-----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, J3wkQ0oy7tQTTsxg+VOKA+oVcQy+HbQhIIdFGkg7AtkFcvowpWlrwngBsZ4nF3N+ xyzUFViEnKOrA6AM3ruAdA== 0000921085-99-000003.txt : 19990330 0000921085-99-000003.hdr.sgml : 19990330 ACCESSION NUMBER: 0000921085-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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-K SEC ACT: SEC FILE NUMBER: 000-25418 FILM NUMBER: 99575182 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-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------ Commission file number 0-25418 CENTRAL COAST BANCORP --------------------- (Exact name of registrant as specified in its charter) STATE OF CALIFORNIA 77-0367061 ------------------- ---------- (State or other jurisdiction of (I.R.S.Employer Identification No.) incorporation or organization) 301 Main Street, Salinas, California 93901 ------------------------------------ ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (408) 422-6642 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Common Stock (no par value) 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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock held by non-affiliates of the registrant at March 8, 1999 was $92,459,969.22. As of March 8, 1999, the registrant had 6,215,796 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference into this Form 10-K: Part III, Items 10 through 13 from registrant's definitive proxy statement for the 1998 annual meeting of shareholders. The Index to Exhibits is located at page 73 Page 1 of 92 Pages PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS. Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K 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. Central Coast Bancorp (the "Company") is a California corporation organized in 1994 to act as the bank holding company of Bank of Salinas and Cypress Bank, state-chartered banks (the "Banks"). The Banks, headquartered in Salinas and Seaside, respectively, serve individuals, merchants, small and medium-sized businesses, professionals, agribusiness enterprises and wage earners located in the Salinas Valley and the Monterey Peninsula. On February 21, 1997, the Bank of Salinas purchased certain assets and assumed certain liabilities of the Gonzales and Castroville branch offices of Wells Fargo Bank. As a result of the transaction the Bank assumed deposit liabilities, received cash, and acquired tangible assets. This transaction resulted in intangible assets, representing the excess of the liabilities assumed over the fair value of the tangible assets acquired. In January 1997, Cypress Bank opened a new branch office in Monterey, California, so that it might better serve business and individual customers on the Monterey Peninsula. In December 1998, the Bank of Salinas opened an additional new branch office in Salinas, California, in order to better provide services to the growing Salinas community. Other than holding the shares of the subsidiary Banks, the Company conducts no significant activities. Although, it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the "Board of Governors"), the Company's principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The Banks operate through their headquarters offices located in Salinas and Seaside, California and through their branch offices located in Castroville, Gonzales, King City, Marina, Monterey and Salinas, California. The Banks offer a full range of commercial banking services, including the acceptance of demand, savings and time deposits, and the making of commercial, real estate (including residential mortgage), Small Business Administration, personal, home improvement, automobile and other installment and term loans. They also offer travelers' checks, safe deposit boxes, notary public, customer courier and other customary bank services. The Bank of Salinas and Cypress Bank Offices are open from 9:00 a.m. to 5:00 p.m., Monday through Thursday, and 9:00 a.m. to 6:00 p.m. on Friday. The Bank of Salinas also operates a limited service facility in a retirement home located in Salinas, California. The facility is open from 10:00 a.m. to 12:00 p.m. on Wednesday of each week. The Banks have automated teller machines (ATMs) located at the Castroville, Gonzales, King City, Marina, Monterey, Salinas and Seaside offices, the Monterey County Fairgrounds, the Soledad Correctional Training Facility Credit Union, Salinas Valley Memorial Hospital and Fort Hunter Liggett which is located in Jolon, California. The Banks are insured under the Federal Deposit Insurance Act and each depositor's account is insured up to the legal limits thereon. The Banks are chartered (licensed) by the California Commissioner of Financial Institutions ("Commissioner") and have chosen not to become a member of the Federal Reserve System. The Banks have no subsidiaries. The Banks also currently offer personal and business Visa credit cards. The Banks have arranged with a correspondent institution to offer trust services to the Banks' customers on request. The Banks operate an on-site computer system which provides independent processing of the Banks' deposits, loans and financial accounting. The three areas in which the Banks have directed virtually all of their lending activities are: (i) commercial loans; (ii) consumer loans; and (iii) real estate loans (including residential construction and mortgage loans). As of December 31, 1998, these three categories accounted for approximately 44 percent, 4 percent and 52 percent, respectively, of the Banks' loan portfolio. The Banks' deposits are attracted primarily from individuals, merchants, small and medium-sized businesses, professionals and agribusiness enterprises. The Banks' deposits are not received from a single depositor or group of affiliated depositors the loss of any one of which would have a materially adverse effect on the business of the Banks, nor is a material portion of the Banks' deposits concentrated within a single industry or group of related industries. As of December 31, 1998, the Banks served a total of 24 municipality and governmental agency depositors totaling $30,929,000 in deposits. In connection with the deposits of municipalities or other governmental agencies or entities, the Banks are generally required to pledge securities to secure such deposits, except for the first $100,000 of such deposits which are insured by the Federal Deposit Insurance Corporation ("FDIC"). As of December 31, 1998, the Banks had total deposits of $489,192,000. Of this total, $149,757,000 represented noninterest-bearing demand deposits, $98,226,000 represented interest-bearing demand deposits, and $241,209,000 represented interest-bearing savings and time deposits. The principal sources of the Banks' revenues are: (i) interest and fees on loans; (ii) interest on Federal Funds sold (funds loaned on a short-term basis to other banks) ; and (iii) interest on investments (principally government securities). For the fiscal year ended December 31, 1998 these sources comprised 72 percent, 8 percent, and 20 percent, respectively, of the Banks' total interest income. SUPERVISION AND REGULATION The common stock of the Company is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. The Banks' common stock, however, is exempt from such requirements. The Company is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, annual, quarterly and other current reports with the Securities and Exchange Commission. The Banks are licensed by the Commissioner, their deposits are insured by the FDIC, and they have chosen not to become members of the Federal Reserve System. The Banks have no subsidiaries. Consequently, the Banks are subject to the supervision of, and are regularly examined by, the Commissioner and the FDIC. Such supervision and regulation include comprehensive reviews of all major aspects of the Banks' business and condition, including their capital ratios, allowance for possible loan losses and other factors. However, no inference should be drawn that such authorities have approved any such factors. The Company and the Banks are required to file reports with the Commissioner, the FDIC and the Board of Governors and provide such additional information as the Commissioner, FDIC and the Board of Governors may require. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is registered as such with, and subject to the supervision of, the Board of Governors. The Company is required to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act prohibits the Company from acquiring any voting shares of, or interest in, all or substantially all of the assets of, a bank located outside the State of California unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any such interstate acquisition is also subject to the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 discussed below. The Company, and any subsidiaries which it may acquire or organize, are deemed to be "affiliates" of the Banks within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by the Banks to affiliates, and (b) on investments by the Banks in affiliates' stock as collateral for loans to any borrower. The Company and its subsidiaries are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities. In addition, regulations of the Board of Governors promulgated under the Federal Reserve Act require that reserves be maintained by the Banks in conjunction with any liability of the Company under any obligation (promissory note, acknowledgement of advance, banker's acceptance or similar obligation) with a weighted average maturity of less than seven (7) years to the extent that the proceeds of such obligations are used for the purpose of supplying funds to the Banks for use in its banking business, or to maintain the availability of such funds. The Board of Governors and the FDIC have adopted risk-based capital guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, the Company and the Banks are required to maintain capital equal to at least 8.0% of its assets and commitments to extend credit, weighted by risk, of which at least 4.0% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves. Assets, commitments to extend credit, and off-balance sheet items are categorized according to risk and certain assets considered to present less risk than others permit maintenance of capital at less than the 8% ratio. For example, most home mortgage loans are placed in a 50% risk category and therefore require maintenance of capital equal to 4% of such loans, while commercial loans are placed in a 100% risk category and therefore require maintenance of capital equal to 8% of such loans. 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 the FDIC have adopted a revised minimum leveraged ratio for bank 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. At December 31, 1998, the Banks and the Company are in compliance with the risk-based capital and leverage ratios described above. See Item 8 below for a listing of the Company's risk-based capital ratios at December 31, 1998 and 1997. On December 19, 1991, President Bush signed the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Board of Governors and FDIC adopted regulations effective December 19, 1992, implementing a system of prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the FDICIA. The regulations establish five capital categories with the following characteristics: (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%; (5) "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%. The regulations established procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency, among other matters. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause an institution to be classified within any one of the three "undercapitalized" categories, such as declaration of dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution would be classified within one of the "undercapitalized" categories. In addition, institutions which are classified in one of the three "undercapitalized" categories are subject to certain mandatory and discretionary supervisory actions. Mandatory supervisory actions include (1) increased monitoring and review by the appropriate federal banking agency; (2) implementation of a capital restoration plan; (3) total asset growth restrictions; and (4) limitation upon acquisitions, branch expansion, and new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may include (1) requirements to augment capital; (2) restrictions upon affiliate transactions; (3) restrictions upon deposit gathering activities and interest rates paid; (4) replacement of senior executive officers and directors; (5) restrictions upon activities of the institution and its affiliates; (6) requiring divestiture or sale of the institution; and (7) any other supervisory action that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under the guaranty is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized." FDICIA also restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are not "well capitalized." An "undercapitalized" institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market areas in which such deposits would otherwise be accepted. Any financial institution which is classified as "critically undercapitalized" must be placed in conservatorship or receivership within 90 days of such determination unless it is also determined that some other course of action would better serve the purposes of the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of principal or interest on subordinated debt without the prior approval of the FDIC and the FDIC must prohibit a critically undercapitalized institution from taking certain other actions without its prior approval, including (1) entering into any material transaction other than in the usual course of business, including investment expansion, acquisition, sale of assets or other similar actions; (2) extending credit for any highly leveraged transaction; (3) amending articles or bylaws unless required to do so to comply with any law, regulation or order; (4) making any material change in accounting methods; (5) engaging in certain affiliate transactions; (6) paying excessive compensation or bonuses; and (7) paying interest on new or renewed liabilities at rates which would increase the weighted average costs of funds beyond prevailing rates in the institution's normal market areas. Under the FDICIA, the federal financial institution agencies have adopted regulations which require institutions to establish and maintain comprehensive written real estate policies which address certain lending considerations, including loan-to-value limits, loan administrative policies, portfolio diversification standards, and documentation, approval and reporting requirements. FDICIA further generally prohibits an insured state bank from engaging as a principal in any activity that is impermissible for a national bank, absent FDIC determination that the activity would not pose a significant risk to the Bank Insurance Fund, and that the bank is, and will continue to be, within applicable capital standards. Similar restrictions apply to subsidiaries of insured state banks. The Company does not currently intend to engage in any activities which would be restricted or prohibited under the FDICIA. The federal banking agencies during 1996 issued a joint agency policy statement regarding the management of interest-rate risk exposure (interest rate risk is the risk that changes in market interest rates might adversely affect a bank's financial condition) with the goal of ensuring that institutions with high levels of interest-rate risk have sufficient capital to cover their exposures. This policy statement reflected the agencies decision at that time not to promulgate a standardized measure and explicit capital charge for interest rate risk, in the expectation that industry techniques for measurement of such risk will evolve. However, the Federal Financial Institution Examination Counsel (OFFIEC) on December 13, 1996, approved an updated Uniform Financial Institutions Rating System ("UFIRS"). In addition to the five components traditionally included in the so-called CAMEL rating system which has been used by bank examiners for a number of years to classify and evaluate the soundness of financial institutions (including capital adequacy, asset quality, management, earnings and liquidity), UFIRS includes for all bank regulatory examinations conducted on or after January 1, 1997, a new rating for a sixth category identified as sensitivity to market risk. Ratings in this category are intended to reflect the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices may adversely affect an institution's earnings and capital. The rating system henceforth will be identified as the "CAMELS" system. The federal financial institution agencies have established safety and soundness standards for insured financial institutions covering (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. If an agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. Under the final rule, an institution must file a compliance plan within 30 days of a request to do so from the institution's primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution. The Board of Governors issued final amendments to its risk-based capital guidelines to be effective December 31, 1994, requiring that net unrealized holding gains and losses on securities available for sale determined in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are not to be included in the Tier 1 capital component consisting of common stockholders' equity. Net unrealized losses on marketable equity securities (equity securities with a readily determinable fair value), however, will continue to be deducted from Tier 1 capital. This rule has the general effect of valuing available for sale securities at amortized cost (based on historical cost) rather than at fair value (generally at market value) for purposes of calculating the risk-based and leverage capital ratios. On December 13, 1994, the Board of Governors issued amendments to its risk-based capital guidelines regarding concentration of credit risk and risks of non-traditional activities, which were effective January 17, 1996. As amended, the risk-based capital guidelines identify concentrations of credit risk and evaluate an institution's ability to manage such risks and the risk posed by non-traditional activities as important factors in assessing an institution's overall capital adequacy. Community Reinvestment Act ("CRA") regulations effective as of July 1, 1996 evaluate banks' lending to low and moderate income individuals and businesses across a four-point scale from "outstanding" to "substantial noncompliance," and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the CRA regulations may be subject to enforcement proceedings. The Banks have a current rating of "satisfactory" or better for CRA compliance. The Company's ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from the Banks. The payment of cash dividends and/or management fees by the Banks is subject to restrictions set forth in the California Financial Code, as well as restrictions established by the FDIC. See Item 5 below for further information regarding the payment of cash dividends by the Company and the Banks. COMPETITION At December 31, 1998, there were 56 branches of commercial and savings banks in the cities of Castroville, Gonzales, King City, Marina, Salinas, Seaside and the Monterey Peninsula. Additionally, the Banks compete with savings and loan associations and, to a lesser extent, credit unions, finance companies and other financial service providers for deposit and loan customers. Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns. They also perform services, such as trust services, international banking, discount brokerage and insurance services which the Banks are not authorized or prepared to offer currently. The Banks have made arrangements with their correspondent banks and with others to provide such services for its customers. For borrowers requiring loans in excess of the Banks' legal lending limits, the Banks have offered, and intend to offer in the future, such loans on a participating basis with its correspondent banks and with other independent banks, retaining the portion of such loans which is within their lending limits. As of December 31, 1998, the Banks' aggregate legal lending limits to a single borrower and such borrower's related parties were $7,947,000 on an unsecured basis and $13,245,000 on a fully secured basis based on regulatory capital of $52,981,000. Each Bank's business is concentrated in its service area, which primarily encompasses Monterey County, including the Salinas Valley area and to a lesser extent, the contiguous areas of San Benito County, Southern Santa Cruz County, and Santa Clara County. The economy of the Bank of Salinas's service area is primarily dependent upon the agricultural industry. Consequently, Bank of Salinas competes with other financial institutions for deposits from and loans to individuals and companies who are also dependent upon the agricultural industry. The economy of Cypress Bank's service area is primarily dependent on the tourist supported small business industry. Cypress Bank competes with other financial institutions located in their own communities and in surrounding communities. Based upon data as of the most recent practicable date (June 30,1998)(1) there were 73 operating commercial and savings bank branches in Monterey County with total deposits of $3,656,276,000. The Banks held a total of $489,192,000 in deposits, representing approximately 13.4% of total commercial and savings banks deposits in Monterey County as of June 30, 1998. Of the Banks'competitors, two are independent banksheadquartered in Monterey County. The Banks also compete with savings and loans associations in Monterey County. In order to compete with the major financial institutions in their primary service areas, the Banks use to the fullest extent possible the flexibility which is accorded by their independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by the Banks' officers, directors and employees. The Banks also seek to provide special services and programs for individuals in its primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture, tools of the trade or expansion of practices or businesses. In the event there are customers whose loan demands exceed the Banks' lending limits, the Banks seek to arrange for such loans on a participation basis with other financial institutions. The Banks also assist those customers requiring services not offered by the Banks to obtain such services from correspondent banks. Banking is a business which depends on interest rate differentials. In general, the difference between the interest rate paid by the Banks to obtain their deposits and other borrowings and the interest rate received by the Banks on loans extended to customers and on securities held in the Banks' portfolio comprise the major portion of the Banks' earnings. Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions. The interest rate differentials of the Banks, and therefore their earnings, are affected not only by general economic conditions, both domestic and foreign, but also by the monetary and fiscal policies of the United States as set by statutes and as implemented by federal agencies, particularly the Federal Reserve Board. This agency can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Board. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on the Banks are not predictable. In 1996 the FDIC, pursuant to Congressional mandate, reduced bank deposit insurance assessment rates to a range from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. Based upon the above risk-based assessment rate schedule, the Banks' current capital ratios and the Banks' current levels of deposits, the Banks anticipate no change in the assessment rate applicable to the Banks during 1999 from that in 1998. Since 1986, California has permitted California banks and bank holding companies to be acquired by banking organizations based in other states on a "reciprocal" basis (i.e., provided the other state's laws permit California banking organizations to acquire banking organizations in that state on substantially the same terms and conditions applicable to local banking organizations). Some increase in merger and acquisition activity among California and out-of-state banking organizations has occurred as a result of this law, as well as increased competition for loans and deposits. Since October 2, 1996, California law implementing certain provisions of prior federal law has (1) permitted interstate merger transactions; (2) prohibited interstate branching through the acquisition of a branch business unit located in California without acquisition of the whole business unit of the California bank; and (3) prohibited interstate branching through de novo establishment of California branch offices. Initial entry into California by an out-of-state institution must be accomplished by acquisition of or merger with an existing whole bank which has been in existence for at least five years. Recently, the Federal banking agencies, especially the OCC and the Board of Governors, have taken steps to increase the types of activities in which national banks and bank holding companies can engage, and to make it easier to engage in such activities. On November 20, 1996, the OCC issued final regulations permitting national banks to engage in a wider range of activities through subsidiaries. "Eligible institutions" (those national banks that are well capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order) may engage in activities related to banking through operating subsidiaries after going through a new expedited application process. In addition, the new regulations include a provision whereby a national bank may apply to the OCC to engage in an activity through a subsidiary in which the bank itself may not engage. This OCC regulation could be advantageous to national banks depending on the extent to which the OCC permits national banks to engage in new lines of business. Certain legislative and regulatory proposals that could affect the Bank and the banking business in general are pending or may be introduced before the United States Congress, the California State Legislature and Federal and state government agencies. The United States Congress is considering numerous bills that could reform banking laws substantially. For example, proposed bank modernization legislation under consideration would, among other matters include a repeal of the Glass-Steagall Act restrictions on banks that now prohibit the combination of commercial and investment banks. It is not known to what extent, if any, the legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. It is likely, however, that many of these proposals would subject the Company and the Banks to increased regulation, disclosure and reporting requirements and would increase competition and the Banks' cost of doing business. In additional to pending legislative changes, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such and regulations may have on the Company and the Banks. - -------- (1) "FDIC Institution Office Deposits", June 30, 1998 ITEM 2. PROPERTIES The headquarters office and centralized operations of the Company are located at 301 Main Street, Salinas, California. The Company owns and leases properties which house administrative and data processing functions and eight banking offices. Major owned and leased facilities are listed below. BANK OF SALINAS CYPRESS BANK 301 main street 1658 fremont boulevard salinas, california seaside, california leased - term expires 1999 leased - term expires 1999 10601 merritt street 228 reservation road castroville, california marina, california owned leased - term expires 2004 400 alta street 484 lighthouse avenue gonzales, california monterey, california. leased - term expires 2003 leased - term expires 2000 532 broadway king city, california leased - term expires 2002 1285 north davis road salinas, california. leased - term expires 2008 The above leases contain options to extend for three to fifteen years. Included in the above are two facilities leased from shareholders at terms and conditions which management believes are consistent with the commercial lease market. Rental rates are adjusted annually for changes in certain economic indices. The annual minimum lease commitments are set forth in Footnote 7 of Item 8 Financial Statements and Supplementary Data included in this report and incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS There are no material proceedings adverse to the Company or the Banks to which any director, officer, affiliate of the Company or 5% shareholder of the Company or the Banks, or any associate of any such director, officer, affiliate or 5% shareholder of the Company or Banks are a party, and none of the above persons has a material interest adverse to the Company or the Banks. Neither the Company nor the Banks are a party to any pending legal or administrative proceedings (other than ordinary routine litigation incidental to the Company's or the Banks' business) and no such proceedings are known to be contemplated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information Prior to the second quarter of 1998, there was limited trading in and no established public trading market for the Company's common stock. As of the second quarter of 1998, the Company's common stock is listed on the Nasdaq National Market exchange (trading symbol CCBN) Sandler O'Neill & Partners, L.P. and Hoefer & Arnett, Incorporated are registered as market makers in the Company's stock. Based on information provided to the Company from Nasdaq and Heofer & Arnett(for those quarters prior to the Company's Nasdaq listing), the range of high and low bids for the common stock for the twomost recent fiscal years, restated to reflect all stock dividends and stock splits distributed by the Company and the 5-for-4 stock split declared in January 1999, are presented below.
Calendar Year Low High 1998 First Quarter ....................... $ 14.55 $ 19.20 Second Quarter ...................... 16.50 20.41 Third Quarter ....................... 13.20 18.50 Fourth Quarter ...................... 14.40 16.10 1997 First Quarter ........................ $ 11.45 $ 17.82 Second Quarter ...................... 12.36 17.00 Third Quarter ....................... 16.18 18.18 Fourth Quarter ...................... 14.00 16.45
The closing price for the Company's common stock was $14.875 as of March 8, 1999. (b) Holders As of March 8, 1999, there were approximately 1,150 holders of the common stock of the Company. There are no other classes of common equity outstanding. (c) Dividends The Company's shareholders are entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available therefor, subject to the restrictions set forth in the California General Corporation Law (the "Corporation Law"). The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (1) the corporation's assets equal at least 1-1/4 times its liabilities; and (2) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation's interest expenses for such fiscal years, then the corporation's current assets must equal at least 1-1/4 times its current liabilities. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from the Banks. The payment of cash dividends by the subsidiary Banks is subject to restrictions set forth in the California Financial Code (the "Financial Code"). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of (a) the bank's retained earnings; or (b) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that the Commissioner determines that the shareholders' equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the Commissioner may order the bank to refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the bank would be included in one of the "undercapitalized" categories for capital adequacy purposes pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. Additionally, while the Board of Governors has no general restriction with respect to the payment of cash dividends by an adequately capitalized bank to its parent holding company, the Board of Governors might, under certain circumstances, place restrictions on the ability of a particular bank to pay dividends based upon peer group averages and the performance and maturity of the particular bank, or object to management fees on the basis that such fees cannot be supported by the value of the services rendered or are not the result of an arm's length transaction. Under these provisions and considering minimum regulatory capital requirements, the amount available for distribution from the Banks to the Company was approximately $17,747,000 as of December 31, 1998. To date, the Company has not paid a cash dividend and presently does not intend to pay cash dividends in the foreseeable future. The Company distributed a five-for-four stock split in February 1999, a ten percent stock dividend in 1998, a three-for-two stock split in 1997 and a ten percent stock dividend in 1996. The Board of Directors will determine payment of dividends in the future after consideration of various factors including the profitability and capital adequacy of the Company and the Banks. The following table presents certain consolidated financial information concerning the business of the Company and its subsidiary Banks. This information should be read in conjunction with the Consolidated Financial Statements, the notes thereto, and Management's Discussion and Analysis included in this report.
Years Ended December 31, ------------------------------------------------- (Dollar amounts in 1998 1997 1996 1995 1994 thousands) OPERATING RESULTS Total Interest Income $37,354 $33,916 $29,301 $26,964 $21,646 Total Interest Expense 13,319 12,041 9,859 10,008 7,071 ------------------------------------------------- Net Interest Income 24,035 21,875 19,442 16,956 14,575 Provision for Credit Losses 159 64 352 695 1,745 ------------------------------------------------- Net Interest Income After Provision for Credit Losses 23,876 21,811 19,090 16,261 12,830 Other Income 2,084 1,765 1,456 1,302 1,315 Other Expenses 13,859 12,573 11,115 10,263 9,170 ------------------------------------------------- Income before Income Taxes 12,101 11,003 9,431 7,300 4,975 Income Taxes 4,948 4,500 3,571 2,975 2,046 ------------------------------------------------- NET INCOME $ 7,153 $ 6,503 $ 5,860 $ 4,325 $ 2,929 - --------------------------------------------------------------------------- Basic Earnings Per Share $ 1.18 $ 1.09 $ 1.01 $ 0.75 $ 0.53 Diluted Earnings Per Share 1.09 1.01 0.94 0.70 0.50 - --------------------------------------------------------------------------- FINANCIAL CONDITION AND CAPITAL - YEAR-END BALANCES Net Loans $307,818 $251,271 $235,992 $191,000 $179,266 Total Assets 543,933 497,674 376,832 357,236 310,362 Deposits 489,192 450,301 338,663 326,089 283,823 Shareholders' Equity 51,199 43,724 36,332 29,916 25,547 - --------------------------------------------------------------------------- FINANCIAL CONDITION AND CAPITAL - AVERAGE BALANCES Net Loans $271,590 $238,793 $203,117 $173,065 $179,514 Total Assets 499,354 441,013 355,386 329,502 290,166 Deposits 447,598 396,457 319,110 300,291 265,512 Shareholders' Equity 47,587 39,969 33,228 27,684 23,691 - --------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS Rate of Return on: Average Total Assets 1.43% 1.47% 1.65% 1.31% 1.01% Average Shareholders' Equity 15.03% 16.27% 17.64% 15.62% 12.36% Rate of Average Shareholders'Equity to Total Average Assets 9.53% 9.06% 9.35% 8.40% 8.16% - ---------------------------------------------------------------------------
(a) (1) Distribution of Assets, Liabilities and Equity; Interest Rates and Interest Differential Table One in Management's Discussion and Analysis included in this report sets forth the Company's average balance sheets (based on daily averages) and an analysis of interest rates and the interest rate differential for each of the three years in the period ended December 31, 1998 and is hereby incorporated by reference. (2) Volume/Rate Analysis Information as to the impact of changes in average rates and average balances on interest earning assets and interest bearing liabilities is set forth in Table Two in Management's Discussion and Analysis. (b) Investment Portfolio (1) The book value of investment securities at December 31, 1998 and 1997 is set forth in Note 5 of Item 8 - "Financial Statements and Supplementary Data" and are included in this report and incorporated herein by reference. (2) The book value, maturities and weighted average yields of investment securities as of December 31, 1998 are set forth in Table Twelve of Management's Discussion and Analysis included in this report and incorporated herein by reference. (3) There were no issuers of securities for which the book value was greater than 10% of shareholders' equity other than U.S. Government and U.S. Government Agencies and Corporations. (c) Loan Portfolio (1) The composition of the loan portfolio is summarized in Table Three of Management's Discussion and Analysis included in this report and is incorporated herein by reference. (2) The maturity distribution of the loan portfolio at December 31, 1998 is summarized in Table Eleven of Management's Discussion and Analysis included in this report and is incorporated herein by reference. (3) Nonperforming Loans The Company's current policy is to cease accruing interest when a loan becomes 90 days past due as to principal or interest, when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, the accrued and uncollected 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 or when the loan is both well secured and in process of collection. For further discussion of nonperforming loans, refer to Risk Elements section of Management Discussion Analysis in this report. (d) Summary of Loan Loss Experience (1) An analysis of the allowance for loan loss showing charged off and recovery activity as of December 31, 1998 is summarized in Table Five of Management's Discussion and Analysis included in this report and is incorporated herein by reference. Factors used in determination of the allowance for loan losses are discussed in greater detail in the "Risk Elements" section of Management's Discussion and Analysis included in this report and are incorporated herein by reference. (2) In evaluating the adequacy of the allowance for loan losses, the Company attempts to allocate the allowance for loan losses to specific categories of loans. Management believes that any breakdown or allocation of the allowance for possible loan losses into loan categories lends an appearance of exactness which does not exist in that the allowance is utilized as a single unallocated allowance available for all loans. Further, management believes that the breakdown of historical losses in the preceding table is a reasonable representation of management's expectation of potential losses in the next full year of operation. However, the allowance for loan losses should not be interpreted as an indication of when charge-offs will occur or as an indication of future charge-off trends. (e) Deposits (1) Table One in Management's Discussion and Analysis included in this report sets forth the distribution of average deposits for the years ended December 31, 1998, 1997 and 1996 and is incorporated herein by reference. (2) Table Ten in Management's Discussion and Analysis included in this report sets forth the maturities of time certificates of deposit of $100,000 or more at December 31, 1998 and is incorporated herein by reference. 3(f) Return on Equity and Assets (1) The table at page 16 of this section sets forth the ratios of net income to average assets and average shareholders' equity, and average shareholders' equity to average assets. As the Company has never paid a cash dividend, the dividend payout ratio is not indicated. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to the historical information contained herein, this Annual Report contains certain forward-looking statements. The reader of this Annual Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, competition effects, fee and other noninterest income earned, general economic conditions, nationally, regionally and in the operating market areas of the Company and the Banks, changes in the regulatory environment, changes in business conditions and inflation, changes in securities markets, effects of Year 2000 problems discussed herein, as well as other factors. This entire Annual Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Business Organization Central Coast Bancorp (the "Company"), a California corporation organized in 1994, acts as the holding company for Bank of Salinas and Cypress Bank (the "Banks"), state-chartered banks, headquartered in Salinas and Seaside, California, respectively. As of December 31, 1998, the Banks operated eight full-service branches and one limited-service branch in Monterey County, California. 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, 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 the Monterey Peninsula. The Company has expanded its banking operations through internal growth and the acquisition of other banking units. Bank of Salinas' newest branch was opened deNovo in December 1998. It is located in Salinas' newest shopping area, Westridge Center. On February 21, 1997, the Bank of Salinas purchased certain assets and assumed certain liabilities of the Gonzales and Castroville branch offices of Wells Fargo Bank. As a result of that transaction the Bank assumed deposit liabilities, received cash, and acquired tangible assets. This transaction resulted in intangible assets, representing the excess of the liabilities assumed over the fair value of the tangible assets acquired. In January 1997, Cypress Bank opened a new branch office in Monterey, California, so that it might better serve business and individual customers on the Monterey Peninsula. The following analysis is designed to enhance the reader's understanding of the Company's financial condition and the results of its operations as reported in the Consolidated Financial Statements included in this Annual Report. Reference should be made to those statements and the Selected Financial Data presented elsewhere in this report for additional detailed information. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Except within the "overview" section, interest income and net interest income are presented on a tax equivalent basis. Overview Central Coast Bancorp continued its record of increased earnings in each successive year since the founding of Bank of Salinas in 1983. Earnings for the year ended December 31, 1998 were $7,153,000 versus $6,503,000 for 1997. Diluted earnings per share for the years were $1.09 and $1.01. The earnings per share for the two years have been adjusted for the 5 for 4 stock split paid on February 26, 1999. For the year 1998, net interest income increased $2,160,000 (9.9%) to $24,035,000 from the prior year. The interest income component was up $3,438,000 to $37,354,000 due to a 13.0% growth in average earning assets of $51,738,000. Loan volume made up $32,797,000 of this increase and represented a 13.7% growth in loans. The higher loan volume added $3,410,000 in interest income on a year over year basis. This increase was offset in part by decrease of $1,201,000 due to a 44 basis point decline in the average yield received on loans during 1998. Interest income on investment securities grew $1,650,000 (28.3%) as average balances were $25,727,000 (25.8%) higher and the average yield improved by 12 basis points. During the year, the Company began a program to reduce Federal Funds sold and move those funds into higher yielding securities. Interest income from Federal Funds sold declined $421,000 (12.9%) in 1998 versus 1997. Interest expense increased $1,278,000 (10.6%) in 1998 due mostly to growth of $33,175,000 (11.0%) in average interest bearing deposits. The average rate paid on interest-bearing liabilities was 4.0% for both 1998 and 1997. Net interest margin for 1998 was 5.34% versus 5.49% in 1997. This change reflects the effect of the 50 basis point decrease in the prime rate during the fourth quarter. Noninterest income increased $319,000 to $2,084,000 in 1998 versus 1997. Service charges on deposits provided $159,000 of the increase mostly due to higher volumes. The increased volume of mortgage originations contributed an additional $136,000 on a year over year basis. Noninterest expenses increased $1,286,000 (10.2%) to $13,859,000. Salary and benefits expenses increased 10.5% to $8,385,000. Part of the higher expense was attributable to the full year effect in 1998 of the two branches purchased from Wells Fargo Bank in late February 1997 and the December 1998 opening of the new Westridge branch in Salinas. Additional staff has been added Company wide due to growth. During the year, the Company installed a wide area network, a Year 2000 compliant central computer and software system and upgraded many of its workstations. These enhancements provide the platform for growth, but contributed significantly to the $128,000 (30.5%) increase in depreciation for 1998 versus 1997. For 1998, the Company had an overhead efficiency ratio of 53.1% as compared to 53.2% for 1997. Assets of the Company totaled $543,933,000 at December 31, 1998 which was an increase of $46,259,000 (9.3%) from the 1997 ending balances. Loan ending balances totaled $312,844,000 on December 31, 1998 versus $256,062,000 on December 31,1997. Nonperforming loans were $2,123,000 at the end of 1998 versus $895,000 at the end of 1997. One real estate secured loan for $1,174,000, which was in the process of collection, accounted for most of the $1,228,000 increase. This loan was refinanced outside the Bank in March 1999. Deposits grew 8.6% to total $489,192,000 at December 31, 1998. For 1998, the Company realized a return on assets of 1.43% and a return on equity of 15.0% versus 1.47% and 16.3%, respectively, in 1997. Central Coast Bancorp ended 1998 with a Tier 1 capital ratio of 13.6% and a total risk-based capital ratio of 14.8%. Management's continuing goals for the Banks are to deliver a full array of competitive products to their customers while maintaining the personalized customer service of a community bank. We believe this strategy will provide continued growth and the ability to achieve above average returns for our shareholders. Accounting Pronouncements See Note One in the Consolidated Financial Statements at Item 8. (A) Results of Operations Net Interest Income/Net Interest Margin Net interest income represents the excess of interest and fees earned on interest-earning assets (loans, securities and federal funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. Net interest income for 1998 totaled $24,130,000 and was up 10.1% ($2,223,000) over the prior year. The interest income component was up $3,501,000 to $37,449,000. Most of the increase was attributable to growth in the earning assets. Average outstanding loan balances of $271,590,000 for 1998 reflected a 13.7% increase over 1997 balances. This increase contributed an additional $3,410,000 to interest income. This increase was offset in part by an average 44 basis point decrease in loan yields that caused a reduction of $1,201,000 in interest income. Competitive pressures and three 25 basis point decreases in the prime rate late in the year contributed to the lower yields. The securities portfolio average balances grew $25,727,000 (25.8%) which added $1,511,000 to interest income. The average yield received on securities was up 16 basis points and added $202,000 to interest income. Federal Funds sold interest income decreased $421,000 as the average balances were $6,786,000 (11.3%) lower. Interest expense increased $1,278,000 (10.6%) in 1998 over 1997. The average balances of interest bearing liabilities increased $31,307,000 (10.4%). The higher balances were due in part to the full year effect in 1998 of the deposits acquired in the February 1997 purchase of two branches from Wells Fargo Bank. Interest expense attributable to the higher volume was $1,787,000. Lower rates paid on all interest bearing liabilities helped offset the higher expense by $509,000. Net interest margin for 1998 was 5.36% versus 5.50% in 1997. Net interest income for 1997 totaled $21,907,000 and was up 12.7% ($2,465,000) over 1996. Average earning assets were $398,416,000 in 1997 for an increase of $73,213,000 over 1996. The purchase of the two branches from Wells Fargo Bank accounted for approximately $25,000,000 of this increase. In 1997, interest income increased by $4,647,000 to $33,948,000. The higher volume of earning assets added $6,003,000 to interest income in 1997. The average yield received on all interest earning assets fell 49 basis points to 8.52%. The yield differential reduced interest income by $1,356,000. Interest expense increased $2,182,000 (22.1%) in 1997 over 1996. Average balances of interest bearing liabilities increased $52,933,000 in 1997. Approximately $28,000,000 of that increase was attributable to the branch purchase from Wells Fargo Bank. Interest expense was up $2,409,000 due to the higher average balances. Changes due to rate variations helped offset the increase by $227,000. Net interest margin for 1997 was 5.50% versus 5.98% in 1996. Table One, Analysis of Net Interest Margin on Earning Assets, and Table Two, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and past trends of the Banks' interest income and expenses. Table One provides an analysis of net interest margin on earning assets setting forth average assets, liabilities and shareholders' equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin on earning assets. Table Two presents an analysis of volume and rate change on net interest income and expense. Table One: Analysis of Net Interest Margin on Earning Assets
(Taxable Equivalent Basis) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- In thousands Avg Avg Avg Avg Avg Avg (except percentages) Balance Interest Yield Balance Interest Yield Balance Interest Yield - ---------------------------------------------------------------------------------------------------------------------------------- Assets: Earning Assets Loans (1) (2) $ 271,590 $27,037 9.96% $ 238,793 $24,828 10.40% $ 203,117 $22,330 10.99% Investment Securities (3) 125,380 7,568 6.04% 99,653 5,855 5.88% 82,883 4,936 5.96% Other 53,184 2,844 5.35% 59,970 3,265 5.44% 39,203 2,035 5.19% ------ ----- ---- ------ ----- ---- ------ ----- ---- Total Earning Assets 450,154 $37,449 8.32% 398,416 $33,948 8.52% 325,203 $29,301 9.01% ------- ---- ------- ---- ------- ---- Cash & due from banks 38,889 33,144 22,867 Other assets 10,311 9,453 7,316 ------ ----- ----- $ 499,354 $ 441,013 $ 355,386 ========= ========= ========= Liabilites & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 89,637 $ 1,720 1.92% $ 93,161 $ 1,881 2.02% $ 75,295 $ 1,629 2.16% Savings 101,256 3,774 3.73% 95,767 3,875 4.05% 102,819 4,303 4.19% Time deposits 142,580 7,825 5.49% 111,370 6,187 5.56% 71,119 3,927 5.52% Other borrowings - - n/a 1,868 98 5.25% - - n/a ------- ------ ---- ------ ------ ---- ------- ----- ---- Total interest bearing liabilities 333,473 13,319 3.99% 302,166 12,041 3.98% 249,233 9,859 3.96% ------ ---- ------ ---- ----- ---- Demand deposits 114,125 96,159 69,877 Other Liabilities 4,169 2,719 3,048 ----- ----- ----- Total Liabilities 451,767 401,044 322,158 Shareholders' Equity 47,587 39,969 33,228 ------ ------ ------ $ 499,354 $ 441,013 $ 355,386 ========= ========= ========= Net interest income & margin (4) $24,130 5.36% $21,907 5.50% $19,442 5.98% ======= ==== ======= ==== ======= ====
- ----------------------------- 1. Loans interest includes loan fees of $951,000, $1,037,000 and $901,000 in 1998, 1997 and 1996, and interest recognized from payments collected on nonaccrual loans of $619,000 in 1996. 2. Average balances of loans include average allowance for loan losses of $4,260,000, $4,229,000 and $4,439,000, and average deferred loan fees of $587,000, $571,000 and $613,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 3. Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for 1998, 1997 and 1996. 4. Net interest margin is computed by dividing net interest income by total average earning assets. Table Two: Volume/Rate Analysis
- -------------------------------------------------------------------------------- (in thousands) 1998 over 1997 Increase (decrease) due to change in: Net Volume Rate (5) Change ------ -------- ------ Interest-earning assets: Net Loans (1)(2)(3) ......................$ 3,410 $(1,201) $ 2,209 Investment securities(4) ................. 1,511 202 1,713 Federal funds sold & other ............... (370) (51) (421) ----- ------ ----- Total .................................. 4,551 (1,050) 3,501 ----- ------- ----- Interest-bearing liabilities: Demand deposits .......................... (71) (90) (161) Savings deposits ......................... 222 (323) (101) Time deposits ............................ 1,734 (96) 1,638 Other borrowings ......................... (98) 0 (98) --- --- --- Total .................................. 1,787 (509) 1,278 ----- ---- ----- Interest differential .......................$ 2,764 $ (541) $ 2,223
- -------------------------------------------------------------------------------- (in thousands) 1997 over 1996 Increase (decrease) due to change in: Net Volume Rate(5) Change ------ ------- ------ Interest-earning assets: Net loans (1)(2)(3) ......................$ 3,924 $(1,426) $ 2,498 Investment securities(4) ................. 999 (80) 919 Federal funds sold & other ............... 1,080 150 1,230 ----- ---- ----- Total .................................. 6,003 (1,356) 4,647 ----- ------ ----- Interest-bearing liabilities: Demand deposits .......................... 393 (141) 252 Savings deposits ......................... (296) (132) (428) Time deposits ............................ 2,214 46 2,260 Other borrowings ......................... 98 - 98 --- --- --- Total .................................. 2,409 (227) 2,182 ----- ---- ----- Interest differential ....................... $ 3,594 $(1,129) $ 2,465 - --------------------------------------------------------------------------------
1. The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans. 2. Loan fees of $951,000, $1,037,000 and $901,000 for the years ended December 31, 1998, 1997 and 1996, respectively, have been included in the interest income computation. 3. Rate variance includes impact of interest income recognized from payments received on nonaccrual loans of $619,000 in 1996. 4. Includes taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for 1998, 1997 and 1996. 5. The rate / volume variance has been included in the rate variance. Provision for Loan Losses Credit quality remained strong in 1998. Consequently, the Company made provisions for loan losses of only $159,000. This amounted to 0.06% of average loans outstanding. In 1997, the Company provided $64,000. That was a decrease of $288,000 from 1996. Service Charges and Fees and Other Income For 1998, noninterest income was up $319,000 (18.1%) from 1997 results to $2,084,000. Service charges and fees related to deposit accounts accounted for $159,000 of the increase. The growth came from both higher volumes and some selective fee increases. Other income was up $160,000 to $849,000 over 1997 results. Mortgage origination fees accounted for $136,000 of that increase as mortgage activity was significantly higher in 1998. Should interest rates increase, activity in mortgage originations would most likely decrease resulting in a decrease in those fees. In 1997, income realized from service charges on deposit accounts increased $341,000 or 46.4% to $1,076,000 over $735,000 in 1996. The increase in income from fees and service charges was largely the result of the increase in deposit accounts due to the two former Wells Fargo branches as well as growth in the total number of interest bearing and noninterest bearing demand deposit accounts at all branches. Other income decreased $32,000 (4.4%) in 1997 versus 1996. Income from the sale and servicing of SBA loans was $119,000 in 1997 representing a decrease of $42,000 or 26.1% over $161,000 recognized in 1996. The Company is retaining the SBA loans in its portfolio rather than selling them. Salaries and Benefits Salary and benefits expenses increased $799,000 (10.5%) to $8,385,000 in 1998 from the level in 1997. Part of the higher expense was attributable to the full year effect in 1998 of the two branches purchased from Wells Fargo Bank in late February 1997 and the December 1998 opening of the new Westridge branch in Salinas. Additional staff has been added Company wide due to growth. At the end of 1998, the full time equivalent (FTE) staff was 197 versus 181 at the end of 1997. Components of salaries and benefits that increased significantly included; base salary and wages, $533,000 and benefits including employer taxes $224,000. Salaries and employee benefits expense for 1997 was $7,586,000, an increase of 17.9% over the $6,437,000 incurred in 1996. The increase in 1997 primarily reflected the impact of increased headcount because of the purchase of the Wells Fargo branches and to accommodate growth in the Banks. In 1997, the FTE staff increased 36 positions from the end of 1996. Salaries and employee benefits in 1997 included approximately $175,000 of nonrecurring charges for restructuring related to the acquisition of Cypress Bank and $250,000 for a salary continuation plan. Occupancy and Furniture and equipment Premise and fixed asset related expenses were $1,975,000 in 1998. This was an increase of $286,000 over 1997. During 1998, the Company installed a wide area network, a Year 2000 compliant central computer and software system and upgraded many of its computer workstations. These enhancements provide the platform for growth, but contributed significantly to the increase in premise and fixed asset expenses. Other significant increases occurred in repairs and maintenance of equipment, janitorial and gardening and rent on leased quarters. For 1997, premise and fixed asset related expenses increased $124,000 or 7.92% to $1,689,000. Most of the increase was related to the branch acquisition. Other Expenses Other expenses increased $201,000 (6.1%) to $3,499,000 in 1998. ATM expense was up $77,000 (51.3%) as the Banks added more locations and changed the service provider. Promotional expenses were up $51,000 (46.3%) as the Banks increased their advertising campaigns. Those two categories saw the largest changes from the prior year. Other expenses were $3,298,000 in 1997 representing an increase of $185,000 or 5.9% from 1996 expenses of $3,113,000. The increase in 1997 was primarily related to increased supplies expense and amortization of intangibles related to the purchase of two branches in that year. Provision for Taxes The effective tax rate on income was 40.9%, 40.9%, and 37.9% in 1998, 1997 and 1996, respectively. The primary factor reducing the effective tax rate of the Company in 1996 was a change in the valuation allowance for the deferred tax assets of Cypress Bank. The effective tax rate was greater than the federal statutory tax rate due to state tax expense of $1,292,000, $1,213,000, and $1,030,000 in these years. Tax-exempt income of $190,000, $63,000, and none ($0) from investment securities in these years helped to reduce the effective tax rate. (B) Balance Sheet Analysis Central Coast Bancorp's total assets at December 31, 1998 were $543,933,000 compared to $497,674,000 at December 31, 1997, representing an increase of 9.3%. The average balances of total assets of $499,354,000 in 1998 represent an increase of $58,341,000 or 13.2% over $441,013,000 in 1997. Loans The Banks concentrate their lending activities in four principal areas: commercial loans (including agricultural loans); installment loans; real estate-other loans and real estate construction loans (both commercial and personal). At December 31, 1998, these four categories accounted for approximately 44%, 4%, 46% and 6% of the Banks' loan portfolio, respectively, as compared to 49%, 3%, 42%, and 6% at December 31, 1997. Strong economic activity in the Banks' market area coupled with lower interest rates resulted in some shifting loan demands during 1998. While all loan categories reflect year over year growth from 1997 to 1998, the largest growth took place in the real estate-other category. Table Three summarizes the composition of the loan portfolio for the past five years as of December 31: Table Three: Loan Portfolio Composite
- ----------------------------------------------------------------------------- In thousands - ----------------------------------------------------------------------------- 1998 1997 1996 1995 1994 Commercial $136,685 124,714 $111,545 $85,823 $78,627 Installment 11,545 9,349 8,230 5,677 6,445 Real Estate: Construction 19,929 14,645 27,997 24,852 24,076 Other 144,685 107,354 93,241 79,644 74,769 - ----------------------------------------------------------------------------- Total Loans 312,844 256,062 241,013 195,996 183,917 Allowance for Credit Losses (4,352) (4,223) (4,372) (4,446) (4,068) Deferred Loans Fees (674) (568) (649) (550) (583) - ----------------------------------------------------------------------------- Total $307,818 $251,271 $235,992 $191,000 $179,266 - -----------------------------------------------------------------------------
The majority of the Bank's loans are direct loans made to individuals, local businesses and agri-businesses. The Bank relies substantially on local promotional activity, personal contacts by bank officers, directors and employees to compete with other financial institutions. The Bank makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment. Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products. Installment loans include a range of traditional consumer loan products offered by the Company such as personal lines of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer items. The construction loans are generally composed of commitments to customers within the Company's service area for construction of both commercial properties and custom and semi-custom single family residences. Other real estate loans consist primarily of loans to the Banks' depositors secured by first trust deeds on commercial and residential properties typically with short-term maturities and original loan to value ratios not exceeding 75%. In general, except in the case of loans with SBA guarantees, the Company does not make long-term mortgage loans; however, the Company has informal arrangements in place with mortgage lenders to assist customers in securing single-family mortgage financing. Average net loans in 1998 were $271,590,000 representing an increase of $32,797,000 or 13.7% over 1997. The favorable economic conditions and lower interest rates provided the impetus for continuing loan growth. Average net loans of $238,793,000 in 1997 represented an increase of $35,676,000 or 17.6% from $203,117,000 in 1996. Risk Elements - 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 $212.1 million at December 31, 1998. 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, an 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. Management believes that its lending policies and underwriting standards will tend to minimize losses in an economic downturn, however, there is no assurance that losses will not occur under such circumstances. The Banks' loan policies and underwriting standards include, but are not limited to, the following: 1) maintaining a thorough understanding of the Banks' service area and limiting investments outside of this area, 2) maintaining a thorough understanding of borrowers' knowledge and capacity in their field of expertise, 3) basing real estate construction loan approval not only on salability of the project, but also on the borrowers' capacity to support the project financially in the event it does not sell within the original projected time period, and 4) maintaining conforming and prudent loan to value and loan to cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Banks' construction lending officers. In addition, the Banks strive to diversify the risk inherent in the construction portfolio by avoiding concentrations to individual borrowers and on any one project. Nonaccrual, Past Due and Restructured Loans Management generally places loans on nonaccrual status when they become 90 days past due, unless the loan is well secured and in the process of collection. Loans are charged off when, in the opinion of management, collection appears unlikely. Table Four sets forth nonaccrual loans and loans past due 90 days or more for December 31: Table Four: Non-Performing Loans
- -------------------------------------------------------------------------------- In thousands 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- Past due 90 days or more and still accruing: Real estate $ 1,174 $ 6 $ 59 $ 71 $ - Commercial 73 73 60 35 - Installment and other - - 90 - 6 - -------------------------------------------------------------------------------- 1,247 79 209 106 6 - -------------------------------------------------------------------------------- Nonaccrual: Real estate 543 628 419 633 2,697 Commercial 333 188 184 194 99 Installment and other - - 1 24 33 - -------------------------------------------------------------------------------- 876 816 604 851 2,829 - -------------------------------------------------------------------------------- Total nonperforming loans $ 2,123 $ 895 $ 813 $ 957 $ 2,835 ================================================================================
Interest due but excluded from interest income on nonaccrual loans was approximately $45,000 in 1998, $7,000 in 1997 and $50,000 in 1996. In 1998, 1997 and 1996 interest income recognized from payments received on nonaccrual loans was $17,000, $7,000 and $619,000, respectively. At December 31, 1998, the recorded investment in loans that are considered impaired was $727,000 of which $335,000 are included as nonaccrual loans above. Such impaired loans had a valuation allowance of $164,000. The average recorded investment in impaired loans during 1998 was $776,000. The Company recognized interest income on impaired loans of $64,000. There were no troubled debt restructurings or loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of December 31, 1998. Management is not aware of any potential problem loans, which were accruing and current at December 31, 1998, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. Other real estate owned was $105,000 and $348,000 at December 31, 1997 and 1996, respectively (none at December 31, 1998). Allowance for Loan Losses Activity The provision for credit losses is based upon management's evaluation of the adequacy of the existing allowance for loans outstanding. 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 the interaction of three primary factors: (1) the loan portfolio growth in the period, (2) a comprehensive grading and review formula for total loans outstanding, and (3) actual previous charge-offs. The allowance for credit losses totaled $4,352,000 or 1.39% of total loans at December 31, 1998 compared to $4,223,000 or 1.65% at December 31, 1997 and $4,372,000 or 1.81% at December 31, 1996. The decrease in the allowance as a percentage of total loans is primarily due to the increase in loan balances in a generally strong economic environment. It is the policy of management to maintain the allowance for credit losses at a level adequate for known and future risks inherent in the loan portfolio. Based on information currently available to analyze credit loss potential, including economic factors, overall credit quality, historical delinquency and a history of actual charge-offs, management believes that the credit loss provision and allowance is prudent and adequate. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty. Table Five summarizes, for the years indicated, the activity in the allowance for loan losses. Table Five: Allowance for Loan Losses
- ---------------------------------------------------------------------------------- For the year ended December 31 1998 1997 1996 1995 1994 (dollars in thousands) - ---------------------------------------------------------------------------------- Average loans outstanding $276,437 $243,593 $208,169 $178,012 $183,434 - ---------------------------------------------------------------------------------- Allowance for possible credit losses at beginning of period $ 4,223 $4,372 $4,446 $ 4,068 $ 2,840 Loans charged off: Real estate (16) (100) (207) (52) (45) Installment (31) (61) (22) (80) (125) Commercial (130) (279) (391) (302) (413) - ---------------------------------------------------------------------------------- (177) (440) (620) (434) (583) - ---------------------------------------------------------------------------------- Recoveries of loans previously Charged off: Real estate 20 28 11 - - Installment 11 37 27 29 35 Commercial 116 162 156 88 31 - ---------------------------------------------------------------------------------- 147 227 194 117 66 - ---------------------------------------------------------------------------------- Net loans charged off (30) (213) (426) (317) (517) Additions to allowance charged to operating expenses 159 64 352 695 1,745 - ---------------------------------------------------------------------------------- Allowance for possible loans Losses at end of period $ 4,352 $ 4,223 $ 4,372 $ 4,446 $ 4,068 ================================================================================== Ratio of net charge-offs to Average loans outstanding 0.01% 0.09% 0.20% 0.18% 0.28% Provision of allowance for possible credit losses to average loans outstanding 0.06% 0.03% 0.17% 0.39% 0.95% Allowance for possible credit losses to loans net of deferred fees at year end 1.39% 1.65% 1.82% 2.27% 2.22% - ----------------------------------------------------------------------------------
As part of its loan review process, Management has allocated the overall allowance based on specific identified problem loans and historical loss data. Table Six summarizes the allocation of the allowance for loan losses at December 31, 1998 and 1997. Table Six: Allowance for Loan Losses by Loan Category
- -------------------------------------------------------------------------- December 31, 1998 December 31, 1997 Percent Percent of of loans in each loans in each category category to to (Dollars in thousands) Amount total loans Amount total loans loans loans - --------------------------------------------------------------------------- Commercial $ 3,416 43% $ 2,704 48% Real estate 678 52% 695 47% Consumer 139 3% 108 4% Loans held for sale - 2% - 1% - --------------------------------------------------------------------------- Total allocated 4,233 100% 3,507 100% Total unallocated 119 716 - --------------------------------------------------------------------------- Total $ 4,352 $ 4,223 - ---------------------------------------------------------------------------
Other Real Estate Owned The Company did not have any properties in OREO at December 31, 1998. At the end of 1997, the Company had properties with a total value of $105,000 in OREO. Deposits Deposits at December 31, 1998 totaled $489,192,000 and were up $38,891,000 (8.6%) over the 1997 year-end balances. The increase in year-end total deposits is attributable to internal growth in noninterest-bearing demand, interest-bearing demand, savings and time deposit categories. At the end of 1997, total deposits were $450,301,000. That represented a $111,638,000 or 32.9% increase over the balances at December 31, 1996. Deposits in the two branches purchased from Wells Fargo Bank in February 1997 accounted for $55,025,000 of the increase. Those two branches realized growth of approximately $21,000,000 from the date of acquisition. Equity See Note 15 in the financial statements for a discussion of regulatory capital requirements. Management believes that the Company's capital is adequate to support anticipated growth, meet the cash dividend requirements of the Banks and meet the future risk-based capital requirements of the Banks and the Company. Market Risk Management Overview. The goal for managing the assets and liabilities of the Bank is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Bank to undue interest rate risk. The Board of Directors has overall responsibility for the Company's interest rate risk management policies. The Bank has an Asset and Liability Management Committee (ALCO) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. The Banks use simulation models to forecast earnings, net interest margin and market value of equity. Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer modeling techniques, the Company is able to estimate the potential impact of changing interest rates on earnings. A balance sheet forecast is prepared using inputs of actual loan, securities and interest bearing liabilities (i.e. deposits/borrowings) positions as the beginning base. The forecast balance sheet is processed against three interest rate scenarios. The scenarios include a 100 basis point rising rate forecast, a flat rate forecast and a 100 basis point falling rate forecast within a one year time frame. The Company's 1999 net interest income forecast is determined by utilizing a forecast balance sheet projected from year end 1998 balances. The following assumptions were used in the modeling activity: Earning asset growth of 14.5% based on ending balances Loan growth of 11.4% based on ending balances Investment and funds sold growth of 16.7% based on ending balances Deposit growth of 12.8% based on ending balances Balance sheet target balances were the same for all rate scenarios The following table summarizes the effect on net interest income of a +/- 100 basis point change in interest rates as measured against a flat rate (no change) scenario. Table 7: Interest Rate Risk Simulation of Net Interest Income as of December 31, 1998 Estimated Impact on 1999 Net Interest Income ------ (in thousands) Variation from flat rate scenario +100 $ 826 -100 (1,007) The simulations of earnings do not incorporate any management actions which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. The Company also uses a second simulation scenario that rate shocks the balance sheet with an immediate parallel shift in interest rates of +/-100 basis points. This scenario provides estimates of the future market value of equity (MVE) and net interest income (NII). MVE measures the impact on equity due to the changes in the market values of assets and liabilities as a result of a change in interest rates. The Bank measures the volatility of these benchmarks using a twelve month time horizon. Using the December 31, 1998 balance sheet as the base for the simulation, the following table summarizes the effect on net interest income of a +/-100 basis point change in interest rates: Table 8: Interest Rate Risk Simulation of NII as of December 31, 1998 % Change Change in NII in NII from Current from Current 12 Mo. Horizon 12 Month Horizon -------------- ---------------- (in thousands) +100bp 7.6% $2,504 -100bp ( 8.5%) ($2,802) These results indicate that the balance sheet is asset sensitive since earnings increase when interest rates rise. The magnitude of the NII change is within the Company's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. Gap analysis provides another measure of interest rate risk. The Company does not actively use gap analysis in managing interest rate risk. It is presented here for comparative purposes. Interest rate sensitivity is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at various time horizons. The differences are known as interest sensitivity gaps. As reflected in Table Nine, at December 31, 1998, the Company is asset sensitive in all time frames except for the immediately repricing items. This gap position would indicate that as interest rates rise, the Bank's earnings should be favorably impacted and conversely, as interest rates fall, earnings should be adversely impacted. Because the deposit liabilities do not reprice immediately with changes in interest rates the Company is very asset sensitive. In 1998, Management began a program to diversify some of the Banks assets into longer term investment instruments that will help reduce earnings volatility in falling interest rate environments. As a result of this program, the interest rate sensitivity gap ratios in Table Nine as of December 31, 1998 show decreased asset sensitivity when compared to those as of December 31, 1997. Table Nine: INTEREST RATE SENSITIVITY DECEMBER 31,1998
- --------------------------------------------------------------------------------------------------------------------- Assets and Liabilities Over three which Mature or Reprice: Next day months and Over one and within within and within Over (In thousands) Immediately three months one year five years five years Total - --------------------------------------------------------------------------------------------------------------------- Interest earning assets: Federal funds sold $ 4,202 $ - $ - $ - $ - $ 4,202 Investment securities 1,525 32,610 11,092 27,487 97,673 170,387 Loans, excluding nonaccrual loans and overdrafts 10,104 204,938 8,919 78,346 13,062 315,369 - --------------------------------------------------------------------------------------------------------------------- Total $ 15,831 $ 237,548 $ 20,011 $105,833 $ 110,735 $ 489,958 ===================================================================================================================== Interest bearing liabilities: Interest bearing demand $ 98,226 $ - $ - $ - $ - $ 98,226 Savings 104,447 - - - - 104,447 Time certificates 14 43,703 81,983 10,950 112 136,762 Other Borrowings - - - - - - - --------------------------------------------------------------------------------------------------------------------- Total $ 202,687 $ 43,703 $ 81,983 $ 10,950 $ 112 $ 339,435 ===================================================================================================================== Interest rate sensitivity gap $ (186,856) $ 193,845 $ (61,972) $ 94,883 $ 110,623 Cumulative interest rate sensitivity gap $ (186,856) $ 6,989 $ (54,983) $ 39,900 $ 150,523 Ratios: Interest rate sensitivity gap 0.08 5.44 0.24 9.67 988.71 Cumulative interest rate sensitivity gap 0.08 1.03 0.83 1.12 1.44 - --------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 Ratios: Interest rate sensitivity gap 0.37 6.06 0.41 4.08 222.17 Cumulative interest rate sensitivity gap 0.37 1.35 1.13 1.35 1.39 - ----------------------------------------------------------------------------------------------------------------------
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 December 31, 1998, were approximately $122,423,000 and $1,556,000, 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 overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale. On December 31, 1998, consolidated liquid assets totaled $153.5 million or 28.2% 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 subsidiary Banks maintain short term lines of credit with correspondent banks. At December 31, 1998, the Banks had $23,500,000 available under these credit lines. Additionally, the Banks are members of the Federal Home Loan Bank. At December 31, 1998, the Banks could have arranged for up to $17,114,000 in secured borrowings from the FHLB. 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 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". In conjunction with the adoption of SFAS 133 the Banks reclassified all securities into the available-for-sale category. This enables the Banks to sell any of their unpledged securities to meet liquidity needs. The maturity distribution of certificates of deposit in denominations of $100,000 or more is set forth in Table Ten. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields elsewhere if available. Table Ten: Certificates of Deposit in Denominations of $100,000 or More
- ------------------------------------------------------------------ Year Ended 12/31/98 - ------------------------------------------------------------------ Three months or less $27,967,000 Over three months through six months 22,280,000 Over six months through twelve months 29,637,000 Over twelve months 8,293,000 - ------------------------------------------------------------------ Total $88,177,000 - ------------------------------------------------------------------
Loan demand also affects the Bank's liquidity position. Table Eleven presents the maturities of loans at December 31, 1998. Table Eleven: Loan Maturities - December 31, 1998
- --------------------------------------------------------------------------------------------------------- One year One year through Over (in thousands) or less five years five years Total - --------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $115,509,000 $ 20,334,000 $ 3,409,000 $139,252,000 Real estate - construction 18,957,000 472,000 500,000 19,929,000 Real estate - other 78,889,000 57,864,000 11,533,000 148,286,000 Installment 9,912,000 1,621,000 12,000 11,545,000 - --------------------------------------------------------------------------------------------------------- Total $223,267,000 $ 80,291,000 $ 15,454,000 $319,012,000 - ---------------------------------------------------------------------------------------------------------
Loans shown above with maturities greater than one year include $36,604,000 of floating interest rate loans and $59,141,000 of fixed rate loans. The maturity distribution and yields of the investment portfolios are presented in Table Twelve which follows:
Table Twelve: Securities Maturities and Weighted Average Yields - December 31, 1998 - --------------------------------------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market Average In thousands Cost Gain Losses Value Yield - --------------------------------------------------------------------------------------------------- December 31, 1998 Available for sale Securities: U.S. Treasury and agency securities Maturing within 1 year $13,976 $ 119 $ - $ 14,095 6.16% Maturing after 1 year but within 5 years 27,248 239 - 27,487 6.16% Maturing after 5 years but within 10 years 20,037 15 - 20,052 6.27% Maturing after 10 years but within 15 years 19,486 118 - 19,604 6.08% Maturing after 15 years 29,169 293 - 29,462 6.19% State & Political Subdivision Maturing after 5 year but within 10 Years 3,159 9 10 3,154 4.06% Maturing after 10 year but within 15 Years 22,144 44 199 21,993 4.18% Maturing after 15 Years 3,418 15 24 3,409 4.74% Corporate Debt Securities Maturing within 1 year 29,608 - - 29,608 5.92% Other 1,525 - - 1,525 - - --------------------------------------------------------------------------------------------------- Total investment securities $ 169,770 $ 852 $ 235 $170,387 5.73% ===================================================================================================
The principal cash requirements of the Company are for expenses incurred in the support of administration and operations of the Banks. These cash requirements are funded through direct reimbursement billings to the Banks. For nonbanking functions, the Company is dependent upon the payment of cash dividends by the Banks to service its commitments. The Company expects that the cash dividends paid by the Bank to the Company will be sufficient to meet this payment schedule. Off-Balance Sheet Items The Bank has certain ongoing commitments under operating leases. (See Note 7 of the financial statements for the terms.) These commitments do not significantly impact operating results. As of December 31, 1998, commitments to extend credit were the only financial instruments with off-balance sheet risk. The Bank has not entered into any contracts for financial derivative instruments such as futures, swaps, options etc. Loan commitments increased to $122,423,000 from $90,649,000 at December 31, 1997. The commitments represent 39.1% of total loans at year-end 1998 versus 35.4% a year ago. Disclosure of Fair Value The Financial Accounting Standards Board (FASB), Statement of Financial Accounting Standards Number 107, Disclosures about Fair Value of Financial Statements, requires the disclosure of fair value of most financial instruments, whether recognized or not recognized in the financial statements. The intent of presenting the fair values of financial instruments is to depict the market's assessment of the present value of net future cash flows discounted to reflect both current interest rates and the market's assessment of the risk that the cash flows will not occur. In determining fair values, the Company used the carrying amount for cash, short-term investments, accrued interest receivable, short-term borrowings and accrued interest payable as all of these instruments are short term in nature. Securities are reflected at quoted market values. Loans and deposits have a long term time horizon which required more complex calculations for fair value determination. Loans are grouped into homogeneous categories and broken down between fixed and variable rate instruments. Loans with a variable rate, which reprice immediately, are valued at carrying value. The fair value of fixed rate instruments is estimated by discounting the future cash flows using current rates. Credit risk and repricing risk factors are included in the current rates. Fair value for nonaccrual loans is reported at carrying value and is included in the net loan total. Since the allowance for loan losses exceeds any potential adjustment for nonaccrual valuation, no further valuation adjustment has been made. Demand deposits, savings and certain money market accounts are short term in nature so the carrying value equals the fair value. For deposits that extend over a period in excess of four months, the fair value is estimated by discounting the future cash payments using the rates currently offered for deposits of similar remaining maturities. At 1998 year end, the fair values calculated on the Bank's assets are .09% above the carrying values versus 1.08% above the carrying values at year end 1997.The change in the calculated fair value percentage relates to the securities and loan categories and is the result of changes in interest rates in 1998 (see Note 12 of the financial statements). 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 (Y2K) issue on the future results of operations, liquidity and financial condition; but believes that failure to ensure that its systems are in compliance with Y2K requirements could have a material adverse effect on its business. As a result, the Company has made addressing Y2K 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 Y2K issues and anticipates no materially adverse processing problems. The Company is subject to examination by the Federal Deposit Insurance Corporation and the Federal Reserve Bank under their Y2K Phase I and Phase II programs. Management is not currently aware of any conditions cited as unsatisfactory by such federal bank regulatory agencies. 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 Y2K 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 Y2K preparedness and risk to the Company and to implement appropriate risk controls. The Company also continues to evaluate the cost to address Y2K issues. Most costs incurred to date are in conjunction with the planned replacement of systems. The cost of system replacements accelerated to meet Y2K requirements and Y2K project specific costs have not been significant to the operations of Company as a whole. Management estimates that the incremental cost of mitigating Year 2000 risk exclusive of management time that has been redirected to focus on this matter will be approximately $171 thousand. 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 Y2K preparedness plan have been completed: the Company has identified, assessed 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 Y2K 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 Y2K 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 Y2K 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 Y2K compliance efforts will be successful without material adverse effects on its business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 7A of Form 10-K is contained in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 44 Consolidated Balance Sheets, December 31, 1998 and 1997 45 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 46 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 47 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 48 Notes to Consolidated Financial Statements 49-66 All schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the Consolidated Financial Statements or notes thereto. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Central Coast Bancorp: We have audited the accompanying consolidated balance sheets of Central Coast Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Coast Bancorp and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Salinas, California January 25, 1999 (February 26, 1999 as to the stock split information in Note 1) CONSOLIDATED BALANCE SHEETS CENTRAL COAST BANCORP AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------- December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 44,684,000 $ 39,891,000 Federal funds sold 4,202,000 64,706,000 - ------------------------------------------------------------------------------------------------------------------------- Total cash and equivalents 48,886,000 104,597,000 Securities: Available-for-sale 170,387,000 91,481,000 Held-to-maturity (Market value: 1997, $39,105,000) - 39,048,000 Loans held for sale 6,168,000 1,331,000 Loans: Commercial 136,685,000 124,714,000 Real estate-construction 19,929,000 14,645,000 Real estate-other 144,685,000 107,354,000 Installment 11,545,000 9,349,000 - ------------------------------------------------------------------------------------------------------------------------- Total loans 312,844,000 256,062,000 Allowance for credit losses (4,352,000) (4,223,000) Deferred loan fees, net (674,000) (568,000) - ------------------------------------------------------------------------------------------------------------------------- Net Loans 307,818,000 251,271,000 - ------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 3,069,000 2,001,000 Accrued interest receivable and other assets 7,605,000 7,945,000 - ------------------------------------------------------------------------------------------------------------------------- Total assets $ 543,933,000 $ 497,674,000 ========================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest bearing $ 149,757,000 $ 126,818,000 Demand, interest bearing 98,226,000 89,107,000 Savings 104,447,000 99,748,000 Time 136,762,000 134,628,000 - ------------------------------------------------------------------------------------------------------------------------- Total Deposits 489,192,000 450,301,000 Accrued interest payable and other liabilities 3,542,000 3,649,000 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 492,734,000 453,950,000 - ------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 7 and 13) Shareholders' Equity: Preferred stock-no par value; authorized 1,000,000 shares; no shares issued Common stock - no par value; authorized 25,000,000 shares; issued and outstanding: 6,112,045 shares in 1998 and 5,460,586 shares in 1997 41,104,000 31,644,000 Shares held in deferred compenstion trust ( 71,949 shares in 1998 and none in 1997), net of deferred obligation - - Retained earnings 9,733,000 11,979,000 Accumulated other comprehensive income, net of taxes of $254,000 in 1998 and $71,000 in 1997 363,000 101,000 - ------------------------------------------------------------------------------------------------------------------------- Shareholders' equity 51,199,000 43,724,000 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 543,933,000 $ 497,674,000 =========================================================================================================================
See notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF INCOME CENTRAL COAST BANCORP AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans (including fees) $ 27,037,000 $ 24,828,000 $22,330,000 Investment securities 7,473,000 5,823,000 4,936,000 Other 2,844,000 3,265,000 2,035,000 - ------------------------------------------------------------------------------------------------------------------- Total interest income 37,354,000 33,916,000 29,301,000 - ------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits 13,319,000 11,943,000 9,859,000 Other - 98,000 - - ------------------------------------------------------------------------------------------------------------------ Total interest expense 13,319,000 12,041,000 9,859,000 - ------------------------------------------------------------------------------------------------------------------- Net Interest Income 24,035,000 21,875,000 19,442,000 Provision for Credit Losses (159,000) (64,000) (352,000) - ------------------------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Credit Losses 23,876,000 21,811,000 19,090,000 - ------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Service charges on deposits 1,235,000 1,076,000 735,000 Other income 849,000 689,000 721,000 - ------------------------------------------------------------------------------------------------------------------ Total noninterest income 2,084,000 1,765,000 1,456,000 - ------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSES Salaries and benefits 8,385,000 7,586,000 6,437,000 Occupancy 970,000 889,000 728,000 Furniture and equipment 1,005,000 800,000 837,000 Other 3,499,000 3,298,000 3,113,000 - ------------------------------------------------------------------------------------------------------------------ Total noninterest expenses 13,859,000 12,573,000 11,115,000 - ------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes 12,101,000 11,003,000 9,431,000 Provision for Income Taxes 4,948,000 4,500,000 3,571,000 - ------------------------------------------------------------------------------------------------------------------ Net Income $ 7,153,000 $ 6,503,000 $5,860,000 ================================================================================================================== Basic Net Income per Share $ 1.18 $ 1.09 $ 1.01 Diluted Net Income per Share $ 1.09 $ 1.01 $ 0.94 ==================================================================================================================
See Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS CENTRAL COAST BANCORP AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------- Years ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATIONS: Net income $ 7,153,000 $ 6,503,000 $5,860,000 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses 159,000 64,000 352,000 Depreciation 656,000 513,000 557,000 Amortization and accretion (6,000) (369,000) (42,000) Deferred income taxes (333,000) 31,000 (300,000) Gain on sale of securities (58,000) - - Net (gain) loss on sale of equipment - (19,000) 52,000 Gain on sale of other real estate owned (20,000) (21,000) (87,000) Increase in accrued interest receivable and other assets 129,000 (1,779,000) (787,000) Increase in accrued interest payable and other liabilities 364,000 1,939,000 606,000 Increase (decrease) in deferred loan fees 106,000 (81,000) 99,000 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 8,150,000 6,781,000 6,310,000 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits in financial institutions - 999,000 3,493,000 Proceeds from maturities of investment securities Available-for-sale 107,423,000 63,750,000 - Held-to-Maturity 20,959,000 41,882,000 56,969,000 Proceeds from sale of available-for-sale securities 9,119,000 - - Purchase of investment securities Available-for-sale (176,593,000) (154,353,000) - Held-to-Maturity - (10,181,000) (48,161,000) Net change in loans held for sale (4,837,000) (884,000) 93,000 Net increase in loans (56,812,000) (15,723,000) (45,485,000) Proceeds from sale of other real estate owned 125,000 725,000 287,000 Proceeds from sale of equipment - 31,000 1,000 Capital expenditures (1,724,000) (1,386,000) (417,000) - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (102,340,000) (75,140,000) (33,220,000) - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 38,891,000 111,638,000 12,574,000 Net increase (decrease) in short-term borrowings (289,000) 289,000 - Proceeds from sale of stock 264,000 380,000 319,000 Shares repurchased under stock repurchase plan (374,000) - - Fractional shares repurchased (13,000) (8,000) (5,000) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 38,479,000 112,299,000 12,888,000 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents (55,711,000) 43,940,000 (14,022,000) Cash and equivalents, beginning of year 104,597,000 60,657,000 74,679,000 - ----------------------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of year $ 48,886,000 $104,597,000 $ 60,657,000 ============================================================================================================================= NONCASH INVESTING AND FINANCING ACTIVITIES: In 1997 and 1996 the Company obtained $461,000 and $42,000, respectively of real estate (OREO) in connection with foreclosures of delinquent loans (none in 1998). In 1998 stock option exercises and stock repurchases totalling $384,000 were performed through a "stock for stock" exercise under the Company's deferred compensation plan (see Note 11). - ----------------------------------------------------------------------------------------------------------------------------- OTHER CASH FLOW INFORMATION: Interest paid $ 13,100,000 $11,367,000 $9,852,000 Income taxes paid 4,619,000 3,497,000 4,063,000 ============================================================================================================================= See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CENTRAL COAST BANCORP AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Income - Net Unrealized Gain on Available- Years Ended December 31, Common Stock Retained For-Sale 1998, 1997 and 1996 Shares Amount Earnings Securities Total - ---------------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1996 4,759,601 $ 25,860,000 $ 4,056,000 $ - $ 29,916,000 Net income and comprehensive income - - 5,860,000 - 5,860,000 10% stock dividend 475,960 4,440,000 (4,440,000) - - Shares repurchased (816) (5,000) - - (5,000) Stock options and warrants exercised 106,789 319,000 - - 319,000 Tax benefit of stock options exercised - 242,000 - - 242,000 - ---------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 5,341,534 30,856,000 5,476,000 - 36,332,000 Net income - - 6,503,000 - 6,503,000 Changes in unrealized gains on securities available for sale, net of taxes of $71,000 - - - 101,000 101,000 ---------------- Comprehensive income 6,604,000 ---------------- Shares repurchased (434) (8,000) - - (8,000) Stock options and warrants exercised 119,486 380,000 - - 380,000 Tax benefit of stock options exercised - 416,000 - - 416,000 - ---------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 5,460,586 31,644,000 11,979,000 101,000 43,724,000 Net income - - 7,153,000 - 7,153,000 Changes in unrealized gains on securities available for sale, net of taxes of $223,000 - - - 320,000 320,000 Reclassification adjustment for gains included in income, net of taxes of $40,000 - - - (58,000) (58,000) ---------------- Comprehensive income - - - 7,415,000 ---------------- 10% stock dividend 546,059 9,399,000 (9,399,000) - Stock options and warrants exercised 153,019 647,000 - - 647,000 Shares repurchased (47,619) (770,000) (770,000) Tax benefit of stock options - exercised - 183,000 - - 183,000 - ---------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1998 6,112,045 $ 41,103,000 $ 9,733,000 $ 363,000 $ 51,199,000 - ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CENTRAL COAST BANCORP AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS. The consolidated financial statements include Central Coast Bancorp (the "Company") and its wholly-owned subsidiaries, Bank of Salinas and Cypress Bank (the "Banks"). All material intercompany accounts and transactions are eliminated in consolidation. The accounting and reporting policies of the Company and the Banks conform to generally accepted accounting principles and prevailing practices within the banking industry. 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. Bank of Salinas operates five full service branches in the Salinas Valley and Cypress Bank operates three full service branches on the Monterey Peninsula, serving small and medium sized business customers, as well as individuals. The Banks focus on business loans and deposit services to customers throughout Monterey. Investment Securities are classified at the time of purchase 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. Accretion of discounts and amortization of premiums arising at acquisition are included in income using methods approximating the effective interest method. Gains and losses on sales of investments, if any, are determined on a specific identification basis. Loans are stated at the principal amount outstanding, reduced by any charge-offs or specific valuation allowance. Loan origination fees and certain direct loan origination costs are deferred and the net amount is recognized using the effective yield method, generally over the contractual life of the loan. Interest income is accrued as earned. The accrual of interest on loans is discontinued and any accrued and unpaid interest is reversed when principal or interest is ninety days past due, when payment in full of principal or interest is not expected or when a portion of the principal balance has been charged off. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Senior management may grant a waiver from nonaccrual status if a loan is well secured and in the process of collection. 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 original terms of the loan agreement or when the loan is both well secured and in process of collection. Loans held for sale are stated at the lower of cost or aggregate market value. The allowance for credit losses is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of collectibility and prior loss experience. The allowance is established through a provision charged to expense. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. In evaluating the adequacy of the reserve, management considers numerous factors such as changes in the composition of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current and anticipated local economic conditions that may affect the borrowers' ability to pay. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. 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 loan amount is treated as a loan loss. Costs of maintaining other real estate owned, subsequent write downs and gains or losses on the subsequent sale are reflected in current earnings. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the lesser of the lease terms or estimated useful lives of the assets, which are generally 3 to 30 years. Intangible assets representing the excess of the purchase price over the fair value of tangible net assets acquired, are being amortized on a straight-line basis over seven years and are included in other assets. Stock Compensation. The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements. Note 11 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share as if the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Income taxes are provided using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities arise principally from differences in reporting provisions for credit losses, net operating loss carryforwards, interest on nonaccrual loans, depreciation, state franchise taxes and accruals related to the salary continuation plan. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings per share. Basic earnings per share is computed by dividing net income by the weighted average of common shares outstanding for the period (6,037,000, 5,966,000 and 5,814,000 in 1998, 1997 and 1996, 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 (546,000, 485,000 and 401,000 in 1998, 1997 and 1996, respectively). All earnings per share information has been adjusted retroactively for stock dividends of 10% in July 1996 and January 1998, a 3-for-2 stock split in March 1997 and a 5-for-4 stock split in January 1999. Stock split. On January 25, 1999 the Board of Directors declared a 5-for-4 stock split, which was distributed on February 26,1999, to shareholders of record as of February 8, 1999. All share and per share data including stock option and warrant information have been retroactively adjusted to reflect the stock split. Comprehensive income. In 1998 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires that an enterprise report, by major components and as a single total, the change in net assets during the period from nonowner sources. Such amounts have been reported in the accompanying statements of shareholders' equity. Segment reporting. In 1998 the Company adopted Financial Accounting Standards Statement (FAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Management has determined that since all of the commercial banking products and services offered by the Company are available in each of the Company's wholly-owned bank subsidiaries, their operations are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Banks and report them as a single operating segment. Reclassification of investment securities. Effective July1, 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. NOTE 2. ACQUISITION OF CYPRESS COAST BANK. On May 31, 1996, the Company completed its acquisition of Cypress Coast Bank ("Cypress") whereby Cypress became a subsidiary of the Company and continues to operate from its offices in Seaside and Marina. Cypress shareholders received shares of common stock of the Company in a tax-free exchange. At May 31, 1996, Cypress had unaudited total assets of $46.9 million, including $29.8 million in net loans and total unaudited liabilities of $42.7 million, including $42.5 million in deposits. The transaction has been accounted for as a pooling-of-interests. NOTE 3. BRANCH ACQUISITION. On February 21, 1997, the Bank of Salinas purchased certain assets and assumed certain liabilities of the Gonzales and Castroville branch offices of Wells Fargo Bank. As a result of the transaction the Bank assumed deposit liabilities ($34 million), received cash ($31 million), and acquired tangible assets ($1 million). This transaction resulted in intangible assets, representing the excess of the liabilities assumed over the fair value of the tangible assets acquired. NOTE 4. CASH AND DUE FROM BANKS. The Company, through its bank subsidiaries, is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposits. At December 31, 1998 the Company maintained reserves of approximately $7,584,000 in the form of vault cash and balances at the Federal Reserve to satisfy regulatory requirements. NOTE 5. SECURITIES. THE SCHEDULED MATURITIES AND WEIGHTED AVERAGE YIELDS OF THE COMPANY'S INVESTMENT SECURITIES PORTFOLIO AS OF DECEMBER 31, 1998 AND 1997 ARE AS FOLLOWS:
- --------------------------------------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market Average In thousands Cost Gain Losses Value Yield - --------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 Available for sale securities: U.S. Treasury and agency securities Maturing within 1 year $13,976 $ 119 $ - $ 14,095 6.16% Maturing after 1 year but within 5 years 27,248 239 - 27,487 6.16% Maturing after 5 years but within 10 years 20,037 15 - 20,052 6.27% Maturing after 10 years but within 15 years 19,486 118 - 19,604 6.08% Maturing after 15 years 29,169 293 - 29,462 6.19% State & Political Subdivision Maturing after 5 year but within 10 Years 3,159 9 10 3,154 4.06% Maturing after 10 year but within 15 Years 22,144 44 199 21,993 4.18% Maturing after 15 Years 3,418 15 24 3,409 4.74% Corporate Debt Securities Maturing within 1 year 29,608 - - 29,608 5.92% Other 1,525 - - 1,525 - - --------------------------------------------------------------------------------------------------- Total investment securities $ 169,770 $ 852 $ 235 $170,387 5.73% =================================================================================================== DECEMBER 31, 1997 Available for sale securities: U.S. Treasury and agency securities Maturing within 1 year $32,861 $ - $ 5 $ 32,856 5.68% Maturing after 1 year but within 5 years 48,410 184 7 48,587 6.16% Corporate Debt Securities Maturing within 1 year 10,034 - - 10,034 5.05% Other 4 4 - - --------------------------------------------------------------------------------------------------- Total available for sale $91,309 $ 184 $ 12 $ 91,481 5.87% - --------------------------------------------------------------------------------------------------- Held to maturity securities: U.S. Treasury and agency securities Maturing within 1 year $27,484 $ 7 $ 11 $ 27,480 5.60% Maturing after 1 year but within 5 years 8,495 66 2 8,559 6.34% Maturing after 5 years but within 10 years 20 - - 20 9.05% Maturing after 10 years 857 6 9 854 7.00% State & Political Subdivision Maturing after 5 years but within 10 years 2,192 - - 2,192 5.60% - --------------------------------------------------------------------------------------------------- Total held to maturity $39,048 $ 79 $ 22 $ 39,105 5.79% - --------------------------------------------------------------------------------------------------- Total investment securities $ 130,357 $ 263 $ 34 $130,586 5.85% ===================================================================================================
At December 31, 1998 and 1997, securities with a book value of $56,936,000 and $57,289,000 were pledged as collateral for deposits of public funds and other purposes as required by law or contract. U.S. Treasury Securities with a market value of $9,119,000 and an amortized cost of $9,061,000 were sold during the fiscal year ended December 31, 1998. There were no sales of securities in 1997 or 1996. NOTE 6. LOANS AND ALLOWANCE FOR CREDIT LOSSES. 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, the ultimate recovery of which is generally dependent on the successful operation, sale or refinancing of real estate, totaling approximately $212 million. 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 judgment, these loans are impaired, appropriate provisions for losses are 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 activity in the allowance for credit losses is summarized as follows:
In thousands 1998 1997 1996 - --------------------------------------------------------------------------- Balances, beginning of year $ 4,223 $ 4,372 $ 4,446 Provision charged to expense 159 64 352 Loans charged off (177) (440) (620) Recoveries 147 227 194 - --------------------------------------------------------------------------- Balance, end of year $ 4,352 $ 4,223 $ 4,372 ===========================================================================
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 December 31, 1998 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 loans at December 31 are summarized below:
- ---------------------------------------------------------------------------------------------------------------------- In thousands 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Past due 90 days or more and still accruing: Real estate $ 1,174 $ 6 Commercial 73 73 Installment and other - - - ---------------------------------------------------------------------------------------------------------------------- 1,247 79 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual: Real estate 543 628 Commercial 333 188 Installment and other - - - ---------------------------------------------------------------------------------------------------------------------- 876 816 - ---------------------------------------------------------------------------------------------------------------------- Total nonperforming loans $ 2,123 $ 895 ======================================================================================================================
Interest due but excluded from interest income on nonaccrual loans was approximately $45,000, $7,000 and $50,000 in 1998, 1997 and 1996 respectively. In 1998, 1997 and 1996, interest income recognized from payments received on nonaccrual loans was $17,000, $7,000 and $619,000, respectively. At December 31, 1998 and 1997, the recorded investment in loans that are considered impaired under SFAS No. 114 was $727,000 and $996,000 of which $335,000 and $816,000 are included as nonaccrual loans above. Such impaired loans had valuation allowances totalling $164,000 and $200,000 based on the estimated fair values of the collateral The average recorded investment in impaired loans during 1998 and 1997 was $776,000 and $829,000. The Company recognized interest income on impaired loans of $64,000 and $33,000 in 1998 and 1997, respectively. Other real estate owned included in other assets was $105,000 at December 31, 1997 (none at December 31, 1998). NOTE 7. PREMISES AND EQUIPMENT. premises and equipment at december 31 are summarized as follows:
- --------------------------------------------------------------------------------- In thousands 1998 1997 - --------------------------------------------------------------------------------- Land $ 145 $ 145 Building 460 478 Furniture and equipment 5,641 4,073 Leasehold improvement 1,310 1,161 - --------------------------------------------------------------------------------- 7,556 5,857 Accumulated depreciation and amortization (4,487) (3,856) - --------------------------------------------------------------------------------- Premises and equipment, net $ 3,069 $ 2,001 - ---------------------------------------------------------------------------------
The Company's facilities leases expire in October 1999 through November 2008 with options to extend for three to fifteen years. These include three facilities leased from shareholders at terms and conditions which management believes are consistent with the market. Rental rates are adjusted annually for changes in certain economic indices. Rental expense was approximately $456,000, $422,000 and $406,000, including lease expense to shareholders of $134,000, $152,000 and $174,000 in 1998, 1997 and 1996, respectively. The minimum annual rental commitments under these leases, including the remaining rental commitment under the leases to shareholders, are as follows:
- -------------------------------------------------------------------------------- Operating In thousands Leases - -------------------------------------------------------------------------------- 1999 $ 519 2000 240 2001 236 2002 231 2003 141 Thereafter 492 - -------------------------------------------------------------------------------- Total $ 1,859 - --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES. The provision for income taxes is as follows:
- ------------------------------------------------------------------------------ In thousands 1998 1997 1996 - ------------------------------------------------------------------------------ Current: Federal $ 3,946 $ 3,255 $ 2,830 State 1,335 1,214 1,041 - ------------------------------------------------------------------------------ Total 5,281 4,469 3,871 - ------------------------------------------------------------------------------ Deferred: Federal (290) 32 (289) State (43) (1) (11) - ------------------------------------------------------------------------------ Total (333) 31 (300) - ------------------------------------------------------------------------------ Total $ 4,948 $ 4,500 $ 3,571 - ------------------------------------------------------------------------------
A reconciliation of the Federal income tax rate to the effective tax rate is as follows:
- ----------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------- Statutory Federal income tax rate 35.0% 35.0% 35.0% State income taxes (net of Federal income tax benefit) 7.1% 7.2% 7.6% Change in the valuation allowance for deferred tax assets - - (4.0%) Tax exempt interest income (0.8%) (0.8%) - Other (0.4%) (0.5%) (0.7%) - ----------------------------------------------------------------------------------- Effective tax rate 40.9% 40.9% 37.9% - -----------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997, respectively, are presented below:
- -------------------------------------------------------------------------------- In thousands 1998 1997 - -------------------------------------------------------------------------------- Deferred Tax assets (liabilities): Provision for credit losses $ 1,680 $ 1,609 State income taxes 263 185 Salary continuation plan 265 165 Excess serving rights 86 110 Unrealized gain on available-for-sale securities (253) (71) Accrual to cash adjustments 30 45 Interest on nonaccrual loans 35 22 Depreciation and amortization 254 161 Other 1 3 - -------------------------------------------------------------------------------- Net deferred tax asset $ 2,361 $ 2,229 - --------------------------------------------------------------------------------
NOTE 9. DETAIL OF OTHER EXPENSE. Other expense for the years ended December 31, 1998, 1997 and 1996 consists of the following:
- -------------------------------------------------------------------------------- In thousands 1998 1997 1996 - -------------------------------------------------------------------------------- Professional fees $ 461 $ 358 $ 454 Customer expenses 431 340 379 Data processing 386 334 330 Marketing 335 302 345 Stationary and supplies 326 466 319 Shareholder and director 262 249 284 Amortization of intangibles 257 209 - Insurance 196 180 176 Dues and assessments 109 123 65 Other 736 737 761 - -------------------------------------------------------------------------------- Total $ 3,499 $ 3,298 $ 3,113 - --------------------------------------------------------------------------------
NOTE 10. STOCK PURCHASE WARRANTS. During 1995 and 1994, warrants were issued in connection with the sale of the Company's common stock at a rate of one warrant for every share of stock purchased. The warrants are exercisable at $4.18 and expire on June 30, 1999. During 1998, 1997 and 1996, respectively 15,868 , 5,875 and 30,157 warrants were exercised and at December 31, 1998, 137,995 warrants were outstanding. NOTE 11. EMPLOYEE BENEFIT PLANS. The Company has two stock option plans under which incentive stock options or nonqualified stock options may be granted to certain key employees or directors to purchase authorized, but unissued, common stock. Shares may be purchased at a price not less than the fair market value of such stock on the date of grant. Options vest over various periods not in excess of ten years from date of grant and expire not more than ten years from date of grant. Activity under the stock option plans adjusted for stock dividends and stock splits is as follows:
- -------------------------------------------------------------------------------------------------------------------- Weighted Average Shares Price per share Price - -------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1996 899,573 $ 1.42 - 7.05 $ 3.30 Granted (wt. avg. fair value $2.91 per share) 441,375 8.04 - 10.42 10.33 Canceled (24,853) 1.42 - 6.18 3.32 Exercised (87,311) 1.42 - 4.72 2.23 - -------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 1,228,784 1.42 - 10.42 5.65 Granted (wt. avg. fair value $3.46 per share) 37,812 9.94 - 16.50 11.14 Expired (95,738) 2.32 - 9.82 8.37 Exercised (125,558) 1.42 - 6.18 2.85 - -------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 1,045,300 2.32 - 16.50 5.94 Granted (wt. avg. fair value $5.60 per share) 68,125 15.40 - 18.80 16.71 Expired (22,000) 9.82 - 9.82 9.82 Exercised (137,150) 2.32 - 9.82 4.24 - -------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1998 954,275 $ 2.32 - 18.80 $ 6.86 - --------------------------------------------------------------------------------------------------------------------
Additional information regarding options outstanding as of December 31, 1998 is as follows:
- ----------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------------------------------------------------------- Weighted Average Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------------------- (C) $2.32 - 2.32 343,235 0.1 $ 2.32 343,235 $ 2.32 4.72 - 6.17 178,321 5.5 5.84 156,361 5.91 8.04 - 9.94 359,594 7.9 9.67 242,591 9.67 15.40 18.80 73,125 9.4 16.87 2,269 16.50 - ----------------------------------------------------------------------------------------------------------------------- $2.32 - 18.80 954,275 4.1 $ 6.86 744,456 $ 5.51 - -----------------------------------------------------------------------------------------------------------------------
At December 31, 1998, 797,360 shares were available for additional grants. 401(k) Savings Plan The Company has a 401(k) Savings Plan under which eligible employees may elect to make tax deferred contributions from their annual salary, to a maximum established annually by the IRS. The Company matches 20% of the employees' contributions. The Company may make additional contributions to the plan at the discretion of the Board of Directors. All employees meeting age and service requirements are eligible to participate in the Plan. Company contributions vest after 3 years of service. Company contributions during 1998, 1997 and 1996 which are funded currently, totaled $68,000, $56,000 and $46,000, respectively. Salary Continuation Plan In 1996 the Company established a salary continuation plan for five officers which provides for retirement benefits upon reaching age 63. During 1997 two of such officers terminated their employment with the Company without vesting in the plan. The Company accrues such post-retirement benefits over the vesting periods (of five or ten years) based on a discount rate of 7.5%. In the event of a change in control of the Company, the officers' benefits will fully vest. The Company recorded compensation expense of $225,000, $117,000 and $250,000 in 1998, 1997 and 1996, respectively. Accrued compensation payable under the salary continuation plan totaled $592,000 and $367,000 at December 31, 1998 and 1997, respectively. Deferred Compensation Plan In 1998 the Company established a deferred compensation plan for the benefit of the Board of Directors and certain officers. In addition to the deferral of compensation, the plan allows participants the opportunity to defer taxable income derived from the exercise of stock options. The participant's may, after making an election to defer receipt of the option shares for a specified period of time, use a "stock-for-stock" exercise to tender to the Company mature shares with a fair value equal to the exercise price of the stock options exercised. The Company simultaneously delivers new shares to the participant equal to the value of shares surrendered and the remaining shares under option are placed in a trust administered by the Company, to be distributed in accordance with the terms of each participant's election to defer. During 1998, 22,430 shares with a fair value of approximately $384,000 were tendered to the Company using a "stock-for-stock" exercise and, at December 31, 1998, 71,949 shares (with a fair value of approximately $1,158,000 at December 31, 1998) were held in the Deferred Compensation Trust. Additional Stock Plan Information As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, four years following vesting; average stock volatility of 16.5%; risk free interest rates ranging from 4.52% to 5.77%; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1998, 1997 and 1996 awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been $6,957,000 ($1.15 basic and $1.06 diluted earnings per share, $6,345,000 ($1.06 basic and $0.98 diluted earnings per share) and $5,348,000 ($0.92 basic and $0.86 diluted per share) in 1998, 1997 and 1996, respectively. However, the impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the 1998, 1997 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. NOTE 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts.
- ------------------------------------------------------------------------------- December 31,1998 December 31,1997 Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and cash equivalents $ 48,886 $48,886 $104,597 $104,597 Securities 170,387 170,387 130,529 130,586 Loans held for sale 6,168 6,208 1,331 1,453 Loans, net 307,818 308,253 251,271 256,361 FINANCIAL LIABILITIES Demand deposits 247,983 247,983 215,925 215,925 Time deposits 136,762 137,559 134,628 135,542 Savings deposits 104,447 104,447 99,748 99,748 Other borrowings - - 289 289 - -------------------------------------------------------------------------------
The following estimates and assumptions were used to estimate the fair value of the financial instruments. Cash and cash equivalents - The carrying amount is a reasonable estimate of fair value. Securities - Fair values of securities are based on quoted market prices or dealer quotes. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. Loans, net - Fair values for certain commercial, construction, revolving customer credit and other loans were estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and similar maturities, adjusted for the allowance for credit losses. Certain adjustable rate loans have been valued at their carrying values, if no significant changes in credit standing have occurred since origination and the interest rate adjustment characteristics of the loan effectively adjust the interest rate to maintain a market rate of return. For adjustable rate loans which have had changes in credit quality, appropriate adjustments to the fair value of the loans are made. Demand, time and savings deposits - The fair value of noninterest-bearing and adjustable rate deposits and savings is the amount payable upon demand at the reporting date. The fair value of fixed-rate interest-bearing deposits with fixed maturity dates was estimated by discounting the cash flows using rates currently offered for deposits of similar remaining maturities. Off-balance sheet instruments - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. The fair values of standby and commercial letters of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair values of such off-balance sheet instruments were not significant at December 31, 1998 and 1997 and, therefore, have not been included in the table above. NOTE 13. COMMITMENTS AND CONTINGENCIES. In the normal course of business there are various commitments outstanding to extend credit which are not reflected in the financial statements, including loan commitments of approximately $122,423,000 and standby letters of credit and financial guarantees of $1,556,000 at December 31, 1998. The Bank does not anticipate any losses as a result of these transactions. Approximately $23,177,000 of loan commitments outstanding at December 31, 1998 relate to 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. Many of these loan commitments are expected to expire without being drawn upon. Therefore the total commitments do not necessarily represent future cash requirements. 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 Banks' commercial customers, are typically short-term in nature and virtually all such commitments are collateralized. Most of the outstanding commitments to extend credit are at variable rates tied to the Banks' reference rate of interest. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit issued is the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company controls the credit risk of the off-balance sheet financial instruments through the normal credit approval and monitoring process. NOTE 14. RELATED PARTY LOANS. The Company makes loans to officers and directors and their associates subject to loan committee approval and ratification by the Board of Directors. These transactions are on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated parties and do not involve more than normal risk of collectibility. An analysis of changes in related party loans for the year ended December 31, 1998 is as follows:
- -------------------------------------------------------------------------------- Beginning Balance Additions Repayments Ending Balance - -------------------------------------------------------------------------------- $9,119,000 $11,817,000 $14,728,000 $6,208,000 - --------------------------------------------------------------------------------
Committed lines of credit, undisbursed loans and standby letters of credit to directors and officers at December 31, 1998 were approximately $4,820,000. NOTE 15. REGULATORY MATTERS. The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Capital adequacy guidelines and the regulatory framework for prompt corrective action require that the Company meet specific capital adequacy guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and a minimum leverage ratio of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 1998 that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1998 and 1997, the most recent notifications from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The following table shows the Company's and the Banks' actual capital amounts and ratios at December 31, as well as the minimum capital ratios to be categorized as "well capitalized" under the regulatory framework:
To Be Categorized Well Capitalized Under For Capital Promt Corrective Actual Adequacy Purposes: Action Provisions: ---------------- ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- AS OF DECEMBER 31, 1998: Total Capital (to Risk Weighted Assets): Company 53,588,000 14.8% 29,004,000 8.0% N/A Bank of Salinas 45,996,000 14.3% 25,796,000 8.0% 32,245,000 10.0% Cypress Bank 5,203,000 14.1% 2,950,000 8.0% 3,687,000 10.0% Tier 1 Capital (to Risk Weighted Assets) Company 49,326,000 13.6% 14,502,000 4.0% N/A Bank of Salinas 42,196,000 13.1% 12,898,000 4.0% 19,347,000 6.0% Cypress Bank 4,743,000 12.9% 1,475,000 4.0% 2,212,000 6.0% Tier 1 Capital (to Risk Average Assets) Company 49,326,000 9.9% 19,935,000 4.0% N/A Bank of Salinas 42,196,000 9.4% 18,014,000 4.0% 22,518,000 5.0% Cypress Bank 4,743,000 8.2% 2,300,000 4.0% 2,874,000 5.0% AS OF DECEMBER 31, 1997: Total Capital (to Risk Weighted Assets): Company 45,782,000 15.2% 24,046,000 8.0% N/A Bank of Salinas 38,887,000 14.5% 21,514,000 8.0% 26,892,000 10.0% Cypress Bank 5,012,000 14.6% 2,739,000 8.0% 3,423,000 10.0% Tier 1 Capital (to Risk Weighted Assets) Company 41,968,000 14.0% 12,023,000 4.0% N/A Bank of Salinas 35,501,000 13.2% 10,757,000 4.0% 16,135,000 6.0% Cypress Bank 4,584,000 13.4% 1,369,000 4.0% 2,054,000 6.0% Tier 1 Capital (to Risk Average Assets) Company 41,968,000 9.6% 17,570,000 4.0% N/A Bank of Salinas 35,501,000 8.9% 15,869,000 4.0% 19,837,000 5.0% Cypress Bank 4,584,000 8.8% 2,084,000 4.0% 2,605,000 5.0%
The ability of the Company to pay cash dividends in the future will largely depend upon the cash dividends paid to it by its subsidiary Banks. Under State and Federal law regulating banks, cash dividends declared by a Bank in any calendar year generally may not exceed its net income for the preceding three fiscal years, less distributions to the Company, or its retained earnings. Under these provisions, and considering minimum regulatory capital requirements, the amount available for distribution from the Banks to the Company was approximately $17,747,000 as of December 31, 1998. The Banks are subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Banks are prohibited from lending to the Company unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Banks are limited to 10% of Bank shareholders' equity, or a combined maximum of $4,863000 at December 31, 1998. No such advances were made during 1998 or 1997. NOTE 16. CENTRAL COAST BANCORP (PARENT COMPANY ONLY) THE CONDENSED FINANCIAL STATEMENTS OF CENTRAL COAST BANCORP FOLLOW (IN THOUSANDS): CONDENSED BALANCE SHEETS
- ------------------------------------------------------------------------------- December 31, 1998 1997 - ------------------------------------------------------------------------------- Assets: Cash - interest bearing account with Bank $ 2,339 $ 191 Investment in Banks 48,629 41,841 Premises and equipment, net 1,506 491 Other Assets 549 1,916 - ------------------------------------------------------------------------------- Total assets $ 53,023 $ 44,439 - ------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Liabilities $ 1,824 $ 715 Shareholders Equity 51,199 43,724 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 53,023 $ 44,439 - -------------------------------------------------------------------------------
CONDENSED INCOME STATEMENTS
- ------------------------------------------------------------------------------- Years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- Management fees $ 5,957 $ 3,624 $ 840 Other income 2 11 - Cash dividends received from the Banks 1,500 2,000 500 - ------------------------------------------------------------------------------- Total income 7,459 5,635 1,340 Operating expenses 7,435 6,386 1,737 - ------------------------------------------------------------------------------- Income(loss) before income taxes and equity in undistributed net income of Banks 23 (751) (397) Provision (credit) for income (604) (1,125) (352) Equity in undistributed net income of Banks 6,526 6,129 5,905 - ------------------------------------------------------------------------------- Net income (loss) 7,153 6,503 5,860 Other comprehensive income 262 101 - - ------------------------------------------------------------------------------- Comprehensive income $ 7,415 $ 6,604 $ 5,860 - -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------- Years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash: Operations: Net income $ 7,153 $ 6,503 $ 5,860 Adjustments to reconcile net income to net cash provided (used) by operations: Equity in undistributed net income of Banks (6,526) (6,129) (5,905) Depreciation 213 71 1 (Increase) decrease in other assets 1,367 (656) (522) Increase (decrease) in liabilities 1,292 450 80 - ------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operations 3,499 239 (486) - ------------------------------------------------------------------------------------------------------------------- Investing Activities - Capital expenditures (1,228) (494) (69) - ------------------------------------------------------------------------------------------------------------------- Financing Activities: Short-term borrowings - - - Fractional shares repurchased (13) (8) (5) Stock repurchases (374) Stock options and warrants exercised 264 380 319 - ------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (123) 372 314 - ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 2,148 117 (241) Cash balance, beginning of year 191 74 315 - ------------------------------------------------------------------------------------------------------------------- Cash balance, end of year $ 2,339 $ 191 $ 74 - -------------------------------------------------------------------------------------------------------------------
NOTE 17. SELECTED QUARTERLY INFORMATION (UNAUDITED)
In thousands (except per share data) - -------------------------------------------------------------------------------------------------------- 1998 1997 -------------------------------- --------------------------------- Three months ended Dec.31 Sep.30 June.30 Mar.31 Dec.31 Sep.30 June.30 Mar.31 - -------------------------------------------------------------------------------------------------------- Interest revenue $9,498 $9,583 $9,281 $8,992 $8,993 $8,737 $8,554 $7,632 Interest expense 3,211 3,358 3,415 3,335 3,305 3,125 2,999 2,612 - -------------------------------------------------------------------------------------------------------- Net interest revenue 6,287 6,225 5,866 5,657 5,688 5,612 5,555 5,020 Provision for credit losses 78 40 24 17 64 - - - - -------------------------------------------------------------------------------------------------------- Net interest revenue after credit losses provision 6,209 6,185 5,842 5,640 5,624 5,612 5,555 5,020 Total noninterest revenues 670 490 530 394 531 428 420 386 Total operating expenses 3,635 3,314 3,458 3,452 3,180 3,200 3,244 2,949 - -------------------------------------------------------------------------------------------------------- Income before taxes 3,244 3,361 2,914 2,582 2,975 2,840 2,731 2,457 Income taxes 1,284 1,391 1,205 1,068 1,216 1,155 1,123 1,006 - -------------------------------------------------------------------------------------------------------- Net income 1,960 1,970 1,709 1,514 1,759 1,685 1,608 1,451 - -------------------------------------------------------------------------------------------------------- Per common share: Basic earnings per share $0.32 $0.33 $0.28 $0.25 $0.29 $0.28 $0.27 $0.25 Diluted earnings per share 0.30 0.30 0.26 0.23 0.27 0.26 0.25 0.23 - -------------------------------------------------------------------------------------------------------- Price range per common share: High $16.10 $18.50 $20.41 $19.20 $16.45 $18.18 $17.00 $17.82 Low 14.40 13.20 16.50 14.55 14.00 16.18 12.36 11.45 - --------------------------------------------------------------------------------------------------------
The principal market on which the Company's common stock is traded is the Nasdaq National Market. The earnings per share and high and low common share prices in the preceding table have been adjusted retroactively for stock dividends of 10% in July 1996 and January 1998, a 3-for-2 stock split in March 1997 and a 5-for-4 stock split in January 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Listed and included in Part II, Item 8. (2) Financial Statement Schedules. Not applicable. (3) Exhibits. (2.1) Agreement and Plan of Reorganization and Merger by and between Central Coast Bancorp, CCB Merger Company and Cypress Coast Bank dated as of December 5, 1995, incorporated by reference from Exhibit 99.1 to Form 8-K filed with the Commission on December 7, 1995. (3.1) Articles of Incorporation, incorporated by reference from Exhibit 4.8 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. (3.2) Bylaws, as amended. (4.1) Specimen form of Central Coast Bancorp stock certificate incorporated by reference from the Company's 1994 Annual Report on Form 10K filed with the Commission on March 31, 1995. (10.1) Lease agreement dated December 12, 1994, related to 301 Main Street, Salinas, California incorporated by reference from the Company's 1994 Annual Report on Form 10K filed with the Commission on March 31, 1995. (10.2) King City Branch Lease incorporated by reference from Exhibit 10.3 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on March 28, 1994. (10.3) Amendment to King City Branch Lease incorporated by reference from Exhibit 10.4 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on March 28, 1994. *(10.4) 1982 Stock Option Plan, as amended, incorporated by reference from Exhibit 4.2 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.5) Form of Nonstatutory Stock Option Agreement under the 1982 Stock Option Plan incorporated by reference from Exhibit 4.6 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.6) Form of Incentive Stock Option Agreement under the 1982 Stock Option Plan incorporated by reference from Exhibit 4.7 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.7) 1994 Stock Option Plan incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.8) Form of Nonstatutory Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.3 to Registration Statement on Form S-8 No. 33-89948, filed with Commission on March 3, 1995. *(10.9) Form of Incentive Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.4 to Registration Statement on Form S-8 No. 33-89948, filed with the commission on March 3, 1995. *(10.10) Form of Director Nonstatutory Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.5 to Registration Statement on Form S-8 No. 33-89948, filed with the commission on March 3, 1995. *(10.11) Form of Bank of Salinas Indemnification Agreement for directors and executive officers incorporated by reference from Exhibit 10.9 to Amendment No. 1 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on April 15, 1994. *(10.12) 401(k) Pension and Profit Sharing Plan Summary Plan Description incorporated by reference from Exhibit 10.8 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on March 28, 1994. *(10.13) Specimen form of Employment Agreement incorporated by reference from Exhibit 10.13 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. *(10.14) Specimen form of Executive Salary Continuation Agreement incorporated by reference from Exhibit 10.14 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. *(10.15) 1994 Stock Option Plan, as amended, incorporated by reference from Exhibit A to the Proxy Statement filed with the Commission on September 3, 1996 in connection with Central Coast Bancorp's 1996 Annual Shareholders' Meeting held on September 23, 1996. (10.16) Specimen of Indemnification Agreement, incorporated by reference from Exhibit D to the Proxy Statement filed with the Commission on September 3, 1996 in connection with Central Coast Bancorp's 1996 Annual Shareholders' Meeting held on September 23, 1996. (10.17) Purchase and Assumption Agreement for the Acquisition of Wells Fargo Bank Branches incorporated by reference from Exhibit 10.17 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. *(10.18) Employee Stock Ownership Plan and Trust Agreement incorporated by reference from Exhibit 10.18 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. (10.19) Lease agreement dated March 7, 1997, related to 484 Lighthouse Avenue, Monterey, California incorporated by reference from Exhibit 10.19 to the Company's 1997 Annual Report on Form 10K filed with the Commission on march 27, 1998. (21.1) The Registrant's only subsidiaries are its wholly-owned subsidiaries, Bank of Salinas and Cypress Bank. (23.1) Independent auditor's consent (27.1) Financial Data Schedule
*Denotes management contracts, compensatory plans or arrangements. (b) Reports on Form 8-K. - none An Annual Report for the fiscal year ended December 31, 1998, and Notice of Annual Meeting and Proxy Statement for the Company's 1999 Annual Meeting will be mailed to security holders subsequent to the date of filing this Report. Copies of said materials will be furnished to the Commission in accordance with the Commission's Rules and Regulations. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTRAL COAST BANCORP Date: March 20, 1999 By: /S/ NICK VENTIMIGLIA ---------------------------- Nick Ventimiglia, President and Chief Executive Officer (Principal Executive Officer) Date: March 20, 1999 By: /S/ ROBERT STANBERRY ---------------------------- Robert Stanberry, Chief Financial Officer (Principal Accounting and Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /S/ C. EDWARD BOUTONNET Director 3/20/99 - ----------------------- (C. Edward Boutonnet) Director 3/20/99 - ----------------------- (Bradford G. Crandall) /S/ ALFRED P. GLOVER Director 3/20/99 - ----------------------- (Alfred P. Glover) Director 3/20/99 - ----------------------- (Michael T. Lapsys) /S/ ROBERT M. MRAULE Director 3/20/99 - ----------------------- (Robert M. Mraule) /S/ DUNCAN L. MCCARTER Director 3/20/99 - ----------------------- (Duncan L. McCarter) /S/ LOUIS A. SOUZA Director 3/20/99 - ----------------------- (Louis A. Souza) /S/ MOSE E. THOMAS Director 3/20/99 - ----------------------- (Mose E. Thomas) /S/ NICK VENTIMIGLIA Chairman,Presidentand CEO 3/20/99 - ----------------------- (Nick Ventimiglia)
EXHIBIT INDEX
Exhibit Sequential Number Description Page Number - ------ ----------- ----------- 3.2 Bylaws, as amended. 74 23.1 Independent auditors' consent. 90 27.1 Financial Data Schedule. 91
EX-3.2 2 EX 3.2 BILAWS, AS AMENDED Exhibit 3.2 BY-LAWS OF CENTRAL COAST BANCORP (A California Corporation) ARTICLE I Offices Section 1. Principal Office. The principal executive office in the State of California for the transaction of the business of the corporation (called the principal office) shall be 301 Main Street, Salinas, California in the County of Monterey. Subject to applicable regulatory authorization therefor, the Board of Directors shall have the authority from time to time to change the principal office from one location to another within the State by amending this Section 1 of the By-Laws. Section 2. Other Offices. Upon applicable regulatory authorization therefor, one or more branches or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within the State of California as it deems appropriate. ARTICLE II Meeting of Shareholders Section 3. Place of Meetings. Meetings of the shareholders shall be held at any place within the State of California that may be designated either by the Board of Directors in accordance with these By-Laws, or by the written consent of all persons entitled to vote at the meeting, given either before or after the meeting and filed with the Secretary of the corporation. If no such designation is made, the meetings shall be held at the principal office of the corporation. Section 4. Annual Meetings. The annual meeting of the shareholders shall be held on the third Thursday in April in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day, at the hour of 5:30 P.M., at which time the shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may properly be brought before the meeting. If the annual meeting of shareholders shall not be held on the date above specified, the Board of Directors shall cause such a meeting to be held as soon thereafter as convenient and any business transacted or election held at such meeting shall be as valid as if transacted or held at an annual meeting on the date above specified. Notice of proposals which shareholders intend to present at any annual meeting of shareholders and wish to be included in the proxy statement of management of the corporation distributed in connection with such annual meeting must be received at the principal executive offices of the corporation not less than 120 days prior to the date on which, during the previous year, management's proxy statement for the previous year's annual meeting was first distributed to shareholders. Any such proposal, and the proponent shareholder, must comply with the eligibility requirements set forth in Rule 14a-8 of the Securities and Exchange Commission. Section 5. Special Meetinqs. Special meetings of the shareholders, for any purpose or purposes whatsoever, may be called at any time by a majority of the Board of Directors, Chairman of the Board of Directors, the President, or by holders of shares entitled to cast not less than 10 percent (10%)of the votes at the meeting. Section 6. Notice of Shareholders' Meetings. Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 (or, if sent by third class mail, 30) nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to the provisions of Section 601(f) of the California Corporations Code, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California Corporations Code) on the record date for the shareholders' meeting, notice may be sent by third-class mail, or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal office of the corporation is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. If any notice addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. Upon request in writing to the Chairman of the Board of Directors, the President, a Vice President or the Secretary by any person entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. Section 7. Ouorum. The presence at any meeting, in person or by proxy, of the persons entitled to vote a majority of the voting shares of the corporation shall constitute a quorum for the transaction of business. Shareholders present at a valid meeting at which a quorum is initially present may continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by persons voting more than 25 percent of the voting shares. Section 8. Adjourned Meeting. Any annual or special shareholders' meeting may be adjourned from time to time, even though a quorum is not present, by vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy, provided that in the absence of a quorum, no other business may be transacted at the meeting except as provided in Section 7 of these by-laws. Notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 9. Waiver or Consent by Shareholders. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by Section 6 of these By-Laws or Section 601(f) of the California Corporations Code to be included in the notice but not so included, if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601(f) of the California Corporations Code. Section 10. Action Without Meeting . Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, except that unanimous written consent shall be required for election of directors to non-vacant positions. Unless the consents of all shareholders entitled to vote have been solicited or received in writing, notice shall be given to non-consenting shareholders to the extent required by Section 603(b) of the California Corporations Code. Any shareholder giving written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 11. Voting Rights; Cumulative Voting. Only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the record date fixed by the Board of Directors as provided in Section 41 of these By-Laws for the determination of shareholders of record shall be entitled to notice of and to vote at such meeting of shareholders. If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business or the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. Except as provided in the next following sentence and except as may be otherwise provided in the Articles of Incorporation, each shareholder entitled to vote shall be entitled to one vote for each share held on each matter submitted to a vote of shareholders. In the election of directors, each such shareholder complying with the following paragraph may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes in favor of any candidate or candidates unless such candidate's or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, such fact shall be announced to all shareholders and proxies present, who may then cumulate their votes for candidates in nomination. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. Voting may be by voice or ballot, provided that any election of directors must be by ballot upon the demand of any shareholder made at the meeting and before the voting begins. Section 12. Proxies. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. All proxies must be in writing and must be signed by the shareholder confirming the proxy or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in Section 705 of the California Corporations Code. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The proxy solicited by management for any annual meeting of shareholders shall confer discretionary authority upon management's proxy holders to vote with respect to any shareholder proposal offered at such meeting, the proponent of which has not notified the corporation, within the time period specified by Section 4 of these Bylaws, of his or her intention to present such proposal at the annual meeting. Specific reference to such voting authority shall be made in management's proxy statement for each annual meeting. Section 13. Voting by Joint Holders or Proxies. Shares or proxies standing in the names of two or more persons shall be voted or represented in accordance with the vote or consent of the majority of such persons. If only one of such persons is present in person or by proxy, that person shall have the right to vote all such shares, and all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum. This section shall apply to the voting of shares by two or more administrators, executors, trustees or other fiduciaries, or joint proxy holders, unless the instrument or order of court appointing them shall otherwise direct. Section 14. Inspectors of Election. In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III Directors Management Section 15. Powers. Subject to any provisions of the Articles of Incorporation, of the By-Laws and of law limiting the powers of the Board of Directors or reserving powers to the shareholders, the Board of Directors shall, directly or by delegation, manage the business and affairs of the corporation and exercise all corporate powers permitted by law. Section 16. Number and qualification of Directors. The authorized number of directors shall be not less than Seven (7) nor more than Thirteen (13), until changed by amendment of the Articles of Incorporation or, if not prohibited by the Articles, by an amendment of this By-Law adopted by the shareholders. The exact number of directors within said range shall be fixed by a resolution adopted by the Board of Directors; and unless and until so amended, the exact number of directors is hereby fixed at nine (9). Directors need not be shareholders of the corporation. Nomination for election of members of the Board of Directors may be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Notice of intention to make any nominations shall be made in writing and shall be delivered or mailed to the President of the corporation not less than 21 days nor more than 60 days prior to any meeting of stockholders called for the election of directors; provided however, that if less than 21 days notice of the meeting is given to shareholders, such notice of intention to nominate shall be mailed or delivered to the President of the corporation not later than the close of business on the tenth day following the day on which the notice of meeting was mailed; provided further that if notice of such meeting is sent by third-class mail as permitted by Section 6 of these By-Laws, no notice of intention to make nominations shall be required. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the corporation owned by each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in the discretion of the Chairman of the meeting, be disregarded and upon the Chairman's instructions, the inspectors of election can disregard all votes cast for each such nominee. A copy of this paragraph shall be set forth in a notice to shareholders of any meeting at which Directors are to be elected. Section 17. Election and Term of Office. The directors shall be elected annually by the shareholders at the annual meeting of the shareholders; provided that if, for any reason, said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall, except as provided in Section 18 of these By-Laws, begin immediately after their election and shall continue until their respective successors are elected and qualified. Section 18. Removal of Directors. A director may be removed from office by the Board of Directors if he is declared of unsound mind by the order of court or convicted of a felony. Any or all of the directors may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; however, unless the entire Board of Directors is removed, an individual director shall not be removed if the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an e1ection at which the same total number of votes were cast, or, if such action is taken by written consent, all shares entitled to vote were voted, and the entire number of directors authorized at the time of the director's most recent election were then being elected. A director may also be removed from office by the superior court of the county in which the principal office is located, at the suit of shareholders holding at least ten percent (10%) of the number of outstanding shares of any class, in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation, in the manner provided by law. No reduction of the authorized number of directors shall have the effect of removing any director before his term of office expires. Section 19. Vacancies. A vacancy or vacancies on the Board of Directors shall exist on the death, resignation, or removal of any director, or if the authorized number of directors is increased or the shareholders fail to elect the full authorized number of directors. Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the remaining directors although less than a quorum, or by a sole remaining director, and each director elected in this manner shall hold office until his successor is elected at an annual or special shareholders' meeting. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the Chairman of the Board of Directors, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 20. Place of Meetings. Regular and special meetings of the Board of Directors shall be held at any place within the State of California that is designated by resolution of the Board or, either before or after the meeting, consented to in writing by all the Board members. If the place of a regular or special meeting is not fixed by resolution or written consents of the Board, it shall be held at the corporation's principal office. Section 21. Organizational Meetings. Immediately following each annual shareholders' meeting, the Board of Directors shall hold an organizational meeting at a date and time adopted by the Board of Directors by Resolution to organize, elect officers, and transact other business. Notice of this meeting shall not be required. Section 22. Other Regular Meetings. Other regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors by resolution shall determine. Notice of these regular meetings shall not be required. Section 23. Special Meetings. Special meetings of the Board of Directors for any purpose may be called at any time by the Chairman of the Board of Directors, or the President, or any Vice President, or the Secretary, or any two directors. Special meetings of the Board shall be held upon four days' notice by mail or 24 hours notice delivered personally or by telephone or telegraph. If notice is by telephone, it shall be complete when the person calling the meeting believes in good faith that the notified person has heard and acknowledged the notice. If the notice is by mail or telegraph, it shall be complete when deposited in the United States mail or delivered to the telegraph office at the place where the corporation's principal office is located, charges prepaid and addressed to the notified person at such person's address appearing on the corporate records or, if it is not on these records or is not readily ascertainable, at the place where the regular Board meeting is held. Section 24. Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn a meeting under Section 26 of these By-Laws. Every act done or decision made by a majority of the directors present at a meeting at which a quorum is present shall be regarded as the act of the Board of Directors, unless the vote of a greater number is required by law, the Articles of Incorporation, or these By-Laws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by a majority of the required quorum for such meeting. Section 25. Contents of Notice and Waiver of Notice. Neither the business to be transacted at, nor the purpose of, any regular or special Board meeting need be specified in the notice or waiver of notice of the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to said director. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 26. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. Section 27. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place are fixed at the meeting being adjourned, except that if the meeting is adjourned for more than 24 hours such notice shall be given prior to the adjourned meeting to the directors who were not present at the time of the adjournment. Section 28. Telephone Participation. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meetings can hear one another. Such participation constitutes presence in person at such meeting. Section 29. Action Without Meeting. The Board of Directors may take any action without a meeting that may be required or permitted to be taken by the Board at a meeting, if all members of the Board individually or collectively consent in waiting to the action. The written consent or consents shall be filed in the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same effect as a unanimous vote of directors. Section 30. Fees and Compensation. Directors and members of committees shall receive neither compensation for their services nor reimbursement for their expenses unless these payments are fixed by resolution of the Board. ARTICLE IV Officers section 31. Officers. The officers of the corporation shall be a President, a Secretary, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board (who shall be chosen from the Board of Directors), one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Chief Financial Officers, and any other officers who may be appointed under Section 33 of these By-Laws. Any two or more officers, except those of President and Secretary, may be held by the same person. Any officer of the corporation may be excluded by resolution of the Board of Directors or by a provision of these By-Laws from participation, other than in the capacity of a director, in major policymaking functions of the corporation. If requested by the Board of Directors, each officer and employee of the corporation shall give bond of suitable amount with security to be approved by the Board of Directors, conditioned on the honest and faithful discharge of his duties as such officer or employee. At the discretion of the Board, such bonds may be schedule or blanket form and the premiums shall be paid by the corporation. The amount of such bonds, the form of coverage, and the name of the company providing the surety therefor shall be reviewed annually by the Board of Directors. Action shall be taken by the Board at that time approving the amount of the bond to be provided by each officer and employee of the corporation for the ensuing year. Section 32. Election. The officers of the corporation, except those appointed under Section 33 of these By-Laws, shall be chosen annually by the Board of Directors, and each shall hold his office until he resigns or is removed or otherwise disqualified to serve, or his successor is elected and qualified. Section 33. Subordinate Officers. The Board of Directors may appoint, and may authorize the President to appoint, any other officers that the business of the corporation may require, each of whom shall hold office for the period, have the authority, and perform the duties specified in the By-Laws or by the Board of Directors. Section 34. Removal and Resignation. Any officer may be removed with or without cause either by the Board of Directors at any regular or special directors' meeting or, except for an officer chosen by the Board, by any officer on whom the power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the Board of directors, the President or the Secretary of the corporation. An officer's resignation shall take effect when it is received or at any later time specified in the resignation. Unless the resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. Section 35. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in the By-Laws for regular appointments to the office. Section 36. Chairman of the Board. The Board of Directors may in its discretion elect a Chairman of the Board, who shall preside at all meetings of the Board of Directors at which the Chairman is present and shall exercise and perform other powers and duties assigned to the Chairman by the Board or prescribed by the By-Laws. Section 37. President. Subject to any supervisory powers that may be given by the Board of Directors or the By-Laws to the Chairman of the Board, the President shall be the corporation's chief executive officer and shall, subject to the control of the Board of Directors, have general supervision, direction, and control over the corporation's business and affairs. The President shall preside as Chairman at all shareholders' meetings and at all directors' meetings not presided over by the Chairman of the Board. He shall be ex officio a member of all the standing committees except the Audit Committee, shall have the general powers and duties of management usually vested in a corporation's president; shall have any other powers and duties that are prescribed by the Board of Directors or these By-Laws; and shall be primarily responsible for carrying out all orders and resolutions of the Board of Directors. Section 38. Vice Presidents. If the President is absent or is unable or refuses to act, the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions on, the President. Each Vice President shall have any other duties that are prescribed for said Vice President by the Board of Directors or the By-Laws. Section 39. Secretary. The Secretary shall keep or cause to be kept, and be available at the principal office and any other place that the Board of Directors specifies, a book of minutes of all directors' and shareholders' meetings. The minutes of each meeting shall state the time and place that it was held; whether it was regular or special; if a special meeting, how it was authorized; the notice given; the names of those present or represented at shareholders' meetings; and the proceedings of the meetings. A similar minute book shall be kept for each committee of the Board. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or duplicate share register, showing the shareholders' names and addresses, the number and classes of shares held by each, the number and date of each certificate issued for these shares, and the number and date of cancellation of each certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all directors' and shareholders' meeting, required to be given under these By-Laws or by law, shall keep the corporate seal in safe custody, and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or these By-Laws. The Secretary shall be deemed not to be an executive officer of the corporation and the Secretary shall be excluded from participation, other than in the capacity of director if the Secretary is also a director, in major policymaking functions of the corporation. Section 40. Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with the depositories designated by the Board of Directors. The Chief Financial Officer shall disburse the corporation's funds as ordered by the Board of Directors; shall render to the President and directors, whenever they request it, an account of all his transactions as Chief Financial Officer and of the corporation's financial condition; and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or By-Laws. If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond in the amount and with the surety or sureties specified by the Board for faithful performance of the duties of that person's office and for restoration to the corporation of all its books, papers, vouchers, money, and other property of every kind in that person's possession or under that person's control on that person's death, resignation, retirement, or removal from office. ARTICLE V General Corporate Matters Section 41. Record Date and Closing of Stockbooks. The Board of Directors may fix a time in the future as a record date for determining shareholders entitled to notice of and to vote at any shareholders' meeting; to receive any dividend, distribution, or allotment of rights; or to exercise rights in respect of any other lawful action, including change, conversion, or exchange of shares. The record date shall not, however, be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. If a record date is fixed for a particular meeting or event, only shareholders of record on that date are entitled to notice and to vote and to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days. Section 42. Corporate Records and Inspection by Shareholders and Directors. Books and records of account and minutes of the proceedings of the shareholders, Board, and committees of the Board shall be kept available at the principal office for inspection by the shareholders to the extent required by Section 1601 of the California Corporations Code. A record of the shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each, shall be kept available for inspection at the principal office or at the office of the corporation's transfer agent or registrar. A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation shall have an absolute right to do either or both of the following: (1) inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the corporation, or (2) obtain from the transfer agent for the corporation, upon five business days prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interests as a shareholder or holder of a voting trust certificate. Inspection and copying may be made in person or by agent or attorney. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and make extracts. Section 43. Checks, Drafts, Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes and all mortgages, or other evidences of indebtedness, issued in the name of or payable to the corporation, and all assignments and endorsements of the foregoing, shall be signed or endorsed by the person or persons and in the manner specified by the Board of Directors. Section 44. Corporate Contracts and Instruments: How Executed. Except as otherwise provided in the By-Laws, officers, agents, or employees must be authorized by the Board of Directors to enter into any contract or execute any instrument in the corporation's name and on its behalf. This authority may be general or confined to specific instances. Section 45. Stock Certificates. One or more certificates for shares of the corporation's capital stock shall be issued to each shareholder for any of such shareholder's shares that are fully paid. The corporate seal or its facsimile may be fixed on certificates. All certificates shall be signed by the Chairman of the Board, President, or a Vice President and the Secretary, Treasurer, or an Assistant Secretary. Any or all of the signatures on the certificate may be facsimile signatures. Section 46. Lost Certificates. Ho new share certificate that replaces an old one shall be issued unless the old one is surrendered and canceled at the same time; provided, however, that if any share certificate is lost, stolen, mutilated, or destroyed, the Board of Directors may authorize issuance of a new certificate replacing the old one on any terms and conditions, including a reasonable arrangement for indemnification of the corporation, that the Board may specify. Section 47. Reports to Shareholders. The requirement for the annual report to shareholders referred to in Section 1501(a) of the California Corporations Code is hereby expressly waived so long as there are less than 100 holders of record of the corporation's shares. The Board of Directors shall cause to be sent to the shareholders such annual or other periodic reports as they consider appropriate or as otherwise required by law. In the event the corporation has 100 or more holders of its shares, an annual report complying with Section 1501(a) and, when applicable, Section 1501(b) of the California Corporations Code, shall be sent to the shareholders not later than 120 days after the close of the fiscal year and at least 15 days prior to the annual meeting of shareholders to be held during the next fiscal year. If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to the person making the request within 30 days thereafter the financial statements referred to in Section 1501(a) for such year. A shareholder or shareholders holding at least five percent (54) of the outstanding shares of any class of a corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month, or nine-month period of the current fiscal year ended more than 30 days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the statements referred to in Section 1501(a) of the California Corporations Code for the last fiscal year. The statement shall be delivered or mailed to the person making the request within 30 days thereafter. A copy of the statements shall be kept on file in the principal office of the corporation for 12 months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. The income statements and balance sheets referred to shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. Section 48. Indemnification of Corporate Agents. The corporation shall have power to indemnify each of its agents to the fullest extent permissible by the California General Corporation Law. Without limiting the generality of the foregoing sentence, the corporation: (a) is authorized to provide indemnification of agents in excess of that expressly permitted by section 317 of the California General Corporation Law for those agents of the corporation for breach of duty to the corporation and its shareholders, provided, however, that the corporation is not authorized to provide indemnification of any agent for any acts or omissions or transactions from which a director may not be relieved of liability as set forth in the exception to section 204(a)(10) of the California General Corporation Law or as to circumstances in which indemnity is expressly prohibited by section 317 of the California General Corporation law; and (b) shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of section 317 of the California General Corporation Law, and shall have power to advance the expenses reasonably expected to be incurred by such agent in defending any such proceeding upon receipt of the undertaking required by subdivision (f) of such section. The term "agent" used in this section 48 shall have the same meaning as such term in section 317 of the California General Corporation Law. ARTICLE VI Amendments Section 49. Amendments by Shareholders. New By-Laws may be adopted or these By-Laws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote. Section 50. Amendments By Directors. Subject to the right of shareholders under the preceding Section 49 of these By-Laws, By-Laws other than a By-Law fixing or changing the authorized number of directors may be adopted, amended, or repealed by the Board of Directors. However, if the Articles of Incorporation, or a By-Law adopted by the shareholders, provide for an indefinite number of directors within specified limits, the directors may adopt or amend a By-Law or resolution fixing the exact number of directors within those limits. ARTICLE VII Committees of the Board of Directors Section 51. Committees of the Board of Directors. The Board of Directors shall, by resolution adopted by a majority of the authorized number of directors, designate the following standing committees: (1) An Audit Committee which shall consist of at least three members of the Board of Directors, none of whom shall be active officers of the corporation. The duties of this committee shall be to make suitable examination every 12 months of the affairs of the corporation. The result of such examination shall be reported, in writing, to the Board of Directors stating whether the corporation is in a sound and solvent condition, whether adequate internal audit controls and procedures are being maintained, and recommending to the Board such changes in the manner of doing business, etc. as shall be deemed advisable. The Audit Committee, upon its own recommendation and with the approval of the Board of Directors, may employ a qualified firm of Certified Public Accountants to make a suitable examination and audit of the corporation. If such a procedure is followed, the one annual examination and audit of such firm of accountants and the presentation of its report to the Board of Directors will be deemed sufficient to comply with the requirements of this section of these By-Laws. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, also designate one or more additional standing committees including, but not limited to, a Loan Committee, an Investment Committee and/or an Executive Committee consisting of two or more directors who shall be appointed by, and hold office at, the pleasure of the Board of Directors. The Board of Directors may, except as hereinafter limited, and to extent permissible under applicable law, delegate to such committees any of the powers and authorities of the Board of Directors. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any such committee shall have all the authority of the Board, except with respect to: (1) The approval of any action for which shareholder approval is also required. (2) The filling of vacancies on the Board or in any committee. (3) The fixing of compensation of the directors for serving on the Board or on any committee. (4) The amendment or repeal of By-Laws or the adoption of new By-Laws. (5) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable. (6) A distribution to the shareholders of the corporation as defined in Section 166 of the California Corporations Code, except at a rate or in a periodic amount or within a price range determined by the Board. (7) The appointment of other committees of the Board or the members thereof. The Board of Directors shall designate a chairman for each committee who shall have the sole power to call any committee meeting other than a meeting set by the Board. Except as otherwise established by the Board of Directors, Article III of these By-Laws shall apply to committees of the Board and action by such committees, mutatis mutandis. EX-23.1 3 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No.33-89948 of Central Coast Bancorp on Form S-8 of our report dated January 25, 1999 (February 26, 1999 as to the stock split information in Note 1),appearing in the Annual Report on Form 10-K of Central Coast Bancorp for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Salinas, California March 25, 1999 EX-27 4 EX-27 FINANCIAL DATA SCHEDULE
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 Reference. 0000921085 CENTRAL COAST BANCORP 1,000 year DEC-31-1998 JAN-01-1998 DEC-31-1998 44,684 0 4,202 0 170,387 0 0 318,338 4,352 543,933 489,192 0 3,542 0 0 0 41,103 10,096 543,933 27,037 7,473 2,844 37,354 13,319 13,319 24,035 159 58 13,859 12,101 12,101 0 0 7,153 1.18 1.09 5.36 876 1,247 0 0 4,223 177 147 4,352 4,352 0 0
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