-----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, Nbu0YdAyyJ1DamdCY0fv7V/11j2pvvHY5wkeQRWoaj7btTk7ROzVsBjMOFBbS5sC dfUgZM8MKvlsyTGD69BBRA== 0000921085-01-500011.txt : 20010815 0000921085-01-500011.hdr.sgml : 20010815 ACCESSION NUMBER: 0000921085-01-500011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL COAST BANCORP CENTRAL INDEX KEY: 0000921085 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770367061 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25418 FILM NUMBER: 1709494 BUSINESS ADDRESS: STREET 1: 301 MAIN ST CITY: SALINAS STATE: CA ZIP: 93901 BUSINESS PHONE: 4084226642 MAIL ADDRESS: STREET 1: 301 MAIN STREET CITY: SALINAS STATE: CA ZIP: 93901 FORMER COMPANY: FORMER CONFORMED NAME: SALINAS VALLEY BANCORP DATE OF NAME CHANGE: 19940330 10-Q 1 tenq.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 June 30, 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 - 7,204,720 shares outstanding at July 30, 2001 . Page 1 of 45 The Index to the Exhibits is located at Page 25 1
PART 1-FINANCIAL INFORMATION Item 1.FINANCIAL STATEMENTS: CENTRAL COAST BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) June 30, December 31, (In thousands, except per share data) 2001 2000 ---- ---- Assets Cash and due from banks $ 51,817 $ 51,411 Federal funds sold 29,324 23,081 ------------ ------------ Total cash and equivalents 81,141 74,492 Available-for-sale securities(amortized cost of $151 at 151,225 152,276 June 30, 2001 and $154 at December 31, 2000) Loans: Commercial 163,288 171,631 Real estate-construction 81,864 57,780 Real estate-other 248,991 234,890 Consumer 14,915 9,840 Deferred loan fees, net (960) (746) ------------ ------------ Total loans 508,098 473,395 Allowance for loan losses (9,509) (9,371) ------------ ------------ Net Loans 498,589 464,024 ------------ ------------ Premises and equipment, net 3,219 3,735 Accrued interest receivable and other assets 11,962 12,166 ------------ ------------ Total assets $ 746,136 $ 706,693 ============ ============ Liabilities and Shareholders' Equity Deposits: Demand, noninterest bearing $ 181,355 $ 207,002 Demand, interest bearing 101,011 88,285 Savings 135,907 110,204 Time 254,474 227,719 ------------ ------------ Total Deposits 672,747 633,210 Accrued interest payable and other liabilities 11,337 13,629 ------------ ------------ Total liabilities 684,084 646,839 ------------ ------------ 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: 7,201,625 shares at June 30, 2001 and 6,721,998 shares at December 31, 2000 51,757 44,472 Shares held in deferred compensation trust (299,048 at June 30, 2001 and 271,862 at December 31, 2000), net of deferred obligation - - Retained earnings 10,425 16,444 Accumulated other comprehensive loss - net of taxes of $139 at June 30, 2001 and $738 at December 31, 2000 (130) (1,062) ------------ ------------ Shareholders' equity 62,052 59,854 ------------ ------------ Total liabilities and shareholders' equity $ 746,136 $ 706,693 ============ ============ See Notes to Consolidated Condensed Financial Statements
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CENTRAL COAST BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share data) 2001 2000 2001 2000 ---- ---- ---- ---- Interest Income Loans (including fees) $ 10,709 $ 10,150 $ 21,734 $ 19,363 Investment securities 2,122 2,197 4,325 4,433 Other 113 271 305 387 --------------- -------------- ----------------- ----------------- Total interest income 12,944 12,618 26,364 24,183 --------------- -------------- ----------------- ----------------- Interest Expense Interest on deposits 4,729 4,365 9,562 8,279 Other 94 72 187 220 --------------- -------------- ----------------- ----------------- Total interest expense 4,823 4,437 9,749 8,499 --------------- -------------- ----------------- ----------------- Net Interest Income 8,121 8,181 16,615 15,684 Provision for Loan Losses 75 800 195 1,326 --------------- -------------- ----------------- ----------------- Net Interest Income after Provision for Loan Losses 8,046 7,381 16,420 14,358 --------------- -------------- ----------------- ----------------- Noninterest Income 775 631 1,425 1,177 --------------- -------------- ----------------- ----------------- Noninterest Expenses Salaries and benefits 2,869 2,467 5,871 4,847 Occupancy 385 345 822 678 Furniture and equipment 456 412 911 800 Other 1,066 1,112 2,111 2,131 --------------- -------------- ----------------- ----------------- Total noninterest expenses 4,776 4,336 9,715 8,456 --------------- -------------- ----------------- ----------------- Income Before Income Taxes 4,045 3,676 8,130 7,079 Provision for Income Taxes 1,522 1,433 3,048 2,760 --------------- -------------- ----------------- ----------------- Net Income $ 2,523 $ 2,243 $ 5,082 $ 4,319 =============== ============== ================= ================= Basic Earnings per Share $ 0.35 $ 0.29 $ 0.70 $ 0.55 Diluted Earnings per Share $ 0.33 $ 0.28 $ 0.66 $ 0.54 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) Six months ended June 30, 2001 2000 ---- ---- Cash Flows from Operations: Net income $ 5,082 $ 4,319 Reconciliation of net income to net cash provided by operating activities: Provision for loan losses 195 1,326 Net gain on sale of investments (3) Net loss on sale of fixed assets 1 18 Depreciation 690 592 Amortization and accretion 193 102 Decrease (increase) in accrued interest receivable and other assets (523) 544 Increase (decrease) in accrued interest payable and other liabilities (2,144) 528 Increase in deferred loan fees 214 8 ---------------- -------------- Net cash provided by operations 3,705 7,437 ---------------- -------------- Cash Flows from Investing Activities: Purchases of investment securities (88,520) (10,209) Proceeds from maturities of investment securities 38,223 7,884 Proceeds from sale of investment securities 52,817 - Net increase in loans (34,974) (30,388) Purchases of premises and equipment (175) (571) ---------------- -------------- Net cash used in investing activities (32,629) (33,284) ---------------- -------------- Cash Flows from Financing Activities: Net increase in deposit accounts 39,537 65,762 Net decrease in short-term borrowings - (12,662) Net decrease in long-term borrowings (148) (138) Proceeds from issuance of stock 67 58 Shares repurchased (3,883) (2,654) ---------------- -------------- Net cash provided by financing activities 35,573 50,366 ---------------- -------------- Net increase in cash and equivalents 6,649 24,519 Cash and equivalents, beginning of period 74,492 39,959 ---------------- -------------- Cash and equivalents, end of period $ 81,141 $ 64,478 ================ ============== Other Cash Flow Information: Interest paid $ 9,642 $ 8,109 Income taxes paid 4,737 3,410 See Notes to Consolidated Condensed Financial Statements
4 CENTRAL COAST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS June 30, 2001 (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 Central Coast Bancorp's (the "Company's") consolidated financial position at June 30, 2001 and December 31, 2000, the results of operations for the three and six month periods ended June 30, 2001 and 2000 and cash flows for the six month periods ended June 30, 2001 and 2000. Certain disclosures normally presented in the notes to the 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 and six month periods ended June 30, 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 $175,572,000 and standby letters of credit of $3,451,000 at June 30, 2001. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 2001. Approximately $44,141,000 of loan commitments outstanding at June 30, 2001 are for real estate construction loans and are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these 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 (7,220,000 and 7,288,000 for the three and six month periods ended June 30, 2001, and 7,664,000 and 7,720,000 for the three and six month periods ended June 30, 2000). Diluted earnings per share reflect 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 (348,000 and 324,000 for the three and six month periods ended June 30, 2001 and 211,000 and 214,000 for the three and six month periods ended June 30, 2000). 4. COMPREHENSIVE EARNINGS
Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2001 2000 2001 2000 ---- ---- ---- ---- Net Earnings $ 2,523 $ 2,243 $ 5,082 $ 4,319 Other comprehensive income (loss)- Net unrealized gain (loss) on available-for-sale securities (316) 216 934 160 Reclassification adjustment for gains included in income, net of taxes of $2 and $1 for the three and six month periods ended June 30, 2001 (3) - (2) - -------------- -------------- ------------- -------------- Total comprehensive earnings $ 2,204 $ 2,459 $ 6,014 $ 4,479 ============== ============== ============= ==============
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 authorized stock repurchase programs 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. As of June 30, 2001, approximately 272,608 shares are remaining 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 assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, and 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 - -------- For the second quarter 2001, Central Coast Bancorp reported diluted earnings per share of $0.33, a 17.9% increase over the $0.28 reported in the year earlier period. Net income for the quarter ended June 30, 2001 was $2,523,000, which is a 12.5% increase over the $2,243,000 reported for the same period of 2000. The return on equity (ROE) and the return on assets (ROA) for the second quarter 2001 were 16.7% and 1.44% as compared to 16.5% and 1.45% for the same period in 2000. 7 Net income for the six months ended June 30, 2001 and 2000 was $5,082,000 and $4,319,000 with diluted earnings per share of $.66 and $.54, respectively. For the first six months of 2001 ROE was 16.8% and ROA was 1.48% as compared to 16.0% and 1.42% for the same period in 2000. The earnings per share for the 2000 periods have been adjusted for the 10% stock dividend distributed in February 2001. At June 30, 2001, the Company had assets totaling $746,136,000, a quarter end record. On a year over year basis, internal growth has generated an increase in assets of $97,319,000 (15.0%); an increase in loans of $82,025,000 (19.3%); and an increase in deposits of $88,796,000 (15.2%). Deposit balances at June 30, 2001 included $10,000,000 of State of California certificates of deposit versus $40,000,000 at June 30, 2000. This difference of $30,000,000 represents additional growth in the Company's core customer base. Central Coast Bancorp ended the second quarter of 2001 with a Tier 1 capital ratio of 10.6% and a total risk-based capital ratio of 11.9% versus 11.8% and 13.1%, respectively, at the end of the second quarter of 2000. The following table provides a summary of the major elements of income and expense for the periods indicated.
Condensed Comparative Income Statement Percentage Percentage Three Months Ended Change Six Months Ended Change June 30, Increase June 30, Increase (In thousands, except percentages) 2001 2000 (Decrease) 2001 2000 (Decrease) ---- ---- ---------- ---- ---- ---------- Interest Income (1) $ 13,225 $ 12,815 3% $ 26,903 $ 24,575 9% Interest Expense 4,822 4,437 9% 9,749 8,499 15% ---------- ---------- ---------- --------- --------- --------- Net interest income 8,403 8,378 0% 17,154 16,076 7% Provision for Loan Losses 75 800 -91% 195 1,326 -85% ---------- ---------- ---------- --------- --------- --------- Net interest income after provision for loan losses 8,328 7,578 10% 16,959 14,750 15% Noninterest Income 775 631 23% 1,425 1,177 21% Noninterest Expense 4,776 4,336 10% 9,715 8,456 15% ---------- ---------- ---------- --------- --------- --------- Income before income taxes 4,327 3,873 12% 8,669 7,471 16% Provision for Income Taxes 1,522 1,433 6% 3,048 2,760 10% Tax Equivalent Adjustment 282 197 43% 539 392 38% ---------- ---------- ---------- --------- --------- --------- Net income $ 2,523 $ 2,243 12% $ 5,082 $4,319 18% ========== ========== ========== ========= ========= ========= 1) Interest on tax-free securities is reported on tax equivalent basis.
Net interest income / net interest margin - ----------------------------------------- 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. Net interest margin is net interest income expressed as a percentage of average earning assets. Net interest income for the second quarter of 2001 was $8,403,000, which was an increase of $25,000 over the second quarter of 2000. The interest income component was up $410,000 (3.2%). Average loan balances were $73,101,000 (17.8%) higher in the second quarter of 2001 versus the year earlier period. This volume difference added $1,808,000 to interest income. Since the beginning of 2001, there have been six prime rate decreases totaling 275 basis points as a result of actions taken by the Federal Reserve Board. Due to the lower rates and the mix between fixed and variable rate loans in the portfolio, the average loan yield for the second quarter of 2001 was 106 basis points lower than the average yield in the year earlier quarter. The lower loan yield decreased interest income by $1,249,000. The average balance of investment securities in the second quarter of 2001 was higher by $4,419,000 (3.0%) over the second quarter of 2000. Average balances for Federal funds sold for these two periods decreased $5,809,000 to $10,978,000. Interest income for the investing activities decreased $149,000 on a period over period basis. 8 Interest expense was $385,000 (8.7%) higher in the second quarter of 2001 versus the prior year period. Average balances of interest-bearing liabilities were higher by $51,360,000 (12.1%), which added $588,000 to interest expense. Average rates paid on interest-bearing liabilities were down 14 basis points on a quarter over quarter basis. The lower rates decreased interest expense by $203,000. The net interest margin for the second quarter of 2001 was 5.20% as compared to 5.85% in the year earlier period. As compared to the net interest margin for the first quarter 2001, the second quarter's net interest margin was down 49 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. As 125 basis points of the 2001 decreases were made throughout the second quarter, the full effect of these rate cuts will be reflected in the net interest margin for the third quarter 2001. For the six-month period ending June 30, 2001, net interest income increased $1,078,000 (6.7%) over the first six months of 2000. The interest income component increased $2,328,000 to $26,903,000. Average balances of earning assets were $72,918,000 (12.9%) higher in the first six months of 2001 than the same period in 2000. The average balance of loans was $72,580,000 higher, which accounted for $3,498,000 of the increase in interest income. The average yield received on loans in the first six months of 2001 was 46 basis points lower than the 9.72% received in the year earlier period. The lower yield on loans decreased interest income by $1,127,000. The average balances of investment securities and Federal funds sold in the first six months of 2001 were basically flat to the year earlier period. Interest income for these investing activities decreased $43,000 on a period over period basis because of lower rates. In the first half of 2000, the prime interest rate was raised three times for a total of 100 basis points. In the first half of 2001 interest rates were lowered six times for a total of 275 basis points. The blended effect of these changes has resulted in a 24 basis point decrease in average rates received on earning assets in the first half of 2001 versus the yields earned in the same period of 2000. Interest expense for the six-month period increased $1,250,000 (14.7%) from the expense in the same 2000 period. Volume increases in deposits added $1,160,000 of interest expense. Overall average rates paid on interest-bearing liabilities in the first six months of 2001 increased 13 basis points to 4.26% from the same period in 2000. The interest expense increase attributable to the higher rates was $116,000. Lower volume in borrowings in 2001 decreased interest expense $26,000. Net interest margin for the first six months of 2001 was 5.44% versus 5.74% in the year earlier period. The first two following tables provide a summary of the components of net interest income and the changes within the components for the periods indicated. The second two tables set 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. 9
(Unaudited) Three months ended June 30 , (Taxable Equivalent Basis) 2001 2000 Avg. Avg. Avg. Avg. (In thousands, except percentages) Balance Interest Yield Balance Interest Yield ------- -------- ----- ------- -------- ----- Assets: Earning Assets Loans (1) (2) $ 484,536 $ 10,709 8.86% $ 411,435 $10,150 9.92% Taxable investments 102,866 1,558 6.08% 112,353 1,805 6.46% Tax-exempt securities (tax equiv. basis) 49,706 845 6.81% 35,800 588 6.61% Federal funds sold 10,978 113 4.13% 16,787 272 6.52% ------------ ----------- ------------ ------------ Total Earning Assets 648,086 $ 13,225 8.18% 576,375 $12,815 8.94% ----------- ------------ Cash & due from banks 42,500 38,201 Other assets (4) 14,249 7,615 ------------ ------------ $ 704,835 $ 622,191 ============ ============ Liabilities & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 98,440 $ 332 1.35% $97,755 $ 392 1.61% Savings 123,679 984 3.19% 99,037 856 3.48% Time deposits 245,628 3,412 5.57% 221,695 3,117 5.65% Other borrowings 6,581 94 5.73% 4,481 72 6.46% ------------ ----------- ------------ ------------ Total interest bearing liabilities 474,328 4,822 4.08% 422,968 4,437 4.22% ----------- ------------ Demand deposits 163,370 139,707 Other Liabilities 6,183 5,028 ------------ ------------ Total Liabilities 643,881 567,703 Shareholders' Equity 60,954 54,488 ------------ ------------ $ 704,835 $ 622,191 ============ ============ Net interest income & margin (3) $ 8,403 5.20% $ 8,378 5.85% =========== ========= ============ ========= - --------------------------------------------------------------------------------------------------------------------------- (1) Loan interest income includes fee income of $347,000 and $238,000 for the three month periods ended June 30, 2001 and 2000, respectively. (2) Includes the average allowance for loan losses of $9,455,000 and $6,422,000 and average deferred loan fees of $966,000 and $738,000 for the three months ended June 30, 2001 and 2000, respectively. (3) Net interest margin is computed by dividing net interest income by the total average earning assets. (4) Includes the unrealized loss on available-for-sale securities.
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(Unaudited) Six months ended June 30 , (Taxable Equivalent Basis) 2001 2000 Avg. Avg. Avg. Avg. (In thousands, except percentages) Balance Interest Yield Balance Interest Yield ------- -------- ----- ------- -------- ----- Assets: Earning Assets Loans (1) (2) $473,106 $21,734 9.26% $400,526 $19,363 9.72% Taxable investments 103,173 3,247 6.35% 114,387 3,650 6.42% Tax-exempt securities (tax equiv. basis) 47,697 1,617 6.84% 35,813 1,175 6.60% Federal funds sold 12,229 305 5.03% 12,561 387 6.20% ------------ ---------- ------------ ----------- Total Earning Assets 636,205 $26,903 8.53% 563,287 $24,575 8.77% ---------- ----------- Cash & due from banks 42,089 37,704 Other assets (4) 14,552 7,829 ------------ ------------ $692,846 $608,820 ============ ============ Liabilities & Shareholders' Equity: Interest bearing liabilities: Demand deposits $93,543 $ 660 1.42% $97,221 $ 797 1.65% Savings 122,253 2,069 3.41% 100,620 1,731 3.46% Time deposits 239,380 6,833 5.76% 209,445 5,751 5.52% Other borrowings 6,147 187 6.13% 6,976 220 6.34% ------------ ---------- ------------ ----------- Total interest bearing liabilities 461,323 9,749 4.26% 414,262 8,499 4.13% ---------- ----------- Demand deposits 163,521 135,172 Other Liabilities 6,952 5,192 ------------ ------------ Total Liabilities 631,796 554,626 Shareholders' Equity 61,050 54,194 ------------ ------------ $692,846 $608,820 ============ ============ Net interest income & margin (3) $17,154 5.44% $16,076 5.74% ========== ======== =========== ======== - ---------------------------------------------------------------------------------------------------------------------------- (1) Loan interest income includes fee income of $679,000 and $474,000 for the six month periods ended June 30, 2001 and 2000, respectively (2) Includes the average allowance for loan losses of $9,434,000 and $6,110,000 and average deferred loan fees of $921,000 and $712,000 for the six months ended June 30, 2001 and 2000, respectively. (3) Net interest margin is computed by dividing net interest income by the total average earning assets. (4) Includes the unrealized loss on available-for-sale securities.
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Volume/Rate Analysis (in thousands) Three Months Ended June 30, 2001 over 2000 Increase (decrease) due to change in: Net Interest-earning assets: Volume Rate (5) Change ------ -------- ------ Net Loans (1)(2) $ 1,808 $(1,249) $ 559 Taxable investment securities (153) (94) (247) Tax exempt investment securities (4) 229 28 257 Federal funds sold (94) (65) (159) ------------- ------------- ------------- Total 1,790 (1,380) 410 ------------- ------------- ------------- Interest-bearing liabilities: Demand deposits 3 (63) (60) Savings deposits 214 (86) 128 Time deposits 337 (42) 295 Other borrowings 34 (12) 22 ------------- ------------- ------------- Total 588 (203) 385 ------------- ------------- ------------- Interest differential $ 1,202 $(1,177) $ 25 ============= ============= ============= (1) The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans. (2) Loan fees of $347,000 and $238,000 for the quarters ended June 30, 2001 and 2000, respectively have been included in the interest income computation. (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.
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Volume/Rate Analysis (in thousands) Six Months Ended June 30, 2001 over 2000 Increase (decrease) due to change in: Net Interest-earning assets: Volume Rate (5) Change ------ -------- ------ Net Loans (1)(3) $ 3,498 $(1,127) $ 2,371 Taxable investment securities (357) (46) (403) Tax exempt investment securities (4) 389 53 442 Federal funds sold (10) (72) (82) ------------- ------------- ------------- Total 3,520 (1,192) 2,328 ------------- ------------- ------------- Interest-bearing liabilities: Demand deposits (30) (107) (137) Savings deposits 371 (33) 338 Time deposits 819 263 1,082 Other borrowings (26) (7) (33) ------------- ------------- ------------- Total 1,134 116 1,250 ------------- ------------- ------------- Interest differential $ 2,386 $(1,308) $ 1,078 ============= ============= ============= (1) The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans. (2) Loan fees of $347,000 and $238,000 for the quarters ended June 30, 2001 and 2000, respectively, have been included in the interest income computation. (3) Loan fees of $679,000 and $474,000 for the six months ended June 30, 2001 and 2000, respectively, have been included in the interest income computation. (4) 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. (5) The rate / volume variance has been included in the rate variance.
Provision for Loan Losses - ------------------------- The Bank provided $75,000 for loan losses in the second quarter of 2001 as compared to $800,000 in the second quarter of 2000. For the six-month period ended June 30, 2001, the Bank provided $195,000 versus $1,326,000 in the year earlier period. Due to loan growth, changing portfolio mix and prevailing local economic conditions in 2000, the Bank modified its factors used in determining its allowance for loan losses. These changes resulted in higher loan loss provisions than had been required previously. The provision for loan losses that has been recorded in 2001 has been based on factors and methodologies consistent with those used in 2000. The ratios of the allowance for loan losses to total loans at each quarter end were 1.87% and 1.65%, respectively. Noninterest Income - ------------------ Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. Noninterest income totaled $775,000 in the second quarter of 2001, which was up $144,000 (22.8%) over the same period in 2000. Service charges on deposit accounts were up $45,000 due to volume increases. Commissions on mortgage originations were up $75,000 (175.7%) as refinance activity continued to be very active. Other increases were generally due to higher business volumes. 13 For the first six-months of 2001, noninterest income was $1,425,000 versus $1,177,000 in the same period last year. Service charges on deposits were up $110,000 (13.9%) due to higher volumes. Other fees were $135,000 (48.2%) higher in the first half of 2001. Most of this increase was due to the significantly higher volume of mortgage originations. As the interest rates decreased during the first half of 2001, the activity in residential mortgage lending picked up significantly. Noninterest Expense - ------------------- Noninterest expenses increased $440,000 (10.1%) to a total of $4,776,000 in the second quarter of 2001 versus second quarter 2000. Salary and employee benefits increased $402,000 (16.3%) because of additional staff due to the two new branches opened in 2000, internal growth, higher benefit costs, and normal salary increases. On a quarter over quarter basis, premises and fixed asset expenses were higher by $84,000 (11.1%). Costs of the two new branches, the California energy shortage and higher business volume contributed to the increase. Other expenses for the second quarter of 2001 were $1,066,000 down from $1,112,000 in the prior year quarter. Management has implemented expense control measures in view of the weaker economy and lower interest rates. The efficiency ratio for the two quarters was 52.0% and 48.1%, respectively. Noninterest expenses for the six-month period ending June 30, 2001 were $9,715,000 versus $8,456,000 for the same period in 2000. Salaries and benefits increased $1,024,000 (21.1%) due to the same factors discussed in the previous paragraph. Premises and fixed asset expenses were up $255,000 (17.3%) due to the items as detailed in the previous paragraph. Other expenses decreased $20,000 (0.9%). The efficiency ratio for the first six-months of 2001 was 52.3% as compared to 49.0% in the same period of 2000. Provision for Income Taxes - -------------------------- The effective tax rate for the second quarter and first six-months of 2001 was 37.6% and 37.5, respectively, versus 39.0% for both periods of 2000. The estimated tax rates in 2001 are lower as tax exempt loans and investment securities are a higher percentage of income. Securities - ---------- At June 30, 2001, available-for-sale securities had a market value of $151,225,000 with an amortized cost basis of $151,494,000. The unrealized loss of $269,000 at June 30, 2001 represented a decrease of $545,000 from the unrealized gain of $276,000 at March 31, 2001. The unrealized loss was the result of the changes in the yield curve and market spreads in the securities markets in the second quarter. Loans - ----- Ending loan balances at June 30, 2001 were $508,098,000, which was an increase of $34,703,000 (7.3%) from year-end 2000 balances and $82,025,000 (19.3%) from June 30, 2000 balances. All categories of loans were higher on a year over year basis. Real estate construction has been particularly strong with growth of $44,435,000 (118.7%) over June 30, 2000 balances. The construction projects cover a broad spectrum of economic activity in the Bank's market including the tourism industry, agricultural industry, other commercial enterprises as well as residential construction. Loan demand has remained brisk into the third quarter, however, the continuing effects of the general economy on loan demand are uncertain. Nonperforming 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. 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 14 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 nonperforming assets:
(In thousands, except percentages) June 30, December 31, 2001 2000 ------------------- ------------------ Past due 90 days or more and still accruing : Real estate $ 3,055 $ 10 Commercial 721 215 Consumer and other 1 5 ------------------- ------------------ 3,777 230 ------------------- ------------------ Nonaccrual: Real estate 101 - Commercial 109 329 Consumer and other 15 - ------------------- ------------------ 225 329 ------------------- ------------------ Total nonperforming assets $ 4,002 $ 559 =================== ================== Allowance for loan losses as a percentage of nonperforming loans 238% 1676% Nonperforming loans to total loans 0.79% 0.12%
Nonperforming loans increased $3,527,000 during the second quarter of 2001. A single loan accounted for 80% of the increase. Subsequent to quarter end, a payment was received on that loan, which brought the loan under 90 days past due. Management is closely monitoring these past due loans and is actively pursuing collection of them. At quarter end, the nonperforming assets were 0.54% of total assets and 0.79% of total loans. This compared to 0.07% and 0.10% at March 31, 2001. At June 30, 2001, the recorded investment in loans that are considered impaired under SFAS No. 114 was $1,347,000 of which $45,000 are included in nonaccrual loans above. Valuation allowances were computed on all impaired loans and totled $366,000 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 June 30, 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 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. 15 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 June 30, 2001, the Company had outstanding real estate and real estate construction loans totaling approximately $330,855,000, which represented 65% 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 creditworthiness, 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 June 30, 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. 16 The following table summarizes activity in the allowance for loan losses for the periods indicated:
Three months ended June 30, Six months ended June 30, (In thousands, except percentages) 2001 2000 2001 2000 ---- ---- ---- ---- Beginning balance $ 9,427 $ 6,136 $ 9,371 $ 5,596 Provision charged to expense 75 800 195 1,326 Loans charged off (17) (3) (104) (19) Recoveries 24 85 47 115 -------------- ------------- ------------- ------------- Ending balance $ 9,509 $ 7,018 $ 9,509 $ 7,018 ============== ============= ============= ============= Ending loan portfolio $508,098 $426,073 ============= ============= Allowance for loan losses as percentage of ending loan portfolio 1.87% 1.65%
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 June 30, 2001 were approximately $175,572,000 and $3,451,000, respectively. Such loans relate primarily to revolving lines of credit and other commercial loans, and to real estate construction loans. The Company's sources of liquidity consist of overnight funds sold to correspondent banks, unpledged short-term marketable investments, and salable SBA loans. On June 30, 2001 consolidated liquid assets totaled $135.5 million or 18.2% of total assets as compared to $140.0 million or 19.8% 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 $62,052,000 at June 30, 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. 17 The following table shows the Company's actual capital amounts and ratios at June 30, 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 June 30, 2001: - ------------------- Total Capital (to Risk Weighted Assets): 68,702,000 11.9% 46,110,232 8.0% Tier 1 Capital (to Risk Weighted Assets): 61,498,000 10.6% 23,055,000 4.0% Tier 1 Capital (to Average Assets): 61,498,000 8.7% 28,193,000 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 June 30, 2001: - -------------------- Total Capital (to Risk Weighted Assets): 66,563,000 11.6% 45,925,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 59,358,000 10.3% 22,962,000 4.0% Tier 1 Capital (to Average Assets): 59,358,000 8.5% 28,109,000 4.0% As of December 31, 2000: - ------------------------ Total Capital (to Risk Weighted Assets): 63,866,000 11.8% 43,273,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 57,073,000 10.6% 21,637,000 4.0% Tier 1 Capital (to Average Assets): 57,073,000 8.7% 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. 18 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 May 31, 2001 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 $2,869,000 in net interest income. Conversely, a 200 basis point decrease would result in a decrease of $3,451,000 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 California Power Crisis - ----------------------- The State of California is presently experiencing serious periodic electric power shortages. It is uncertain whether or when these shortages will be discontinued. However, conservation efforts and unanticipated cooler weather conditions through the end of the second quarter of 2001 have resulted in lower demand for electricity throughout California. California has initiated action to supplement conservation efforts including acceleration of the approval process for development of new energy production facilities and entering into long-term energy contracts for the supply of electricity. Despite these efforts and the fact that during the second quarter of 2001, wholesale prices for electricity supplied to California declined and electricity in excess of current needs was available for sale to other states, it is currently anticipated that an increase in demand for electricity and concomitant power shortages will occur during the months of August and September if customary weather patterns prevail resulting in higher temperatures and greater reliance upon air conditioning in certain regions of California. The Company and its subsidiaries 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 its subsidiaries' 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 future results of operations. Accounting Pronouncements - ------------------------- The Financial Standards Accounting Board ("FASB") adopted Statement of Financial Accounting Standards No. 141, "Business Combinations" covering elimination of pooling accounting treatment in business combinations and financial accounting and reporting for acquired goodwill and other intangible assets at acquisition. SFAS No. 141 supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises" and is effective for transactions initiated after June 30, 2001. Under SFAS No. 141, all mergers and business combinations initiated after the effective date must be accounted for as "purchase" transactions. A merger or business combination was considered initiated if the major terms of the transaction, including the exchange or conversion ratio, were publicly announced or otherwise disclosed to shareholders of the combining companies prior to the effective date. Goodwill in any merger or business combination which is not initiated prior to the effective date will be recognized as an asset in the financial statements, measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed, and then tested for impairment to assess losses and expensed against earnings only in 19 the periods in which the recorded value of goodwill exceeded its implied fair value. The FASB concurrently adopted SFAS No. 142, "Goodwill and Other Intangible Assets" to address financial accounting and reporting for acquired goodwill and other intangible assets at acquisition in transactions other than business combinations covered by SFAS No. 141, and the accounting treatment of goodwill and other intangible assets after acquisition and initial recognition in the financial statements. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets" and is required to be applied at the beginning of an entity's fiscal year to all goodwill and other intangible assets recognized in its financial statements at that date, for fiscal years beginning after December 15, 2001. It is not certain what effect SFAS No. 141 and SFAS No. 142 may have upon the pace of business combinations in the banking industry in general or upon prospects of any merger or business combination opportunities involving the Company in the future. 20 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. THE FOLLOWING ARE THE VOTING RESULTS OF THE REGISTRANTS'S ANNUAL MEETING OF THE SHAREHOLDERS HELD ON JUNE 11, 2001: PROPOSAL NO. 1 - ------------------------------ AMENDMENT OF THE ARTICLES AND BYLAWS TO PROVIDE FOR THE CLASSIFICATION OF THE BOARD OF DIRECTORS. FOR 3,776,209 AGAINST 195,046 ABSTAIN 32,749 PROPOSAL NO. 2 - ------------------------------ AMENDMENT OF THE ARTICLES AND BYLAWS TO ELIMINATE CUMULATIVE VOTING IN THE ELECTION OF DIRECTORS. FOR 3,886,116 AGAINST 71,917 ABSTAIN 45,971 PROPOSAL NO. 3 - ------------------------------ ELECTION OF DIRECTORS AFFIRMATIVE NOMINEE VOTES - ---------- ---------- C. EDWARD BOUTONNET (Class 3) 5,572,727 BRADFORD G. CRANDALL (Class 3) 5,572,753 ALFRED P. GLOVER (Class 1) 5,578,777 MICHAEL T. LAPSYS (Class 2) 5,578,711 DUNCAN L. McCARTER (Class 2) 5,572,753 ROBERT M. MRAULE, D.D.S., M.D. (Class 3) 5,578,711 LOUIS A. SOUZA (Class 1) 5,578,711 MOSE E. THOMAS, JR. (Class 1) 5,572,753 NICK VENTIMIGLIA (Class 2) 5,577,743 21 PROPOSAL NO.4 - ------------------------------ APPROVAL OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE 2001 FISCAL YEAR. FOR 5,579,984 AGAINST 6,723 ABSTAIN 21,426 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, as amended. (3.2) Bylaws, as amended. (4.1) Specimen form of Central Coast Bancorp stock certificate incorporated by reference from the Registrant'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 Registrant's 1994 Annual Report on Form 10-K 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. 22 *(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 Registrant'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 Registrant'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 Registrant'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 - A current report on Form 8-K was filed with the Commission on June 18, 2001 to report the results of the shareholder vote on amending the Company's articles and bylaws, the election of directors and approval of the independent auditors. The results of the vote are reported in Item 4 above. 23 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. July 30, 2001 CENTRAL COAST BANCORP By:/s/ ROBERT M STANBERRY -------------------------- Robert M. Stanberry (Chief Financial Officer,Principal Financial and Accounting Officer) 24 EXHIBIT INDEX Exhibit Number Description Page - ------ ----------- ---- 3.1 Articles of Incorporation 26 3.2 Bylaws 29 25 EX-3.(I) 3 exhibit3x1.txt ARTICLES OF INCORPORATION OF SALINAS VALLEY BANCORP The undersigned incorporator, for the purpose of forming a corporation under the General Corporation Law of the State of California, hereby declares: I The name of the corporation is Salinas Valley Bancorp. II The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III The name and address in the State of California of the corporation's Initial Agent for Service of Process is: John McCarthy, 301 Main Street, Salinas, California 93901. IV The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Twenty Million (20,000,000). The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. V The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. VI This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California General Corporation Law) for breach of duty to the corporation and its shareholders through bylaw provisions, agreements with agents, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California General Corporation Law, subject to the limits on such excess indemnification set forth in Section 204 of the California General Corporation Law. Dated: filed and certified by Secretary of State on February 24, 1994. 26 Article I of Central Coast Bancorp's Articles of Incorporation shall be amended in its entirety to read as follows: The name of the corporation is Central Coast Bancorp. Date of amendments: filed and certified by Secretary of State on December 28, 1994. 27 Article IV of the articles of incorporation of Bancorp is amended to read as follows: The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Twenty Million (20,000,000). Upon the amendment of this article, each outstanding share of Common Stock is split into 1.5 shares as of March 28, 1997. The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. Date of amendments: filed and certified by Secretary of State on April 14, 1997. 28 Article IV of the articles of incorporation of Bancorp is amended to read as follows: The corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Twenty Five Million (25,000,000). Upon the amendment of this article, each outstanding share of Common Stock is split into 1.25 shares. The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. Date of amendments: filed and certified by Secretary of State on February 8, 1999. 29 The articles of incorporation of Central Coast Bancorp shall be amended by adding thereto a new Article VII which shall read as set forth below: VII (a) The number of directors which shall constitute the whole board of directors of this corporation shall be specified in the bylaws of the corporation. (b) In the event that the authorized number of directors shall be fixed at nine (9) or more, the board of directors shall be divided into three classes: Class I, Class II and Class III, each consisting of a number of directors equal as nearly as practicable to one-third the total number of directors. Directors in Class I shall initially serve for a term expiring at the 2002 annual meeting of shareholders, directors in Class II shall initially serve for a term expiring at the 2003 annual meeting of shareholders, and directors in Class III shall initially serve for a term expiring at the 2004 annual meeting of shareholders. Thereafter, each director shall serve for a term ending at the third annual shareholders meeting following the annual meeting at which such director was elected. In the event that the authorized number of directors shall be fixed with at least six (6) but less than nine (9), the board of directors shall be divided into two classes, designated Class I and Class II, each consisting of one-half of the directors or as close an approximation as possible. At each annual meeting, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the second annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. The foregoing notwithstanding, each director shall serve until his or her successor shall have been duly elected and qualified, unless he or she shall resign, die, become disqualified or disabled, or shall otherwise be removed. (c) At each annual election, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the board of directors shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality in the number of directors among the classes. When the board of directors fills a vacancy resulting from the resignation, death, disqualification or removal of a director, the director chosen to fill that vacancy shall be of the same class as the director he or she succeeds, unless, by reason of any previous changes in the authorized number of directors, the board of directors shall designate the vacant directorship as a directorship of another class in order more nearly to achieve equality in the number of directors among the classes. (d) Notwithstanding the rule that the classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such will nevertheless continue as a director of the class of which he or she is a member, until the expiration of his current term or his or her earlier resignation, death, disqualification or removal. If any newly created directorship or vacancy on the board of directors, consistent with the rule that the three classes shall be as nearly equal in number of directors as possible, may be allocated to one or two or more classes, the board of directors shall allocate it to that of the available class whose term of office is due to expire at the earliest date following such allocation. 30 The articles of incorporation of Central Coast Bancorp shall be amended by adding thereto a new Article VIII which shall read as set forth below: VIII No holder of any class of stock of the corporation shall be entitled to cumulative voting in connection with any election of directors of the corporation. Date of amendments: filed and certified by Secretary of State on June 28, 2001 I, Linda Higley, Assistant Corporate Secretary, hereby confirm that all of the foregoing amendments as of the dates certified are full and complete copies of the articles as amended certified by the California Secretary of State as of the dates set forth. /s/ LINDA HIGLEY ------------------ Linda Higley (Assistant Corporate Secretary) 31 EX-3.(II) 4 exhibit3x2.txt BY-LAWS OF CENTRAL COAST BANCORP (A California Corporation) ARTICLE I Offices Section 1. Principal Office. The principal executive office in the State of California for the transaction of the business of the corporation (called the principal office) shall be 301 Main Street, Salinas, California in the County of Monterey. Subject to applicable regulatory authorization therefor, the Board of Directors shall have the authority from time to time to change the principal office from one location to another within the State by amending this Section 1 of the By-Laws. Section 2. Other Offices. Upon applicable regulatory authorization therefor, one or more branches or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within the State of California as it deems appropriate. ARTICLE II Meeting of Shareholders Section 3. Place of Meetings. Meetings of the shareholders shall be held at any place within the State of California that may be designated either by the Board of Directors in accordance with these By-Laws, or by the written consent of all persons entitled to vote at the meeting, given either before or after the meeting and filed with the Secretary of the corporation. If no such designation is made, the meetings shall be held at the principal office of the corporation. Section 4. Annual Meetings. The annual meeting of the shareholders shall be held on the third Thursday in April in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day, at the hour of 5:30 P.M., at which time the shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may properly be brought before the meeting. If the annual meeting of shareholders shall not be held on the date above specified, the Board of Directors shall cause such a meeting to be held as soon thereafter as convenient and any business transacted or election held at such meeting shall be as valid as if transacted or held at an annual meeting on the date above specified. Notice of proposals which shareholders intend to present at any annual meeting of shareholders and wish to be included in the proxy statement of management of the corporation distributed in connection with such annual meeting must be received at the principal executive offices of the corporation not less than 120 days prior to the date on which, during the previous year, management's proxy statement for the previous year's annual meeting was first distributed to shareholders. Any such proposal, and the proponent shareholder, must comply with the eligibility requirements set forth in Rule 14a-8 of the Securities and Exchange Commission. Section 5. Special Meetinqs. Special meetings of the shareholders, for any purpose or purposes whatsoever, may be called at any time by a majority of the Board of Directors, Chairman of the Board of Directors, the President, or by holders of shares entitled to cast not less than 10 percent (10%)of the votes at the meeting. Section 6. Notice of Shareholders' Meetings. Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 (or, if sent by third class mail, 30) nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and 32 (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to the provisions of Section 601(f) of the California Corporations Code, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California Corporations Code) on the record date for the shareholders' meeting, notice may be sent by third-class mail, or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal office of the corporation is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. If any notice addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. Upon request in writing to the Chairman of the Board of Directors, the President, a Vice President or the Secretary by any person entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. Section 7. Quorum. The presence at any meeting, in person or by proxy, of the persons entitled to vote a majority of the voting shares of the corporation shall constitute a quorum for the transaction of business. Shareholders present at a valid meeting at which a quorum is initially present may continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by persons voting more than 25 percent of the voting shares. Section 8. Adjourned Meeting. Any annual or special shareholders' meeting may be adjourned from time to time, even though a quorum is not present, by vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy, provided that in the absence of a quorum, no other business may be transacted at the meeting except as provided in Section 7 of these by-laws. Notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 9. Waiver or Consent by Shareholders. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the 33 meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by Section 6 of these By-Laws or Section 601(f) of the California Corporations Code to be included in the notice but not so included, if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601(f) of the California Corporations Code. Section 10. Action Without Meeting . Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, except that unanimous written consent shall be required for election of directors to non-vacant positions. Unless the consents of all shareholders entitled to vote have been solicited or received in writing, notice shall be given to non-consenting shareholders to the extent required by Section 603(b) of the California Corporations Code. Any shareholder giving written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 11. Voting Rights; Cumulative Voting. Only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the record date fixed by the Board of Directors as provided in Section 41 of these By-Laws for the determination of shareholders of record shall be entitled to notice of and to vote at such meeting of shareholders. If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business or the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. Except as provided in the next following sentence and except as may be otherwise provided in the Articles of Incorporation, each shareholder entitled to vote shall be entitled to one vote for each share held on each matter submitted to a vote of shareholders. In the election of directors, each such shareholder complying with the following paragraph may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes in favor of any candidate or candidates unless such candidate's or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, such fact shall be announced to all shareholders and proxies present, who may then cumulate their votes for candidates in nomination. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. 34 Voting may be by voice or ballot, provided that any election of directors must be by ballot upon the demand of any shareholder made at the meeting and before the voting begins. Section 12. Proxies. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. All proxies must be in writing and must be signed by the shareholder confirming the proxy or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in Section 705 of the California Corporations Code. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The proxy solicited by management for any annual meeting of shareholders shall confer discretionary authority upon management's proxy holders to vote with respect to any shareholder proposal offered at such meeting, the proponent of which has not notified the corporation, within the time period specified by Section 4 of these Bylaws, of his or her intention to present such proposal at the annual meeting. Specific reference to such voting authority shall be made in management's proxy statement for each annual meeting. Section 13. Voting by Joint Holders or Proxies. Shares or proxies standing in the names of two or more persons shall be voted or represented in accordance with the vote or consent of the majority of such persons. If only one of such persons is present in person or by proxy, that person shall have the right to vote all such shares, and all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum. This section shall apply to the voting of shares by two or more administrators, executors, trustees or other fiduciaries, or joint proxy holders, unless the instrument or order of court appointing them shall otherwise direct. Section 14. Inspectors of Election. In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III Directors Management Section 15. Powers. Subject to any provisions of the Articles of Incorporation, of the By-Laws and of law limiting the powers of the Board of Directors or reserving powers to the shareholders, the Board of Directors shall, directly or by delegation, manage the business and affairs of the corporation and exercise all corporate powers permitted by law. 35 Section 16. Number and qualification of Directors. The authorized number of directors shall be not less than Seven (7) nor more than Thirteen (13), until changed by amendment of the Articles of Incorporation or, if not prohibited by the Articles, by an amendment of this By-Law adopted by the shareholders. The exact number of directors within said range shall be fixed by a resolution adopted by the Board of Directors; and unless and until so amended, the exact number of directors is hereby fixed at nine (9). Directors need not be shareholders of the corporation. Nomination for election of members of the Board of Directors may be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Notice of intention to make any nominations shall be made in writing and shall be delivered or mailed to the President of the corporation not less than 21 days nor more than 60 days prior to any meeting of stockholders called for the election of directors; provided however, that if less than 21 days notice of the meeting is given to shareholders, such notice of intention to nominate shall be mailed or delivered to the President of the corporation not later than the close of business on the tenth day following the day on which the notice of meeting was mailed; provided further that if notice of such meeting is sent by third-class mail as permitted by Section 6 of these By-Laws, no notice of intention to make nominations shall be required. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the corporation owned by each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in the discretion of the Chairman of the meeting, be disregarded and upon the Chairman's instructions, the inspectors of election can disregard all votes cast for each such nominee. A copy of this paragraph shall be set forth in a notice to shareholders of any meeting at which Directors are to be elected. Section 17. Election and Term of Office. The directors shall be elected annually by the shareholders at the annual meeting of the shareholders; provided that if, for any reason, said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall, except as provided in Section 18 of these By-Laws, begin immediately after their election and shall continue until their respective successors are elected and qualified. Section 18. Removal of Directors. A director may be removed from office by the Board of Directors if he is declared of unsound mind by the order of court or convicted of a felony. Any or all of the directors may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; however, unless the entire Board of Directors is removed, an individual director shall not be removed if the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an e1ection at which the same total number of votes were cast, or, if such action is taken by written consent, all shares entitled to vote were voted, and the entire number of directors authorized at the time of the director's most recent election were then being elected. A director may also be removed from office by the superior court of the county in which the principal office is located, at the suit of shareholders holding at least ten percent (10%) of the number of outstanding shares of any class, in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation, in the manner provided by law. No reduction of the authorized number of directors shall have the effect of removing any director before his term of office expires. Section 19. Vacancies. A vacancy or vacancies on the Board of Directors shall exist on the death, resignation, or removal of any director, or if the authorized number of directors is increased or the shareholders fail to elect the full authorized number of directors. Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the remaining directors although less than a quorum, or by a sole remaining director, and each director elected in this manner shall hold office until his successor is elected at an annual or special shareholders' meeting. 36 The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the Chairman of the Board of Directors, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 20. Place of Meetings. Regular and special meetings of the Board of Directors shall be held at any place within the State of California that is designated by resolution of the Board or, either before or after the meeting, consented to in writing by all the Board members. If the place of a regular or special meeting is not fixed by resolution or written consents of the Board, it shall be held at the corporation's principal office. Section 21. Organizational Meetings. Immediately following each annual shareholders' meeting, the Board of Directors shall hold an organizational meeting at a date and time adopted by the Board of Directors by Resolution to organize, elect officers, and transact other business. Notice of this meeting shall not be required. Section 22. Other Regular Meetings. Other regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors by resolution shall determine. Notice of these regular meetings shall not be required. Section 23. Special Meetings. Special meetings of the Board of Directors for any purpose may be called at any time by the Chairman of the Board of Directors, or the President, or any Vice President, or the Secretary, or any two directors. Special meetings of the Board shall be held upon four days' notice by mail or 24 hours notice delivered personally or by telephone or telegraph. If notice is by telephone, it shall be complete when the person calling the meeting believes in good faith that the notified person has heard and acknowledged the notice. If the notice is by mail or telegraph, it shall be complete when deposited in the United States mail or delivered to the telegraph office at the place where the corporation's principal office is located, charges prepaid and addressed to the notified person at such person's address appearing on the corporate records or, if it is not on these records or is not readily ascertainable, at the place where the regular Board meeting is held. Section 24. Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn a meeting under Section 26 of these By-Laws. Every act done or decision made by a majority of the directors present at a meeting at which a quorum is present shall be regarded as the act of the Board of Directors, unless the vote of a greater number is required by law, the Articles of Incorporation, or these By-Laws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by a majority of the required quorum for such meeting. Section 25. Contents of Notice and Waiver of Notice. Neither the business to be transacted at, nor the purpose of, any regular or special Board meeting need be specified in the notice or waiver of notice of the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to said director. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 26. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. 37 Section 27. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place are fixed at the meeting being adjourned, except that if the meeting is adjourned for more than 24 hours such notice shall be given prior to the adjourned meeting to the directors who were not present at the time of the adjournment. Section 28. Telephone Participation. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meetings can hear one another. Such participation constitutes presence in person at such meeting. Section 29. Action Without Meeting. The Board of Directors may take any action without a meeting that may be required or permitted to be taken by the Board at a meeting, if all members of the Board individually or collectively consent in waiting to the action. The written consent or consents shall be filed in the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same effect as a unanimous vote of directors. Section 30. Fees and Compensation. Directors and members of committees shall receive neither compensation for their services nor reimbursement for their expenses unless these payments are fixed by resolution of the Board. ARTICLE IV Officers section 31. Officers. The officers of the corporation shall be a President, a Secretary, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board (who shall be chosen from the Board of Directors), one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Chief Financial Officers, and any other officers who may be appointed under Section 33 of these By-Laws. Any two or more officers, except those of President and Secretary, may be held by the same person. Any officer of the corporation may be excluded by resolution of the Board of Directors or by a provision of these By-Laws from participation, other than in the capacity of a director, in major policymaking functions of the corporation. If requested by the Board of Directors, each officer and employee of the corporation shall give bond of suitable amount with security to be approved by the Board of Directors, conditioned on the honest and faithful discharge of his duties as such officer or employee. At the discretion of the Board, such bonds may be schedule or blanket form and the premiums shall be paid by the corporation. The amount of such bonds, the form of coverage, and the name of the company providing the surety therefor shall be reviewed annually by the Board of Directors. Action shall be taken by the Board at that time approving the amount of the bond to be provided by each officer and employee of the corporation for the ensuing year. Section 32. Election. The officers of the corporation, except those appointed under Section 33 of these By-Laws, shall be chosen annually by the Board of Directors, and each shall hold his office until he resigns or is removed or otherwise disqualified to serve, or his successor is elected and qualified. Section 33. Subordinate Officers. The Board of Directors may appoint, and may authorize the President to appoint, any other officers that the business of the corporation may require, each of whom shall hold office for the period, have the authority, and perform the duties specified in the By-Laws or by the Board of Directors. 38 Section 34. Removal and Resignation. Any officer may be removed with or without cause either by the Board of Directors at any regular or special directors' meeting or, except for an officer chosen by the Board, by any officer on whom the power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the Board of directors, the President or the Secretary of the corporation. An officer's resignation shall take effect when it is received or at any later time specified in the resignation. Unless the resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. Section 35. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in the By-Laws for regular appointments to the office. Section 36. Chairman of the Board. The Board of Directors may in its discretion elect a Chairman of the Board, who shall preside at all meetings of the Board of Directors at which the Chairman is present and shall exercise and perform other powers and duties assigned to the Chairman by the Board or prescribed by the By-Laws. Section 37. President. Subject to any supervisory powers that may be given by the Board of Directors or the By-Laws to the Chairman of the Board, the President shall be the corporation's chief executive officer and shall, subject to the control of the Board of Directors, have general supervision, direction, and control over the corporation's business and affairs. The President shall preside as Chairman at all shareholders' meetings and at all directors' meetings not presided over by the Chairman of the Board. He shall be ex officio a member of all the standing committees except the Audit Committee, shall have the general powers and duties of management usually vested in a corporation's president; shall have any other powers and duties that are prescribed by the Board of Directors or these By-Laws; and shall be primarily responsible for carrying out all orders and resolutions of the Board of Directors. Section 38. Vice Presidents. If the President is absent or is unable or refuses to act, the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions on, the President. Each Vice President shall have any other duties that are prescribed for said Vice President by the Board of Directors or the By-Laws. Section 39. Secretary. The Secretary shall keep or cause to be kept, and be available at the principal office and any other place that the Board of Directors specifies, a book of minutes of all directors' and shareholders' meetings. The minutes of each meeting shall state the time and place that it was held; whether it was regular or special; if a special meeting, how it was authorized; the notice given; the names of those present or represented at shareholders' meetings; and the proceedings of the meetings. A similar minute book shall be kept for each committee of the Board. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or duplicate share register, showing the shareholders' names and addresses, the number and classes of shares held by each, the number and date of each certificate issued for these shares, and the number and date of cancellation of each certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all directors' and shareholders' meeting, required to be given under these By-Laws or by law, shall keep the corporate seal in safe custody, and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or these By-Laws. The Secretary shall be deemed not to be an executive officer of the corporation and the Secretary shall be excluded from participation, other than in the capacity of director if the Secretary is also a director, in major policymaking functions of the corporation. 39 Section 40. Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with the depositories designated by the Board of Directors. The Chief Financial Officer shall disburse the corporation's funds as ordered by the Board of Directors; shall render to the President and directors, whenever they request it, an account of all his transactions as Chief Financial Officer and of the corporation's financial condition; and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or By-Laws. If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond in the amount and with the surety or sureties specified by the Board for faithful performance of the duties of that person's office and for restoration to the corporation of all its books, papers, vouchers, money, and other property of every kind in that person's possession or under that person's control on that person's death, resignation, retirement, or removal from office. ARTICLE V General Corporate Matters Section 41. Record Date and Closing of Stockbooks. The Board of Directors may fix a time in the future as a record date for determining shareholders entitled to notice of and to vote at any shareholders' meeting; to receive any dividend, distribution, or allotment of rights; or to exercise rights in respect of any other lawful action, including change, conversion, or exchange of shares. The record date shall not, however, be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. If a record date is fixed for a particular meeting or event, only shareholders of record on that date are entitled to notice and to vote and to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days. Section 42. Corporate Records and Inspection by Shareholders and Directors. Books and records of account and minutes of the proceedings of the shareholders, Board, and committees of the Board shall be kept available at the principal office for inspection by the shareholders to the extent required by Section 1601 of the California Corporations Code. A record of the shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each, shall be kept available for inspection at the principal office or at the office of the corporation's transfer agent or registrar. A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation shall have an absolute right to do either or both of the following: (1) inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the corporation, or (2) obtain from the transfer agent for the corporation, upon five business days prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interests as a shareholder or holder of a voting trust certificate. Inspection and copying may be made in person or by agent or attorney. 40 Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and make extracts. Section 43. Checks, Drafts, Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes and all mortgages, or other evidences of indebtedness, issued in the name of or payable to the corporation, and all assignments and endorsements of the foregoing, shall be signed or endorsed by the person or persons and in the manner specified by the Board of Directors. Section 44. Corporate Contracts and Instruments: How Executed. Except as otherwise provided in the By-Laws, officers, agents, or employees must be authorized by the Board of Directors to enter into any contract or execute any instrument in the corporation's name and on its behalf. This authority may be general or confined to specific instances. Section 45. Stock Certificates. One or more certificates for shares of the corporation's capital stock shall be issued to each shareholder for any of such shareholder's shares that are fully paid. The corporate seal or its facsimile may be fixed on certificates. All certificates shall be signed by the Chairman of the Board, President, or a Vice President and the Secretary, Treasurer, or an Assistant Secretary. Any or all of the signatures on the certificate may be facsimile signatures. Section 46. Lost Certificates. Ho new share certificate that replaces an old one shall be issued unless the old one is surrendered and canceled at the same time; provided, however, that if any share certificate is lost, stolen, mutilated, or destroyed, the Board of Directors may authorize issuance of a new certificate replacing the old one on any terms and conditions, including a reasonable arrangement for indemnification of the corporation, that the Board may specify. Section 47. Reports to Shareholders. The requirement for the annual report to shareholders referred to in Section 1501(a) of the California Corporations Code is hereby expressly waived so long as there are less than 100 holders of record of the corporation's shares. The Board of Directors shall cause to be sent to the shareholders such annual or other periodic reports as they consider appropriate or as otherwise required by law. In the event the corporation has 100 or more holders of its shares, an annual report complying with Section 1501(a) and, when applicable, Section 1501(b) of the California Corporations Code, shall be sent to the shareholders not later than 120 days after the close of the fiscal year and at least 15 days prior to the annual meeting of shareholders to be held during the next fiscal year. If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to the person making the request within 30 days thereafter the financial statements referred to in Section 1501(a) for such year. A shareholder or shareholders holding at least five percent (54) of the outstanding shares of any class of a corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month, or nine-month period of the current fiscal year ended more than 30 days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the statements referred to in Section 1501(a) of the California Corporations Code for the last fiscal year. The statement shall be delivered or mailed to the person making the request within 30 days thereafter. A copy of the statements shall be kept on file in the principal office of the corporation for 12 months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. The income statements and balance sheets referred to shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. 41 Section 48. Indemnification of Corporate Agents. The corporation shall have power to indemnify each of its agents to the fullest extent permissible by the California General Corporation Law. Without limiting the generality of the foregoing sentence, the corporation: (a) is authorized to provide indemnification of agents in excess of that expressly permitted by section 317 of the California General Corporation Law for those agents of the corporation for breach of duty to the corporation and its shareholders, provided, however, that the corporation is not authorized to provide indemnification of any agent for any acts or omissions or transactions from which a director may not be relieved of liability as set forth in the exception to section 204(a)(10) of the California General Corporation Law or as to circumstances in which indemnity is expressly prohibited by section 317 of the California General Corporation law; and (b) shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of section 317 of the California General Corporation Law, and shall have power to advance the expenses reasonably expected to be incurred by such agent in defending any such proceeding upon receipt of the undertaking required by subdivision (f) of such section. The term "agent" used in this section 48 shall have the same meaning as such term in section 317 of the California General Corporation Law. ARTICLE VI Amendments Section 49. Amendments by Shareholders. New By-Laws may be adopted or these By-Laws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote. Section 50. Amendments By Directors. Subject to the right of shareholders under the preceding Section 49 of these By-Laws, By-Laws other than a By-Law fixing or changing the authorized number of directors may be adopted, amended, or repealed by the Board of Directors. However, if the Articles of Incorporation, or a By-Law adopted by the shareholders, provide for an indefinite number of directors within specified limits, the directors may adopt or amend a By-Law or resolution fixing the exact number of directors within those limits. ARTICLE VII Committees of the Board of Directors Section 51. Committees of the Board of Directors. The Board of Directors shall, by resolution adopted by a majority of the authorized number of directors, designate the following standing committees: 42 (1) An Audit Committee which shall consist of at least three members of the Board of Directors, none of whom shall be active officers of the corporation. The duties of this committee shall be to make suitable examination every 12 months of the affairs of the corporation. The result of such examination shall be reported, in writing, to the Board of Directors stating whether the corporation is in a sound and solvent condition, whether adequate internal audit controls and procedures are being maintained, and recommending to the Board such changes in the manner of doing business, etc. as shall be deemed advisable. The Audit Committee, upon its own recommendation and with the approval of the Board of Directors, may employ a qualified firm of Certified Public Accountants to make a suitable examination and audit of the corporation. If such a procedure is followed, the one annual examination and audit of such firm of accountants and the presentation of its report to the Board of Directors will be deemed sufficient to comply with the requirements of this section of these By-Laws. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, also designate one or more additional standing committees including, but not limited to, a Loan Committee, an Investment Committee and/or an Executive Committee consisting of two or more directors who shall be appointed by, and hold office at, the pleasure of the Board of Directors. The Board of Directors may, except as hereinafter limited, and to extent permissible under applicable law, delegate to such committees any of the powers and authorities of the Board of Directors. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any such committee to the extent provided in the resolution of the Board of Directors shall have all the authority of the Board, except with respect to: (1) The approval of any action for which shareholder approval is also required. (2) The filling of vacancies on the Board or in any committee. (3) The fixing of compensation of the directors for serving on the Board or on any committee. (4) The amendment or repeal of By-Laws or the adoption of new By-Laws. (5) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable. (6) A distribution to the shareholders of the corporation as defined in Section 166 of the California Corporations Code, except at a rate or in a periodic amount or within a price range determined by the Board. (7) The appointment of other committees of the Board or the members thereof. The Board of Directors shall designate a chairman for each committee who shall have the sole power to call any committee meeting other than a meeting set by the Board. Except as otherwise established by the Board of Directors, Article III of these By-Laws shall apply to committees of the Board and action by such committees, mutatis mutandis. Dated: January 26, 1999 43 Section 11 of Article II of the Central Coast Bancorp bylaws shall be amended in its entirety to read as follows: Section 11. Voting Rights; No Cumulative Voting. Only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the record date fixed by the Board of Directors as provided in Section 41 of these Bylaws for the determination of shareholders of record shall be entitled to notice of and to vote at a meeting of shareholders. If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business or the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; the record date for determining corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. No holder of any class of stock of the corporation shall be entitled to cumulate votes in connection with any election of directors of the corporation. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them are elected. Voting may be by voice or ballot, provided that any election of directors must be by ballot upon the demand of any shareholder made at the meeting and before the voting begins. Section 17 of Article III of the Central Coast Bancorp bylaws shall be amended in its entirety to read as follows: Section 17. Election and Term of Office. The directors shall be elected annually by the shareholders at the annual meeting of the shareholders; provided, that if for any reason, the annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall, except as provided in Section 18, begin immediately after their election and shall continue until their respective successors are elected and qualified. In the event that the authorized number of directors shall be fixed at nine (9) or more, the board of directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist of one-third of the directors or as close an approximation as possible. The initial term of office of the directors of Class I shall expire at the annual meeting to be held during fiscal year 2002, the initial term of office of the directors of Class II shall expire at the annual meeting to be held during fiscal year 2003 and the initial term of office of the directors of Class III shall expire at the annual meeting to be held during fiscal year 2004. At each annual meeting, commencing with the annual meeting to be held during fiscal year 2002, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the third annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. In the event that the authorized number of directors shall be fixed with at least six (6) but less than nine (9), the board of directors shall be divided into two classes, designated Class I and Class II. Each class shall consist of one-half of the directors or as close an 44 approximation as possible. At each annual meeting, each of the successors to the directors of the class whose term shall have expired at such annual meeting shall be elected for a term running until the second annual meeting next succeeding his or her election and until his or her successor shall have been duly elected and qualified. Notwithstanding the rule that the classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. At such annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the board of directors shall designate one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes. This Section 17 may be amended or repealed only by approval of the board of directors and the outstanding shares (as defined in Section 152 of the California General Corporation Law) voting as a single class, notwithstanding Section 903 of the California General Corporation Law. Date of amendment: June 11, 2001 I, Linda Higley, Assistant Corporate Secretary, hereby confirm that all of the foregoing amendments as of the dates certified are full and complete copies of the articles as amended certified by the California Secretary of State as of the date set forth. /s/ LINDA HIGLEY ------------------ Linda Higley (Assistant Corporate Secretary) 45 -----END PRIVACY-ENHANCED MESSAGE-----