, did not have an impact on its consolidated financial statements as the Corporation has no interests in any variable interest entities.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated, as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement did not have an affect on the nature or timing of subsequent events evaluations performed by the Corporation. ASU 2010-09 became effective upon issuance.
(NOTE 4) STOCK BASED COMPENSATION
The Corporations compensation cost relating to share-based payment transactions is recognized in the financial statements based upon the fair value of the equity or liability instruments issued. Based on the stock-based compensation awards outstanding for the nine months ended September 30, 2010 and 2009, there was no stock-based compensation expense.
Under the Corporations 1998 Stock Option Plan, the Corporation granted 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 subsidiaryUnder the Plan, 64,661 options had been reserved for the granting, all of which had been granted in prior periods. At September 30, 2010, 23,500 options were outstanding. During 2010, 2,661 options were exercised by officers, employees, and board members. No further options may be granted under the 1998 Stock Option Plan. The plan provided that options could be granted for a period of ten years from the date the plan was adopted by the Board. The Board adopted the plan on April 16, 1998. The plan remains in effect until all options granted under the Plan have been satisfied or expired.
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 September 30, 2010, no options have been granted under the 2007 stock option plan. Thus, no pre-tax stock-based compensation expense was required for the nine months ended September 30, 2010 and 2009.
(NOTE 5) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represents income (loss) available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share reflect 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 Corporation 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 (loss) per share is as follows:
|
|
Earnings (Loss) per Share |
| ||||||||||||||
|
|
For the three months ended September 30 |
| ||||||||||||||
|
|
2010 |
|
2009 |
| ||||||||||||
(in thousands except per |
|
Net |
|
Weighted |
|
Per Share |
|
Net |
|
Weighted |
|
Per Share |
| ||||
Basic (loss) earnings per share |
|
$ |
(1,015 |
) |
1,785,891 |
|
$ |
(0.57 |
) |
$ |
744 |
|
1,783,230 |
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
assumed exercise of outstanding options |
|
|
|
|
|
|
|
|
|
5,504 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted (loss) earnings per share |
|
$ |
(1,015 |
) |
1,785,891 |
|
$ |
(0.57 |
) |
$ |
744 |
|
1,788,734 |
|
$ |
0.42 |
|
|
|
Earnings (Loss) per Share |
| ||||||||||||||
|
|
For the nine months ended September 30 |
| ||||||||||||||
|
|
2010 |
|
2009 |
| ||||||||||||
(in thousands except per |
|
Net |
|
Weighted |
|
Per Share |
|
Net |
|
Weighted |
|
Per Share |
| ||||
Basic (loss) earnings per share |
|
$ |
(1,352 |
) |
1,785,179 |
|
$ |
(0.76 |
) |
$ |
1,823 |
|
1,793,910 |
|
$ |
1.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
assumed exercise of outstanding options |
|
|
|
|
|
|
|
|
|
3,244 |
|
0.01 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted (loss) earnings per share |
|
$ |
(1,352 |
) |
1,785,179 |
|
$ |
(0.76 |
) |
$ |
1,823 |
|
1,797,154 |
|
$ |
1.01 |
|
(NOTE 6) INVESTMENT SECURITIES
The following table presents investment securities, available for sale at September 30, 2010 and December 31, 2009:
|
|
September 30, 2010 |
| ||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
| ||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
|
|
(Dollars in thousands) |
| ||||||||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
| ||||
Mortgage Backed Securities |
|
$ |
675 |
|
$ |
33 |
|
$ |
|
|
$ |
708 |
|
State/Local Agency Securities |
|
39,369 |
|
1,288 |
|
(451 |
) |
40,206 |
| ||||
Government Agency Securities |
|
1,997 |
|
23 |
|
|
|
2,020 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total securities available for sale |
|
$ |
42,041 |
|
$ |
1,344 |
|
$ |
(451 |
) |
$ |
42,934 |
|
|
|
December 31, 2009 |
| ||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
| ||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
|
|
(Dollars in thousands) |
| ||||||||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
| ||||
Mortgage Backed Securities |
|
$ |
1,534 |
|
$ |
|
|
$ |
(44 |
) |
$ |
1,490 |
|
State/Local Agency Securities |
|
53,000 |
|
1,501 |
|
(1,427 |
) |
53,074 |
| ||||
Government Agency Securities |
|
7,988 |
|
|
|
(139 |
) |
7,849 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total securities available for sale |
|
$ |
62,522 |
|
$ |
1,501 |
|
$ |
(1,610 |
) |
$ |
62,413 |
|
In addition, the Corporation maintains a trading account, at fair value, consisting of marketable securities. At September 30, 2010 and December 31, 2009 the account value was $106,000 and $153,000, respectively.
The amortized cost and fair value of debt securities by contractual maturity date at September 30, 2010 follows:
|
|
Available for Sale |
| ||||
|
|
Amortized |
|
Fair |
| ||
(Dollars in thousands) |
|
Cost |
|
Value |
| ||
|
|
|
|
|
| ||
Due after ten years |
|
$ |
42,041 |
|
$ |
42,934 |
|
Proceeds from calls, maturities and sales of investment securities for the nine months ended September 30, 2010, and 2009 were $25,395,000, and $129,848,000, respectively. Realized gains for nine months ended September 30, 2010, and 2009 were $936,000, and $3,153,000, respectively.
At September 30, 2010 and December 31, 2009, U.S. Government and Mortgage Backed obligations with a carrying value of $2,726,000 and $8,761,000, respectively, were pledged to secure advances from the Federal Home Loan Bank of San Francisco.
At September 30, 2010 and December 31, 2009 State/Local Agency obligations with a carrying value of $17,856,000 and $20,462,000, respectively, were pledged to secure loans from the Federal Reserve Bank of San Francisco.
In September 2010, the Bank sold debt securities with proceeds totaling $769,000 that had settlement dates in October 2010. The Bank had recorded the investment securities sold as of the trade date and had recorded the corresponding receivable of $769,000 at September 30, 2010.
Information pertaining to securities with gross unrealized losses at September 30, 2010, 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 |
| ||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
|
|
Value |
|
Loss |
|
Value |
|
Loss |
|
Value |
|
Loss |
| ||||||
|
|
(Dollars in thousands) |
| ||||||||||||||||
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
State/Local Agency Securities |
|
$ |
2,699 |
|
$ |
(136 |
) |
$ |
5,316 |
|
$ |
(315 |
) |
$ |
8,015 |
|
$ |
(451 |
) |
Information pertaining to securities with gross unrealized losses at December 31, 2009, 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 |
| ||||||||||||
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
|
|
Value |
|
Loss |
|
Value |
|
Loss |
|
Value |
|
Loss |
| ||||||
|
|
(Dollars in thousands) |
| ||||||||||||||||
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Government Agency Securities |
|
$ |
7,849 |
|
$ |
(139 |
) |
$ |
|
|
$ |
|
|
$ |
7,849 |
|
$ |
(139 |
) |
Mortgage Backed Securities |
|
1,491 |
|
(44 |
) |
|
|
|
|
1,491 |
|
(44 |
) | ||||||
State/Local Agency Securities |
|
8,827 |
|
(245 |
) |
8,889 |
|
(1,182 |
) |
17,716 |
|
(1,427 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
18,167 |
|
$ |
(428 |
) |
$ |
8,889 |
|
$ |
(1,182 |
) |
$ |
27,056 |
|
$ |
(1,610 |
) |
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) if Bank does not have the intent to sell the security; whether it is more likely than not it will not have to sell the security before recovery of its cost basis.
On September 30, 2010, twelve securities had an unrealized loss with aggregate depreciation of 5.32% from the Banks amortized cost basis. On December 31, 2009, forty securities had an unrealized loss with aggregate depreciation of 5.62% from the Banks amortized cost basis. The unrealized losses relate primarily to securities issued by agencies of the United States and securities issued by local government agencies. Since the Bank has the ability to hold these securities until estimated maturity, no decline is deemed to be other than temporary.
(NOTE 7) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table presents information on loans and the allowance for loan and losses at September 30, 2010 and December 31, 2009:
|
|
SEPTEMBER 30 |
|
DECEMBER 31 |
| ||
(dollars in thousands) |
|
2010 |
|
2009 |
| ||
Commercial and Industrial |
|
$ |
36,028 |
|
$ |
31,389 |
|
Construction |
|
1,265 |
|
8,705 |
| ||
Real Estate - Mortgage |
|
119,495 |
|
121,887 |
| ||
Installment |
|
566 |
|
2,746 |
| ||
Government Guaranteed Loans Purchased |
|
9 |
|
16 |
| ||
|
|
157,363 |
|
164,743 |
| ||
Allowance for loan losses |
|
(3,253 |
) |
(3,529 |
) | ||
Deferred origination fees, net |
|
(179 |
) |
(217 |
) | ||
Net Loans |
|
$ |
153,931 |
|
$ |
160,997 |
|
|
|
|
|
|
| ||
Balance at Beginning of Period |
|
$ |
3,529 |
|
$ |
2,413 |
|
Recoveries |
|
2 |
|
77 |
| ||
Provision for Loan Losses |
|
|
|
3,368 |
| ||
Charge Offs |
|
(278 |
) |
(2,329 |
) | ||
Balance at End of Period |
|
$ |
3,253 |
|
$ |
3,529 |
|
The following table summarizes the Banks investment in loans for which impairment has been recognized as of and for the periods ended September 30, 2010 and December 31, 2009. Impaired loans consist of the loans on non-accrual status. There were two loans past due 90 days or more and still accruing as of September 30, 2010 that were not considered impaired since they are well secured and process of collection, and no loans were past due 90 days or more and still accruing as of December 31, 2009.
|
|
September 30, 2010 |
|
December 31, 2009 |
| ||
|
|
(Dollars in thousands) |
| ||||
Total impaired loans which as a result of writedown or the fair value of the collateral, did not have a specific allowance |
|
$ |
2,195 |
|
$ |
4,399 |
|
Impaired loans which have a specific allowance |
|
2,185 |
|
3,681 |
| ||
|
|
|
|
|
| ||
Total impaired loans |
|
$ |
4,380 |
|
$ |
8,080 |
|
|
|
|
|
|
| ||
Total specific allowance on impaired loans |
|
$ |
117 |
|
$ |
357 |
|
|
|
|
|
|
| ||
Average recorded investment in impaired loans during the period |
|
$ |
7,087 |
|
$ |
6,490 |
|
Income recognized on impaired loans during the period |
|
$ |
|
|
$ |
|
|
(NOTE 8) FORECLOSED ASSETS
As of September 30, 2010 and December 31, 2009, foreclosed assets totaled $27,575,000 and $14,333,000, respectively, net of valuation allowance. Based on property values, a valuation allowance of $2,060,000 and $1,010,000 was deemed necessary at September 30, 2010 and December 31, 2009, respectively.
During the nine months ended September 30, 2010 four properties were purchased for $6,942,000 in a negotiated settlement of a lawsuit.
During the nine months ended September 30, 2010 four properties were sold for $3,419,000, with a loss on sale of $136,000. One property valued at $520,000 was acquired through trade. During the nine months ended September 30, 2009 four properties were sold for $7,700,000, with a loss on sale of $67,000. Two properties valued at $4,185,000 were acquired through trade, resulting in a deferred gain on sale of $279,000.
Operating expenses for foreclosed assets totaled $1,997,000 and $792,000 for the nine months ended September 30, 2010 and 2009, respectively.
(NOTE 9) FAIR VALUE MEASUREMENTS:
Authoritative guidance establishes a hierarchy for measuring fair value under generally accepted accounting principles (GAAP) in the United States of America and applies to all financial assets and liabilities that are being measured and reported at fair value on a recurring and non-recurring basis. Fair value is measured in levels, which are described in more detail below, and is determined based on the observability and reliability of the assumptions used to determine fair value.
Level 1: Valuation for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuation for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
Level 3: Valuation for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques, and not based on market exchange, dealer, or broker traded transactions. These valuations incorporate certain assumptions and projections by management in determining the fair value assigned to such assets or liabilities.
The Corporation measures and reports available-for-sale securities at fair value on a recurring basis. The following tables show the balances of these assets based on the designated levels at September 30, 2010 and December 31, 2009.
|
|
At September 30, 2010 |
| ||||||||||
(dollars in thousands) |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
Investment securities AFS |
|
$ |
42,934 |
|
$ |
|
|
$ |
42,934 |
|
$ |
|
|
|
|
At December 31, 2009 |
| ||||||||||
(dollars in thousands) |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
Investment securities AFS |
|
$ |
62,413 |
|
$ |
|
|
$ |
62,413 |
|
$ |
|
|
Fair values of investment securities available for sale are based on broker quotes. Such third party information was not adjusted by management; thus, the fair values of investment securities available for sale are classified as level 2.
The Corporation is also required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with GAAP. During the nine months ended September 30, 2010, the Corporation measured collateral dependent impaired loans, loans held for sale, and Other Real Estate Owned (OREO) at fair value. The assets are measured at fair value on a non-recurring basis and the following table provides the assets designated levels, as well as the fair value losses recognized during the nine months ended September 30, 2010 and the year ended December 31, 2009.
|
|
At September 30, 2010 |
| |||||||||||||
(dollars in thousands) |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Losses for the |
| |||||
Impaired loans |
|
$ |
4,380 |
|
$ |
|
|
$ |
|
|
$ |
4,380 |
|
$ |
117 |
|
Loans held for sale |
|
1,598 |
|
|
|
1,598 |
|
|
|
|
| |||||
OREO |
|
27,575 |
|
|
|
|
|
27,575 |
|
|
| |||||
|
|
$ |
33,553 |
|
$ |
|
|
$ |
1,598 |
|
$ |
31,955 |
|
$ |
117 |
|
|
|
At December 31, 2009 |
| |||||||||||||
(dollars in thousands) |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Losses for the |
| |||||
Impaired loans |
|
$ |
8,080 |
|
$ |
|
|
$ |
|
|
$ |
8,080 |
|
$ |
357 |
|
Loans held for sale |
|
2,216 |
|
|
|
2,216 |
|
|
|
|
| |||||
OREO |
|
14,333 |
|
|
|
|
|
14,333 |
|
|
| |||||
|
|
$ |
24,629 |
|
$ |
|
|
$ |
2,216 |
|
$ |
22,413 |
|
$ |
357 |
|
Impaired Loans
Collateral-dependent impaired loans are carried at the fair value of the collateral, less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2.
Impaired loans that are not collateral dependent are carried at the present value of expected future cash flows discounted at the loans effective interest rate. Troubled debt restructurings are also carried at the present value of expected future cash flows. However, expected cash flows for troubled debt restructurings are discounted using the loans original effective interest rate rather than the modified interest rate. Since fair value of these loans is based on managements own projection of future cash flows, the fair value measurements are categorized as Level 3 measurements.
Loans Held for Sale
Loans held for sale are required to be measured at the lower of cost or fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions, which are a level 2 inputs. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At September 30, 2010, the fair value of loans held for sale was greater than cost; therefore, the entire balance of loans held for sale was recorded at cost.
Foreclosed Assets
Assets acquired through foreclosure or other proceedings are initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. All foreclosed assets are real properties. The fair values of real properties initially are determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real properties are based on management estimates or on updated appraisals. Foreclosed assets are categorized under Level 3 when significant adjustments are made by management to appraised values based on unobservable inputs. Otherwise, foreclosed assets are categorized under Level 2 if their values are based solely on appraisals.
Current authoritative guidance requires interim reporting period disclosure about the fair value of financial instruments, including assets, liabilities and off-balance sheet items for which it is practicable to estimate fair value. The fair value estimates are made based upon relevant market information, if available, and upon the characteristics of the financial instruments themselves. Because no market exists for a significant portion of the Corporations financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimated fair value of the Corporations financial instruments as of September 30, 2010 and December 31, 2009 is shown below.
|
|
September 30, 2010 |
|
December 31, 2009 |
| ||||
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
(dollars in thousands) |
|
Amount |
|
Value |
|
Amount |
|
Value |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
34,769 |
|
34,769 |
|
12,251 |
|
12,251 |
|
Interest Bearing Deposits |
|
5,000 |
|
5,000 |
|
|
|
|
|
Investment Securities, available for sale |
|
42,934 |
|
42,934 |
|
62,413 |
|
62,413 |
|
Other Investments |
|
3,835 |
|
3,835 |
|
4,085 |
|
4,085 |
|
Trading Assets |
|
106 |
|
106 |
|
153 |
|
153 |
|
Loans, held for sale |
|
1,598 |
|
1,598 |
|
2,216 |
|
2,216 |
|
Loans, net |
|
153,931 |
|
187,002 |
|
160,997 |
|
163,839 |
|
Accrued interest receivable |
|
1,032 |
|
1,032 |
|
1,371 |
|
1,371 |
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
Deposits |
|
218,815 |
|
219,659 |
|
202,422 |
|
205,699 |
|
Long-term debt |
|
42,248 |
|
43,913 |
|
37,248 |
|
33,929 |
|
Short-term debt |
|
2,850 |
|
2,850 |
|
12,850 |
|
12,850 |
|
Accrued Interest Payable |
|
1,608 |
|
1,608 |
|
1,274 |
|
1,274 |
|
(NOTE 10) OFF-BALANCE SHEET 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 September 30, 2010 and December 31, 2009, such commitments to extend credit were $15,231,000 and $14,839,000, respectively, comprised of undisbursed lines of credit, undisbursed loans in process, and commitment letters.
The Bank has two letters of credit issued by Federal Home Loan Bank of San Francisco. One letter of credit in the amount of $330,000, expiring April 17, 2011, is used to secure local agency deposits. The beneficiary of the letter of credit is the Administrator of Local Agency Security, California Department of Financial Institutions. The other letter of credit in the amount of $1,300,000, expiring February 17, 2019, has MasterCard International Inc. as the beneficiary and is used to secure settlement of credit card transactions.
(NOTE 11) CONSENT ORDER
The Corporations wholly-owned subsidiary bank, Monterey County Bank (the Bank,) has entered into a Consent Order (the Order) with the Federal Deposit Insurance Corporation (the FDIC) and the California Department of Financial Institutions (the CDFI). The Order became effective on September 1, 2010. Among other requirements, the Order requires the Bank to maintain Tier 1 capital in such an amount to ensure that the Banks leverage ratio equals or exceeds 9% and the Banks total risk-based capital ratio equals or exceeds 12% within 120 days of the effective date of the Order (i.e., by December 29, 2010). The Banks leverage ratio and total risk-based capital ratio are 8.48% and 13.91%, respectively, as of September 30, 2010. The Bank is taking certain steps, including the sale of certain of its merchant card processing accounts (see Note 12 below), to achieve compliance with the minimum required leverage capital ratio by the due date. For more information on the Order, see the Other Regulatory Matters section of Item 2 of this Form 10-Q.
(NOTE 12) SUBSEQUENT EVENT
Subsequent to September 30, 2010 the Bank entered into and closed an agreement to sell certain of its merchant credit card processing accounts to Elavon, Inc, for $1,850,000, effective as of November 1, 2010. The Agreement calls for the Bank to receive an initial payment of $1,000,000 at closing, with $800,000 due within thirty (30) days of the Bank attaining a Leverage Capital Ratio of 9%, a payment of $50,000 due upon the completion of the transition of the merchant accounts purchased to Elavons processing system, additionally, the Bank will share in the monthly net income of the accounts sold. Since the Banks basis in the sold accounts is zero under U.S. generally accounting principles, the entire purchase price will be recognized as income.
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 the Corporation and the 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-Q and in the Banks other reports filed with the Federal Deposit Insurance Corporation (FDIC) 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.
OVERVIEW OF THE RESULTS OF OPERATION AND FINANCIAL CONDITION
Results of Operations Summary
Third quarter 2010 compared to third quarter 2009
Net loss for the quarter ended September 30, 2010 was $1,015,000 compared with net income of $744,000 for the quarter ended September 30, 2009. Basic loss per share for the third quarter of 2010 was ($0.57), compared to basic earnings of $0.42 for the third quarter of 2009. The Corporations annualized return on average equity was (24.97%) and annualized return on average assets was (1.39%) for the quarter ended September 30, 2010, compared to a return on average equity of 13.14% and a return on assets of 0.78% for same quarter in 2009. The primary reasons for the change in net income during the quarter of 2010 are as follows:
The net interest income decreased from $1,661,000 to $1,512,000, due primarily to a decline of $8,018,000 in average interest-earning assets while average interest bearing liabilities increased $8,688,000. As a result, net interest income decreased $149,000 or 8.97% during the three months ended September 30, 2010.
No provision for loan losses was recorded during the third quarter of 2010 compared to a provision of $1,272,000 during the third quarter of 2009.
Total non-interest income was $2,226,000 during the third quarter of 2010 compared to $4,072,000 during the third quarter of 2009. The decrease of $1,846,000 was due primarily to decreases of $1,500,000 in gains on sales of investment securities and $214,000 in other income.
Total non-interest expense was $5,784,000 during the third quarter of 2010 compared to $3,420,000 during the third quarter of 2009, an increase of $2,364,000. The resolution of an FDIC investigation of a third-party credit card program and a third-party debit card program resulted in charges to earnings, net of receivables from the third-party debit card program, of $1,250,000 for potential restitution to cardholders, $250,000 in civil money penalty and a charitable donation of $300,000, for a total of $1,800,000. See the Other Regulator Matters section of this report for additional information. Additionally, changes occurred as the result of an accrual of estimated litigation settlement expense of $158,000 and increases of $753,000 in expenses related to foreclosed assets and $231,000 in professional fees. These increases in expense were partially offset by a decrease of $457,000 in prepayment fees on borrowings and a decline of $169,000 in other general and administrative expense.
Subsequent to September 30, 2010 the Bank entered into and closed an agreement to sell certain of its merchant credit card processing accounts to Elavon, Inc. for $1,850,000, effective as of November 1, 2010. The Agreement calls for the Bank to receive an initial payment of $1,000,000 at closing, with $800,000 due within thirty (30) days of the Bank attaining a Leverage Capital Ratio of 9%, a payment of $50,000 due upon the completion of the transition of the merchant accounts purchased to Elavons processing system, additionally, the Bank will share in the monthly net income of the accounts sold. Since the Banks basis in the sold accounts is zero under U.S. generally accounting principles, the entire purchase price will be recognized as income.
Nine months ended September 30, 2010 compared to the same period in 2009
Net loss for the nine months ended September 30, 2010 was $1,352,000 compared with net income of $1,823,000 for the nine months ended September 30, 2009. Basic loss per share for the third quarter of 2010 was $(0.76), compared to basic earnings per share of $1.02 for the nine months ended September 30, 2009. The Corporations annualized return on average equity was (11.09%) and annualized return on average assets was (0.62%) for the nine months ended September 30, 2010, compared to an annualized return on average equity of 15.15% and an annualized return on average assets of .80% for the nine months ended September 30, 2009. The primary reasons for the change in net income during the nine months ended September 30, 2010 are as follows:
Net interest income decreased from $5,654,000 to $5,163,000, a decline of $491,000 or (8.68%). Average interest-earning assets declined $16,727,000 while interest-bearing liabilities decreased $16,786,000. The interest rate on the interest-earning assets was approximately 300 basis points higher than the interest rate paid on the interest-bearing liabilities.
No provision for loan losses was during the third quarter of 2010 compared to a provision of $1,918,000 during the nine months ended September 30, 2009.
Total non-interest income was $5,277,000 during the nine months ended September 30, 2010 compared to $8,375,000 during the nine months ended September 30, 2009. The decrease of $3,098,000 was due primarily to decreases of $2,217,000 in gains on sales of investment securities and $666,000 in other income.
Total non-interest expense was $13,244,000 during the nine months ended September 30, 2010 compared to $9,818,000 during the nine months ended September 30, 2009, an increase of $3,426,000. The resolution of an FDIC investigation of a third-party credit card program and a third-party debit card program resulted in charges to earnings, net of receivables from the third-party debit card program, of $1,250,000 for potential restitution to cardholders, $250,000 in civil money penalty and a charitable donation of $300,000, for a total of $1,800,000. See the Other Regulator Matters section of this report for additional information. Additionally changes occurred as the result of litigation settlement expense of $1,038,000 and increases of $1,205,000 in expenses related to foreclosed assets, $540,000 professional fees and $280,000 in salaries and employee benefits, partially offset by a decrease of $888,000 in prepayment fees on borrowings and a decrease of $502,000 in other general and administrative expense.
Subsequent to September 30, 2010 the Bank entered into and closed an agreement to sell certain of its merchant credit card processing accounts to Elavon, Inc. for $1,850,000, effective as of November 1, 2010. The Agreement calls for the Bank to receive an initial payment of $1,000,000 at closing, with $800,000 due within thirty (30) days of the Bank attaining a Leverage Capital Ratio of 9%, a payment of $50,000 due upon the completion of the transition of the merchant accounts purchased to Elavons processing system, additionally, the Bank will share in the monthly net income of the accounts sold. Since the Banks basis in the sold accounts is zero under U.S. generally accounting principles, the entire purchase price will be recognized as income.
The following table sets forth certain selected financial data and ratios of the Corporation for the three months and nine months ended September 30, 2010 and 2009.
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
| ||||||||
(in thousands except share data) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
| ||||
Summary of Operating Results: |
|
|
|
|
|
|
|
|
| ||||
Total interest income |
|
$ |
2,998 |
|
$ |
3,591 |
|
$ |
9,632 |
|
$ |
12,049 |
|
Total interest expense |
|
1,486 |
|
1,930 |
|
4,469 |
|
6,395 |
| ||||
Net interest income |
|
1,512 |
|
1,661 |
|
5,163 |
|
5,654 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Provision for loan losses |
|
|
|
1,272 |
|
|
|
1,918 |
| ||||
Net interest income after provision for loan losses |
|
1,512 |
|
389 |
|
5,163 |
|
3,736 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total non-interest income |
|
2,226 |
|
4,072 |
|
5,277 |
|
8,375 |
| ||||
Total non-interest expenses |
|
5,784 |
|
3,420 |
|
13,244 |
|
9,818 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) before tax provision (benefit) |
|
(2,046 |
) |
1,041 |
|
(2,804 |
) |
2,293 |
| ||||
Income tax provision (benefit) |
|
(1,031 |
) |
297 |
|
(1,452 |
) |
470 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
|
$ |
(1,015 |
) |
$ |
744 |
|
$ |
(1,352 |
) |
$ |
1,823 |
|
|
|
|
|
|
|
|
|
|
| ||||
Per Common Share Data: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) - Basic (1) |
|
$ |
(0.57 |
) |
0.42 |
|
$ |
(0.76 |
) |
$ |
1.02 |
| |
Net income (loss) - Diluted (2) |
|
(0.57 |
) |
0.42 |
|
(0.76 |
) |
1.01 |
| ||||
Book value, end of period |
|
8.60 |
|
9.44 |
|
8.60 |
|
9.44 |
| ||||
Shares outstanding end of period |
|
1,785,891 |
|
1,783,230 |
|
1,785,891 |
|
1,783,230 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total loans, net of unearned income (3) |
|
$ |
155,529 |
|
167,287 |
|
$ |
155,529 |
|
$ |
167,287 |
| |
Total assets |
|
287,645 |
|
280,929 |
|
287,645 |
|
280,929 |
| ||||
Total deposits |
|
218,815 |
|
217,892 |
|
218,815 |
|
217,892 |
| ||||
Stockholders equity |
|
15,360 |
|
16,824 |
|
15,360 |
|
16,824 |
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
| ||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Selected Financial Ratios: |
|
|
|
|
|
|
|
|
|
Return on average assets (4) (4) |
|
(1.39 |
)% |
1.03 |
% |
(0.47 |
)% |
0.80 |
% |
Return on average stockholders equity (4) (5) |
|
(24.97 |
)% |
17.34 |
% |
(8.32 |
)% |
15.15 |
% |
Net interest spread |
|
2.63 |
% |
1.73 |
% |
3.05 |
% |
3.03 |
% |
Net yield on interest earning assets (4) |
|
2.80 |
% |
2.28 |
% |
3.22 |
% |
3.24 |
% |
Avg shareholders equity to average assets (4) |
|
5.57 |
% |
5.93 |
% |
5.68 |
% |
5.29 |
% |
Risked-Based capital ratios |
|
|
|
|
|
|
|
|
|
Tier 1 |
|
9.44 |
% |
10.47 |
% |
9.44 |
% |
10.47 |
% |
Total |
|
12.92 |
% |
13.39 |
% |
12.92 |
% |
13.39 |
% |
Total loans to total deposits at end of period (3) |
|
72.65 |
% |
76.78 |
% |
72.65 |
% |
76.78 |
% |
Allowance for loan and lease losses to total loans at end of period (3) |
|
2.05 |
% |
1.75 |
% |
2.05 |
% |
1.75 |
% |
Nonperforming loans to total loans at end of period (3) |
|
2.76 |
% |
4.42 |
% |
4.50 |
% |
5.66 |
% |
Net charge-offs to average loans (3) |
|
0.17 |
% |
0.79 |
% |
0.17 |
% |
0.79 |
% |
(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 1,785,891 and 1,783,230 for the three months ended September 30, 2010 and 2009, respectively. The weighted average number of common shares used for this computation was 1,785,179 and 1,793,910 for the nine months ended September 30, 2010 and 2009, 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 common shares used for this computation was 1,785,891 and 1,788,734 for the three months ended September 30, 2010 and 2009, respectively. The weighted average number of shares used for this computation was 1,785,179 and 1,797,154 for the nine months ended September 30, 2010 and 2009, respectively.
(3) Includes loans held for sale.
(4) Averages are of daily balances.
(5) 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.
Net interest income for the quarter ended September 30, 2010 was $1,512,000 compared to $1,661,000 for the quarter ended September 30, 2009, which was a decrease of $149,000 primarily resulting from decreases of $203,000 in interest on loans and $407,000 in interest on investment securities, partially offset by decreases interest expense of $337,000 on savings and time deposit accounts and $102,000 on time deposits in denominations of $100,000 or more.
Net interest income for the nine months ended September 30, 2010 was $5,163,000 compared to $5,654,000 for the nine months ended September 30, of 2009, which was a decrease of $491,000 primarily resulting from decreases of $827,000 in interest on loans and $1,616,000 in interest on investment securities, partially offset by decreases interest expense of $1,025,000 on savings and time deposit accounts, $542,000 on notes payable and other borrowings and $357,000 on time deposits of $100,000 or more.
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. Yields are computed on a tax-equivalent basis, resulting in adjustments to interest earned on municipal bonds of $255,000 and $279,000 for the three months ended and $844,000 and $787,000 for the nine months September 30, 2010 and 2009, respectively. Non-accrual loans and overdrafts are included in average loan balances. Average loans are presented net of unearned income.
|
|
Three Months Ended September 30, |
|
Three Months Ended September 30, |
| ||||||||||||
|
|
Average |
|
|
|
Yield/ |
|
Average |
|
|
|
Yield/ |
| ||||
(dollars in thousands) |
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
|
$ |
159,029 |
|
$ |
2,347 |
|
5.90 |
% |
$ |
172,696 |
|
$ |
2,550 |
|
5.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Time deposits - in other banks |
|
39,966 |
|
21 |
|
0.21 |
% |
12,929 |
|
4 |
|
0.12 |
% | ||||
Investment securities - taxable |
|
7,061 |
|
56 |
|
3.17 |
% |
26,617 |
|
417 |
|
6.27 |
% | ||||
Investment securities - nontaxable |
|
46,267 |
|
829 |
|
7.17 |
% |
48,099 |
|
899 |
|
7.48 |
% | ||||
Total interest-earning assets |
|
252,323 |
|
3,253 |
|
5.16 |
% |
260,341 |
|
3,870 |
|
5.95 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for loan and lease losses |
|
(3,253 |
) |
|
|
|
|
(2,977 |
) |
|
|
|
| ||||
Non-interest bearing assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and due from banks |
|
4,957 |
|
|
|
|
|
6,166 |
|
|
|
|
| ||||
Bank premises and equipment |
|
4,945 |
|
|
|
|
|
4,843 |
|
|
|
|
| ||||
Accrued interest receivable |
|
1,334 |
|
|
|
|
|
1,648 |
|
|
|
|
| ||||
Other assets |
|
31,477 |
|
|
|
|
|
19,559 |
|
|
|
|
| ||||
Total average assets |
|
$ |
291,783 |
|
|
|
|
|
$ |
289,580 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand |
|
$ |
15,818 |
|
$ |
4 |
|
0.10 |
% |
$ |
14,575 |
|
$ |
4 |
|
0.11 |
% |
Money market savings |
|
1,835 |
|
1 |
|
0.22 |
% |
1,292 |
|
1 |
|
0.31 |
% | ||||
Savings deposits |
|
7,701 |
|
10 |
|
0.52 |
% |
5,844 |
|
7 |
|
0.48 |
% | ||||
Time deposits >$100M |
|
71,156 |
|
430 |
|
2.42 |
% |
60,403 |
|
532 |
|
3.52 |
% | ||||
Time deposits <$100M |
|
93,364 |
|
515 |
|
2.21 |
% |
96,629 |
|
855 |
|
3.54 |
% | ||||
Other Borrowings |
|
45,098 |
|
526 |
|
4.67 |
% |
47,541 |
|
531 |
|
4.47 |
% | ||||
Total interest-bearing liabilities |
|
234,972 |
|
1,486 |
|
2.53 |
% |
226,284 |
|
1,930 |
|
3.41 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest-bearing checking |
|
34,466 |
|
|
|
|
|
36,976 |
|
|
|
|
| ||||
Accrued interest payable |
|
1,568 |
|
|
|
|
|
1,376 |
|
|
|
|
| ||||
Other liabilities |
|
4,515 |
|
|
|
|
|
7,781 |
|
|
|
|
| ||||
Total Liabilities |
|
275,521 |
|
|
|
|
|
272,417 |
|
|
|
|
| ||||
Total shareholders equity |
|
16,262 |
|
|
|
|
|
17,163 |
|
|
|
|
| ||||
Total average liabilities and Shareholders equity |
|
$ |
291,783 |
|
|
|
|
|
$ |
289,580 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
|
|
|
$ |
1,767 |
|
|
|
|
|
$ |
1,940 |
|
|
| ||
Interest income as a percentage of average earning assets |
|
|
|
|
|
5.16 |
% |
|
|
|
|
5.95 |
% | ||||
Interest expense as a percentage of average earning assets |
|
|
|
|
|
2.36 |
% |
|
|
|
|
2.97 |
% | ||||
Net yield on interest earning assets |
|
|
|
|
|
2.80 |
% |
|
|
|
|
2.98 |
% | ||||
Net interest spread |
|
|
|
|
|
2.63 |
% |
|
|
|
|
2.53 |
% |
|
|
Nine Months Ended September 30, 2010 |
|
Nine Months Ended September 30, 2009 |
| ||||||||||||
|
|
Average |
|
|
|
Yield/ |
|
Average |
|
|
|
Yield/ |
| ||||
(dollars in thousands) |
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans |
|
$ |
160,395 |
|
$ |
7,412 |
|
6.16 |
% |
$ |
171,349 |
|
$ |
8,239 |
|
6.41 |
% |
Time deposits - in other banks |
|
26,185 |
|
41 |
|
0.21 |
% |
2,802 |
|
14 |
|
0.67 |
% | ||||
Investment securities - taxable |
|
11,043 |
|
300 |
|
3.62 |
% |
46,748 |
|
2,039 |
|
5.82 |
% | ||||
Investment securities - nontaxable |
|
50,791 |
|
2,723 |
|
7.15 |
% |
44,242 |
|
2,544 |
|
7.67 |
% | ||||
Total interest-earning assets |
|
248,414 |
|
10,476 |
|
5.62 |
% |
265,141 |
|
12,836 |
|
6.45 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Allowance for loan and lease losses |
|
(3,385 |
) |
|
|
|
|
(2,653 |
) |
|
|
|
| ||||
Non-interest bearing assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and due from banks |
|
4,963 |
|
|
|
|
|
15,449 |
|
|
|
|
| ||||
Bank premises and equipment |
|
4,967 |
|
|
|
|
|
4,898 |
|
|
|
|
| ||||
Accrued interest receivable |
|
1,392 |
|
|
|
|
|
1,722 |
|
|
|
|
| ||||
Other assets |
|
29,957 |
|
|
|
|
|
18,450 |
|
|
|
|
| ||||
Total average assets |
|
$ |
286,308 |
|
|
|
|
|
$ |
303,007 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand |
|
$ |
15,443 |
|
$ |
12 |
|
0.10 |
% |
$ |
14,821 |
|
$ |
14 |
|
0.13 |
% |
Money market savings |
|
1,862 |
|
3 |
|
0.21 |
% |
1,407 |
|
3 |
|
0.28 |
% | ||||
Savings deposits |
|
7,356 |
|
28 |
|
0.51 |
% |
5,697 |
|
21 |
|
0.49 |
% | ||||
Time deposits >$100M |
|
66,114 |
|
1,243 |
|
2.51 |
% |
57,207 |
|
1,600 |
|
3.73 |
% | ||||
Time deposits <$100M |
|
95,979 |
|
1,645 |
|
2.29 |
% |
96,908 |
|
2,677 |
|
3.68 |
% | ||||
Other Borrowings |
|
44,640 |
|
1,538 |
|
4.59 |
% |
72,140 |
|
2,080 |
|
3.84 |
% | ||||
Total interest-bearing liabilities |
|
231,394 |
|
4,469 |
|
2.57 |
% |
248,180 |
|
6,395 |
|
3.44 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest-bearing checking |
|
33,749 |
|
|
|
|
|
34,188 |
|
|
|
|
| ||||
Accrued interest payable |
|
1,393 |
|
|
|
|
|
1,542 |
|
|
|
|
| ||||
Other liabilities |
|
3,510 |
|
|
|
|
|
3,058 |
|
|
|
|
| ||||
Total Liabilities |
|
270,046 |
|
|
|
|
|
286,968 |
|
|
|
|
| ||||
Total shareholders equity |
|
16,262 |
|
|
|
|
|
16,039 |
|
|
|
|
| ||||
Total average liabilities and Shareholders equity |
|
$ |
286,308 |
|
|
|
|
|
$ |
303,007 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
|
|
|
$ |
6,007 |
|
|
|
|
|
$ |
6,441 |
|
|
| ||
Interest income as a percentage of average earning assets |
|
|
|
|
|
5.62 |
% |
|
|
|
|
6.45 |
% | ||||
Interest expense as a percentage of average earning assets |
|
|
|
|
|
2.40 |
% |
|
|
|
|
3.22 |
% | ||||
Net yield on interest earning assets |
|
|
|
|
|
3.22 |
% |
|
|
|
|
3.24 |
% | ||||
Net interest spread |
|
|
|
|
|
3.05 |
% |
|
|
|
|
3.03 |
% |
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 three months and nine months ended September 30, 2010 compared with the same periods in 2009.
|
|
Increase (decrease) in the three months ended |
| |||||||
|
|
September 30, 2010 compared with September 30, 2009 |
| |||||||
(dollars in thousands) |
|
Volume |
|
Rate |
|
Total |
| |||
Increase (decrease) in interest income: |
|
|
|
|
|
|
| |||
Loans |
|
$ |
(202 |
) |
$ |
(1 |
) |
$ |
(203 |
) |
Time deposits - in other banks |
|
8 |
|
9 |
|
17 |
| |||
Investment securities - taxable |
|
(306 |
) |
(55 |
) |
(361 |
) | |||
Investment securities - nontaxable |
|
(34 |
) |
(36 |
) |
(70 |
) | |||
|
|
(534 |
) |
(83 |
) |
(617 |
) | |||
|
|
|
|
|
|
|
| |||
Increase (decrease) in interest expense: |
|
|
|
|
|
|
| |||
Interest-bearing demand |
|
|
|
|
|
|
| |||
Savings deposits |
|
2 |
|
1 |
|
3 |
| |||
Time deposits >$100M |
|
95 |
|
(197 |
) |
(102 |
) | |||
Time deposits <$100M |
|
(29 |
) |
(311 |
) |
(340 |
) | |||
Other borrowing |
|
(27 |
) |
22 |
|
(5 |
) | |||
|
|
41 |
|
(485 |
) |
(444 |
) | |||
Increase (decrease) in net interest income: |
|
$ |
(575 |
) |
$ |
402 |
|
$ |
(173 |
) |
|
|
Increase (decrease) in the nine months ended |
| |||||||
|
|
September 30, 2010 compared with September 30, 2009 |
| |||||||
(dollars in thousands) |
|
Volume |
|
Rate |
|
Total |
| |||
Increase (decrease) in interest income: |
|
|
|
|
|
|
| |||
Loans |
|
$ |
(527 |
) |
$ |
(300 |
) |
$ |
(827 |
) |
Time deposits - in other banks |
|
125 |
|
(99 |
) |
26 |
| |||
Investment securities - taxable |
|
(1,557 |
) |
(182 |
) |
(1,739 |
) | |||
Investment securities - nontaxable |
|
376 |
|
(196 |
) |
180 |
| |||
|
|
(1,583 |
) |
(777 |
) |
(2,360 |
) | |||
|
|
|
|
|
|
|
| |||
Increase (decrease) in interest expense: |
|
|
|
|
|
|
| |||
Interest-bearing demand |
|
1 |
|
(2 |
) |
(1 |
) | |||
Money market savings |
|
1 |
|
(1 |
) |
|
| |||
Savings deposits |
|
6 |
|
1 |
|
7 |
| |||
Time deposits >$100M |
|
249 |
|
(606 |
) |
(357 |
) | |||
Time deposits <$100M |
|
(26 |
) |
(1,007 |
) |
(1,033 |
) | |||
Other borrowing |
|
(793 |
) |
251 |
|
(542 |
) | |||
|
|
(562 |
) |
(1,364 |
) |
(1,926 |
) | |||
Increase (decrease) in net interest income: |
|
$ |
(1,021 |
) |
$ |
587 |
|
$ |
(434 |
) |
Provision and Allowance for Loan and Lease Losses
The Corporation maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan and lease losses (ALLL). The ALLL 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 Corporation employs several methodologies for estimating probable losses. Methodologies are determined based on a number of factors, including loan type of collateral, risk rating, concentrations, and collateral value.
The Corporation calculates the required ALLL on a quarterly basis and makes adjusting entries as needed. 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 Corporations product-specific credit policy and lending staff experience. These estimates depend on subjective factors and, therefore, contain inherent uncertainties.
The Corporations ALLL 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 Corporation 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 ALLL.
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 September 30, 2010 and 2009 the Banks allowance stood at 2.05 percent and 1.75 percent of total loans, respectively.
No provision was made to the ALLL during the nine months ended September 30, 2010 compared to $1,918,000 for the same period in 2009. Loans charged off during the nine months ended September 30, 2010 totaled $278,000 compared to $1,351,000 for the same period in 2009. Recoveries totaled $2,000 during the nine months ended September 30, 2010 and 2009.
The Banks non-performing (delinquent 90 days or more and on non-accrual) net loans as a percentage of total loans were 4.50 percent and 5.66 percent as of the end of September 30, 2010 and 2009, respectively.
Non-Interest Income
Total non-interest income for the three months ended September 30, 2010 was $2,226,000 compared with $4,072,000 for the same period in 2009. The decrease of $1,846,000 was due primarily to decreases of $1,500,000 in gains on sales of investment securities, $115,000 in merchant discount fees, $83,000 in income from the sale and servicing of SBA Loans and $49,000 in services on deposit accounts.
Total non-interest income for the nine months ended September 30, 2010 was $5,277,000 compared with $8,375,000 for the same period in 2009. The decrease of $3,098,000 was due primarily to decreases of $878,000 in merchant discount fees, $2,217,000 in gains on sales of investment securities, $156,000 in service charges on deposit accounts and $59,000 in income from sales and servicing of Small Business Administration loans, partially offset by an increase of $391,000 in credit card/stored value card program fees.
We anticipate that non-interest income from credit card programs will decline from $0.9 million for the first nine months of 2010 and from $1.1 million for 2009 to approximately $0.4 million in 2011. The decrease is due to the expiration on June 30, 2011 of a card sponsorship agreement with a third party.
Non-Interest Expense
Salary and benefits expense for the three months and nine months ended September 30, 2010 increased $54,000 and $280,000 compared with the same periods in 2009. The increase was due to the addition of a Credit Administration Officer, a loan processor and a senior accounting staff position.
Total occupancy and equipment expense for the three months and nine months ended September 30, 2010 was $259,000 and $777,000 resulting in a nominal change when compared to the same period in 2009.
Professional fees for the three months ended September 30, 2010 were $403,000 compared to $172,000 for the same period in 2009. Professional fees for the nine months ended September 30, 2010 were $1,239,000 compared to $699,000 for the same period in 2009. The increases were primarily due to increases in accounting/audit expense and legal fees associated with regulatory matters discussed elsewhere herein as well as lawsuits related to various loans and loan collection expense. Accounting/audit fees is anticipated to remain above historic levels due the additional audits required by the FDIC Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty. Legal fees are expected to decline in 2011 as a result of the resolution of the FDIC matter; however they will remain above historic levels due to the litigation related to various loans and loan collection expense.
Data processing expense for the three months and nine months ended September 30, 2010 was $56,000 and $192,000, respectively; representing decreases of $11,000 and $55,000 when compared the same period in 2009.
During the three and nine months ended September 30, 2010 no prepayment fees on borrowings from the FHLB fo San Francisco were paid on borrowing compared with $457,000 and $888,000, respectively for the same periods in 2009.
During the three and nine months ended September 30, 2010 litigation settlement expenses totaled $158,000 and $1,038,000, respectively. No litigation settlement expenses were incurred during the same periods in 2009. See Part II Other Information Item 1 Legal Proceedings Section for addition information.
Other general and administrative expenses for the three months ended September 30, 2010 totaled $1,310,000 compared with $1,479,000 for the same period in 2009, which is an decrease of $169,000. Significant changes occurred in the following categories: increases in ATM expense of $76,000, director fees of $26,000, business development expenses of $20,000 and Bank business credit card expense of $16,000; partially offset by decreases in FDIC insurance premiums of $122,000, merchant card processing expense of $84,000, prepaid debit card expense of $58,000, loan expense of $47,000 and credit card program expense of $19,000.
Other general and administrative expenses for the for the nine months ended September 30, 2010 totaled $3,523,000 compared with $4,025,000 for the same period in 2009, which is a decrease of $502,000. Significant changes occurred in the following categories: increases in ATM expense of $43,000, other operating losses of $82,000, Bank Business credit card expense of $54,000, FDIC insurance premiums of $35,000 and director fees of $28,000, partially offset by decreases of $568,000 in merchant card processing expense, $58,000 in prepaid debit card expense, $37,000 in loan expense, $36,000 in credit card program expense, $22,000 in insurance expense, $18,000 in miscellaneous expense, $18,000 in bank security expense and $15,000 in advertising expense.
OREO expenses and provision for losses on foreclosed assets for the three months and nine months ended September 30, 2010 totaled $916,000 and $1,997,000, respectively compared to $163,000 and $792,000 during the same period in 2009. These increases are due to the continued decline in real estate values as a result of local and national economic conditions.
FDIC settlement expenses related to the issuance of a Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty included funding a restitution reserve of $1,250,000, civil money penalty of $250,000, net of a receivable from the third-party debit card program, and $300,000 charitable donation. These non-recurring expenses affected both the three months and nine months ended September 30, 2010.
Provision for Income Taxes
The income tax provision (benefit) was ($1,031,000) for the three months ended September 30, 2010 compared to $297,000 for the same period in 2009, representing (50.39%) and 28.53% of pre-tax income for those periods. The decrease in the effective tax rate for 2010 is a direct result of the Banks investing in tax-exempt securities and decreasing income.
The income tax provision (benefit) was ($1,452,000) for the nine months ended September 30, 2010 compared to $470,000 for the same period in 2009, representing (51.78%) and 20.50% of pre-tax income for those periods. The decrease in the effective tax rate for 2010 is a direct result of the Banks investing in tax-exempt securities and decreasing income.
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
Average loans represented 64.57% of average earning assets and 56.02% of average total assets for the nine months ended September 30, 2010 compared with 64.63% and 56.55%, respectively during 2009. For the nine months ended September 30, 2010, average loans decreased 6.39% to $160,395,000 from $171,349,000 for the same period in 2009. Average real estate loans increased $148,000 (0.12%), average commercial loans increased $482,000 (1.37%); while average construction loans decreased $11,056,000 (82.5%) and average installment loans decreased $528,000 (31.13%).
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 (SBA) lending in Monterey County, and holds SBAs coveted Preferred Lender Status. Generally, SBA loans are guaranteed, by the SBA, for 75 to 90 percent of their principal amount, which can be retained in the loan 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.
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
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 and interest on the loan is available and in the process of collection.
In relation to SBA loans sold, the Bank generally repurchases from the secondary market the guaranteed portion of 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 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 and foreclosed assets (referred to collectively as non-performing assets):
|
|
As of |
|
As of |
| |||||
|
|
September 30, |
|
December 31, |
| |||||
|
|
2010 |
|
2009 |
|
2009 |
| |||
|
|
(Dollars in thousands) |
| |||||||
Accruing, past due 90 days or more: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Real Estate : |
|
|
|
|
|
|
| |||
Construction |
|
$ |
|
|
$ |
|
|
$ |
|
|
Commercial |
|
2,777 |
(1) |
|
|
|
| |||
Land Development |
|
|
|
350 |
|
|
| |||
Single Family Residence |
|
|
|
1,762 |
|
|
| |||
Total Real Estate |
|
2,777 |
|
2,112 |
|
|
| |||
|
|
|
|
|
|
|
| |||
Commercial |
|
|
|
|
|
|
| |||
Installment |
|
|
|
|
|
|
| |||
Other |
|
|
|
|
|
|
| |||
Total accruing |
|
2,777 |
|
2,112 |
|
|
| |||
|
|
|
|
|
|
|
| |||
Nonaccrual Loans: |
|
|
|
|
|
|
| |||
Real Estate: |
|
|
|
|
|
|
| |||
Construction |
|
|
|
|
|
|
| |||
Commercial |
|
|
|
572 |
|
|
| |||
Land Development |
|
701 |
|
2,120 |
|
2,242 |
| |||
Single Family Residence |
|
1,621 |
|
3,269 |
|
2,895 |
| |||
Total Real Estate |
|
2,322 |
|
5,961 |
|
5,137 |
| |||
|
|
|
|
|
|
|
| |||
Commercial |
|
2,058 |
|
1,582 |
|
2,943 |
| |||
Installment |
|
|
|
|
|
|
| |||
Other |
|
|
|
|
|
|
| |||
Total nonaccrual |
|
4,380 |
|
7,543 |
|
8,080 |
| |||
|
|
|
|
|
|
|
| |||
Total nonperforming loans |
|
4,380 |
|
7,543 |
|
8,080 |
| |||
Other Real Estate Owned |
|
27,575 |
|
13,923 |
|
14,333 |
| |||
Total nonperforming assets |
|
$ |
31,955 |
|
$ |
21,466 |
|
$ |
22,413 |
|
|
|
|
|
|
|
|
| |||
Total loans end of period |
|
$ |
158,961 |
|
$ |
170,505 |
|
$ |
166,959 |
|
|
|
|
|
|
|
|
| |||
Ratio of nonperforming loans to total loans at end of period |
|
2.76 |
% |
4.42 |
% |
4.84 |
% | |||
Ratio nonperforming assets to total loans and OREO at end of period |
|
17.13 |
% |
11.63 |
% |
12.36 |
% |
(1) Two loans which are well secured and in process of collection.
Loans past due ninety days or more and still accruing interest totaled $2,777,000 at September 30, 2010 compared with no loans in this category at December 31, 2009.
Non-accrual loans totaled $4,380,000 at September 30, 2010 compared to $8,080,000 at December 31, 2009. The following table presents information with respect to the reasons for the changes in non-accrual loans:
|
|
Balance |
|
|
|
|
|
|
|
|
|
Returned |
|
Balance |
| |||||||
|
|
December 31, |
|
|
|
|
|
Charge |
|
Transfer |
|
to |
|
September |
| |||||||
Description |
|
2009 |
|
Additions |
|
Collections |
|
Offs |
|
to OREO |
|
Performing |
|
30, 2010 |
| |||||||
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Construction |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Land Development |
|
1,751 |
|
|
|
|
|
|
|
1,200 |
|
|
|
551 |
| |||||||
Single Family Residence |
|
3,386 |
|
1,704 |
|
50 |
|
66 |
|
3,203 |
|
|
|
1,771 |
| |||||||
Total Real Estate |
|
5,137 |
|
1,704 |
|
50 |
|
66 |
|
4,403 |
|
|
|
2,322 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial |
|
2,943 |
|
349 |
|
11 |
|
201 |
|
949 |
|
73 |
|
2,058 |
| |||||||
|
|
$ |
8,080 |
|
$ |
2,053 |
|
$ |
61 |
|
$ |
267 |
|
$ |
5,352 |
|
$ |
73 |
|
$ |
4,380 |
|
As previously noted, the primary reason for the decline in non-accrual loans was the transfer of the collateral property into OREO.
Summary of Loan Loss Experience
|
|
Nine Months |
|
Year ended |
| |||||
|
|
Ended September 30, |
|
December 31, |
| |||||
|
|
2010 |
|
2009 |
|
2009 |
| |||
|
|
(Dollars in thousands) |
| |||||||
Average loans outstanding |
|
$ |
160,395 |
|
$ |
171,349 |
|
$ |
169,853 |
|
|
|
|
|
|
|
|
| |||
Total loans outstanding at end of the period |
|
$ |
158,961 |
|
$ |
170,505 |
|
$ |
166,959 |
|
|
|
|
|
|
|
|
| |||
Allowance, beginning of period |
|
3,529 |
|
2,413 |
|
2,413 |
| |||
|
|
|
|
|
|
|
| |||
Loans charged off during period: |
|
|
|
|
|
|
| |||
Commercial |
|
(250 |
) |
(13 |
) |
(358 |
) | |||
Installment |
|
|
|
(30 |
) |
(37 |
) | |||
Real Estate |
|
(28 |
) |
(1,308 |
) |
(1,908 |
) | |||
Other |
|
|
|
|
|
(26 |
) | |||
Total charge offs |
|
(278 |
) |
(1,351 |
) |
(2,329 |
) | |||
|
|
|
|
|
|
|
| |||
Recoveries during period: |
|
|
|
|
|
|
| |||
Commercial |
|
2 |
|
2 |
|
2 |
| |||
Installment |
|
|
|
|
|
|
| |||
Real Estate |
|
|
|
|
|
75 |
| |||
Other |
|
|
|
|
|
|
| |||
Total recoveries |
|
2 |
|
2 |
|
77 |
| |||
|
|
|
|
|
|
|
| |||
Net loans charged off during the period |
|
(276 |
) |
(1,349 |
) |
(2,252 |
) | |||
|
|
|
|
|
|
|
| |||
Additions to allowance for possible loan losses |
|
|
|
1,918 |
|
3,368 |
| |||
Allowance, end of period |
|
$ |
3,253 |
|
$ |
2,982 |
|
$ |
3,529 |
|
|
|
|
|
|
|
|
| |||
Ratio of net loans charged off to average loans outstanding during the period |
|
0.17 |
% |
0.79 |
% |
1.33 |
% | |||
|
|
|
|
|
|
|
| |||
Ratio of allowance to total loans at end of period |
|
2.05 |
% |
1.75 |
% |
2.12 |
% | |||
|
|
|
|
|
|
|
| |||
Ratio of nonperforming loans to allowance for loan losses at end of period |
|
134.63 |
% |
252.95 |
% |
228.96 |
% |
The following table provides a breakdown of the allowance for loan losses by categories as of the dates indicated:
|
|
As of September 30, |
|
As of |
| |||||||||||
|
|
2010 |
|
2009 |
|
December 31, 2009 |
| |||||||||
Balance at End of Period Applicable to: |
|
Amount |
|
% of |
|
Amount |
|
% of |
|
Amount |
|
% of |
| |||
|
|
(Dollars in thousands) |
| |||||||||||||
Construction |
|
$ |
25 |
|
0.8 |
% |
$ |
112 |
|
6.6 |
% |
$ |
338 |
|
5.2 |
% |
Commercial |
|
810 |
|
23.7 |
% |
645 |
|
21.4 |
% |
995 |
|
20.1 |
% | |||
Installment |
|
4 |
|
0.3 |
% |
218 |
|
0.4 |
% |
9 |
|
1.7 |
% | |||
Real Estate |
|
2,289 |
|
75.2 |
% |
1,996 |
|
71.6 |
% |
2 174 |
|
73.0 |
% | |||
Unallocated |
|
125 |
|
|
|
11 |
|
|
|
13 |
|
|
| |||
Total allowance for loan and lease losses |
|
$ |
3,253 |
|
100.0 |
% |
$ |
2,982 |
|
100.0 |
% |
$ |
3,529 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total loans end of period |
|
$ |
158,961 |
|
|
|
$ |
170,505 |
|
|
|
$ |
166,959 |
|
|
|
Non-performing Assets
The following table presents information with respect to nonperforming assets, as of the dates indicated. The non-accrual loans are net of the guaranteed portion of SBA loans and the OREO was acquired through deed-in-lieu or foreclosure. The OREO was recorded at fair value less selling costs on the date of acquisition.
|
|
As of |
|
As of |
| |||||
|
|
September 30, |
|
December 31, |
| |||||
|
|
2010 |
|
2009 |
|
2009 |
| |||
|
|
(Dollars in thousands) |
| |||||||
Nonperforming loans |
|
$ |
4,380 |
|
$ |
9,655 |
|
$ |
8,080 |
|
Other real estate owned, net (1) |
|
27,575 |
|
13,923 |
|
14,333 |
| |||
Total nonperforming assets |
|
$ |
31,955 |
|
$ |
23,578 |
|
$ |
22,413 |
|
|
|
|
|
|
|
|
| |||
Nonperforming loans to total gross loans |
|
2.76 |
% |
4.42 |
% |
4.84 |
% | |||
Nonperforming assets to total loans and OREO at end of period |
|
17.13 |
% |
11.63 |
% |
12.36 |
% |
(1) net of reserve for foreclosed assets losses of $2,060,000 as of September 30, 2010, $522,000 as of September 30, 2009 and $1,010,000 as of December 31, 2009.
Deposits
Average interest bearing and non-interest-bearing deposits for the nine months ended September 30, 2010 were $220,503,000 an increase of 4.89% compared with the same period in 2009. Average certificates of deposit represented 73.51% of average deposits for the nine months ended September 30, 2010 compared with 73.31% for the same period in 2009. Average interest bearing checking, money market and savings accounts as a group were 11.18% of average deposits for the nine months ended September 30, 2010 compared with 10.43% for the same period in 2009. Average non-interest bearing deposits represented 15.31% of average deposits for the nine months ended September 30, 2010 compared with 16.26% for the same period in 2009.
The following table sets forth the scheduled maturities of the Corporations time deposits in denominations of $100,000 or greater at September 30, 2010:
Maturities of Time Deposits of
$100,000 or More
(Dollars in Thousands)
Three months or less |
|
$ |
19,301 |
|
Three months through six months |
|
8,305 |
| |
Nine months through twelve months |
|
18,084 |
| |
Over twelve months |
|
25,026 |
| |
Total |
|
$ |
70,716 |
|
Borrowings
The Corporation has a line of credit with Marshall & Ilsley Bank in the amount of $3,000,000, at a floating interest rate based on the one-month LIBOR Rate plus 3.75% with a floor rate of 6.50% and a maturity date of October 30, 2010. At September 30, 2010, $2,850,000 was outstanding on the line of credit. Marshall & Ilsley Bank has proposed a one year renewal term, a principal reduction of $150,000 and funding of an interest reserve account in the amount of $200,000. .Based on indications from Marshall & Ilsley Bank, management believes the line of credit will be renewed by the end of November.
The Bank has lines of credit from the Federal Reserve Bank of San Francisco (FRB) and the Federal Home Loan Bank of San Francisco (FHLB) with remaining available borrowing capacity on September 30, 2010 of $9,152,000 and $98,000, respectively. The FRB discount window line is secured by a portion of the Banks investment securities at September 30, 2010. At September 30, 2010, the total book value of securities pledged to the FRB was $10,681,000 with no outstanding loan balance. The FHLB line of credit has a maximum borrowing capacity of 20% of the Banks total assets, adjusted quarterly. The FHLB line of credit is secured by a blanket lien on the Banks loan and securities at September 30, 2010. The total principal balance at September 30, 2010 of pledged loans and securities at the FHLB was $158,961,000 and $2,726,000, respectively.
The following table provides information on eleven FHLB advances outstanding at September 30, 2010.
|
|
|
|
Funding |
|
Maturity |
| |
Amount |
|
Rate |
|
Date |
|
Date |
| |
$ |
5,000,000 |
|
4.96 |
% |
11/14/05 |
|
11/15/10 |
|
1,750,000 |
|
4.74 |
% |
1/26/06 |
|
1/26/11 |
| |
2,250,000 |
|
4.75 |
% |
1/26/06 |
|
1/26/11 |
| |
3,500,000 |
|
5.51 |
% |
7/17/06 |
|
7/18/11 |
| |
1,500,000 |
|
5.52 |
% |
7/17/06 |
|
7/18/11 |
| |
1,000,000 |
|
5.22 |
% |
8/25/06 |
|
8/25/11 |
| |
5,000,000 |
|
5.21 |
% |
7/30/07 |
|
7/30/12 |
| |
3,000,000 |
|
4.85 |
% |
10/1/07 |
|
10/1/12 |
| |
5,000,000 |
|
1.75 |
% |
3/15/10 |
|
3/15/13 |
| |
5,000,000 |
|
5.01 |
% |
9/18/07 |
|
9/18/14 |
| |
1,000,000 |
|
7.72 |
% |
6/1/00 |
|
6/3/30 |
| |
$ |
34,000,000 |
|
|
|
|
|
|
|
The Bank has two letters of credit issued by the FHLB. One letter of credit in the amount of $330,000, expiring April 17, 2011, 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. The other letter of credit in the amount of $1,300,000, expiring February 17, 2019 has MasterCard International Inc. as the beneficiary and is used to secure settlement of credit card transactions.
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 September 30, 2010, shareholders equity was $15,360,000 versus $16,150,000 at December 31, 2009. The Corporation paid no cash dividends to shareholders for the nine months ended September 30, 2010 and for the year ended December 31, 2009. The Bank paid no cash dividends to the Corporation for the nine months ended September 30, 2010 and $500,000 in dividends for the year ended December 31, 2009.
The FDIC and Federal Reserve Board have adopted capital adequacy guidelines for use in their examination and regulation of banks and bank holding companies. If the capital of a bank or bank holding company falls below the minimum levels established by these guidelines, it may be denied approval to acquire or establish additional banks or non-bank businesses, or the FDIC or Federal Reserve Board may take other administrative actions. The guidelines employ two measures of capital: (1) risk-based capital and (2) leverage capital.
In general, the risk-based capital guidelines provide detailed definitions of which obligations will be treated as capital, and assign different weights to various assets and off-balance sheet items, depending upon the perceived degree of credit risk associated with each asset. Each asset is assigned to one of four risk-weighted categories. For example, 0 percent for cash and unconditionally guaranteed government securities; 20 percent for deposits with other banks and fed funds; 50 percent for state bonds and certain residential real estate loans; and 100 percent for 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 to maintain Tier 1 capital of at least 5.0% 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 12.55% and 13.39% at September 30, 2010 and 2009, respectively. The Banks Tier 1 capital exceeds the minimum regulatory requirement by $16,780,000. The Bank had a Total Risk-Based capital to risk-adjusted assets ratio of 13.91% and 14.64% at September 30, 2010 and 2009, respectively. The Banks Total Risk-Based capital exceeds the minimum regulatory requirement by $11,595,000.
The Tier 1 leverage capital ratio guidelines require a minimum leverage capital ratio of 5.0% of Tier 1 capital to total assets less goodwill. The Bank had a leverage capital ratio of 8.48% and 9.04% at September 30, 2010 and 2009, respectively. The Banks Tier 1 leverage capital exceeds the minimum regulatory requirement by $13,008,000 under the Prompt Corrective Action framework. However , under the recently issued Consent Order (see Other Regulatory Matters section), the Bank must achieve a 9% leverage capital ratio by December 29, 2010.
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. The Corporation did not repurchase any shares of stock during the nine months ended September 30, 2010. The Corporation repurchased 20,678 shares of common stock at an average cost of $4.20 per share in open market transactions during 2009. The Corporation repurchased 46,010 shares of common stock at an average cost of $7.51 per share in open market transactions during 2008.
In October 2008, the Board and the holders of more than a majority of our issued and outstanding common stock approved by written consent, an amendment to the Corporations articles of incorporation (the Amendment). The Amendment authorizes the Corporation to issue up to 10,000,000 shares of preferred stock, which may be issued from time to time in one or more series as determined by the Board. The Board is authorized to designate all rights, preferences, privileges and restrictions attendant to each series as well as the number of shares authorized for issuance in each series of the preferred stock, which matters shall be expressed in resolutions adopted by the Board and filed with the Secretary of State of the state of California. Additionally, the Amendment authorizes the Corporation to issue an additional 7,500,000 shares of common stock for a total of 10,000,000 shares of common stock authorized for issuance after the Amendment. The Amendment became effective January 23, 2009. There were no shares issued as of September 30, 2010.
Other Regulatory Matters
The Bank has entered into a Consent Order with the Federal Deposit Insurance Corporation (the FDIC) and the California Department of Financial Institutions (the CDFI). The order became effective on September 1, 2010. The order was filed as an exhibit to the Companys Current Report on Form 8-K filed on September 23, 2010.
The order requires the Bank to take corrective actions to address certain alleged violations of law and/or regulation. The following is a list of the corrective actions required of the Bank and the current status (in italics) of the actions taken as of the filing date hereof:
1. have and retain qualified management having such qualifications and experience commensurate with his or her duties and responsibilities at the Bank and notify the FDIC and the CDFI prior to adding any individual to the Banks Board of Directors or employing any individual as a senior executive officer of the Bank.
The Board of Directors has undertaken a review of the qualifications and experience of individuals serving in key management positions.
2. develop and adopt a capital plan that complies with the FDICs Statement of Policy on Risk-Based Capital contained in Appendix A to Part 325 of the FDICs rules and regulations in order to maintain Tier 1 capital in such an amount to ensure that the Banks leverage ratio equals or exceeds 9% and the Banks total risk-based capital ratio equals or exceeds 12%.
The Bank has developed a capital plan that complies with the FDICs Statement of Policy on Risk-Based Capital contained in Appendix A of Par 325 of the FDICs rules and regulations to ensure that the Banks leverage ratio equals or exceeds 9% and the Banks total risk-based capital ratio equals or exceeds 12%. This capital plan was approved by the Board on October 28, 2010. Although the Bank has consistently maintained a total risk-based capital ratio in excess of the required 12%,the Banks compliance with the 9% leverage ratio requirement cannot yet be determined until completion of its income tax calculation for the year ended December 31, 2010.
3. not pay cash dividends or make any other payments to the Banks shareholders absent the prior written consent of the FDIC and the CDFI;
The Board has acknowledged the prohibition on payment of dividends or any other payments to the Banks shareholders without the prior written consent of the FDIC and the CDFI.
4. eliminate, either by charge-off or collection, assets classified as Loss in the examination report of the FDIC and the CDFI relating to their examination of the Bank on February 16, 2010 (the ROE).
Assets classified as Loss in the examination report of the FDIC and the CDFI relating to their examination of the Bank on February 16, 2010 have been charged-off.
5. formulate a written plan to reduce the Banks risk exposure in adversely classified Substandard or Doubtful assets listed in the ROE.
A written plan is being developed to reduce the Banks risk exposure in adversely classified Substandard or Doubtful assets listed in the ROE. When completed, such plan will be submitted to the FDIC Regional Director and CDFI Commissioner for their review and comment.
6. not extend any additional credit to or for the benefit of any borrower who has a loan or other extension of credit that either: (a) has been charged off or classified (in whole or in part) as Loss and is uncollected, or (b) absent the prior approval of the Banks board or loan committee, has been classified (in whole or in part) as Doubtful or Substandard;
The Bank has not extended any additional credit to or for the benefit of any borrower who has a loan or other extension of credit that either has been charged off or classified (in whole or in part) as Loss, Doubtful or Substandard since the date of this order.
7. review the appropriateness of the Banks allowance for loan and lease losses (ALLL) and establish a comprehensive policy for determining the appropriate level of the ALLL, including documenting the analysis according to the standards set forth in the applicable policy guidelines of the FDIC.
The ALLL policy has been reviewed and revised to ensure the determination of the appropriate level of the ALLL, including documenting the analysis according to the standards set forth in the applicable policy guidelines of the FDIC. The revised policy was approved by the Board on October 14, 2010.
8. develop or revise, adopt, and implement a written lending and collection policy to provide effective guidance and control over the Banks lending functions in accordance with the requirements of the order.
The Banks written lending and collection policy has been revised to provide effective guidance and control over the Banks lending functions. The revised policy was approved by the Board on October 28, 2010.
9. develop or revise, adopt, and implement a written liquidity and funds management policy that adequately addresses liquidity needs and contingency funding, appropriately reduces the Banks reliance on non-core funding sources and complies with FDICs Guidance on Liquidity Risk Management, dated August 26, 2008.
A revised liquidity and funds management policy which addresses liquidity needs and contingency funding, appropriately reduces reliance on non-core funding sources, and complies with FDICs Guidance on Liquidity Risk Management, dated August 26, 2008 was approved by the Board on October 28, 2010, and has been implemented.
10. comply with the FDICs rules and regulations relating to brokered deposits and formulate and submit for approval, a written plan to eliminate the Banks reliance on brokered deposits.
The Bank is in compliance with the FDICs rules and regulations relating to brokered deposits and has formulated and submitted to the FDIC a written plan to eliminate its reliance on brokered deposits. The plan was approved by the Board on October 28, 2010 and was submitted to the FDIC on October 29, 2010.
11. develop or revise, adopt, and implement a written plan addressing retention of profits, reducing overhead expenses, and setting forth a comprehensive budget to cover the three-year period from January 1, 2011 to December 31, 2013, which shall include formal goals, strategies and benchmarks which are consistent with sound banking practices to improve the Banks net interest margin, increase interest income, reduce discretionary expenses, and improve and sustain earnings.
The Bank is in the process of developing a Strategic Plan and Budget for the period from January 1, 2011 through December 31, 2013. Once completed, the Strategic Plan and Budget will be presented to the Board for approval and submitted to the FDIC Regional Director and the CDFI Commissioner for their review.
12. develop and submit for regulatory review and approval, a written three-year strategic plan, including a written profit plan, which includes, among other things, specific goals for the dollar volume of total loans, total investment securities and total deposits as of December 31, 2011 through December 31, 2013.
See Item 11.
13. refrain from engaging in any expansionary activities, including opening any branches absent prior regulatory approval.
The Bank currently does not anticipate any expansionary activities and acknowledges the requirement for prior regulatory approval before under taking any such activities.
14. inform the FDIC and the CDFI prior to making any planned public announcement or notification regarding changes to the Banks financial condition, executive management or board of directors.
The Board and management acknowledge the requirement to inform the FDIC and the CDFI prior to making any planned public announcement or notification regarding changes to the Banks financial condition, executive management or Board.
15. furnish written progress reports to the FDIC and the CDFI detailing the form and manner of any actions taken to secure compliance with the order; and provide a description of the order to the Banks shareholders in conjunction with the Banks next shareholder communication and also in conjunction with the Banks notice or proxy statement preceding the next shareholder meeting.
The Banks initial progress report was filed with the FDIC & CDFI on October 30, 2010.
The Bank, has stipulated to the issuance of a Consent Order, Order for Restitution and Order to Pay Civil Money Penalties by the FDIC. The orders became effective on September 29, 2010. The orders were filed as an exhibit to the Companys Current Report on Form 8-K, filed on October 5, 2010.
In connection with the issuance of the orders, the FDIC alleged that the Bank had engaged in unsafe or unsound banking practices, deceptive practices and violations of law by:
1. offering credit cards (Balance Transfer Credit Cards) which are intended for the transfer and payment of charged-off consumer debt without disclosing the age of the debt and the fact that the transferred debt was time-barred and/or no longer reportable by credit reporting agencies;
2. offering Balance Transfer Credit Cards to consumers when the Bank does not have sufficient substantiation that the debtor is obligated for the amount of indebtedness subject to the balance transfer;
3. misleading consumers about the utility of Balance Transfer Credit Cards advertised as credit cards when, in fact, the consumers have no available credit at the time the credit card is issued;
4. misrepresenting debt collection programs as a credit card offer;
5. misleading consumers regarding the interest charged on debt transferred to Balance Transfer Credit Cards; and
6. misleading consumers concerning the fees associated with stored value debit cards through website solicitations for the cards.
The allegations contained in 1 through 5 above were related to a credit card program offered to consumers under a card sponsorship agreement between the Bank and Tighorn Financial Services, LLC (Tighorn). Tighorn acquired consumer debt and solicited consumers as a part of its debt collection program. A portion of the debt was forgiven and, as an incentive to make payments, the remainder of the debt was transferred to a credit card.
The Bank agreed to issue MasterCard credit cards on behalf of Tighorn to certain eligible consumers who Tighorn solicited. The card sponsorship agreement required, among other things, that Tighorns solicitations comply with laws, regulations and regulatory orders governing the Bank in the solicitation, issuance and administration of the credit cards.
In June 2008, the Bank provided notice of cancellation to Tighorn in accordance with provisions of the card sponsorship agreement. While the Bank continues to service existing credit card accounts, solicitations of new accounts were discontinued effective December 31, 2008.
The allegation contained in 6 above was related to a stored value card program which was canceled in accordance with provisions of the card sponsorship agreement, in June 2008. The card portfolio was transferred to another issuer on or about December 31, 2008.
Without admitting or denying any of the alleged charges of unsafe or unsound banking practices and any violations of law, the Bank has agreed to take the following corrective actions to address the foregoing alleged violations of law and/or regulation. Below each listed action is a description of the status of the Banks efforts to comply with the required action (in italics).
1. provide full accurate disclosure and refrain from making misleading statements to consumers regarding the Banks balance transfer credit card programs, the interest rates and fees associated with these programs, the Banks debt collection practices, and the Banks stored value card programs.
The Bank has established procedures for the review of disclosures and solicitation materials for both credit card and stored value card programs which require disclosures and solicitation materials be reviewed by the Banks compliance department and independent legal counsel with expertise in credit card and stored value card regulations.
2. Board to participate fully in the oversight of the Banks compliance management system and to assume full responsibility for the approval of sound compliance policies and objectives. Board to establish a compliance committee comprised of at least three directors who are not Bank officers that will meet at least monthly to review among other things, compliance with consumer laws and compliance with the Order. Board to develop and adopt a comprehensive educational program for periodic training of Board members.
A compliance committee which meets on a monthly basis was established prior to entering into the Order and is still in place. A training program for the Board was prepared and approved by the Board on October 28, 2010.
3. develop and maintain effective monitoring, training and audit procedures to review each aspect of the Banks agreement with third parties in order to ensure that third party vendors comply with consumer protection laws, regulatory guidance, regulations, and policies (consumer laws).
The Bank has engaged independent consultants with expertise in credit card and stored value card regulations to audit the third parties to ensure their compliance with consumer protection laws, regulatory guidance, regulations and policies.
4. develop and maintain an adequate compliance management system that implements a written compliance program to ensure the Banks compliance with consumer laws.
The Bank has developed and now maintains a written compliance program which is designed to ensure compliance with consumer laws. A Compliance Committee, consisting of three outside directors, a Compliance Officer, and the Chief Executive Officer, meets monthly and reports its activities to the full Board.
5. retain a qualified compliance officer with the requisite knowledge and experience to administer an effective compliance management system, including experience with third-party debit and credit card agreements.
The Bank has appointed a Compliance Officer with 19 years of banking experience and an Assistant Compliance Officer with 29 years of banking experience and has engaged legal counsel and consultants having experience with third-party debit and credit card agreements to augment staff experience.
6. have an independent audit to ensure compliance with consumer laws.
An independent audit has been conducted and the Compliance Committee is awaiting the audit report.
7. correct, to the extent possible, all violations of consumer laws and refrain from making, either directly or indirectly, any false, deceptive or misleading representations with respect to any extension of credit or other Bank product; and
The Bank continues to make efforts to correct, to the extent possible, all violations of consumer laws and refrain from and acknowledges its legal obligations to refrain from making, either directly or indirectly, any false, deceptive or misleading representations with respect to any extension of credit or other Bank product.
8. contribute $300,000 to an established local or national non-profit organization for the specific purpose of consumer financial education and counseling.
The Bank has submitted the name and qualifications of a non-profit organization meeting the specific requirements as detailed in the Order to the FDIC Regional Director for approval. Once approval is granted, the Bank will disburse the designated funds.
9. make restitution payments to certain consumers who had or currently have a credit card and/or a prepaid debit card issued by the Bank through agreements with certain third party vendors. In this regard, the Bank must prepare a restitution plan for regulatory approval with respect to making restitution payments to such consumers not to exceed $2.5 million in the aggregate and reserve or deposit into a segregated account for the payment of restitution an amount not less than $1.5 million. The Bank is also required to retain an independent accounting firm to determine compliance with the restitution plan.
The Bank has submitted the name and qualifications of the independent accounting firm to the FDIC Regional Director for approval. The restitution plans are currently being developed and will be submitted to the FDIC Regional Director for review and approval on or before November 28, 2010
10. furnish written progress reports to the FDIC detailing the form and manner of any actions taken to secure compliance with the Order and provide a description of the Order to the Banks shareholders in conjunction with the Banks next shareholder communication and also in conjunction with the Banks notice or proxy statement preceding the next shareholder meeting.
The initial progress report was provided to the FDIC on October 29, 2010.
Additionally, as a result of the alleged violations of laws and/or regulation, the FDIC has assessed a civil money penalty in the amount of $500,000 against the Bank which has been paid to the United States Treasury.
The Company has entered into a written agreement (the Agreement) with the Federal Reserve Bank of San Francisco, effective as of October 29, 2010, pursuant to which the Company has agreed to take the following actions listed below. The Agreement was filed as an exhibit to the Companys Current Report on Form 8-K, filed on November 2, 2010. Below each listed action is a description of the status of the Banks efforts to comply with the required action (in italics).
1. take appropriate steps to fully utilize the Companys financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure the Banks compliance with the Consent Order, dated September 1, 2010, between the Bank and the Federal Deposit Insurance Corporation (the FDIC) and any other supervisory action taken by the Banks federal and state regulators;
The Company provided the Bank with a capital injection of $400,000 on December 31, 2010 in order enhance the Banks capital.
2. refrain from declaring or paying dividends, taking dividends or any form of payment from the Bank representing a reduction in the Banks capital, or making any distributions of interest, principal or other sums on the Companys subordinated debentures or trust preferred securities absent prior regulatory approval;
The Board has acknowledged the requirement of regulatory approval prior to declaring or paying dividends, taking dividends or any form of payment from the Bank representing a reduction in the Banks capital, or making any distributions of interest, principal or other sums on the Companys subordinated debentures or trust preferred securities.
3. refrain from incurring, increasing or guaranteeing any debt or repurchasing or redeeming any shares of its stock absent prior regulatory approval;
The Board has acknowledged the requirement of regulatory approval prior to incurring, increasing or guaranteeing any debt or repurchasing or redeeming any shares of its stock.
4. develop and submit for regulatory approval a cash flow projection of the Companys planned sources and uses of cash for debt service, operating expenses and other purposes;
The required cash flow projection was submitted to the Federal Reserve Bank on December 27, 2010.
5. comply with appropriate regulatory notice and approval requirements when appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer and comply with the limitations on indemnification and severance payments set forth in Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(i)) and Part 359 of the FDICs implementing regulations; and
The Board has acknowledged the notice and approval requirements when appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer and the obligation to comply with the limitations on indemnification and severance payments set forth in Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(i)) and Part 359 of the FDICs implementing regulations. No changes have occurred which required approval.
6. furnish written progress reports to the Federal Reserve Bank of San Francisco detailing the form and manner of any actions taken to secure compliance with the Agreement.
The initial progress report will be due on January 30, 2011.
The Board of Directors and management are diligently working to ensure compliance with the requirements of these regulatory actions.
Liquidity
Liquidity represents the ability to provide sufficient cash flows or cash resources in a manner that enables an entity to meet its obligations in a timely fashion and adequately provide 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 $58,589,000, based on 20 percent 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. At September 30, 2010, $98,000 in excess collateral was pledged. The Bank has a borrowing line with the Federal Reserve Bank of San Francisco secured a portion of the Banks securities, with available overnight borrowing of $9,152,000 at September 30, 2010.
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 September 30, 2010 and 2009 was 29.49% and 35.26%, respectively, while its average loan to average deposit ratio for such years was 72.74% and 81.51%, 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 has received notice from the FDIC that its capital classification has been designated as adequately capitalized; therefore the Bank is prohibited from accepting new or renewing any brokered deposits. The Bank had $48,623,000 in brokered deposits at September 30, 2010 compared with $6,300,000 in brokered deposits at September 30, 2009.
Deferral of Interest Payments on Trust Preferred Securities
The Corporation has exercised its rights in accordance with Section 2.11 Extension of Interest Payment Period of the Indentures dated March 27, 2003 for Northern California Bancorp, Inc. Trust I and November 3, 2003 for Northern California Bancorp, Inc. Trust II to
defer interest payments for an undetermined period of time, not to exceed twenty (20) consecutive quarterly payments. The deferral of interest payments on Northern California Bancorp, Inc. Trust I was effective with the October 7, 2009 interest payment. The deferral of interest payments on Northern California Bancorp, Inc. Trust II was effective with the November 8, 2009 interest payment.
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 of 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 is 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 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 various rate shocks, expressed in basis points, at September 30, 2010. The table includes one projection for a decrease in rates, as the Federal Funds target rate is currently between 0% and 0.25%.
Rate Shock Increase(Decrease) |
|
Percent Increase(Decrease) |
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(25) |
|
(1.8 |
)% |
100 |
|
8.1 |
% |
200 |
|
16.6 |
% |
300 |
|
25.2 |
% |
400 |
|
33.9 |
% |
Item 4T. Controls and Procedures
(a) The Corporations 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 Corporations disclosure controls and procedures were adequate and effective to ensure that material information relating to the Corporation 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 September 30, 2010, the Corporation 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.
The Bank, its Chief Executive Officer and Chief Credit Officer were named as defendants in a lawsuit filed July 27, 2009 in the Monterey County Superior Court by Bank of the Orient. The lawsuit involved claims related to loan participations purchased from the Bank and sought rescission of the participation agreements or damages and attorneys fees and costs. While the action was originally filed in the Superior Court under the terms of the participation agreements the matter was submitted to arbitration through the American Arbitration Association.
The parties reached a settlement of the claims raised in the litigation which has been consummated. The settlement resulted in a one-time after tax charge to the Banks earnings of $390,000 in the second quarter of 2010.
The Bank, its Chief Financial Officer and a former Senior Vice President were named as defendants in a lawsuit filed February 26, 2009 in Monterey County Superior Court, Civil Division, by Tighorn Financial Services, LLC (Tighorn). The lawsuit seeks to compel the Bank to continue its credit card sponsorship program with Tighorn and the servicing of a credit card portfolio under a card sponsorship agreement with a third party. The suit also alleges that Tighorn was misled into entering the credit card sponsorship agreement. For its part, the Bank has responded by contending that it properly terminated the sponsorship agreement pursuant to termination provisions contained in the parties Agreement, and that the Bank properly gave Tighorn written notice of termination of the Agreement in June 2008. The Bank has filed a counter claim for damages and equitable relief against Tighorn, and the Banks Chief financial Officer has filed cross-complaints against two Tighorn representatives and a third party claiming indemnity and equitable apportionment under California law.
The Bank and its Chief Executive Officer and Chief Credit Officer were named as defendants in a lawsuit filed April 29, 2009 in the Monterey County Superior Court, by First Foundation Bank. The lawsuit involves claims related to two loan participations purchased by First Foundation Bank from Monterey County Bank. The lawsuit seeks to rescind the participation agreements, payment of all principal and interest, damages, attorneys fees and costs. While the action was originally filed in the Superior Court, under the terms of the participation agreements, the matter has been submitted to arbitration through the American Arbitration Association. It is reasonably possible but not probable that an unfavorable arbitration ruling will result in a loss. The loss cannot be reasonably estimated, but the range of possible loss is $0 to $4 million, with no number in the range more reasonable than another number.
The Bank was named as defendant in two separate actions filed June 17, 2008 and June 26, 2008 to foreclose mechanics liens on site improvements performed in the amounts of $1.5 million and $6.0 million, respectively. The actions assert that the mechanics liens have priority over the Banks Deeds of Trust against various lots in the subdivision that were benefited by the site improvements. The Bank is being defended by its title insurer and in legal counsels opinion the Bank does not have any exposure in these matters because the priority of its trust deeds is insured by policies of title insurance.
The Bank and its Chief Lending Officer were named as defendants in a lawsuit filed January 23, 2009 by Travis Construction Company in the Superior Court of Monterey County to foreclose a mechanics lien in connection with a single family residence financed by the Bank. Under the terms of a settlement reached in the lawsuit the title company will pay $137,000 and the Bank will pay the contractor $113,000 in exchange for a release of the mechanics lien and dismissal of the suit.
Northern California Bancorp, Inc, Monterey County Bank and the Chief Executive Officer among other unrelated parties were named as defendants in a lawsuit filed July 22, 2010 in the Monterey County Superior Court by South Valley Developers, Inc. and Paseo Vista LLC. The lawsuit seeks a declaration of the parties respective obligations under a profit participation agreement in which the bank is a successor in interest as well as for breach of contract and fraud related to a loan extended to one of the plaintiffs and for injunctive relief pending the declaratory judgment.
Although the amount of any ultimate liability with respect to the above 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, except as previously addressed above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
None
A. |
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EXHIBITS |
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10.1 |
Stipulation to the Issuance of a Consent Order and Consent Order, effective September 1, 2010 (filed as Exhibit 10.1 to Current Report on Form 8-K filed September 23, 2010) |
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10.2 |
Consent Order, effective September 29, 2010 (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 5, 2010). |
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10.3 |
Written Agreement by and between the Federal Reserve Bank of San Francisco and Northern California Bancorp, effective October 29, 2010 (filed as Exhibit 10.1 to Current Report on Form 8-K filed November 2, 2010) |
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31.1 |
Certification of the Chief Executive Officer of Northern California Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
Certification of the Chief Financial Officer of Northern California Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
Certification of the Chief Executive Officer of Northern California Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
Certification of the Chief Financial Officer of Northern California Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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. | ||
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| |
Date: February 8, 2011 |
By: |
/s/ Charles T. Chrietzberg, Jr. |
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Charles T. Chrietzberg, Jr. | |
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Chairman of the Board & | |
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Chief Executive Officer | |
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Date: February 8, 2011 |
By: |
/s/ Bruce N. Warner |
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Bruce N. Warner | |
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Chief Financial Officer and | |
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Principal Accounting Officer |