-----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, Eb77CuGEieU5dE7c8pZnDoSg7IyW4VoIDj/qlmZtlpUw62Ijlc/0nCxH5LXebgkR GkqPqQJFignghk/ESbIkhg== 0000921085-98-000014.txt : 19981116 0000921085-98-000014.hdr.sgml : 19981116 ACCESSION NUMBER: 0000921085-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: SEC FILE NUMBER: 000-25418 FILM NUMBER: 98747102 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 10-Q 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 September 30, 1998 . --------------------- [ ] 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) (831) 422-6642 -------------------------------- (Registrant's telephone number, including area code) not applicable --------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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 - 4,913,970 shares outstanding at October 29, 1998. Page 1 of 30 The Index to the Exhibits is located at Page 30
PART I - FINANCIAL INFORMATION Item 1. Financial Statements: CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------ September 30, 1998 December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $40,827,000 $39,891,000 Federal funds sold 47,507,000 64,706,000 - ------------------------------------------------------------------------------------------------------------------------------ Total cash and equivalents 88,334,000 104,597,000 Securities: Available-for-sale 109,002,000 91,481,000 Held-to-maturity - 39,048,000 (Market value: $39,105,000 at December 31, 1997) Loans held for sale 4,523,000 1,331,000 Loans: Commercial 129,101,000 124,714,000 Real estate-construction 21,887,000 14,645,000 Real estate-other 132,522,000 107,354,000 Installment 10,199,000 9,349,000 - ------------------------------------------------------------------------------------------------------------------------------ Total loans 293,709,000 256,062,000 Allowance for credit losses (4,346,000) (4,223,000) Deferred loan fees, net (628,000) (568,000) - ------------------------------------------------------------------------------------------------------------------------------ Net Loans 288,735,000 251,271,000 - ------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 2,434,000 2,001,000 Accrued interest receivable and other assets 6,644,000 7,945,000 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $499,672,000 $497,674,000 ============================================================================================================================== Liabilities and Shareholders' Equity Deposits: Demand, noninterest bearing $113,299,000 $126,818,000 Demand, interest bearing 94,079,000 89,107,000 Savings 101,678,000 99,748,000 Time 136,191,000 134,628,000 - ------------------------------------------------------------------------------------------------------------------------------ Total Deposits 445,247,000 450,301,000 Accrued interest payable and other liabilities 4,794,000 3,649,000 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 450,041,000 453,950,000 - ------------------------------------------------------------------------------------------------------------------------------ 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 30,000,000 shares; issued and outstanding: 4,903,970 shares at September 30, 1998 and 4,368,469 shares at December 31, 1997 41,195,000 31,644,000 Retained earnings 7,772,000 11,979,000 Accumulated other comprehensive income - Net unrealized gain (loss) on available-for-sale securities, net of tax 664,000 101,000 - ------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity 49,631,000 43,724,000 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $499,672,000 $497,674,000 ============================================================================================================================== See Notes to Consolidated Condensed Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Interest Income Loans (including fees) $ 7,040,000 $ 6,309,000 $ 19,976,000 $ 18,565,000 Investment securities 1,853,000 1,612,000 5,660,000 4,235,000 Other 690,000 816,000 2,220,000 2,123,000 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 9,583,000 8,737,000 27,856,000 24,923,000 - ------------------------------------------------------------------------------------------------------------------------------ Interest Expense Interest on deposits 3,358,000 3,105,000 10,109,000 8,644,000 Other - 20,000 - 92,000 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 3,358,000 3,125,000 10,109,000 8,736,000 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Income 6,225,000 5,612,000 17,747,000 16,187,000 Provision for Credit Losses - 40,000 - 81,000 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Income after Provision for Credit Losses 6,185,000 5,612,000 17,666,000 16,187,000 - ------------------------------------------------------------------------------------------------------------------------------ Other Income 490,000 428,000 1,415,000 1,234,000 - ------------------------------------------------------------------------------------------------------------------------------ Other Expenses Salaries and benefits 2,074,000 1,926,000 6,281,000 5,668,000 Occupancy 222,000 213,000 714,000 654,000 Furniture and equipment 241,000 205,000 671,000 592,000 Other 777,000 856,000 2,558,000 2,479,000 - ------------------------------------------------------------------------------------------------------------------------------ Total other expenses 3,314,000 3,200,000 10,224,000 9,393,000 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes 3,361,000 2,840,000 8,857,000 8,028,000 Provision for Income Taxes 1,391,000 1,155,000 3,664,000 3,284,000 ============================================================================================================================== Net Income $ 1,970,000 $ 1,685,000 $ 5,193,000 $ 4,744,000 ============================================================================================================================== Basic Earnings per Share $ 0.41 $ 0.35 $ 1.08 $ 1.00 Diluted Earnings per Share $ 0.38 $ 0.32 $ 0.99 $ 0.91 ============================================================================================================================== See Notes to Consolidated Condensed Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) - -------------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operations: Net income $ 5,193,000 $ 4,744,000 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses 81,000 - Net gain on sale of fixed assets (1,000) (11,000) Depreciation 414,000 378,000 Amortization and accretion 22,000 (218,000) Loss on other real estate owned - 17,000 (Increase) decrease in accrued interest receivable and other assets 721,000 (1,300,000) Increase in accrued interest payable and other liabilities 1,269,000 2,142,000 Increase (decrease) in deferred loan fees 60,000 (82,000) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 7,759,000 5,670,000 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Net decrease in interest-bearing deposits in financial institutions - 999,000 Purchases of investment securities (72,512,000) (103,288,000) Proceeds from maturities of investment securities 95,160,000 69,026,000 Net change in loans held for sale (3,192,000) (229,000) Net increase in loans (37,605,000) (4,852,000) Proceeds from sale of other real estate owned - 709,000 Proceeds from sale of fixed assets 1,000 11,000 Capital expenditures (847,000) (1,138,000) - -------------------------------------------------------------------------------------------------------------------------- Net cash used by in investing activities (18,995,000) (38,762,000) - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net increase (decrease) in deposit accounts (5,054,000) 76,924,000 Net increase (decrease) in short-term borrowings (124,000) 2,500,000 Proceeds from sale of stock 163,000 360,000 Fractional shares repurchased (12,000) (8,000) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided(used) by financing activities (5,027,000) 79,776,000 - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents (16,263,000) 46,684,000 Cash and equivalents, beginning of period 104,597,000 60,657,000 - -------------------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of period $88,334,000 $107,341,000 ========================================================================================================================== Other Cash Flow Information: Interest paid $ 9,762,000 $ 7,913,000 Income taxes paid 3,210,000 1,615,000 ========================================================================================================================== See Notes to Consolidated Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS September 30, 1998 (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 September 30, 1998 and December 31, 1997, the results of operations for the three and nine month periods ended September 30, 1998 and 1997, and cash flows for the nine month periods ended September 30, 1998 and 1997. Certain disclosures normally presented in the notes to the 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 1997 Annual Report to Shareholders. The results of operations for the three and nine month periods ended September 30, 1998 and 1997 may not necessarily be indicative of the operating results for the full year. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses and the carrying value of other real estate owned. Management uses information provided by an independent loan review service in connection with the determination of the allowance for loan losses. 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.
The carrying value and approximate market value of securities at September 30, 1998 and December 31, 1997 are as follows: - ------------------------------------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Market In thousands Cost Gain Losses Value - ------------------------------------------------------------------------------------------------------------------------- September 30, 1998 Available for sale securities: U.S. Treasury and agency securities Maturing within 1 year $ 19,989 $ 93 $ - $ 20,082 Maturing after 1 year but within 5 years 60,686 572 - 61,258 Maturing after 10 years 25,017 457 - 25,474 State & Political Subdivision Maturing after 5 years but within 10 years 2,180 4 - 2,184 Other 4 - - 4 - ------------------------------------------------------------------------------------------------------------------------- Total investment securities $ 107,876 $ 1,126 $ - $ 109,002 ========================================================================================================================= December 31, 1997 Available for sale securities: U.S. Treasury and agency securities Maturing within 1 year $ 32,861 $ - $ 5 $ 32,856 Maturing after 1 year but within 5 years 48,410 184 7 $ 48,587 Bankers' Acceptances Maturing within 1 year 10,034 - - 10,034 Other 4 - - 4 - ------------------------------------------------------------------------------------------------------------------------- Total available for sale $ 91,309 $ 184 $ - $ 91,481 - ------------------------------------------------------------------------------------------------------------------------- Held to maturity securities: U.S. Treasury and agency securities Maturing within 1 year $ 27,484 $ 7 $ 11 $ 27,480 Maturing after 1 year but within 5 years 8,495 66 2 8,559 Maturing after 5 years but within 10 years 20 - - 20 Maturing after 10 years 857 6 9 854 State & Political Subdivision Maturing after 5 years but within 10 years 2,192 - - 2,192 - ------------------------------------------------------------------------------------------------------------------------- Total held to maturity $ 39,048 $ 79 $ 22 $ 39,105 - ------------------------------------------------------------------------------------------------------------------------- Total investment securities $ 130,357 $ 263 $ 34 $ 130,586 =========================================================================================================================
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES The activity in the allowance for credit losses is summarized as follows: - ------------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, In thousands 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Beginning balance $ 4,228 $ 4,203 $ 4,223 $ 4,372 Provision charged to expense 40 - 81 - Loans charged off (4) (174) (94) (417) Recoveries 82 79 136 153 - ------------------------------------------------------------------------------------------------------------------- Ending balance $ 4,346 $ 4,108 $ 4,346 $ 4,108 ===================================================================================================================
The allowance for credit losses reflects management's judgement as to the level considered adequate to absorb potential losses inherent in the loan portfolio. The 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 allowances 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 September 30, 1998 is adequate, 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 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:
- ----------------------------------------------------------------------------- September 30, December 31, In thousands 1998 1997 - ----------------------------------------------------------------------------- Past due 90 days or more and still accruing Real estate $ - $ 6 Commercial 73 73 Installment and other - - - ----------------------------------------------------------------------------- 73 79 - ----------------------------------------------------------------------------- Nonaccrual: Real estate 706 628 Commercial 312 188 Installment and other 6 - - ----------------------------------------------------------------------------- 1,024 816 - ----------------------------------------------------------------------------- Total nonperforming loans $ 1,097 $ 895 ============================================================================= Other real estate owned $ - $ 105 =============================================================================
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 $117,192,000 and standby letters of credit of $1,603,000 at September 30, 1998. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 1998. Approximately $20,198,000 of loan commitments outstanding at September 30, 1998 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. Each potential borrower and the necessary collateral are evaluated on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities or business assets. Stand-by letters of credit are commitments written to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating to purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. Virtually all such commitments are collateralized. 5. EARNINGS PER SHARE COMPUTATION Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period (4,842,000 and 4,823,000 for the three and nine month periods ended September 30, 1998, and 4,795,000 and 4,763,000 for the three and nine month periods ended September 30, 1997, respectively). Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options and stock purchase warrants were exercised. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options and warrants (393,000 and 412,000 for the three and nine month periods ended September 30, 1998 and 443,000 and 423,000 for the three and nine month periods ended September 30, 1997, respectively). 6. RECENTLY ISSUED ACCOUNTING STANDARDS Effective January 1, 1998, Central Coast Bancorp adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This Statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. For example, other comprehensive earnings may include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. Annual financial statements for prior periods will be reclassified, as required. Central Coast Bancorp's total comprehensive earnings were as follows:
- ------------------------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, In thousands 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Net Earnings $ 1,970 $ 1,685 $ 5,193 $ 4,744 Other comprehensive gain - Net unrealized gain on available-for-sale securities 448 89 563 132 - ------------------------------------------------------------------------------------------------------------------ Total comprehensive earnings $ 2,418 $ 1,774 $ 5,756 $ 4,876 ==================================================================================================================
Effective July 1, 1998 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. In connection with the adoption of SFAS 133 the Company reclassified certain securities with an amortized cost of $18,085,000 and a fair value of $18,202,000 from held-to-maturity to available-for-sale. Adoption of this statement did not have any other impact on the Company's consolidated financial position and had no impact on the Company's results of operations or cash flows. 7. STOCK DIVIDEND On January 20, 1998 the Board of Directors declared a 10% stock dividend, to be distributed on March 3, 1998, to shareholders of record as of February 17, 1998. All share and per share data including stock option and warrant information have been retroactively adjusted to reflect the stock dividend. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q including, but not limited to, matters described in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Changes to such risks and uncertainties, which could impact future financial performance, include, among others, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, nationally, regionally and in the operating market areas of the Company and the Banks; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) effects of Year 2000 problems discussed herein. 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, state-chartered banks, headquartered in Salinas and Seaside, California, respectively (the "Banks"). 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, including 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 September 30, 1998, total assets of Central Coast Bancorp were $499,672,000, an increase of $1,998,000 or 0.4% from December 31, 1997 total assets of $497,674,000. Average total assets for the quarters ended September 30, 1998 and 1997 were $503,059,000 and $454,245,000, 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 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 September 30, 1998 were $288,735,000 compared to $251,271,000 at December 31, 1997, an increase of $37,464,000 or 14.9%. The increase in loan balances is primarily the result of significant increases in term real estate loan categories, in addition to increases in real estate construction and commercial loans. Term real estate loans increased $25,168,000 or 23.4% to $132,522,000 at September 30, 1998 from $107,354,000 at December 31, 1997. The increase in term real estate loan balances is primarily due to favorable economic conditions spurring business expansion and refinancing activities. Enhancing this increase, was an increase in commercial and real estate construction and land development loans. Commercial loan balances of $129,101,000 at September 30, 1998 represented an increase of $4,387,000 or 3.5% over $124,714,000 at December 31, 1997. Real estate construction and land development loans of $21,887,000 at September 30, 1998 represented an increase of $7,242,000 or 49.5% from $14,645,000 at December 31, 1997 due to the success of key marketing strategies capturing the benefit of favorable economic conditions. The Company designated securities with an estimated market value of $109,002,000 as available-for-sale at September 30, 1998. The amortized cost of securities designated as available-for-sale on that date was $107,876,000. The available-for-sale portfolio at September 30, 1998 consisted primarily of U.S. Treasury bills and notes and securities issued by U.S. government-sponsored agencies (FNMA, FHLMC and FHLB) with maturities within five years and U.S. government-sponsored agencies mortgage backed securities with maturities greater than ten years. During the nine months ended September 30, 1998, the Company made securities purchases of $72,512,000 to replace $68,989,000 of maturities and to more fully employ excess liquidity. During the nine months ended September 30, 1998, $26,171,000 held-to-maturity securities matured and $18,085,000 were transferred to available-for-sale. Other earning assets are comprised of Federal funds sold. Federal funds sold balances of $47,507,000 at September 30, 1998 represent a decrease of $17,199,000 over $64,706,000 at December 31, 1997. The decrease in federal funds sold primarily reflects the growth in the loan portfolio. Total deposits were $445,247,000 at September 30, 1998 which represented an decrease of $5,054,000 or 1.1% over balances of $450,301,000 at December 31, 1997. The decrease in total deposits includes increases in all deposit categories, except noninterest bearing demand. Noninterest-bearing demand deposits were $113,299,000 at September 30, 1998 compared to $126,818,000 at December 31, 1997, a decrease of $13,519,000 or 10.7%. The decrease in noninterest bearing demand balances is partially due to seasonal fluctuation. Interest bearing demand balances increased $4,972,000 or 5.6% to $94,079,000 at September 30, 1998 from $89,107,000 at December 31, 1997. Savings balances of $101,678,000 represent an increase of $1,930,000 or 1.9% from $99,748,000 at December 31, 1997. Time deposits increased $1,563,000 or 1.2% to $136,191,000 at September 30, 1998 from $134,628,000 at December 31, 1997. THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Net income for the three months ended September 30, 1998 was $1,970,000 ($.41 basic and $.38 diluted earnings per share) compared to $1,685,000 ($.35 basic and $.32 diluted earnings per share) for the comparable period in 1997. 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 Banks' earnings. The components of net interest income are as follows:
(Unaudited) Three months ended September 30, In thousands (except percentages) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Avg Avg Avg Avg Balance Interest Yield Balance Interest Yield - ------------------------------------------------------------------------------------------------------------------- Assets: Earning Assets Loans (1)(2) $ 281,126 $7,040 9.9% $ 240,882 $6,309 10.4% Investment Securities 122,148 1,853 6.0% 108,777 1,612 5.9% Other 50,015 690 5.5% 58,938 816 5.5% --------- ------ ----- --------- ------ ----- Total Earning Assets 453,289 9,583 8.4% 408,597 8,737 8.5% ------ ------ Cash and due from banks 39,311 35,679 Other assets 10,459 9,969 --------- --------- $ 503,059 $ 454,245 ========= ========= Liabilities & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 90,110 $ 445 2.0% $ 92,604 $ 465 2.0% Savings 103,828 997 3.8% 95,152 971 4.0% Time deposits 139,847 1,916 5.4% 119,178 1,669 5.6% Other borrowings - - n/a 1,740 20 4.6% --------- ------ ----- --------- ------ ----- Total interest bearing liabilities 333,785 3,358 4.0% 308,674 3,125 4.0% Demand deposits 116,278 101,386 Other Liabilities 4,554 3,361 --------- --------- Total Liabilities 454,617 413,421 Shareholders' Equity 48,442 40,824 --------- --------- $ 503,059 $ 454,245 ========= ========= Net interest income and margin (net yield) (3) $6,225 5.4% $5,612 5.4% - -------------------------------------------------- ====== ====== ====== ===== 1 Loan interest income includes fee income of $241,000 and $225,000 for the three month periods ended September 30, 1998 and 1997, respectively. 2 Includes the average allowance for loan losses of $4,302,000 and $4,158,000 and average deferred loan fees of $622,000 and $537,000 for the three months ended September 30, 1998 and 1997, respectively. 3 Net interest margin is computed by dividing net interest income by the total average earning assets.
Net interest income for the three months ended September 30, 1998 was $6,225,000 representing an improvement of $613,000 or 10.9% over $5,612,000 for the comparable period in 1997. The increase in net interest income is comprised of an increase of $846,000 or 9.7% in interest income partially offset by an increase in interest expense of $233,000 or 7.5%. As a percentage of average earning assets, the net interest margin for the third quarter of 1998 was 5.4% and compares to 5.4% in the same period one year earlier. On average, the loan to deposit ratio of the Company increased to 63.5% in the third quarter of 1998 from 59.9% in the same period last year. Interest income recognized in the three months ended September 30, 1998 was $9,583,000 representing an increase of $846,000 or 9.7% over $8,737,000 for the same period of 1997. The increase in interest income was primarily due to an increase in the volume of average earning assets. Earning assets averaged $453,289,000 in the three months ended September 30, 1998 compared to $408,597,000 in the same period in 1997, representing an increase of $44,692,000 or 10.9%. The increase in average earning assets included an increase in average net loans of $40,244,000 or 16.7% and in investment securities of $13,371,000 or 12.3%, partially offset by a decrease of $8,923,000 or 15.1% in fed funds sold. The average yield on interest earning assets decreased to 8.4% in the three months ended September 30, 1998 compared to 8.5% for the same period of 1997. Included in average yield is a decrease in the yield on average loans, net of the average allowance for loan losses and average deferred loan fees, to 9.9% for the three months ended September 30, 1998, from 10.4% for the same period in 1997. Included in the net yield on loans were fees of $241,000 and $225,000 for the three month periods ended September 30, 1998 and 1997, respectively. Partially offsetting this decrease, was an increase in the average yield on investment securities to 6.0%, for the quarter ended September 30, 1998, from 5.9%, for the same period in the prior year. The average yield on federal funds sold for the three months ended September 30, 1998, compared to that in 1997, remained unchanged. The average cost of deposits of 4.0% for the three months ended September 30,1998 compares to 4.0% for the same period in 1997. The average cost of savings and time deposits decreased to 3.8% and 5.4% respectively, for the three month period ended September 30,1998 from 4.0% and 5.6% for the same period in the prior year. This decrease in rates was offset by an increase in the percentage of average time deposits included in total interest bearing liabilities. Average time deposits for the three months ended September 30,1998 represents 41.9% of the average total interest bearing liabilities for that period, compared to 38.6% for the same period in the prior year. 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, totaling approximately $202,363,000. 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. The Company recorded a $40,000 provision for loan losses through a charge to earnings in the quarter ended September 30, 1998 and no provision was recorded during the comparable period in 1997. The small amount of increase in the provision in relation to the increase in loans reflects the strengthening economy, continued strong credit performance and an increase in the rate of recovery of loan balances previously charged-off. Loan balances of $4,000, which were previously identified and fully reserved for, were charged-off in the third quarter of 1998 compared to $174,000 charged-off in the same period one year earlier. Recoveries of loan balances previously charged-off were $82,000 for the quarter ended September 30, 1998 compared to $79,000 for the same period in 1997. See Note 3 of the consolidated condensed financial statements for further discussion of nonperforming loans and the allowance for credit losses. At September 30, 1998 the allowance for credit losses was $4,346,000 or 1.48% of total loans, compared to $4,223,000 or 1.65% at December 31, 1997. 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 the 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 could increase. Noninterest Income and Expense Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. Total other income was $490,000 for the three months ended September 30, 1998 as compared to $428,000 for the same period of 1997. Noninterest income for the third quarter of 1998 represented an increase of 14.5% over the third quarter of 1997. The increase in noninterest income is primarily attributed to an increase in mortgage referral fees of $45,000. Noninterest expense increased $114,000 or 3.6% to $3,314,000 in the quarter ended September 30, 1998 from $3,200,000 in the same period one year earlier. The increase in noninterest expenses is primarily due to increases in salaries and benefits, and occupancy and equipment expense. As a percentage of average earning assets, other expenses, on an annualized basis, decreased to 2.9% in the three months ended September 30, 1998 from 3.1% in the comparable period of 1997. Salary and benefits expense was $2,074,000 in the three months ended September 30, 1998 compared to $1,926,000 in the same period one year earlier, an increase of $148,000 or 7.7%. The increase in salary and benefits expense is primarily due to growth and changes in the staffing of the Company. Occupancy expense for the quarter ended September 30, 1998 was $222,000 and represented an increase of $9,000 or 4.2% over $213,000 for the same period last year. Furniture and equipment expense for the third quarter of 1998 increased $36,000 or 17.6% to $241,000 from $205,000 for the same period last year. The increase in furniture and equipment expense is the result of a program for upgrading the Company's internal systems in addition to the impact of facilities moves and expansion by the Banks. Other expenses decreased $79,000 or 9.2% to $777,000 in the three months ended September 30, 1998 from $856,000 for the comparable period one year earlier. Due largely to decreases in loan and supplies expenses. NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Net income for the nine months ended September 30, 1998 was $5,193,000 ($1.08 basic and $.99 diluted earnings per share) compared to $4,744,000 ($1.00 basic and $.91 diluted earnings per share) for the comparable period in 1997. 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 Banks' earnings. The components of net interest income are as follows:
(Unaudited) Nine months ended September 30, In thousands (except percentages) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Avg Avg Avg Avg Balance Interest Yield Balance Interest Yield - --------------------------------------------------------------------------------------------------------------------- Assets: Earning Assets Loans (1)(2) $ 263,830 $ 19,976 10.1% $ 237,525 $ 18,565 10.4% Investment Securities 125,819 5,660 6.0% 97,310 4,235 5.8% Other 54,374 2,220 5.5% 52,057 2,123 5.5% ---------- --------- ----- ---------- -------- ----- Total Earning Assets 444,023 27,856 8.4% 386,892 24,923 8.6% --------- -------- Cash and due from banks 38,516 32,537 Other assets 10,450 9,305 ---------- ---------- $ 492,989 $ 428,734 ========== ========== Liabilities & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 87,707 $ 1,282 2.0% $ 93,623 $ 1,417 2.0% Savings 100,290 2,864 3.8% 93,775 2,832 4.0% Time deposits 143,455 5,963 5.6% 106,293 4,395 5.5% Other borrowings - - n/a 2,502 92 4.9% ---------- --------- ----- ---------- -------- ----- Total interest bearing Liabilities 331,452 10,109 4.1% 296,193 8,736 3.9% --------- -------- Demand deposits 111,017 91,368 Other Liabilities 3,996 2,102 ---------- ---------- Total Liabilities 446,465 389,663 Shareholders' Equity 46,524 39,071 ---------- ---------- $ 492,989 $ 428,734 ========== ========== Net interest income and Margin (net yield) (3) $ 17,747 5.3% $ 16,187 5.6% - ------------------------------------------------ ========= ===== ======== ===== 1 Loan interest income includes fee income of $747,000 and $838,000 for the nine month periods ended September 30, 1998 and 1997, respectively. 2 Includes the average allowance for loan losses of $4,239,000 and $4,264,000 and average deferred loan fees of $566,000 and $570,000 for the nine months ended September 30, 1998 and 1997, respectively. 3 Net interest margin is computed by dividing net interest income by the total average earning assets.
Net interest income for the nine months ended September 30, 1998 was $17,747,000 representing an improvement of $1,560,000 or 9.6% over $16,187,000 for the comparable period in 1997. The increase in net interest income is comprised of an increase of $2,933,000 or 11.8% in interest income partially offset by an increase in interest expense of $1,373,000 or 15.7%. As a percentage of average earning assets, the net interest margin for the first nine months of 1998 was 5.3% and compares to 5.6% in the same period one year earlier. On average, the loan to deposit ratio of the Company decreased to 60.7% in the first half of 1998 from 62.5% in the same period last year. Interest income recognized in the nine months ended September 30, 1998 was $27,856,000 representing an increase of $2,933,000 or 11.8% over $24,923,000 for the same period of 1997. The increase in interest income was primarily due to an increase in the volume of average earning assets. Earning assets averaged $444,023,000 in the nine months ended September 30, 1998 compared to $386,892,000 in the same period in 1997, representing an increase of $57,131,000 or 14.8%. The increase in average earning assets included an increase in average loans of $26,305,000 or 11.1% and increases in investment securities and fed funds sold of $28,509,000 and $2,317,000 or 29.3% and 4.5%, respectively. The average yield on interest earning assets decreased to 8.4% in the nine months ended September 30, 1998 compared to 8.6% for the same period of 1997. The decrease in average yield is attributed to a decrease in the proportion of loans to total earning assets to 59.4% in the first nine months of 1998 from 61.4% in the same period in 1997. Loan fees recognized during the nine months ended September 30, 1998 were $747,000 compared to $838,000 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 nine months ended September 30, 1998 was $10,109,000 and represented an increase of $1,373,000 or 15.7% over $8,736,000 for the comparable period in 1997. During the nine months ended September 30, 1998, the average rate paid by the Banks on interest-bearing liabilities was 4.1% compared to 3.9% for the same period in 1997. The increase in interest expense for the first nine months of 1998 reflects an increase in the proportion of time deposits to total interest bearing liabilities to 43.3% in the first nine months of 1998 from 35.9% in the same period in 1997. Average interest bearing liabilities were $331,452,000 in the nine months ended September 30, 1998 compared to $296,193,000 for the same period in 1997, an increase of $35,259,000 or 11.9%. Partially 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 $111,017,000 for the nine months ended September 30, 1998 represented an increase of $19,649,000 or 21.5% over $91,368,000 for the same period one year earlier. Provision for Credit Losses The Company recorded an $81,000 provision for loan losses through a charge to earnings in the nine months ended September 30, 1998 and no provision was recorded during the comparable period in 1997. The small amount of increase in the provision in relation to the increase in loans reflects the strengthening economy, continued strong credit performance and an increase in the rate of recovery of loan balances previously charged off. Loan balances of $94,000, which were previously identified and fully reserved for, were charged-off in the first three quarters of 1998 compared to $417,000 charged-off in the same period one year earlier. Recoveries of loan balances previously charged-off were $136,000 for the three quarters ended September 30, 1998 compared to $153,000 for the same period in 1997. See Note 3 of the consolidated condensed financial statements for further discussion of nonperforming loans and the allowance for credit losses. Noninterest Income and Expense Total other income was $1,415,000 for the nine months ended September 30, 1998 as compared to $1,234,000 for the same period of 1997. Noninterest income for the first three quarters of 1998 represented an increase of 14.7% over that for 1997. The increase in noninterest income is primarily attributed to an increase in service charges on deposit accounts of $111,000 and mortgage referral fees of $101,000 offsetting nonrecurring revenues in the prior year. Noninterest expense increased $831,000 or 8.8% to $10,224,000 in the three quarters ended September 30, 1998 from $9,393,000 in the same period one year earlier. The increase in noninterest expenses is primarily due to increases in salaries and benefits, and occupancy and equipment expense. As a percentage of average earning assets, other expenses, on an annualized basis, decreased to 3.1% in the nine months ended September 30, 1998 from 3.2% in the comparable period of 1997. Salary and benefits expense was $6,281,000 in the nine months ended September 30, 1998 compared to $5,668,000 in the same period one year earlier, an increase of $613,000 or 10.8%. The increase in salary and benefits expense is primarily due to increased headcount related to the branch acquisition by Bank of Salinas during the first quarter of 1997. Occupancy expense for the three quarters ended September 30, 1998 was $714,000 and represented an increase of $60,000 or 9.2% over $654,000 for the same period last year. The increase in occupancy expense relates to the branch acquisition by Bank of Salinas during the first quarter of 1997 and the relocation of a branch by Bank of Salinas during the second quarter of 1998. Furniture and equipment expense for the first three quarters of 1998 increased $79,000 or 13.3% to $671,000 from $592,000 for the same period last year. The increase in furniture and equipment expense is the result of a program for upgrading the Company's internal data processing systems in addition to the impact of facilities moves and expansion by the Banks. Other expenses increased $79,000 or 3.2% to $2,558,000 in the nine months ended September 30, 1998 from $2,479,000 for the comparable period one year earlier. The increase in other expenses is comprised of increases in advertising and operating expenses and amortization of intangibles. Partially offsetting these increases were decreases in loan expenses and stationery and supplies. 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 Banks assess 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 September 30, 1998, were approximately $117,192,000 and $1,603,000, 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 available for sale. On September 30, 1998, consolidated liquid assets totaled $115 million or 23.1% of total assets as compared to $164.2 million or 33.0% of total consolidated assets on December 31, 1997. In addition to liquid assets, the Banks maintain lines of credit with correspondent banks for up to $20,000,000 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 Banks with additional secondary sources of liquidity. Another key liquidity ratio is the ratio of gross loans to total deposits, which was 66.0% at September 30, 1998 and 56.9% at December 31, 1997. Interest Rate Sensitivity Interest rate sensitivity is a measure of the exposure to fluctuations in the Banks' 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. 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 Banks' earning assets and interest-bearing liabilities at September 30, 1998, 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.
September 30,1998 - ------------------------------------------------------------------------------------------------------------------- In thousands (except ratios) - ------------------------------------------------------------------------------------------------------------------- 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 $ 47,507 $ - $ - $ - $ - $ 47,507 Investment securities 4 2,000 18,085 61,215 27,698 109,002 Loans, excluding Nonaccrual loans and overdrafts 12,033 189,263 17,095 66,481 10,552 295,424 - ------------------------------------------------------------------------------------------------------------------- Total $ 59,544 $ 191,263 $ 35,180 $127,696 $ 38,250 $ 451,933 =================================================================================================================== Interest bearing liabilities: Interest bearing demand $ 94,079 $ - $ - $ - $ - $ 94,079 Savings 101,678 - - - - 101,678 Time certificates 53 36,972 85,426 13,629 111 136,191 - ------------------------------------------------------------------------------------------------------------------- Total $ 195,810 $ 36,972 $ 85,426 $ 13,629 $ 111 $ 331,948 =================================================================================================================== Interest rate sensitivity gap $ (136,266) $ 154,291 $ (50,246) $114,067 $ 38,139 Cumulative interest rate sensitivity gap $ (136,266) $ 18,025 $ (32,221) $ 81,846 $ 119,985 Ratios: Interest rate sensitivity gap 0.30 5.17 0.41 9.37 344.59 Cumulative interest rate sensitivity gap 0.30 1.08 0.90 1.25 1.36 - -------------------------------------------------------------------------------------------------------------------
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 pressures. CAPITAL RESOURCES The Company's total shareholders' equity was $49,631,000 at September 30, 1998 compared to $43,724,000 at December 31, 1997. The Company and the Banks are subject to regulations issued by the Board of Governors and the FDIC which require maintenance of 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 Governors' 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 include common shareholders' equity and noncumulative perpetual preferred stock) and Tier 2 capital which includes, among other items, limited life(and in case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserve for credit losses. Effective October 1,1998, the Board of Governors and other federal bank regulatory agencies approved including in Tier 2 capital up to 45% of the pretax net unrealized gains on certain available-for-sale equity securities having readily determinable fair values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion against risk. 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. The Board of Governors and other federal regulatory agencies have adopted a revised minimum leveraged ratio for banks holding companies as a supplement to the risk-weighted capital guidelines. The old rule established a 3% minimum leverage standard for well-run banking organizations (bank holding companies and banks)with diversified risk profiles. Banking organizations which did not exhibit such characteristics or had greater risk due to significant growth, among other factors, were required to maintain a minimum leverage ratio 1% to 2% higher. The old rule did not take into account the implementation of the market risk capital measure set forth in the federal regulatory agency capital adequacy guidelines. The revised leverage ratio establishes a minimum Tier1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank holding companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth. The old rule remains in effect for banks, however, the federal regulatory agencies are currently continuing work on revised leverage rule for banks. The following table shows the Company's actual capital amounts and ratios at September 30, 1998 and December 31, 1997 as well as the minimum capital ratios for capital adequacy under the regulatory framework:
For Capital Actual Adequacy Purposes: ---------------------------- ----------------------------- Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------ As of September 30, 1998 Total Capital (to Risk Weighted Assets): $ 51,382,000 15.1% $ 27,307,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 47,114,000 13.8% 13,653,000 4.0% Tier 1 Capital (to Average Assets): 47,114,000 9.6% 19,724,000 4.0% As of December 31, 1997 Total Capital (to Risk Weighted Assets): $ 45,782,000 15.2% $ 24,046,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 41,968,000 14.0% 12,023,000 4.0% Tier 1 Capital (to Average Assets): 41,968,000 9.6% 17,570,000 4.0% - ------------------------------------------------------------------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised 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 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 Banks 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. OTHER MATTERS Year 2000 As the year 2000 approaches, a critical issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. In brief, many existing application software products in the marketplace were designed to only accommodate a two digit date position which represents the year (e.g., "95""is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., "99") could be the maximum date value these systems will be able to accurately process. This is not just a banking problem, as corporations around the world and in all industries are similarly impacted. The Company is uncertain regarding the consequences of the Year 2000 issue on the future results of operations, liquidity and financial condition; but believes that failure to ensure that its systems are in compliance with Year 2000 requirements could have a material adverse effect on its business. As a result, the Company has made addressing Year 2000 issues a priority of management and the Board. Based upon actions implemented to date, the Company currently anticipates that it will be successful in addressing Year 2000 issues and anticipates no materially adverse processing problems. All mission critical systems have been identified by the Company, and the Company is currently testing, or developing contingency plans, for each. The term "mission critical" refers to an application or system that is vital to the successful continuance of core business activity. Significantly all mission critical hardware and software utilized by the Company are provided by third parties. This requires that the Company is in close contact with relevant vendors and contractors as it conducts testing and contingency planning. The Company anticipates that all of its mission critical systems will be tested and implemented, or that contingency plans will be written and in place, by March 31, 1999. The Company has made disclosures to all existing and new customers regarding the importance of the Year 2000 issue and its relevance to the Company and the customer. The Company is conducting an ongoing effort to identify customers that represent material risk exposure to the institution, to evaluate their Year 2000 preparedness and risk to the Company and to implement appropriate risk controls. The Company also continues to evaluate the cost to address Year 2000 issues. Most costs incurred to date are in conjunction with the planned replacement of systems. The cost of system replacements accelerated to meet Year 2000 requirements and Year 2000 project specific costs have not been significant to the operations of Company as a whole. The Company believes that it will meet its Year 2000 compliance commitments using existing resources, without incurring significant incremental expenses. Despite efforts undertaken to date and as projected, there can be no assurance that problems will not arise which could have an adverse impact upon the Company due, among other matters, to the complexities involved in computer programming related to resolution of Year 2000 problems and the fact that the systems of other companies on which Central Coast Bancorp and its subsidiaries, Bank of Salinas and Cypress Bank, may rely must also be corrected on a timely basis. Many phases of the Company's Year 2000 preparedness plan have been completed: the Company has identified, assess and prioritized mission critical systems; developed Year 2000 testing strategies and plans; implemented a customer due diligence program; and tested most mission critical systems. But, delays, mistakes or failures in correcting Year 2000 system problems by other companies on which Central Coast Bancorp and its subsidiaries may rely, could have a significant adverse impact upon Central Coast Bancorp and its subsidiaries, Bank of Salinas and Cypress Bank, and their ability to mitigate the risk of adverse impact of Year 2000 problems for their customers. The disclosure set forth above contains forward-looking statements. Specifically, such statements are contained in sentences including the words "expect" or "anticipate" or "could" or "should". Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results to differ materially from those contemplated by such forward-looking statements. The factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include the failure by third parties adequately to remediate Year 2000 issues or the inability of the Company to complete testing software changes on the time schedules currently expected. Nevertheless, the Company currently expects that its Year 2000 compliance efforts will be successful without material adverse effects on its business. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The reader is referred to pages 28 to 29 of the Annual Report on Form 10--K for information on market risk. There have been no significant changes since December 31, 1997 (also see pages 22 - 23 of this report). 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 Reports on Form 8-K - None 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. October 30, 1998 CENTRAL COAST BANCORP By: \S\JAYME C. FIELDS -------------------------- Jayme C. Fields, Controller (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit Number Description Page 27.1 Financial Data Schedule 31 EX-27 2 EX-27
9 This Schedule Contains Summary Financial Information Extracted >From (A) Item 7 - 'Financial Statements And Supplementary Data" And Is Qualified In Its Entirety By Reference To Such (B) Financial Statements Included In This Report And Incorporated Herein By Refernce. 0000921085 CENTRAL COAST BANCORP 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 40,827 0 47,507 0 96,578 12,424 12,525 298,232 4,346 499,627 445,247 0 4,794 0 0 0 41,195 7,772 499,672 7,040 1,853 690 9,583 3,358 3,358 6,225 40 0 3,314 3,361 3,361 0 0 1,970 0.41 0.38 5.40 1,024 73 0 0 4,228 4 82 4,346 4,346 0 0
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