-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UWsmNwohUuIT6oMUfKrco9lX4xu5uV03c530FG7JUui6anwKfAk4Q6yE6p5Jy+ee dndCnu7UkN6XpIZ7Sob8TQ== 0000891618-97-002240.txt : 19970514 0000891618-97-002240.hdr.sgml : 19970514 ACCESSION NUMBER: 0000891618-97-002240 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL COAST BANCORP CENTRAL INDEX KEY: 0000921085 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770367061 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25418 FILM NUMBER: 97602160 BUSINESS ADDRESS: STREET 1: 301 MAIN ST CITY: SALINAS STATE: CA ZIP: 93901 BUSINESS PHONE: 4084226642 MAIL ADDRESS: STREET 1: P O BOX 450 CITY: SALINAS STATE: CA ZIP: 93902 FORMER COMPANY: FORMER CONFORMED NAME: SALINAS VALLEY BANCORP DATE OF NAME CHANGE: 19940330 10-Q 1 FORM 10-Q FOR PERIOD ENDED 3/31/97 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1997. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ________________ to ________________ Commission File No. 0-25418. CENTRAL COAST BANCORP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 77-0367061 - ------------------------------- ------------------------ (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 301 Main Street, Salinas, California 93901 - ------------------------------------ ----- (Address of principal executive offices) (Zip code) (408) 422-6642 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: No par value Common Stock - 4,344,950 shares outstanding at April 8, 1997. Page 1 of 22 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------- March 31, December 31, 1997 1996 (Unaudited) - ----------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 32,589,000 $ 37,522,000 Federal funds sold 54,706,000 23,135,000 - ----------------------------------------------------------------------------------------------- Total cash and equivalents 87,295,000 60,657,000 Interest-bearing deposits in other financial institutions 399,000 999,000 Securities: Available-for-sale 24,529,000 - Held-to-maturity 75,059,000 70,877,000 (Market value: $74,759,000 at March 31, 1997 and $70,835,000 at December 31, 1996) Loans held for sale 612,000 447,000 Loans: Commercial 108,182,000 111,545,000 Real estate-construction 22,380,000 27,997,000 Real estate-other 99,692,000 93,241,000 Installment 7,580,000 8,230,000 - ----------------------------------------------------------------------------------------------- Total loans 237,834,000 241,013,000 Allowance for credit losses (4,313,000) (4,372,000) Deferred loan fees, net (615,000) (649,000) - ----------------------------------------------------------------------------------------------- Net Loans 232,906,000 235,992,000 - ----------------------------------------------------------------------------------------------- Premises and equipment, net 1,909,000 1,140,000 Accrued interest receivable and other assets 7,607,000 6,720,000 - ----------------------------------------------------------------------------------------------- Total assets $ 430,316,000 $ 376,832,000 =============================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest bearing $ 92,453,000 $ 90,149,000 Demand, interest bearing 100,805,000 76,392,000 Savings 90,179,000 89,650,000 Time 101,419,000 82,472,000 - ----------------------------------------------------------------------------------------------- Total Deposits 384,856,000 338,663,000 Accrued interest payable and other liabilities 7,677,000 1,837,000 - ----------------------------------------------------------------------------------------------- Total liabilities 392,533,000 340,500,000 - ----------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 4) SHAREHOLDERS' EQUITY: Preferred stock - no par value; authorized 1,000,000 shares; no shares issued Common stock - no par value; authorized 20,000,000 shares; issued and outstanding: 4,298,238 shares at March 31, 1997 and 4,273,227 shares at December 31, 1996 30,908,000 30,856,000 Retained earnings 6,927,000 5,476,000 Net unrealized losses on available-for-sale securities (52,000) - - ----------------------------------------------------------------------------------------------- Shareholders' equity 37,783,000 36,332,000 - ----------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 430,316,000 $ 376,832,000 ===============================================================================================
See notes to Consolidated Condensed Financial Statements 2 3 CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
- -------------------------------------------------------------- Three Months Ended March 31, 1997 1996 - -------------------------------------------------------------- INTEREST INCOME Loans (including fees) $ 5,932,000 $ 5,589,000 Investment securities 1,110,000 1,206,000 Other 590,000 723,000 - -------------------------------------------------------------- Total interest income 7,632,000 7,518,000 - -------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 2,610,000 2,562,000 Other 2,000 -- - -------------------------------------------------------------- Total interest expense 2,612,000 2,562,000 - -------------------------------------------------------------- NET INTEREST INCOME 5,020,000 4,956,000 PROVISION FOR CREDIT LOSSES -- (20,000) - -------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,020,000 4,936,000 - -------------------------------------------------------------- OTHER INCOME 386,000 412,000 - -------------------------------------------------------------- OTHER EXPENSES Salaries and benefits 1,833,000 1,488,000 Occupancy 204,000 195,000 Furniture and equipment 178,000 153,000 Other 734,000 543,000 - -------------------------------------------------------------- Total other expenses 2,949,000 2,379,000 - -------------------------------------------------------------- INCOME BEFORE INCOME TAXES 2,457,000 2,969,000 PROVISION FOR INCOME TAXES 1,006,000 1,185,000 - -------------------------------------------------------------- NET INCOME $ 1,451,000 $ 1,784,000 ============================================================== NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 0.30 $ 0.39 ==============================================================
See Notes to Consolidated Condensed Financial Statements 3 4 CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
- ---------------------------------------------------------------------------------------------- Three months ended March 31, 1997 1996 - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATIONS: Net income $ 1,451,000 $ 1,784,000 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses -- 20,000 Net gain on sale of fixed assets (11,000) -- Depreciation 115,000 94,000 Amortization and accretion (15,000) (14,000) Increase in accrued interest receivable and other assets (524,000) (552,000) Increase in accrued interest payable and other liabilities 3,040,000 1,165,000 Decrease in deferred loan fees (34,000) (17,000) - ---------------------------------------------------------------------------------------------- Net cash provided by operations 4,022,000 2,480,000 - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits in financial institutions 600,000 2,888,000 Purchases of investment securities (32,350,000) (31,805,000) Proceeds from maturities of investment securities 3,566,000 24,475,000 Net change in loans held for sale (165,000) -- Net (increase) decrease in loans 2,660,000 (1,486,000) Proceeds from sale of other real estate owned 133,000 -- Proceeds from sale of fixed assets 11,000 -- Capital expenditures (884,000) (14,000) - ---------------------------------------------------------------------------------------------- Net cash used in investing activities (26,429,000) (5,942,000) - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts 46,193,000 (9,449,000) Net increase in short-term borrowings 2,800,000 -- Proceeds from sale of stock 60,000 40,000 Common stock repurchased (8,000) -- - ---------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 49,045,000 (9,409,000) - ---------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 26,638,000 (12,871,000) CASH AND EQUIVALENTS, BEGINNING OF PERIOD 60,657,000 74,679,000 - ---------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS, END OF PERIOD $ 87,295,000 $ 61,808,000 ============================================================================================== OTHER CASH FLOW INFORMATION: Interest paid $ 2,213,000 $ 2,438,000 Income taxes paid -- -- ==============================================================================================
See Notes to Consolidated Condensed Financial Statements 4 5 CENTRAL COAST BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 1997 (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS In the opinion of Management, the unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position at March 31, 1997 and December 31, 1996, and the results of operations and cash flows for the three month periods ended March 31, 1997 and 1996. Certain information and footnote disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report to Shareholders. The results of operations for the three month period ended March 31, 1997 may not necessarily be indicative of the operating results for the full year. 2. INVESTMENT SECURITIES The Company is required under Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting for Investments in Certain Debt and Equity Securities", to classify debt and equity securities into one of three categories: held-to-maturity, trading or available-for-sale. Investment securities classified as held-to-maturity are measured at amortized cost based on the Company's positive intent and ability to hold such securities to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at market value with a corresponding recognition of unrecognized holding gain or loss in the results of operations. The remaining investment securities are classified as available-for-sale and are measured at market value with a corresponding recognition of the unrealized holding gain or loss (net of tax effect) as a separate component of shareholders' equity until realized. Any gains and losses on sales of investments are computed on a specific identification basis. 5 6 The carrying value and approximate market value of securities at March 31, 1997 and December 31, 1996 are as follows:
Amortized Unrealized Unrealized Market In thousands Cost Gain Losses Value - ---------------------------------------------------------------------------- MARCH 31, 1997 Available for sale securities: U.S. Treasury and agency services Maturing after 1 year but within 5 years $ 9,475 $ -- $ 83 $ 9,392 Bankers' Acceptances Maturing within 1 year 15,139 -- $ 6 $ 15,133 Other 4 -- -- 4 - -------------------------------------------------------------------------------- $24,618 $ -- $ 89 $ 24,529 - -------------------------------------------------------------------------------- Held to maturity securities: U.S. Treasury and agency services Maturing within 1 year $36,314 $ 3 $ 64 $36,253 Maturing after 1 year but within 5 years 29,741 2 221 29,522 Maturing after 5 years but within 10 years 5,035 -- 28 5,007 Maturing after 10 years 952 14 -- 966 Corporate Debt Securities Maturing within 1 year 3,017 -- 6 3,011 - -------------------------------------------------------------------------------- $75,059 $ 19 $ 319 $74,759 - -------------------------------------------------------------------------------- Total investment securities $99,677 $ 19 $ 408 $99,288 ================================================================================ DECEMBER 31, 1996 Held to maturity securities: U.S. Treasury and agency services Maturing within 1 year $29,358 $ 46 $ 9 $29,395 Maturing after 1 year but within 5 years 37,460 71 96 37,435 Maturing after 10 years 1,027 1 44 984 Corporate Debt Securities Maturing within 1 year 3,028 -- 11 3,017 Other 4 -- -- 4 - -------------------------------------------------------------------------------- Total investment securities $70,877 $ 118 $ 160 $70,835 ================================================================================
6 7 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES The activity in the allowance for credit losses is summarized as follows:
- --------------------------------------------------------------------------- Three months ended March 31, In thousands 1997 1996 - --------------------------------------------------------------------------- Beginning balance $ 4,372 $ 4,446 Provision charged to expense 20 Loans charged off (88) (88) Recoveries 29 16 - --------------------------------------------------------------------------- Ending balance $ 4,313 $ 4,394 ===========================================================================
The allowance for credit losses reflects management's judgement as to the level which is considered adequate to absorb potential losses inherent in the loan portfolio. This allowance is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Management determines an appropriate provision based upon information currently available to analyze credit loss potential, including (1) the loan portfolio balance in the period; (2) a comprehensive grading and review of new and existing loans outstanding; (3) actual previous charge-offs; and, (4) changes in economic conditions. In determining the provision for estimated losses related to specific major loans, management evaluates its allowance on an individual loan basis, including an analysis of the credit worthiness, cash flows and financial status of the borrower, and the condition and the estimated value of the collateral. Specific valuation allowance for secured loans are determined by the excess of recorded investment in the loan over the fair market value or net realizable value where appropriate, of the collateral. In determining overall general valuation allowances to be maintained and the loan loss allowance ratio, management evaluates many factors including prevailing and forecasted economic conditions, regular reviews of the quality of loans, industry experience, historical loss experience, composition and geographic concentrations of the loan portfolio, the borrowers' ability to repay and repayment performance and estimated collateral values. Management believes that the allowance for credit losses at March 31, 1997 is prudent and warranted, based on information currently available. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty. Nonperforming assets are comprised of loans delinquent 90 days or more with respect to interest or principal, loans for which the accrual of interest has been discontinued, and other real estate which has been acquired through foreclosure and is awaiting disposition. Unless well secured and in the process of collection, loans are placed on nonaccrual status when a loan becomes 90 days past due as to interest or principal, when the payment of interest or principal in accordance with the contractual terms of the loan becomes uncertain or when a portion of the principal balance has been charged off. When a loan is placed on 7 8 nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement and remaining principal is considered collectible or when the loan is both well secured and in process of collection. Real estate and other assets acquired in satisfaction of indebtedness are recorded at the lower of estimated fair market value net of anticipated selling costs or the recorded loan amount, and any difference between this and the amount is treated as a loan loss. Costs of maintaining other real estate owned and gains or losses on the subsequent sale are reflected in current earnings. Nonperforming loans and other real estate owned (foreclosed properties) are summarized below:
- ---------------------------------------------------------------------------- March 31, December 31, In thousands 1997 1996 - ---------------------------------------------------------------------------- Past due 90 days or more and still accruing Real estate $ 206 $ 59 Commercial 99 60 Installment and other 7 90 - ---------------------------------------------------------------------------- 312 209 - ---------------------------------------------------------------------------- Nonaccrual: Real estate 241 419 Commercial 388 184 Installment and other - 1 - ---------------------------------------------------------------------------- 629 604 - ---------------------------------------------------------------------------- Total nonperforming loans $ 941 $ 813 ============================================================================ Other real estate owned $ 676 $ 348 ============================================================================
4. COMMITMENTS AND CONTINGENCIES In the normal course of business there are outstanding various commitments to extend credit which are not reflected in the financial statements, including loan commitments of approximately $84,884,000 and standby letters of credit of $1,458,000 at March 31, 1997. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 1997. Approximately $14,013,000 of loan commitments outstanding at March 31, 1997 relate to real estate construction loans and are expected to fund within the next twelve months. The remainder relate primarily to revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. The Bank evaluates each potential borrower and the necessary collateral on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities or business assets. 8 9 Stand-by letters of credit are commitments written by the Bank to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating to purchases of inventory by the Bank's commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and the Bank accordingly uses evaluation and collateral requirements similar to those for loan commitments. Virtually all such commitments are collateralized. 5. NET INCOME PER SHARE COMPUTATION Net income per common and equivalent share is calculated using weighted average shares and dilutive effect of stock options outstanding during the period totaling 4,778,000 and 4,606,000 for the three month periods ended March 31, 1997 and 1996, respectively. 6. BRANCH ACQUISITION On February 21, 1997, the Bank of Salinas purchased certain assets and assumed certain liabilities of the Gonzales and Castroville offices of Wells Fargo Bank (including unaudited total deposit liabilities of approximately $34 million). As a result of the transaction the Bank assumed deposit liabilities, received cash and acquired tangible assets. In addition, the transaction resulted in intangible assets, representing the excess of the liabilities assumed over the fair value of the tangible assets acquired. 7. STOCK SPLIT On March 28, 1997, a 3-for-2 stock split was distributed to stockholders of record as of March 14, 1997. All share and per share data have been retroactively adjusted to reflect the stock split. 8. RECENTLY ISSUED ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The Company is required to adopt SFAS 128 in the fourth quarter of 1997 and will restate at that time earnings per share (EPS) data for prior periods to conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces current EPS reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. If SFAS 128 had been in effect during the current and prior year periods, basic EPS would have been $.34 and $.42 for the quarters ended March 31, 1997 and 1996, respectively. Diluted EPS under SFAS 128 would not have been significantly different than EPS currently reported for the periods. 9 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, matters described in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company and the Banks. Business Organization Central Coast Bancorp (the "Company") is a California corporation organized in 1994, and is the parent company for Bank of Salinas and Cypress Bank (the "Banks"), state-chartered banks, headquartered in Salinas and Seaside, California, respectively. Other than its investment in the Banks, the Company currently conducts no other significant business activities, although it is authorized to engage in a variety of activities which are deemed closely related to the business of banking upon prior approval of the Board of Governors of the Federal Reserve System (the "FRB"), the Company's principal regulator. The Banks offer a full range of commercial banking services, offering a diverse range of traditional banking products and services to individuals, merchants, small and medium-sized businesses, professionals and agribusiness enterprises located in the Salinas Valley and Monterey Peninsula. Summary of Financial Results At March 31, 1997, total assets of Central Coast Bancorp were $430,316,000, an increase of $53,484,000 or 14.2% from December 31, 1996 total assets of $376,832,000. Average total assets for the quarters ended March 31, 1997 and 1996 were $390,871,000 and $351,727,000, respectively. On February 21, 1997, the Bank of Salinas purchased certain assets and assumed certain liabilities of the Gonzales and Castroville offices of Wells Fargo Bank (including unaudited total deposit liabilities of approximately $34 million). As a result of the transaction the Bank assumed deposit liabilities, received cash and acquired tangible assets. In addition, the transaction resulted in intangible assets, representing the excess of the liabilities assumed over the fair value of the tangible assets acquired. Net loans at March 31, 1997 were $232,906,000 compared to $235,992,000 at December 31, 1996, a decrease of $3,086,000 or 1.3%. The decrease in loan balances is primarily the result of decreases in commercial, construction and land development and consumer loan 10 11 categories. Commercial loans decreased $3,363,000 or 3.0% to $108,182,000 at March 31, 1997 from $111,545,000 at December 31, 1996. The decrease in commercial loan balances is primarily due to seasonal fluctuation related to the agribusinesss sector of the local economy. Real estate construction and land development loans of $22,380,000 at March 31, 1997 represented a decrease of $5,617,000 or 20.1% from $27,997,000 at December 31, 1996. Partially offsetting this decrease, was an increase in real estate mortgage loan balances of $6,451,000 or 6.9% to $99,692,000 at March 31, 1997 compared to $93,241,000 at December 31, 1996. The Company designated securities with an estimated market value of $24,529,000 as available-for-sale at March 31, 1997. The amortized cost of securities designated as available-for-sale at March 31,1997 was $24,618,000. The available-for-sale portfolio at March 31, 1997 consists primarily of investment-grade bankers' acceptances, U.S. Treasury bills and notes and securities issued by U.S. government-sponsored agencies (FNMA, FHLMC and FHLB) with maturities within five years. During the three months ended March 31, 1997, the Company made securities purchases of $24,617,000 to more fully employ excess liquidity. Securities designated as held-to-maturity at March 31, 1997 were carried at an amortized cost of $75,059,000. The estimated market value of the held-to-maturity portfolio at quarter end was $74,759,000. The held-to-maturity portfolio at March 31, 1997 consists primarily of U.S. Treasury bills and notes and securities issued by U.S. government-sponsored agencies with maturities within five years. Investment securities classified as held-to-maturity are measured at amortized cost based on the Company's intent and ability to hold such securities to maturity. During the three months ended March 31, 1997, the Company made securities purchases of $7,733,000 to replace $3,566,000 of maturities and to more fully employ excess liquidity. Other earning assets are comprised of Federal funds sold and time deposits at other financial institutions. Federal funds sold balances of $54,706,000 at March 31, 1997 represent an increase of $31,571,000 over $23,135,000 at December 31, 1996. The increase in federal funds sold primarily reflects Bank of Salinas' addition of two branch offices purchased from Wells Fargo in February. The Company also invests a portion of its excess liquidity in time deposits at other financial institutions. Time deposits in other financial institutions were $399,000 at March 31, 1997 compared to $999,000 at December 31, 1996, representing a decrease of $600,000. The decrease in time deposits at other institutions is a result of management's decision to redeploy these funds into other short-term investment securities. Total deposits of $384,856,000 at March 31, 1997 represent an increase of $46,193,000 or 13.6% over balances of $338,663,000 at December 31, 1996. The increase total in deposits includes increases in all deposit categories, primarily as a result of Bank of Salinas' branch acquisition noted above. Interest bearing demand balances increased $24,413,000 or 32.0% to $100,805,000 at March 31, 1997 from $76,392,000 at December 31, 1996. Interest bearing demand deposits represented approximately 37.9% of the deposits acquired by Bank of Salinas. Noninterest-bearing demand deposits were $92,453,000 at March 31, 1997 compared to $90,149,000 at December 31, 1996, an increase of $2,304,000 or 2.6%. The increase in noninterest bearing demand balances related to the branch purchase was partially offset by seasonal fluctuation in this category. Savings balances of $90,179,000 represent a 11 12 slight increase of $529,000 or .6% over $89,650,000 at December 31, 1996. Additionally, time deposits increased $18,947,000 or 23.0% to $101,419,000 at March 31, 1997 from $82,472,000 at December 31, 1996. 12 13 THREE MONTHS ENDED MARCH 31, 1997 AND 1996 Net income for the three months ended March 31, 1997 was $1,451,000 or $.30 per share compared to $1,784,000 or $.39 per share for the comparable period in 1996. The following discussion highlights changes in certain items in the consolidated condensed statements of income. Net interest income Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and other borrowings, is the principal component of the Bank's earnings. The components of net interest income are as follows:
Three months ended March 31, (Unaudited) In thousands (except percentages) 1997 1996 - ---------------------------------------------------------------------------------------------------- Avg Avg Avg Avg Balance Interest Yield Balance Interest Yield - ---------------------------------------------------------------------------------------------------- Assets: Earning Assets Loans (1)(2) $ 236,526 $ 5,932 10.2% $ 194,506 $ 5,589 11.5% Investment Securities 78,696 1,110 5.7% 79,754 1,206 6.1% Other 45,667 590 5.2% 54,512 723 5.3% ---------- ------- ----------- ---------- Total Earning Assets 360,889 $ 7,632 8.6% 328,772 $ 7,518 9.2% ------- ---------- Cash and due from banks 26,983 20,032 Other assets net of deferred loan fees and allowance for loan losses 2,999 2,923 ---------- ----------- $ 390,871 $ 351,727 ========== =========== Liabilities & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 86,789 $ 437 2.0% $ 69,370 $ 385 2.2% Savings 92,579 926 4.1% 125,509 1,284 4.1% Time deposits 92,332 1,247 5.5% 63,726 893 5.6% Other borrowings 923 2 0.9% - - n/a ---------- ------- ----------- ---------- Total interest bearing liabilities 272,623 2,612 3.9% 258,605 2,562 4.0% ------- --------- Demand deposits 80,170 60,361 Other Liabilities 1,464 1,784 ---------- ----------- Total Liabilities 354,257 320,750 Shareholders' Equity 36,614 30,977 ---------- ----------- $ 390,871 $ 351,727 ========== =========== Net interest income and margin (net yield) (3) $ 5,020 5.6% $ 4,956 6.0% ======= === ========== ===
- ---------- 1 Loan interest income includes fee income of $276,000 and $173,000, for the three month periods ended March 31, 1997 and 1996, respectively, and interest recognized from payments received on nonaccrual loans of $619,000 for the three month period ended 13 14 March 31, 1996 (none for the three month period ended March 31, 1997). 2 Average balances of loans include average allowance for loan losses of $4,354,000 and $4,421,000, and average deferred loan fees of $649,000 and $543,000 for the three month periods ended March 31, 1997 and 1996, respectively. 3 Net interest margin is computed by dividing net interest income by total average earning assets. Net interest income for the three months ended March 31, 1997 was $5,020,000 representing an improvement of $64,000 or 1.3% over $4,956,000 for the comparable period in 1996. As a percentage of average earning assets, the net interest margin for the first three months of 1997 was 5.6% and compares to 6.0% in the same period one year earlier. The increase in net interest income is comprised of an increase of $114,000 or 1.5% in interest income partially offset by an increase in interest expense of $50,000 or 2.0%. Net interest income for the first quarter of 1996 included approximately $498,000 recognized as a result of collection of foregone interest on one nonaccruing loan. Excluding this nonrecurring event, the increase in net interest income would have been $562,000 or 11.3% and a comparable net interest margin of 5.5%. Interest income recognized in the three months ended March 31, 1997 was $7,632,000 representing an increase of $114,000 or 1.5% over $7,518,000 for the same period of 1996. The increase in interest income was primarily due to an increase in the volume of average earning assets and was partially offset by the nonrecurring recovery of nonaccrual interest in the first quarter of 1996 noted above. Earning assets averaged $360,889,000 in the three months ended March 31, 1997 compared to $328,772,000 in the same period in 1996, representing an increase of $32,117,000 or 9.8%. The increase in average earning assets included an increase in average net loans of $42,020,000 or 21.6% that was partially offset by decreases in investment securities and fed funds sold of $1,058,000 and $8,845,000 or 1.3% and 16.2%, respectively. In addition, as noted above, interest income for the first quarter of 1996 includes approximately $498,000, recognized as a result of collection of foregone interest on one nonaccruing loan. Excluding this nonrecurring event, the increase in interest income would have been $612,000 or 8.7%. The average yield on interest earning assets decreased to 8.6% in the first three months of 1997 compared to 9.2% for the first three months of 1996. The average yield on earning assets in the first quarter of 1996 after adjusting for the impact of the nonrecurring event noted above would have been 8.7%. Loan fees recognized during the first three months of 1997 were $276,000 compared to $173,000 one year earlier. Partially offsetting the increase in interest income was an increase in the cost of liabilities funding the growth in average earning assets. Interest expense for the three months ended March 31, 1997 was $2,612,000 and represented an increase of $50,000 or 2.0% over $2,562,000 for the three months ended March 31, 1996. During the three months ended March 31, 1997, the average rate paid by the Bank on interest-bearing liabilities was 3.9% compared to 4.0% for the same period in 1996. The increase in interest expense for the first quarter of 1997 reflects the impact of an increase in the volume of average interest bearing liabilities as a result of the Bank of Salinas branch purchase. Average interest bearing liabilities were $272,623,000 in the three months ended March 31, 1997 compared to $258,605,000 for the same period in 1996, an increase of $14,018,000 or 5.4%. Partially 14 15 offsetting the impact on net interest income resulting from the increase in interest bearing liabilities was an increase in average noninterest bearing demand deposits. Average noninterest bearing demand deposits of $80,170,000 for the quarter ended March 31, 1997 represented an increase of $19,809,000 or 32.8% over $60,361,000 for the same period one year earlier. Credit Risk and Provision for Credit Losses The Company assesses and manages credit risk on an ongoing basis through stringent credit review and approval policies, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically grade new loans and to review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan portfolio is critical for profitability and growth. Management strives to continue the historically low level of credit losses by continuing its emphasis on credit quality in the loan approval process, active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio. Ultimately, credit quality may be influenced by underlying trends in the economic and business cycles. The Company's business is concentrated in Monterey County, California whose economy is highly dependent on the agricultural industry. As a result, the Company lends money to individuals and companies dependent upon the agricultural industry. In addition, the Company has significant extensions of credit and commitments to extend credit which are secured by real estate, totalling approximately $145 million. The ultimate recovery of these loans is generally dependent on the successful operation, sale or refinancing of the real estate. The Company monitors the effects of current and expected market conditions and other factors on the collectibility of real estate loans. When, in management's judgement, these loans are impaired, appropriate provision for losses is recorded. The more significant assumptions management considers involve estimates of the following: lease, absorption and sale rates; real estate values and rates of return; operating expenses; inflation; and sufficiency of collateral independent of the real estate including, in limited instances, personal guarantees. In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrowers. The Company's requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management's evaluation of the credit worthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. The Company secures its collateral by perfecting its interest in business assets, obtaining deeds of trust, or outright possession among other means. Credit losses from lending transactions related to real estate and agriculture compare favorably with the Company's credit losses on its loan portfolio as a whole. In the first quarter of 1997, the Bank did not record a provision for loan losses through a charge to earnings as a response to a strengthening economy and continued strong credit 15 16 performance. This compares to $20,000 charged against earnings for the same period in 1996. Loan balances of $88,000, which were previously identified and fully reserved for, were charged-off in the first quarter of 1997 compared to $88,000 charged-off in the same period one year earlier. Recoveries of loan balances previously charged-off were $29,000 for the quarter ended March 31, 1997 compared to $16,000 for the same period in 1996. See Note 3 of the consolidated condensed financial statements for further discussion of nonperforming loans and the allowance for credit losses. At March 31, 1997 the allowance for credit losses was $4,313,000 or 1.81% of total loans, compared to $4,372,000 or 1.81% at December 31, 1996. Management believes that the allowance for loan losses is maintained at an adequate level for known and anticipated future risks inherent in the loan portfolio. However, the Company's loan portfolio, particularly the real estate related segments, may be adversely affected if California's economic conditions and Monterey County real estate market were to weaken. As a result, the level of nonperforming loans, the provision for loan losses and the level of the allowance for loan losses may increase. Noninterest Income and Expense Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. Total other income was $386,000 for the three months ended March 31, 1997 as compared to $412,000 for the same period of 1996. The decrease in noninterest income is primarily the result of a decrease in mortgage loan origination fees of approximately $30,000 and a decrease in gains on sales of SBA loans of approximately $35,000. Partially offsetting this impact was an increase in service charges on deposit accounts of $22,000. Noninterest expense increased $570,000 or 24.0% to $2,949,000 in the quarter ended March 31, 1997 from $2,379,000 in the same period one year earlier. The increase in noninterest expenses is primarily due to increases in salaries and benefits, occupancy and equipment, directors fees and supplies expense. As a percentage of average earning assets, other expenses, on an annualized basis, increased to 3.3% in the first three months of 1997 from 2.9% in the first three months of 1996. Salary and benefits expense was $1,833,000 in the three months ended March 31, 1997 compared to $1,488,000 in the same period one year earlier, an increase of $345,000 or 23.2%. The increase in salary and benefits expense is primarily due to increased headcount related to the branch acquisition by Bank of Salinas and a de novo branch established in Monterey by Cypress Bank. In addition, salary and benefits expense for the first quarter of 1997 includes an accrual of $63,000 for benefits under salary continuation agreements entered into with Executive Officers of the Company effective in the fourth quarter of 1996. Occupancy expense for the quarter ended March 31, 1997 was $204,000 and represented an increase of $9,000 or 4.6% over $195,000 for the same period last year. The increase in occupancy expense relates to the branch acquisition by Bank of Salinas and the opening of a de novo branch by Cypress Bank. 16 17 LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Bank assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at March 31, 1997, were approximately $84,884,000 and $1,458,000, respectively. Such loans relate primarily to revolving lines of credit and other commercial loans, and to real estate construction loans. The Company's sources of liquidity consist of its deposits with other banks, overnight funds sold to correspondent banks, unpledged short-term, marketable investments and loans held for sale. On March 31, 1997, consolidated liquid assets totaled $140.9 million or 32.8% of total assets as compared to $85.1 million or 22.6% of total consolidated assets on December 31, 1996. In addition to liquid assets, the subsidiary banks maintain lines of credit with correspondent banks for up to $15,000,000 available on a short-term basis. Informal agreements are also in place with various other banks to purchase participations in loans, if necessary. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. In addition, it has been the Company's policy to restrict average maturities in the investment portfolio to not more than three years. The short-term repricing characteristics of the loan and investment portfolios, and loan agreements which generally require monthly interest payments, provide the Bank with additional secondary sources of liquidity. Another key liquidity ratio is the ratio of gross loans to total deposits, which was 61.8% at March 31, 1997 and 71.2% at December 31, 1996. Interest rate sensitivity Interest rate sensitivity is a measure of the exposure to fluctuations in the Bank's future earnings caused by fluctuations in interest rates. Such fluctuations result from the mismatch in repricing characteristics of assets and liabilities at a specific point in time. This mismatch, or interest rate sensitivity gap, represents the potential mismatch in the change in the rate of accrual of interest revenue and interest expense from a change in market interest rates. Mismatches in interest rate repricing among assets and liabilities arise primarily from the interaction of various customer businesses (i.e., types of loans versus the types of deposits maintained) and from management's discretionary investment and funds gathering activities. The Company attempts to manage its exposure to interest rate sensitivity, but due to its size and direct competition from the major banks, it must offer products which are competitive in the market place, even if less than optimum with respect to its interest rate exposure. 17 18 The Company's natural position is asset-sensitive (based upon the significant amount of variable rate loans and the repricing characteristics of its deposit accounts). This natural position provides a hedge against rising interest rates, but has a detrimental effect during times of interest rate decreases. The following table sets forth the distribution of repricing opportunities, based on contractual terms, of the Bank's earning assets and interest-bearing liabilities at March 31, 1997, the interest rate sensitivity gap (i.e. interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e. interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative interest rate sensitivity gap ratio.
In thousands - ----------------------------------------------------------------------------------------------------------------------- Over three Assets and Liabilities Next day months and Over one which Mature or and within within and within Over Reprice Immediately three months one year five years Five years Total - ----------------------------------------------------------------------------------------------------------------------- Interest earning assets: Federal funds sold $ 54,706 $ - $ - $ - $ - $ 54,706 - - - Purchased CD's - 399 - - - 399 Investment securities 4 23,640 30,823 39,133 5,988 99,588 Loans, excluding Nonaccrual loans and overdrafts 167,219 9,146 236,434 31,496 8,335 20,238 - ----------------------------------------------------------------------------------------------------------------------- Total $ 221,929 $ 55,535 $ 39,158 $ 59,371 $ 15,134 $ 391,127 ======================================================================================================================= Interest bearing Liabilities: Interest bearing demand $ 100,805 $ - $ - $ - $ - $ 100,805 Savings 90,179 - - - - 90,179 Time certificates 346 16,048 36,054 48,948 23 101,419 - ----------------------------------------------------------------------------------------------------------------------- Total $ 191,330 $ 16,048 $ 36,054 $ 48,948 $ 23 $ 292,403 ======================================================================================================================= Interest rate Sensitivity gap $ 30,599 $ 39,487 $ 3,104 $ 10,423 $ 15,111 Cumulative interest rate sensitivity gap $ 30,599 $ 70,086 $ 73,190 $ 83,613 $ 98,724 Ratios: Interest rate Sensitivity gap 1.16 3.46 1.09 1.21 658.00 Cumulative interest rate sensitivity gap 1.16 1.34 1.30 1.29 1.34 - -----------------------------------------------------------------------------------------------------------------------
It is management's objective to maintain stability in the net interest margin in times of fluctuating interest rates by maintaining an appropriate mix of interest sensitive assets and liabilities. The Banks strive to achieve this goal through the composition and maturities of the investment portfolio and by adjusting pricing of interest-bearing liabilities, however, as noted above, the ability to manage interest rate exposure may be constrained by competitive 18 19 pressures. CAPITAL RESOURCES The Company's total shareholders' equity was $37,783,000 at March 31, 1997 compared to $36,332,000 at December 31, 1996. The Company and the Bank are subject to regulations issued by the Board of Governors and the FDIC which require that it maintain a certain level of capital. These regulations impose two capital standards: a risk-based capital standard and a leverage capital standard. Under the Board of Governor's risk-based capital guidelines, assets reported on an institution's balance sheet and certain off-balance sheet items are assigned to risk categories, each of which has an assigned risk weight. Capital ratios are calculated by dividing the institution's qualifying capital by its period-end risk-weighted assets. The guidelines establish two categories of qualifying capital: Tier 1 Capital (defined to included common shareholders' equity and noncumulative perpetual preferred stock) and Tier 2 capital defined to include limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserves for loan and lease losses). Each institution is required to maintain a risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier 1 capital. Under the Board of Governors' leverage capital standard an institution is required to maintain a minimum ratio of Tier 1 capital to the sum of its quarterly average total assets and quarterly average reserve for loan losses, less intangibles not included in Tier 1 capital. Period-end assets may be used in place of quarterly average total assets on a case-by-case basis. A minimum leverage ratio of 3% is required for institutions which have been determined to be in the highest of five categories used by regulators to rate financial institutions and which are not experiencing or anticipating significant growth. All other organizations are required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. The table below presents the capital and leverage ratios of the Company as of:
(Dollars in thousands) March 31, 1997 December 31, 1996 RISK-BASED CAPITAL RATIOS Amount Ratio Amount Ratio - ----------------------------------------------------------------------------- Tier I Capital $ 37,783 13.5% $ 36,332 14.1% Total Capital $ 41,286 14.8% $ 39,562 15.4% Total risk-adjusted assets $ 279,456 $ 257,305 - ----------------------------------------------------------------------------- LEVERAGE RATIOS Tier I Capital to average total assets $ 37,783 9.7% $ 36,332 10.1% Quarterly average total assets $390,871 $358,027 - -----------------------------------------------------------------------------
On December 19, 1991, the President signed the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other matters, substantially revises banking regulations and established a framework for determination of capital adequacy of financial institutions. Under the FDICIA, financial institutions are placed into one of five 19 20 capital adequacy categories as follows: (1) "well capitalized" consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "adequately capitalized" consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "undercapitalized" consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%; (4) "significantly undercapitalized" consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; and, (5) "critically undercapitalized" consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%. Financial institutions classified as undercapitalized or below are subject to various limitations including, among other matters, certain supervisory actions by bank regulatory authorities and restrictions related to (i) growth of assets, (ii) payment of interest on subordinated indebtedness, (iii) payment of dividends or other capital distributions, and (iv) payment of management fees to a parent holding company. The FDICIA requires the bank regulatory authorities to initiate corrective action regarding financial institutions which fail to meet minimum capital requirements. Such action may, among other matters, require that the financial institution augment capital and reduce total assets. Critically undercapitalized financial institutions may also be subject to appointment of a receiver or conservator unless the financial institution submits an adequate capitalization plan. INFLATION The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company indirectly through its effect on market rates of interest, and thus the ability of the Bank to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects the Company's capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which the Company may generate in the future. In addition to its effects on interest rates, inflation directly affects the Company by increasing the Company's operating expenses. The effect of inflation was not material to the Company's results of operations during the periods covered by this report. 20 21 PART II - OTHER INFORMATION Item 1. Legal proceedings. None. Item 2. Changes in securities. None. Item 3. Defaults upon senior securities. None. Item 4. Submission of matters to a vote of security holders. None. Item 5. Other information. None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits (27.1) Financial Data Schedules (b) Reports on Form 8-K - None. 21 22 SIGNATURES - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. May 14, 1997 CENTRAL COAST BANCORP By: /s/ THOMAS A. SA ----------------------------------- Thomas A. Sa, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 22 23 EXHIBIT INDEX Exhibit No. Description - ------ ----------- 27.1 Financial Data Schedule EX-27.1 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 32,589 399 54,706 0 24,529 75,059 74,756 237,220 4,313 430,316 384,856 5,709 1,968 0 0 0 30,908 6,875 430,316 5,932 1,110 590 7,632 2,610 2,612 5,020 0 0 2,949 2,457 2,457 0 0 1,451 0.31 0.30 5.60 629 312 0 0 4,372 88 29 4,313 4,313 0 0
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