-----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, Se6LClqLYawwVM8HwpPIpkkQajneLUuRKOGhxgEvmEUBOLGDjx+on67FArWpSqE+ rSU5DOZKHvtR+O6HWffbeA== 0000921085-00-000006.txt : 20000515 0000921085-00-000006.hdr.sgml : 20000515 ACCESSION NUMBER: 0000921085-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL COAST BANCORP CENTRAL INDEX KEY: 0000921085 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770367061 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25418 FILM NUMBER: 627811 BUSINESS ADDRESS: STREET 1: 301 MAIN ST CITY: SALINAS STATE: CA ZIP: 93901 BUSINESS PHONE: 4084226642 MAIL ADDRESS: STREET 1: P O BOX 450 CITY: SALINAS STATE: CA ZIP: 93902 FORMER COMPANY: FORMER CONFORMED NAME: SALINAS VALLEY BANCORP DATE OF NAME CHANGE: 19940330 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2000 . [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-25418 . CENTRAL COAST BANCORP - -------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 77-0367061 - ------------------------------- ------------------------ (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 301 Main Street, Salinas, California . 93901. -------------------------------------- ------ (Address of principal executive offices) (Zip code) (831) 422-6642 . ---------------- (Registrant's telephone number, including area code) not applicable --------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: No par value Common Stock - 6,972,430 shares outstanding at May 9, 2000. Page 1 of 21 The Index to the Exhibits is located at Page 19 1
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS: CENTRAL COAST BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) March 31, December 31, (In thousands) 2000 1999 ---------- ---------- Assets Cash and due from banks $ 37,532 $ 39,959 Federal funds sold 26,803 - ------------ ----------- Total cash and equivalents 64,335 39,959 Available-for-sale securities 139,738 145,435 Loans: Commercial 155,229 159,385 Real estate-construction 30,310 35,330 Real estate-other 200,137 188,600 Consumer 10,950 13,003 Deferred loan fees, net (697) (721) ------------ ----------- Total loans 395,929 395,597 Allowance for loan losses (6,136) (5,596) ------------ ----------- Net Loans 389,793 390,001 ------------ ----------- Premises and equipment, net 3,767 3,888 Accrued interest receivable and other assets 12,269 14,162 ------------ ----------- Total assets $ 609,902 $593,445 ============ =========== Liabilities and Shareholders' Equity Deposits: Demand, noninterest bearing $ 132,105 $141,389 Demand, interest bearing 98,384 100,871 Savings 99,292 97,833 Time 216,761 178,096 ------------ ----------- Total Deposits 546,542 518,189 Accrued interest payable and other liabilities 9,153 21,951 ------------ ----------- Total liabilities 555,695 540,140 ------------ ----------- Commitments and contingencies (Note 2) 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: 7,014,930 shares at March 31, 2000 and 6,440,257 shares at December 31, 1999 49,371 40,223 Shares held in deferred compensation trust (271,862 at March 31, 2000 and 247,148 at December 31, 1999), net of deferred obligation - - Retained earnings 9,594 17,784 Accumulated other comprehensive loss - net of taxes of $3,307,000 at March 31, 2000 and $3,267,000 at December 31, 1999 (4,758) (4,702) ------------ ----------- Shareholders' equity 54,207 53,305 ------------ ----------- Total liabilities and shareholders' equity $ 609,902 $593,445 ============ =========== See notes to Consolidated Condensed Financial Statements
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CENTRAL COAST BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (In thousands) Three Months Ended March 31, 2000 1999 ---- ---- Interest Income Loans (including fees) $ 9,213 $ 7,140 Investment securities 2,236 2,249 Other 116 73 --------------- -------------- Total interest income 11,565 9,462 --------------- -------------- Interest Expense Interest on deposits 3,914 3,086 Other 148 27 --------------- -------------- Total interest expense 4,062 3,113 --------------- -------------- Net Interest Income 7,503 6,349 Provision for Loan Losses 526 127 --------------- -------------- Net Interest Income after Provision for Loan Losses 6,977 6,222 --------------- -------------- Noninterest Income 546 542 --------------- -------------- Noninterest Expenses Salaries and benefits 2,380 2,331 Occupancy 333 280 Furniture and equipment 388 291 Other 1,019 921 --------------- -------------- Total other expenses 4,120 3,823 --------------- -------------- Income Before Income Taxes 3,403 2,941 Provision for Income Taxes 1,327 1,216 --------------- -------------- Net Income $ 2,076 $ 1,725 =============== ============== Basic Earnings per Share $ 0.29 $ 0.25 Diluted Earnings per Share $ 0.29 $ 0.24 See notes to Consolidated Condensed Financial Statements
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CENTRAL COAST BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, 2000 1999 ---- ---- Cash Flows from Operations: Net income $ 2,076 $ 1,725 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 526 127 Depreciation 296 212 Amortization and accretion 61 77 (Increase) decrease in accrued interest receivable and other assets 1,869 (919) Increase (decrease) in accrued interest payable and other liabilities (136) 1,107 Increase (decrease) in deferred loan fees (24) 54 --------------- -------------- Net cash provided by operations 4,668 2,383 --------------- -------------- Cash Flows from Investing Activities: Purchases of investment securities (20) (87,498) Proceeds from maturities of investment securities 5,624 90,738 Net change in loans held for sale - 877 Net increase in loans (295) (8,084) Capital expenditures (175) (382) --------------- -------------- Net cash provided (used) in investing activities 5,134 (4,349) --------------- -------------- Cash Flows from Financing Activities: Net increase (decrease) in deposit accounts 28,353 (13,724) Net increase (decrease) in short-term borrowings (12,662) 3,740 Proceeds from sale of stock - 810 Shares repurchased (1,117) (808) --------------- -------------- Net cash provided (used) by financing activities 14,574 (9,982) --------------- -------------- Net increase (decrease) in cash and equivalents 24,376 (11,948) Cash and equivalents, beginning of period 39,959 48,886 --------------- -------------- Cash and equivalents, end of period $ 64,335 $ 36,938 =============== ============== Other Cash Flow Information: Interest paid $ 4,005 $ 3,092 Income taxes paid 2,640 224 See Notes to Consolidated Condensed Financial Statements
4 CENTRAL COAST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS In the opinion of Management, the unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position at March 31, 2000 and December 31, 1999, the results of operations for the three month periods ended March 31, 2000 and 1999, and cash flows for the three month periods ended March 31, 2000 and 1999. Certain disclosures normally presented in the notes to the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1999 Annual Report to Shareholders. The results of operations for the three-month periods ended March 31, 2000 and 1999 may not necessarily be indicative of the operating results for the full year. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan 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. Management has determined that since all of the commercial banking products and services offered by the Company are available in each branch of the Bank, all branches 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 Bank branches and report them as a single operating segment. 2. COMMITMENTS AND CONTINGENCIES In the normal course of business there are outstanding various commitments to extend credit which are not reflected in the financial statements, including loan commitments of approximately $123,780,000 and standby letters of credit of $2,433,000 at March 31, 2000. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 2000. Approximately $16,712,000 of loan commitments outstanding at March 31, 2000 relate to real estate construction loans and are expected to fund within the next twelve months. The remainder relate primarily to revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each potential borrower and the necessary collateral are evaluated on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities or business assets. Stand-by letters of credit are commitments written to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating to purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. Virtually all such commitments are collateralized. 5 3. EARNINGS PER SHARE COMPUTATION Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period (7,069,000 for the three month period ended March 31, 2000, and 6,996,000 for the three month period ended March 31, 1999). 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 (198,000 for the three month period ended March 31, 2000 and 362,000 for the three month period ended March 31, 1999). 4. COMPREHENSIVE EARNINGS
Three Months Ended March 31, (In thousands) 2000 1999 ---- ---- Net Earnings $ 2,076 $ 1,725 Other comprehensive loss - net unrealized loss on available-for-sale securities (56) (779) --------------- --------------- Total comprehensive earnings $ 2,020 $ 946 =============== ===============
5. STOCK DIVIDEND On January 31, 2000, the Board of Directors declared a ten percent stock dividend, which was distributed on February 28, 2000, to shareholders of record as of February 14, 2000. All share and per share data have been retroactively adjusted to reflect the stock dividend. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to the historical information contained herein, this report on Form 10-Q contains certain forward-looking statements. The reader of this 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 Bank, changes in the regulatory environment, changes in business conditions and inflation, changes in securities markets, as well as other factors. This entire report should be read to put such forward-looking statements in context. To gain a more complete understanding of the uncertainties and risks involved in the Company's business this report should be read in conjunction with Central Coast Bancorp's annual report on Form 10-K for the year ended December 31, 1999. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within the Management's Discussion and Analysis. Business Organization Central Coast Bancorp (the "Company") is a California corporation organized in 1994, and is the parent company for Community Bank of Central California, a state-chartered bank, headquartered in Salinas, California (the "Bank"). Other than its investment in the Bank, the Company currently conducts no other significant business activities, although it is authorized to engage in a variety of activities which are deemed closely related to the business of banking upon prior approval of the Board of Governors of the Federal Reserve System (the "FRB"), the Company's principal regulator. The Bank offers a full range of commercial banking services, including a diverse range of traditional banking products and services to individuals, merchants, small and medium-sized businesses, professionals and agribusiness enterprises located in the Salinas Valley and Monterey Peninsula. Overview Central Coast Bancorp reported a 21% increase in diluted earnings per share of $0.29 for the three months ended March 31, 2000 versus $0.24 in the first quarter last year. Net income for the first quarters of 2000 and 1999 were $2,076,000 and $1,725,000, respectively. The first quarter 2000 net income was a record for a first quarter and was 20% higher than year ago net income. The earnings per share for the 1999 first quarter have been adjusted for the 10% stock dividend distributed in February 2000. Total assets of the Company at March 31, 2000 were $609,902,000 up $73,898,000 (13.8%) over the ending balance at March 31, 1999 and up $16,457,000 (2.8%) from December 31, 1999 balances. At quarter end, loans totaled $395,929,000, up $70,519,000 (21.7%) from the ending balances on March 31, 1999 and up slightly from $395,597,000 at December 31, 1999. Deposit balances at quarter end totaled $546,542,000 up $71,074,000 (14.9%) from the year earlier balances and up $28,353,000 (5.5%) from year-end 1999. The deposit growth included $20,000,000 of State of California certificates of deposit placed in the Bank in February 2000. 7 For the first quarter 2000, the Company realized a return on average equity of 15.4% and a return on average assets of 1.40%, as compared to 13.6% and 1.32% in the first quarter of 1999. Central Coast Bancorp ended the first quarter of 2000 with a Tier 1 capital ratio of 12.2% and a total risk-based capital ratio of 13.4% versus 14.4% and 15.7%, respectively at the end of the first quarter of 1999. The following table provides a summary of the major elements of income and expense on a tax equivalent basis for the periods indicated.
Condensed Comparative Income Statement Percentage Change Three months ended March 31, Increase (In thousands, except percentages) 2000 1999 (Decrease) ---- ---- ---------- Interest income (1) $ 11,760 $ 9,638 22% Interest expense 4,062 3,113 30% -------------- ------------ ------------- Net interest income 7,698 6,525 18% Provision for loan losses 526 127 314% -------------- ------------ ------------- Net interest income after provision for loan losses 7,172 6,398 12% Noninterest income 546 542 1% Noninterest expense 4,120 3,823 8% -------------- ------------ ------------- Income before income taxes 3,598 3,117 15% Income taxes 1,327 1,216 9% Tax equivalent adjustment 195 176 11% -------------- ------------ ------------- Net income $ 2,076 $ 1,725 20% ============== ============ ============= 1) Interest on tax-free securities is reported on tax equivalent basis.
8 Net interest income Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and other borrowings, is the principal component of the Bank's earnings. The following table provides a summary of the components of net interest income and the changes within the components for the periods indicated. The second table sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates.
(Unaudited) Three months ended March 31, (Taxable Equivalent Basis) 2000 1999 Average Average Average Average (In thousands, except percentages) Balance Interest Yield Balance Interest Yield ------- -------- ----- ------- -------- ----- Assets: Earning Assets Loans (1) (2) $ 389,616 $ 9,213 9.48% $ 309,892 $ 7,140 9.34% Taxable investments 107,673 1,844 6.87% 127,466 1,894 6.03% Tax-exempt securities (tax equiv. basis) 35,825 587 6.57% 32,314 531 6.66% Federal funds sold 8,335 116 5.58% 6,230 73 4.75% --------- -------- --------- ------- Total Earning Assets 541,449 $ 11,760 8.71% 475,902 $ 9,638 8.21% -------- ------- Cash & due from banks 37,206 42,400 Other assets 16,665 10,578 --------- --------- $ 595,320 $ 528,880 ========= ========= Liabilites & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 96,688 $ 405 1.68% $ 93,030 $ 354 1.54% Savings 102,204 875 3.43% 108,843 891 3.32% Time deposits 197,194 2,634 5.36% 147,048 1,841 5.08% Other borrowings 9,474 148 6.27% 2,252 27 4.86% --------- -------- --------- ------- Total interest bearing liabilities 405,560 4,062 4.02% 351,173 3,113 3.60% -------- ------- Demand deposits 130,637 122,259 Other Liabilities 5,221 3,882 --------- --------- Total Liabilities 541,418 477,314 Shareholders' Equity 53,902 51,566 --------- --------- $ 595,320 $ 528,880 ========= ========= Net interest income & margin (3) $ 7,698 5.70% $ 6,525 5.56% ======== ======= - ---------------------------------------------------------------------------------------------------------------- 1 Loan interest income includes fee income of $236,000 and $241,000 for the three month periods ended March 31, 2000 and 1999, respectively. 2 Includes the average allowance for loan losses of $5,795,000 and $4,364,000 and average deferred loan fees of $686,000 and $719,000 for the three months ended March 31, 2000 and 1999, respectively. 3 Net interest margin is computed by dividing net interest income by the total average earning assets.
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Volume/Rate Analysis (in thousands) Three Months Ended March 31, 2000 over 1999 Increase (decrease) due to change in: Net Volume Rate (4) Change ------ -------- ------ Interest-earning assets: Net Loans (1)(2) $ 1,856 $ 217 $2,073 Taxable investment securities (298) 248 (50) Tax exempt investment securities (3) 58 (2) 56 Federal funds sold 25 18 43 ------- ------- ------- Total 1,641 481 2,122 ------- ------- ------- Interest-bearing liabilities: Demand deposits 14 37 51 Savings deposits (55) 39 (16) Time deposits 635 158 793 Other borrowings 88 3 121 ------- ------ ------- Total 682 267 949 ------- ------- ------- Interest differential $ 959 $ 214 $1,173 ======= ======= =======
(1.) Loan interest income includes fee income of $236,000 and $241,000 for the three month periods ended March 31, 2000 and 1999, respectively. (2.) The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans. (3.) Includes taxable-equivalent adjustments that relate to income on certain securities that is exempt from federal income taxes. The effective federal statutory tax rate was 34% for 2000 and 1999. (4.) The rate / volume variance has been included in the rate variance. Net interest income (fully taxable equivalent, FTE) for the first quarter of 2000 was $7,698,000, a $1,173,000 (18.0%) increase over the first quarter of 1999. Interest income was up $2,122,000 (22.0%) over those same periods. The average balances of earning assets were $65,547,000 (13.8%) higher in the first quarter of 2000 versus the prior year first quarter. Included in this increase, the average balances of loans, tax-exempt investments and Federal funds sold increased $79,724,000 (25.7%), $3,511,000 (10.9%) and $2,105,000 (33.8%), respectively, for the first quarter of 2000 compared to that of 1999. Average balances of taxable investments decreased $19,793,000 (15.5%) in the first three months of 2000 compared to that period in 1999, as these assets were deployed into loans throughout the previous twelve months. These higher balances accounted for $1,641,000 of the increase in interest income on a quarter over quarter basis. Average yields on the earning assets increased 50 basis points in the first three months of 2000 compared to that period in 1999 due to the higher rates initiated by the Federal Reserve Board, adding $481,000 to interest income. Interest expense was $949,000 (30.5%) higher in the first quarter of 2000 versus the same quarter in 1999. Average balances of interest-bearing liabilities were higher by $54,387,000 (15.5%) in the first three moths of 2000 compared to that period in 1999, adding $682,000 to interest expense. Average rates paid on interest-bearing liabilities were up 42 basis points on a quarter over quarter basis. The higher rates added $267,000 to interest expense in the first quarter of 2000 compared to the first quarter of 1999. The net interest margin for the first quarter of 2000 was 5.70% as compared to 5.56% in the year earlier period. Provision for Loan Losses The Bank provided $526,000 for loan losses in the first quarter of 2000 as compared to $127,000 in the first quarter of 1999 and $529,000 in the fourth quarter of 1999. While there has been no specific identification of deterioration in the Bank's loan portfolio at this time, management is aware of some weakness appearing in the local agricultural economy. For that reason the loss provision was maintained at the level recorded in the fourth quarter of 1999. 10 Noninterest Income Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. Noninterest income totaled $546,000 in the first quarter of 2000, which was up only $4,000 (0.7%) over the same period in 1999. Service charges on deposits were up $40,000 (12.2%) due to higher volumes and some selective fee increases implemented in the fourth quarter in 1999. This increase was largely offset by a reduction of $39,000 (51.4%) in fees from mortgage originations as higher interest rates for home mortgages resulted in a significant reduction in demand for those loans. Noninterest Expense Noninterest expenses increased $297,000 (7.8%) to a total of $4,120,000 in the first quarter of 2000 versus first quarter 1999. Salary and employee benefits increased $49,000 (2.1%) due to higher benefit costs and normal salary increases, offset in part by lower commissions paid on mortgage originations. Premises and fixed asset expense increased $150,000 (26.3%) due in great part to higher operating costs for the three branches and the operations center that were moved or remodeled in 1999. Other expenses increased $98,000 (10.6%) generally due to higher business volumes and price increases. The overhead efficiency ratio (FTE) for the two quarters was 51.2% and 55.5%, respectively. Provision for Income Taxes The Company recorded income tax expense of $1,327,000 in the first quarter of 2000 versus $1,216,000 in the first quarter of 1999. The effective tax rate for the three months ended March 31, 2000 is 39.0% as compared to 41.3% in the year earlier period. The effective tax rate is lower as the result of the effect of investments in tax exempt securities and loans. Loans Ending loan balances at March 31, 2000 were $395,929,000, which was a slight increase of $332,000 from year-end 1999 balances. The March 31, 2000 loan balances were $75,810,000 (23.7%) higher than the year earlier totals. On a year over year basis commercial loans were up 20%; construction loans were up 39%; and real estate-other loans were up 27%. The balances at March 31, 2000 for these loan categories were $155,229,000, $30,310,000 and $200,137,000, respectively. Loan demand remains strong heading into the second quarter of 2000. Nonperforming Assets Nonperforming assets are comprised of loans delinquent 90 days or more with respect to interest or principal, loans for which the accrual of interest has been discontinued, and other real estate which has been acquired through foreclosure and is awaiting disposition. Unless well secured and in the process of collection, loans are placed on nonaccrual status when a loan becomes 90 days past due as to interest or principal, when the payment of interest or principal in accordance with the contractual terms of the loan becomes uncertain or when a portion of the principal balance has been charged off. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement and remaining principal is considered collectible or when the loan is both well secured and in the process of collection. Real estate and other assets acquired in satisfaction of indebtedness are recorded at the lower of estimated 11 fair market value net of anticipated selling costs or the recorded loan amount, and any difference between this and the amount is treated as a loan loss. Costs of maintaining other real estate owned and gains or losses on the subsequent sale are reflected in current earnings. The following is a summary of nonperforming assets:
(In thousands, except percentages) March 31, December 31, 2000 1999 ----------------- ------------------ Past due 90 days or more and still accruing : Real estate $ 306 $ 303 Commercial 170 51 Consumer and other - - ----------------- ------------------ 476 354 ----------------- ------------------ Nonaccrual: Real estate - 1,565 Commercial 502 11 Consumer and other 44 - ----------------- ------------------ 546 1,576 ----------------- ------------------ Total nonperforming loans 1,022 1,930 ----------------- ------------------ Other real estate owned 180 180 ----------------- ------------------ Total nonperforming assets $ 1,202 $ 2,110 ================= ================== Allowance for loan losses as a percentage of nonperforming loans 600% 290% Nonperforming loans to total loans 0.26% 0.49%
Nonperforming loans decreased $908,000 during the first quarter of 2000. This decrease coupled with the quarterly provision in the allowance for loan losses resulted in the improvement in the coverage ratio of the allowance for loan losses to nonperforming loans from 290% at year-end to 600%. At March 31, 2000, the recorded investment in loans that are considered impaired under SFAS No. 114 was $2,422,000 of which $546,000 are included in nonaccrual loans above. Such impaired loans had valuation allowances totalling $588,000 based on the estimated fair value of the collateral. Allowance for Loan Losses The allowance for loan losses reflects management's judgement as to the level considered adequate to absorb probable losses inherent in the loan portfolio. The allowance is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Management determines an appropriate provision based upon information currently available to analyze loan loss potential, including (1) the loan portfolio balance in the period; (2) a comprehensive grading and review of new and existing loans outstanding; (3) actual previous charge-offs; and, (4) changes in economic conditions. In determining the provision for estimated losses related to specific major loans, management evaluates its allowance on an individual loan basis, including an analysis of the credit worthiness, cash flows and financial status of the borrower, and the condition and the estimated value of the collateral. Specific valuation allowances for secured loans are determined by the excess of recorded investment in the loan over the fair market value or net realizable value where appropriate, of the collateral. In determining overall general valuation allowances to be maintained and the loan loss allowance ratio, management evaluates many factors including prevailing and forecasted economic conditions, regular reviews of the quality of loans, industry experience, historical loss experience, composition and geographic concentrations of the loan portfolio, the borrowers' ability to repay and repayment performance and estimated collateral values. 12 Management believes that the allowance for loan losses at March 31, 2000 is adequate, based on information currently available. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty. The following table summarizes activity in the allowance for loan losses for the periods indicated:
(In thousands, except percentages) Three months ended March 31, 2000 1999 ------------ ------------- Beginning balance $ 5,596 $ 4,352 Provision charged to expense 526 127 Loans charged off (16) (90) Recoveries 30 9 ------------ ------------- Ending balance $ 6,136 $ 4,398 ============ ============= Ending loan portfolio $395,929 $320,119 ============ ============= Allowance for loan losses as percentage of ending loan portfolio 1.55% 1.37%
Liquidity Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Bank assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at March 31, 2000 were approximately $123,780,000 and $2,433,000, respectively. Such loans relate primarily to revolving lines of credit and other commercial loans, and to real estate construction loans. The Company's sources of liquidity consist of its deposits with other banks, overnight funds sold to correspondent banks, unpledged short-term marketable investments, and sellable government guaranteed loans. On March 31, 2000 consolidated liquid assets totaled $98.7 million or 16.2% of total assets as compared to $91.1 million or 15.4% of total consolidated assets on December 31, 1999. In addition to liquid assets, the Bank maintains lines of credit with correspondent banks for up to $80,000,000 available on a short-term basis. Informal agreements are also in place with various other banks to purchase participations in loans, if necessary. The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. Capital Resources The Company's total shareholders' equity was $54,207,000 at March 31, 2000 compared to $53,305,000 at December 31, 1999. The Company and the Bank are subject to regulations issued by the Board of Governors and the FDIC which require maintenance of a certain level of capital. A banking organization's total qualifying capital includes two components, core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, trust preferred securities and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, trust preferred securities, certain other capital instruments and term subordinated debt. The Company's major capital components are shareholders' equity less goodwill in core capital, and the allowance for loan losses in supplementary capital. 13 The following table shows the Company's actual capital amounts and ratios at March 31, 2000 and December 31, 1999 as well as the minimum capital ratios for capital adequacy under the regulatory framework:
For Capital Actual Adequacy Purpose: Amount Ratio Amount Ratio ------ ----- ------ ----- As of March 31, 2000 Total Capital (to Risk Weighted Assets): 63,864,000 13.4% 38,002,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 57,967,000 12.2% 19,001,000 4.0% Tier 1 Capital (to Average Assets): 57,967,000 9.7% 23,813,000 4.0% As of December 31, 1999: Total Capital (to Risk Weighted Assets): 62,489,000 13.8% 36,125,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 56,938,000 12.6% 18,062,000 4.0% Tier 1 Capital (to Average Assets): 56,938,000 9.7% 23,593,000 4.0%
Year 2000 During 1998 and 1999, management of the Company focused the appropriate resources to address the potential problems that could arise regarding the Year 2000 (Y2K) century date change. The Company's mission critical systems were evaluated, modified as required and contingency plans were put into place should the systems have experienced any failures. The Y2K readiness of vendors and customers was also evaluated and monitored. The century date change passed without any operational difficulties for the Company, its vendors or its customers. There are certain dates within the year 2000 that have been identified as critical processing dates. The first was January 31, the end of the first month of the year. The second was February 29, leap year day. The third was March 31, the end of the first quarter. The Company did not experience any processing problems on those dates. Upcoming dates during the year are October 10, the first date to require an 8-digit field (10/10/2000) and December 31, the end of the year. Those dates were tested as part of the Y2K project. The Company does not anticipate having any processing problems on those dates, however failure by third parties to adequately remediate Y2K issues could have an impact upon Central Coast Bancorp, which is impossible to quantify. Nevertheless, the Company currently expects that its Y2K compliance efforts will be successful without material adverse effects on its business. Item 3. 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 Bank uses 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 200 basis point rising rate forecast, a flat rate forecast and a 200 basis point falling rate forecast which take place within a one year time frame. The net interest income is measured during the first year of the rate changes and in the year following the rate changes. Based on a forecast using year-end 1999 balances and measuring against a flat rate environment, in a one-year horizon an increase in interest rates of 200 basis points would result in an increase of $1,841,000 in net interest income. Conversely, a 200 basis point decrease would result in a decrease of $2,337,000 in net interest income. 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 risk profile of the Bank has not changed materially from that at year-end 1999. 14 PART II - OTHER INFORMATION Item 1. Legal proceedings. None. Item 2. Changes in securities. None. Item 3. Defaults upon senior securities. None. Item 4. Submission of matters to a vote of security holders. None. Item 5. Other information. None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits (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, 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. (4.1) Specimen form of Central Coast Bancorp stock certificate, incorporated by reference from the Company's 1994 Annual Report on Form 10-K, 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. 15 *(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)Form of Employment Agreement, incorporated by reference from Exhibit 10.13 to the Company's 1996 Annual Report on Form 10-K,filed with the Commission on March 31, 1997. *(10.14)Form of Executive Salary Continuation Agreement, incorporated by reference from Exhibit 10.14 to the Company's 1996 Annual Report on Form 10-K, 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) Form 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. 16 (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 10-K, 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 10-K, 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 10-K, filed with the Commission on March 27, 1998. (21.1) The Registrant's only subsidiary is Community Bank of Central California (the successor entity resulting from the merger of Registrant's wholly-owned subsidiaries, Bank of Salinas and Cypress Bank, as referenced in Exhibit 2.1 above). (27.1) Financial Data Schedule *Denotes management contracts, compensatory plans or arrangements. (b) Reports on Form 8-K - None 17 SIGNATURES - --------------------------------------------------------------------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. May 9, 2000 CENTRAL COAST BANCORP By: ------------------------ Robert M. Stanberry (Chief Financial Officer and Principal Accounting Officer) 18 EXHIBIT INDEX Exhibit Number Description Page - ------ ----------- ---- 27.1 Financial Data Schedule 20 EX-27 2 ARTICLE 9 FDS FOR 10-Q
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 3-mos DEC-31-2000 JAN-01-2000 MAR-31-2000 37,532 0 26803 0 139,738 0 0 395,929 6,136 609,902 546,542 0 4,934 4,219 0 0 49,371 4,836 609,902 9,213 2,236 116 11,565 3,914 4,062 7,503 526 0 4,120 3,403 3,403 0 0 2,076 0.29 0.29 5.7 546 476 0 0 5,596 16 30 6,136 6,136 0 0
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