10-Q 1 tenq0301.txt 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, 2001 -------------- [ ] 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 - 7,201,125 shares outstanding at May 8, 2001. Page 1 of 19 The Index to the Exhibits is located at Page 16 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) 2001 2000 ---- ---- Assets Cash and due from banks $ 42,727 $ 51,411 Federal funds sold 20,128 23,081 ------- ------- Total cash and equivalents 62,855 74,492 Available-for-sale securities (amortized cost of $148,324 148,600 152,276 at March 31, 2001 and $154,076 at December 31 2000) Loans: Commercial 165,841 171,631 Real estate-construction 69,681 57,780 Real estate-other 231,123 234,890 Consumer 15,936 9,840 Deferred loan fees, net (972) (746) ------- ------- Total loans 481,609 473,395 Allowance for loan losses (9,427) (9,371) ------- ------- Net Loans 472,182 464,024 ------- ------- Premises and equipment, net 3,535 3,735 Accrued interest receivable and other assets 11,054 12,166 ------- ------- Total assets $698,226 $706,693 ======= ======= Liabilities and Shareholders' Equity Deposits: Demand, noninterest bearing $168,654 $207,002 Demand, interest bearing 90,405 88,285 Savings 126,021 110,204 Time 239,589 227,719 ------- ------- Total Deposits 624,669 633,210 Accrued interest payable and other liabilities 11,889 13,629 ------- ------- Total liabilities 636,558 646,839 ------- ------- 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: 7,293,761 shares at March 31, 2001 and 6,721,998 shares at December 31, 2000 53,577 44,472 Shares held in deferred compensation trust (299,048 at March 31, 2001 and 271,000 at December 31, 2000), net of deferred obligation - - Retained earnings 7,902 16,444 Accumulated other comprehensive gain (loss) - net of taxes of $87,171 at March 31, 2001 and $(738,000) at December 31, 2000 189 (1,062) ------- ------- Shareholders' equity 61,668 59,854 ------- ------- Total liabilities and shareholders' equity $698,226 $706,693 ======= ======= 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, 2001 2000 ---- ---- Interest Income Loans (including fees) $ 11,025 $ 9,213 Investment securities 2,203 2,236 Other 192 116 --------- -------- Total interest income 13,420 11,565 --------- -------- Interest Expense Interest on deposits 4,834 3,914 Other 92 148 --------- -------- Total interest expense 4,926 4,062 --------- -------- Net Interest Income 8,494 7,503 Provision for Loan Losses 120 526 --------- -------- Net Interest Income after Provision for Loan Losses 8,374 6,977 --------- -------- Noninterest Income 650 546 --------- -------- Noninterest Expenses Salaries and benefits 3,002 2,380 Occupancy 437 333 Furniture and equipment 455 388 Other 1,045 1,019 --------- -------- Total other expenses 4,939 4,120 --------- -------- Income Before Income Taxes 4,085 3,403 Provision for Income Taxes 1,526 1,327 --------- -------- Net Income $ 2,559 $ 2,076 ========= ======== Basic Earnings per Share $ 0.35 $ 0.27 Diluted Earnings per Share $ 0.33 $ 0.26 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, 2001 2000 ---- ---- Cash Flows from Operations: Net income $ 2,559 $ 2,076 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 120 526 Depreciation 349 296 Amortization and accretion (9) 61 Loss on sale of securities 2 - Loss on sale of fixed assets 1 - (Increase) decrease in accrued interest receivable and other assets 223 1,869 Increase (decrease) in accrued interest payable and other liabilities (1,667) (136) Increase (decrease) in deferred loan fees 226 (24) --------- --------- Net cash provided by operations 1,804 4,668 --------- --------- Cash Flows from Investing Activities: Purchases of investment securities (67,195) (20) Proceeds from maturities of investment securities 33,805 5,624 Proceeds from sale of investment securities 39,213 Net increase in loans (8,504) (295) Purchases of equipment (150) (175) --------- --------- Net cash provided (used) in investing activities (2,831) 5,134 --------- --------- Cash Flows from Financing Activities: Net increase (decrease) in deposit accounts (8,541) 28,353 Net increase (decrease) in short-term borrowings (73) (12,662) Proceeds from sale of stock 2 - Shares repurchased (1,998) (1,117) --------- --------- Net cash provided (used) by financing activities (10,610) 14,574 --------- --------- Net increase (decrease) in cash and equivalents (11,637) 24,376 Cash and equivalents, beginning of period 74,492 39,959 --------- --------- Cash and equivalents, end of period $ 62,855 $ 64,335 ========= ========= Other Cash Flow Information: Interest paid $ 4,914 $ 4,005 Income taxes paid 5,970 2,640 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, 2001 and December 31, 2000, the results of operations for the three month periods ended March 31, 2001 and 2000, and cash flows for the three month periods ended March 31, 2001 and 2000. Certain disclosures normally presented in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 2000 Annual Report to Shareholders. The results of operations for the three-month periods ended March 31, 2001 and 2000 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 Community Bank of Central California, its bank subsidiary (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 $164,490,000 and standby letters of credit of $4,340,000 at March 31, 2001. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 2001. Approximately $46,842,000 of loan commitments outstanding at March 31, 2001 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 (7,358,000 for the three month period ended March 31, 2001, and 7,776,000 for the three month period ended March 31, 2000). Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options 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 (294,000 for the three month period ended March 31, 2001 and 218,000 for the three month period ended March 31, 2000). 4. COMPREHENSIVE EARNINGS
Three Months Ended March 31, (In thousands) 2001 2000 ---- ---- Net Earnings $ 2,559 $ 2,076 Other comprehensive income (loss) - net unrealized gain (loss) on available-for-sale securities. 1,250 (56) Reclassification adjustment for losses included in income, net of taxes of $1 for the three month period ended March 31, 2001 1 - --------- --------- Total comprehensive earnings $ 3,810 $ 2,020 ========= =========
5. STOCK DIVIDEND On January 29, 2001, the Board of Directors declared a ten percent stock dividend, which was distributed on February 28, 2001, to shareholders of record as of February 14, 2001. All share and per share data have been retroactively adjusted to reflect the stock dividend. 6. STOCK REPRUCHASE PLAN The Board of Directors has authorized a stock repurchase program under which repurchases will be made from time to time by the Company in the open market, or in block purchases, or in privately negotiated transactions, in compliance with Securities and Exchange Commission rules. At March 31, 2001 the Company is authorized to repurchase approximately another 369,440 shares under the program. 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. 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 operating market areas, including a decline in real estate values in the Company's market areas; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; (7) data processing compliance problems; (8) the California power crisis; (9) variances in the actual versus projected growth in assests; (10) return on assets; (11) loan losses; (12) expenses; (13) rates charged on loans and earned on securities investments; (14) rates paid on deposits; and (15) fee and other noninterest income earned, 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, 2000. Within the Management's Discussion and Analysis, interest income, net interest income, net interest margin and the efficiency ratio are presented on a fully taxable equivalent basis (FTE). 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 federal 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 counties of Monterey, San Benito and Santa Cruz, which are in the central coastal area of California. Overview -------- Central Coast Bancorp reported a 26.9% increase in diluted earnings per share of $0.33 for the three months ended March 31, 2001 versus $0.26 in the first quarter last year. Net income for the first quarters of 2001 and 2000 were $2,559,000 and $2,076,000, respectively. The first quarter 2001 net income was a quarterly record and was 23.3% higher than year ago net income. The earnings per share for the 2000 first quarter have been adjusted for the 10% stock dividend distributed in February 2001. Total assets of the Company at March 31, 2001 were $698,226,000 up $88,324,000 (14.5%) over the ending balance at March 31, 2000. At quarter end, loans totaled $481,609,000, up $85,680,000 (21.6%) from the ending balances on March 31, 2000. Deposit balances at quarter end totaled $624,669,000 up $78,127,000 (14.3%) from the year earlier balances. The deposit balances in 2000 included $40,000,000 of State of California certificates of deposit. At its option, the Bank returned these certificates of deposit in the last half of 2000. 7 For the first quarter 2001, the Company realized a return on average equity of 16.9% and a return on average assets of 1.52%, as compared to 15.4% and 1.40% in the first quarter of 2000. Central Coast Bancorp ended the first quarter of 2001 with a Tier 1 capital ratio of 11.0% and a total risk-based capital ratio of 12.3% versus 12.2% and 13.4%, respectively at the end of the first quarter of 2000. 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) 2001 2000 (Decrease) -------------- ---------------- ---------------- Interest income (1) $ 13,678 $ 11,760 16% Interest expense 4,926 4,062 21% -------------- ---------------- ---------------- Net interest income 8,752 7,698 14% Provision for loan losses 120 526 -77% -------------- ---------------- ---------------- Net interest income after provision for loan losses 8,632 7,172 20% Noninterest income 650 546 19% Noninterest expense 4,939 4,120 20% -------------- ---------------- ---------------- Income before income taxes 4,343 3,598 21% Income taxes 1,526 1,327 15% Tax equivalent adjustment 258 195 32% -------------- ---------------- ---------------- Net income $ 2,559 $ 2,076 23% ============== ================ ================ 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) 2001 2000 Average Average Average Avg (In thousands, except percentages) Balance Interest Yield Balance Interest Yield ------- -------- ----- ------- -------- ----- Assets: Earning Assets Loans (1) (2) $ 461,548 $ 11,025 9.69% $ 389,616 $ 9,213 9.48% Taxable investments 102,607 1,687 6.67% 107,673 1,844 6.87% Tax-exempt securities (tax equiv. basis) 45,666 774 6.88% 35,825 587 6.57% Federal funds sold 13,495 192 5.77% 8,335 116 5.58% ------- ------ ------- ------ Total Earning Assets 623,316 $ 13,678 8.90% 541,449 $ 11,760 8.71% ------ ------ Cash & due from banks 41,674 37,206 Other assets 15,733 16,665 ------- ------- $ 680,723 $ 595,320 ======= ======= Liabilites & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 88,591 $ 328 1.50% $ 96,688 $ 405 1.68% Savings 120,812 1,086 3.65% 102,204 875 3.43% Time deposits 233,062 3,420 5.95% 197,194 2,634 5.36% Other borrowings 5,708 92 6.54% 9,474 148 6.27% ------- ----- ------- ----- Total interest bearing liabilities 448,173 4,926 4.46% 405,560 4,062 4.02% ----- ----- Demand deposits 163,674 130,637 Other Liabilities 7,627 5,221 ------- ------- Total Liabilities 619,474 541,418 Shareholders' Equity 61,249 53,902 ------- ------- $ 680,723 $ 595,320 ======= ======= Net interest income & margin (3) $ 8,752 5.69% $ 7,698 5.70% ===== ===== ------------------------------------------------------------------------------------------------------------------- 1) Loan interest income includes fee income of $332,000 and $236,000 for the three month periods ended March 31, 2001 and 2000, respectively. 2) Includes the average allowance for loan losses of $9,413,000 and $5,795,000 and average deferred loan fees of $875,000 and $686,000 for the three months ended March 31, 2001 and 2000, 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, 2001 over 2000 Increase (decrease) due to change in: Net Interest-earning assets: Volume Rate (4) Change ------ -------- ------ Net Loans (1)(2) $1,681 $ 131 $ 1,812 Taxable investment securities (86) (71) (157) Tax exempt investment securities (3) 159 28 187 Federal funds sold 71 5 76 ----- ---- ----- Total 1,825 93 1,918 ----- ---- ----- Interest-bearing liabilities: Demand deposits (34) (43) (77) Savings deposits 157 54 211 Time deposits 474 312 786 Other borrowings (58) 2 (56) ---- ---- ----- Total 539 325 864 --- ---- ----- Interest differential $1,286 $ (232) $ 1,054 ===== ==== ===== 1) Loan interest income includes fee income of $332,000 and $236,000 for the three month periods ended March 31, 2001 and 2000, 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 2001 and 2000. 4) The rate / volume variance has been included in the rate variance.
Net interest income for the first quarter of 2001 was $8,752,000, a $1,054,000 (13.7%) increase over 2000. Interest income was up $1,918,000 (16.3%). Average earning assets in the first quarter of 2001 were $623,316,000, which was $81,867,000 (15.1%) higher than the prior year period. The increased volume of earning assets added $1,825,000 to interest income. Of that amount $1,681,000 was due to a $71,932,000 increase in average loans outstanding. The average yield on earning assets for the first quarter of 2001 was 8.90%, which was an increase 19 basis points over the yield in the first quarter of 2000. The higher yield added $93,000 to interest income. The higher yield resulted from the blended effect of 100 basis points in lending rate increases in the first half of 2000 offset in part by 150 basis points in lending rate decreases in the first quarter of 2001. However, the average yield on earning assets for the first quarter was down 26 basis points from the fourth quarter of 2000. The average yields on loans decreased from 10.08% in the fourth quarter to 9.69% in the first quarter of 2001. Since the decreases in the lending rates took place within the first quarter coupled with the fact that SBA loans reprice at the beginning of a quarter, the full effect of the rate decreases will be reflected in the second quarter average loan yields. Interest expense was $864,000 (21.3%) higher in the first quarter of 2001 versus the prior year period. Average balances of interest-bearing liabilities were higher by $42,613,000 (10.5%), which added $539,000 to interest expense. Average rates paid on interest-bearing liabilities were up 44 basis points on a quarter over quarter basis. The higher rates added $325,000 to interest expense. Average rates paid in interest-bearing liabilities decreased slightly to 4.46% in the first quarter of 2001 versus 4.49% in the fourth quarter of 2001. The net interest margin for the first quarter of 2001 was 5.69% as compared to 5.70% in the year earlier period. As compared to the net interest margin for the fourth quarter 2000, the first quarter's net interest margin was down 24 basis points. As the Bank's loan assets reprice more quickly than do its deposit liabilities, a declining rate environment puts downward pressure on the net interest margin. The full effect of the three 50 basis point decreases in the first quarter will be reflected in net interest margins in the future quarters. 10 Provision for Loan Losses ------------------------- The Bank provided $120,000 for loan losses in the first quarter of 2001 as compared to $526,000 in the first quarter of 2000 and $1,127,000 in the fourth quarter of 2000. Significant additions were made to the allowance for loan losses throughout 2000 based on management's analysis of the loan portfolio and in accordance with regulatory guidelines. At March 31, 2001, nonperforming loans totaled $475,000 as compared to $1,022,000 at March 31, 2000. The ratios of the allowance for loan losses to total loans on those two dates were 1.96% and 1.55%, respectively. The ratio at December 31, 2000 was 1.98%. Noninterest Income ------------------ Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. Noninterest income totaled $650,000 in the first quarter of 2000, which was up $104,000 (19.0%) over the same period in 2000. Two categories accounted for most of the increases. Service charges on deposit accounts were up $65,000 due to volume increases. Fees from mortgage originations increased $25,000 (68.8%) as lower interest rates for home mortgages increased the demand for those loans. Noninterest Expense ------------------- Noninterest expenses increased $819,000 (19.9%) to a total of $4,939,000 in the first quarter of 2001 versus first quarter 2000. The new Watsonville and Hollister branches, which were not in operation the first quarter of last year, accounted for $192,000 of the increase. Increased salary and benefit expense due to normal salary progression, internal growth and higher benefit costs added $470,000 on a quarter over quarter basis. The remaining increase was generally due to higher business volumes and price increases. The efficiency ratio (FTE) for the two quarters was 52.5% and 50.0%, respectively. Provision for Income Taxes -------------------------- The Company recorded income tax expense of $1,526,000 in the first quarter of 2001 versus $1,327,000 in the first quarter of 2000. The effective tax rate for the three months ended March 31, 2001 was 37.4% as compared to 39.0% in the year earlier period. The effective tax rate was lower in 2001 as the result of the effect of investments in tax exempt securities and loans. Securities ---------- At March 31, 2001, available-for-sale securities had a market value of $148,600,000 with an amortized cost basis of $148,324,000. The pretax unrealized gain of $276,000 at March 31, 2001 was a change of $2,076,000 from the $1,800,000 unrealized loss at December 31, 2000. The increase in securities valuation resulted from lower interest rates in the securities markets in the first quarter of 2001. Loans ----- Ending loan balances at March 31, 2001 were $481,609,000, which was an increase of $8,214,000 from year-end 2000 balances. The March 31, 2001 loan balances were $85,680,000 (21.6%) higher than the year earlier totals. On a year over year basis commercial loans were up 7%; construction loans were up 130%; and real estate-other loans were up 15%. The balances at March 31, 2001 for these loan categories were $165,841,000, $69,681,000 and $231,123,000, respectively. Loan demand remained steady heading into the second quarter of 2001. Non-performing Assets --------------------- Non-performing 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. 11 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 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 non-performing assets:
(In thousands, except percentages) March 31, December 31, 2001 2000 -------------- --------------- Past due 90 days or more and still accruing : Real estate $ 160 $ 10 Commercial 29 215 Consumer and other 50 5 ------------- ----------- 239 230 ------------- ----------- Nonaccrual: Real estate - - Commercial 236 329 Consumer and other - - ------------- ----------- 236 329 ------------- ----------- Total nonperforming assets $ 475 $ 559 ============= =========== Allowance for loan losses as a percentage of nonperforming loans 1985% 1676% Nonperforming loans to total loans 0.10% 0.12%
Non-performing loans decreased $84,000 during the first quarter of 2001. 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 1,676% at year-end to 1,985%. At March 31, 2001, the recorded investment in loans that are considered impaired under SFAS No. 114 was $578,000 of which $201,000 are included in nonaccrual loans above. Such impaired loans had valuation allowances totaling $253,000 based on the estimated fair value of the collateral. At December 31, 2000, the recorded investment in loans considered impaired was $1,691,000, including $215,000 of nonaccrual loans above and $1,010,000 of restructured loans performing in compliance with modified terms. Management is not aware of any potential problem loans, other than the impaired loans disclosed above, which were accruing and current at March 31, 2001, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. Credit Risk and Allowance for Loan Losses The Company assesses and manages credit risk on an ongoing basis through stringent credit review and approval policies, extensive internal monitoring and established formal lending policies. Additionally, the Company contracts with an outside loan review consultant to periodically grade new loans and to review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the 12 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 economic and business cycles. The Company's business is concentrated in Monterey, San Benito and Santa Cruz counties in California. These counties are heavily dependent on agriculture and tourism industries as their main economic base. As a result, the Company lends money to individuals and companies dependent upon these two industries. In addition, the Company has significant extensions of credit and commitments to extend credit which are secured by real estate. At March 31, 2001, the Company had outstanding real estate and real estate construction loans totaling approximately $300,804,000, which represented 62% of the loan portfolio. Although management believes the concentration to have no more than the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in the Company's primary market areas in particular, could have an adverse impact on the collectibility of these loans. Adverse economic conditions could require an increase in the provision for loan and lease losses which in turn could adversely affect the Company's future prospects, results of operations, profitability and stock price." 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. Management believes that the allowance for loan losses at March 31, 2001 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. 13 The following table summarizes activity in the allowance for loan losses for the periods indicated:
(In thousands, except percentages) Three months ended March 31, 2001 2000 --------------- --------------- Beginning balance $ 9,371 $ 5,596 Provision charged to expense 120 526 Loans charged off (87) (16) Recoveries 23 30 --------------- --------------- Ending balance $ 9,427 $ 6,136 =============== =============== Ending loan portfolio $ 481,609 $ 395,929 =============== =============== Allowance for loan losses as percentage of ending loan portfolio 1.96% 1.55%
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, 2001 were approximately $164,490,000 and $4,340,000, 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 salable government guaranteed loans. On March 31, 2001 consolidated liquid assets totaled $119.2 million or 17.1% of total assets as compared to $132.0 million or 18.7% (per the Annual Report) of total consolidated assets on December 31, 2000. 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 $61,668,000 at March 31, 2001 compared to $59,854,000 at December 31, 2000. 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. Under the regulations, capital requirements are based upon the composition of an institution's asset base and the risk factors assigned to those assets. The guidelines characterize an institution's capital as being "Tier 1" capital (defined to be principally shareholders' equity less intangible assets) and "Tier 2" capital (defined to be principally the allowance for loan losses, limited to one and one-fourth percent of gross risk weighted assets). The guidelines require the Company and the Bank to maintain a risk-based capital target ratio of 8%, one-half or more of which should be in the form of Tier 1 capital. 14 The following table shows the Company's and the Bank's actual capital amounts and ratios at March 31, 2001 and December 31, 2000 as well as the minimum capital ratios for capital adequacy under the regulatory framework:
For Capital Actual Adequacy Purpose: Company Amount Ratio Amount Ratio ------- ------ ----- ------ ----- As of March 31, 2001 -------------------- Total Capital (to Risk Weighted Assets): 67,624,000 12.3% 44,126,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 60,731,000 11.0% 22,063,000 4.0% Tier 1 Capital (to Average Assets): 60,731,000 8.9% 27,229,000 4.0% As of December 31, 2000: ------------------------ Total Capital (to Risk Weighted Assets): 66,892,000 12.3% 43,490,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 60,098,000 11.1% 21,745,000 4.0% Tier 1 Capital (to Average Assets): 60,098,000 9.1% 26,344,000 4.0%
For Capital Actual Adequacy Purpose: Community Bank Amount Ratio Amount Ratio -------------- ------ ----- ------ ----- As of March 31, 2001: Total Capital (to Risk Weighted Assets): 66,668,000 12.10% 43,916,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 59,774,000 10.90% 21,958,000 4.0% Tier 1 Capital (to Average Assets): 59,774,000 8.80% 27,136,000 4.0% As of December 31, 2000: Total Capital (to Risk Weighted Assets): 63,866,000 11.80% 43,273,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 57,073,000 10.60% 21,637,000 4.0% Tier 1 Capital (to Average Assets): 57,073,000 8.70% 26,251,000 4.0%
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. 15 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 2000 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 $2,731,000 in net interest income. Conversely, a 200 basis point decrease would result in a decrease of $3,310,000 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 2000. Other Matters ------------- The State of California is presently experiencing serious periodic electric power shortages. It is uncertain whether or when these shortages will be discontinued. The Company and the Bank could be materially and adversely affected either directly or indirectly by a severe electric power shortage if such a shortage caused any of its critical data processing or computer systems and related equipment to fail, or if the local infrastructure systems such as telephone systems should fail, or the Company's and the Bank's significant vendors, suppliers, service providers, customers, borrowers, or depositors are adversely impacted by their internal systems or those of their respective customers or suppliers. Material increases in the expenses related to electric power consumption and the related increase in operating expense could also have an adverse effect on the Company's and the Bank's future results of operations. 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. 16 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. *(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. 17 *(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 for directors and executive officers, 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 10-K, filed with the Commission on March 31, 1997. (21.1) The Registrant's only subsidiary is its wholly-owned subsidiary, Community Bank of Central California. *Denotes management contracts, compensatory plans or arrangements. (b) Reports on Form 8-K The Company filed two reports on Form 8-K during the first quarter of 2001 as follows: (1) Report on Form 8-K filed January 23, 2001 reporting a press release dated January 23, 2001 regarding the Company's operating results for the year ended December 31, 2000. (2) Report on Form 8-K filed February 28, 2001 reporting a press release dated February 28, 2001 regarding the announcement of a new stock repurchase program upon the completion of the previous stock repurchase program. 18 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 8, 2001 CENTRAL COAST BANCORP By:/S/ ROBERT M. STANBERRY ------------------------ Robert M. Stanberry (Chief Financial Officer and Principal Accounting Officer) 19