-----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, GNPiBtd9V7EeSFPrvN0BoffcyN1T3cycJ+oIdQGSIlk/4/hNe/kp2JMTk/1u4VXF e/95gH/SZnJeHDgUWH7fvw== 0000921085-99-000009.txt : 19990517 0000921085-99-000009.hdr.sgml : 19990517 ACCESSION NUMBER: 0000921085-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL COAST BANCORP CENTRAL INDEX KEY: 0000921085 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770367061 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25418 FILM NUMBER: 99623560 BUSINESS ADDRESS: STREET 1: 301 MAIN ST CITY: SALINAS STATE: CA ZIP: 93901 BUSINESS PHONE: 4084226642 MAIL ADDRESS: STREET 1: P O BOX 450 CITY: SALINAS STATE: CA ZIP: 93902 FORMER COMPANY: FORMER CONFORMED NAME: SALINAS VALLEY BANCORP DATE OF NAME CHANGE: 19940330 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1999 . [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-25418 . --------- CENTRAL COAST BANCORP - ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) California 77-0367061 - ------------------------------- ----------------------- (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 301 Main Street, Salinas, California. 93901 . - ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) (831) 422-6642 . ------------------------------- (Registrant's telephone number, including area code) not applicable --------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: No par value Common Stock - 6,504,812 shares outstanding at April 29,1999. Page 1 of 22 The Index to the Exhibits is located at Page 20
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS: CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (In thousands) March 31, 1999 December 31,1998 -------------- ---------------- Assets Cash and due from banks $ 36,938 $ 44,684 Federal funds sold - 4,202 --------- --------- Total cash and equivalents 36,938 48,886 Available-for-sale securities 165,961 170,387 Loans held for sale 5,291 6,168 Loans: Commercial 129,350 136,685 Real estate-construction 21,854 19,929 Real estate-other 157,984 144,685 Installment 11,659 11,545 Deferred loan fees, net (728) (674) --------- --------- Total loans 320,119 312,170 Allowance for loan losses (4,398) (4,352) --------- --------- Net Loans 315,721 307,818 --------- --------- Premises and equipment, net 3,239 3,069 Accrued interest receivable and other assets 8,854 7,605 --------- -------- Total assets $536,004 $543,933 ========= ======== Liabilities and Shareholders' Equity Deposits: Demand, noninterest bearing $122,272 $149,757 Demand, interest bearing 93,176 98,226 Savings 101,558 104,447 Time 158,462 136,762 --------- -------- Total Deposits 475,468 489,192 Accrued interest payable and other liabilities 8,389 3,542 --------- -------- Total liabilities 483,857 492,734 --------- -------- 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: 6,490,327 shares at March 31, 1999 and 6,112,045 shares at December 31, 1998 41,106 41,103 Shares held in deferred compensation trust (247,148 at March 31, 1999 and 71,949 at December 31, 1998), net of deferred obligation - - Retained earnings 11,457 9,733 Accumulated other comprehensive income - net of deferred obligation taxes of $289,000 at March 31, 1999 and $254,000 at December 31,1998 (416) 363 -------- --------- Shareholders' equity 52,147 51,199 -------- --------- Total liabilities and shareholders' equity $536,004 $543,933 ======== ========= See notes to Consolidated Condensed Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (In thousands) Three Months Ended March 31, 1999 1998 ---- ---- Interest Income Loans (including fees) $7,140 $6,267 Investment securities 2,249 1,780 Other 73 945 ----------- ------------ Total interest income 9,462 8,992 ----------- ------------ Interest Expense Interest on deposits 3,086 3,334 Other 27 1 ----------- ------------ Total interest expense 3,113 3,335 ----------- ------------ Net Interest Income 6,349 5,657 Provision for Loan Losses 127 17 ----------- ------------ Net Interest Income after Provision for Loan Losses 6,222 5,640 ----------- ------------ Noninterest Income 542 394 ----------- ------------ Noninterest Expenses Salaries and benefits 2,331 2,155 Occupancy 280 219 Furniture and equipment 291 195 Other 921 883 ----------- ------------ Total other expenses 3,823 3,452 ----------- ------------ Income Before Income Taxes 2,941 2,582 Provision for Income Taxes 1,216 1,068 ----------- ------------ Net Income $1,725 $1,514 =========== ============ Basic Earnings per Share $0.27 $0.25 Diluted Earnings per Share $0.26 $0.23 See Notes to Consolidated Condensed Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, 1999 1998 ---- ---- Cash Flows from Operations: Net income $1,725 $1,514 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses 127 17 Net gain on sale of fixed assets - (1) Depreciation 212 139 Amortization and accretion 77 (100) (Increase) decrease in accrued interest receivable and other assets (919) 53 Increase in accrued interest payable and other liabilities 1,107 367 (Increase) decrease in deferred loan fees 54 (50) ---------- ---------- Net cash provided by operations 2,383 1,939 ---------- ---------- Cash Flows from Investing Activities: Purchases of investment securities (87,498) (62,166) Proceeds from maturities of investment securities 90,738 61,780 Net change in loans held for sale 877 (877) Net (increase) decrease in loans (8,084) 5,056 Proceeds from sale of fixed assets - 1 Capital expenditures (382) (267) ---------- ---------- Net cash provided (used) in investing activities (4,349) 3,527 ---------- ---------- Cash Flows from Financing Activities: Net decrease in deposit accounts (13,724) (13,984) Net increase (decrease) in short-term borrowings 3,740 (288) Proceeds from sale of stock 810 39 Shares repurchased (808) (13) ---------- ---------- Net cash used by financing activities (9,982) (14,246) ---------- ---------- Net decrease in cash and equivalents (11,948) (8,780) Cash and equivalents, beginning of period 48,886 104,597 ---------- ---------- Cash and equivalents, end of period $36,938 $95,817 ========== ========== Other Cash Flow Information: Interest paid $ 3,092 $ 2,612 Income taxes paid 224 -
See Notes to Consolidated Condensed Financial Statements CENTRAL COAST BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 1999 (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS In the opinion of Management, the unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position at March 31, 1999 and December 31, 1998, the results of operations for the three month periods ended March 31, 1999 and 1998, and cash flows for the three month periods ended March 31, 1999 and 1998. Certain disclosures normally presented in the notes to the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Annual Report to Shareholders. The results of operations for the three month periods ended March 31, 1999 and 1998 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. 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 $125,601,000 and standby letters of credit of $1,135,000 at March 31, 1999. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company during 1999. Approximately $18,783,000 of loan commitments outstanding at March 31, 1999 relate to real estate construction loans and are expected to fund within the next twelve months. The remainder relate primarily to revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each potential borrower and the necessary collateral are evaluated on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities or business assets. Stand-by letters of credit are commitments written to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating to purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. Virtually all such commitments are collateralized. 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 (6,360,000 for the three month period ended March 31, 1999, and 6,008,000 for the three month period ended March 31, 1998). Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options and stock purchase warrants were exercised. Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options and warrants (329,000 for the three month period ended March 31, 1999 and 534,000 for the three month period ended March 31, 1998). 4. COMPREHENSIVE EARNINGS In 1998, Central Coast Bancorp adopted Statement of Financial Accounting Standards No. 130,"Reporting Comprehensive Income", which requires that an enterprise report, by major components and as a single total, the change in net assets during the period from nonowner sources. Such amounts are as follows:
Three Months Ended March 31, (In thousands) 1999 1998 ---- ---- Net Earnings $ 1,725 $ 1,514 Other comprehensive loss - net unrealized loss on available-for-sale securities. (779) (115) --------- ---------- Total comprehensive earnings $ 946 $ 1,399 ========= ==========
5. STOCK DIVIDEND On January 25, 1999 the Board of Directors declared a five-for-four stock split, which was distributed on February 26, 1999, to shareholders of record as of February 8, 1999. All share and per share data have been retroactively adjusted to reflect the stock dividend. 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 the operating market areas of the Company and the Banks; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) effects of possible Year 2000 problems. 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, 1998. Interest income and net interest income are presented on a fully taxable equivalent basis (FTE) within the Management's Discussion and Analysis. Business Organization Central Coast Bancorp (the "Company") is a California corporation organized in 1994, and is the parent company for Bank of Salinas and Cypress Bank, state-chartered banks, headquartered in Salinas and Seaside, California, respectively (the "Banks"). Other than its investment in the Banks, the Company currently conducts no other significant business activities, although it is authorized to engage in a variety of activities which are deemed closely related to the business of banking upon prior approval of the Board of Governors of the Federal Reserve System (the "FRB"), the Company's principal regulator. The Banks offer a full range of commercial banking services, including a diverse range of traditional banking products and services to individuals, merchants, small and medium-sized businesses, professionals and agribusiness enterprises located in the Salinas Valley and Monterey Peninsula. Overview Central Coast Bancorp, holding company for Bank of Salinas and Cypress Bank, reported record first quarter earnings of $1,725,000 for the three months ended March 31,1999. The earnings reflect a 13.9% increase over the $1,514,000 reported for the first quarter of 1998. Diluted earnings per share for the first quarters of 1999 and 1998 were $0.26 and $0.23, respectively. Assets of the Company totaled $536,004,000 at March 31, 1999 for an increase of $50,810,000 (10.5%) from March 31, 1998 ending balances and a decrease of $7,929,000 (1.5%) from December 31, 1998 balances. Due to seasonal variations of the Company's agribusiness customers, it is normal for the Company to experience a decline in assets in the first quarter of each year from year-end balances. March 31, 1998 total assets reflected a decrease of $12,480,000 (2.5%) from the December 31, 1997 ending assets of $497,674,000. For the first quarter of 1999, the Company had annualized return on assets of 1.32% and return on equity of 13.57% versus 1.27% and 13.70%, respectively, for the first quarter of 1998. Central Coast Bancorp ended the first quarter of 1999 with a Tier 1 capital ratio of 14.4% and a total risk-based capital ratio of 15.7%. The following table provides a summary of the major elements of income and expense for the periods indicated.
Percentage Change Three months ended Increase March 31, (Decrease) (In thousands) 1999 1998 ---- ---- -------- Interest income (1) $ 9,638 $ 9,007 7% Interest expense 3,113 3,335 (7%) --------- -------- -------- Net interest income 6,525 5,672 15% Provision for loan losses 127 17 647% --------- -------- -------- Net interest income after provision for loan losses 6,398 5,655 13% Noninterest income 542 394 38% Noninterest expense 3,823 3,452 11% --------- -------- -------- Net income before income taxes 3,117 2,597 20% Tax equivalent adjustment 176 15 1073% Income taxes 1,216 1,068 14% --------- -------- -------- Net income $ 1,725 $1,514 14% ========= ======== ======== 1) Interest on tax-free securities is reported on tax equivalent basis.
Net interest income Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and other borrowings, is the principal component of the Banks' earnings. The following table provides a summary of the components of net interest income and the changes within the components for the periods indicated. The second table sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates.
(Unaudited) Three months ended March 31, (Taxable Equivalent Basis) 1999 1998 Avg. Avg. Avg. Avg. (In thousands, except percentages) Balance Interest Yield Balance Interest Yield Assets: Earning Assets Loans (1) (2) $ 309,892 $ 7,140 9.3% $ 245,425 $ 6,267 10.4% Taxable investments 127,466 1,894 6.0% 119,377 1,750 6.0% Tax-exempt securities (tax equiv.basis) 32,314 531 6.7% 2,127 45 8.6% Federal funds sold 6,230 73 4.8% 70,211 945 5.5% ------- ------- ------- ----- Total Earning Assets 475,902 $ 9,638 8.2% 437,140 $ 9,007 8.4% Cash & due from banks 42,400 ------- 37,718 ----- Other assets 10,578 10,100 ------- ------- $ 528,880 $ 484,958 ======= ======= Liabilites & Shareholders' Equity: Interest bearing liabilities: Demand deposits $ 93,030 $ 354 1.5% $ 86,596 $ 422 2.0% Savings 108,843 891 3.3% 99,572 942 3.8% Time deposits 147,048 1,841 5.1% 142,025 1,970 5.6% Other borrowings 2,252 27 4.9% 61 1 6.6% ------- ------- ------- ----- Total interest bearing liabilities 351,173 3,113 3.6% 328,254 3,335 4.1% Demand deposits 122,259 ------- 108,580 ----- Other Liabilities 3,882 3,308 ------- ------- Total Liabilities 477,314 440,142 Shareholders' Equity 51,566 44,816 ------- ------- $ 528,880 $ 484,958 Net interest income & margin (3) ======= $ 6,525 5.6% ======= $ 5,672 5.3% ======= ==== ===== ====
1 Loan interest income includes fee income of $241,000 and $244,000 for the three month periods ended March 31, 1999 and 1998, respectively. 2 Includes the average allowance for loan losses of $4,364,000 and $4,207,000 and average deferred loan fees of $719,000 and $548,000 for the three months ended March 31, 1999 and 1998, respectively. 3 Net interest margin is computed by dividing net interest income by the total average earning assets.
Volume/Rate Analysis (in thousands) Three Months Ended March 31, 1999 over 1998 Increase (decrease) due to change in: Interest-earning assets: Rate Net Volume (4) Change ------ ----- ----- Net Loans (1)(2) $1,653 $(780) $ 873 Taxable investment securities 118 26 144 Tax exempt investment securities(3) 640 (154) 486 Federal funds sold (868) (4) (872) ------ ----- ----- Total 1,543 (912) 631 ------ ----- ----- Interest-bearing liabilities: Demand deposits 32 (100) (68) Savings deposits 87 (138) (51) Time deposits 69 (198) (129) Other borrowings 36 (10) 26 ------ ---- ----- Total 224 (446) (222) ------ ----- ----- Interest differential $1,319 $ (466) $ 853 ====== ===== =====
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 $241,000 and $244,000 for the quarters ended March 31, 1999 and 1998, 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 1999 and 1998. 4. The rate / volume variance has been included in the rate variance. First quarter 1999 net interest income of $6,525,000 was a 15.0% increase of $853,000 over the same period in 1998. Interest income increased $631,000 (7.0%) as a result of an 8.9% increase in average earning assets. The growth in earning assets was due to increases of $64,467,000 (26.3%) in average loans outstanding and $38,276,000 (31.5%) in average investment securities offset in part by a decrease of $63,981,000 (91.1%) in average balances of Federal Funds sold. The average rate received on Federal Funds sold decreased from 5.5% in the first quarter of 1998 to 4.8% for the same period in 1999.The change in mix from Federal Funds sold in 1998 to longer term securities including tax-exempt municipal bonds in the later part of 1998 and the first quarter of 1999 helped to stabilize interest income. The increase in tax exempt municipal investments results in an increased tax benfit, as reflected in the increase in the tax equivalent adjustment of 1073% from $15,000 in 1998 to 176,000 in 1999. The positive effect on earnings of the higher balances in earning assets was also offset in part by a 110 basis point decrease in the average yield received on loans from 10.4% in the first quarter of 1998 to 9.3% in the first quarter of 1999. The 75 basis point decrease in the prime interest rate in the last half of 1998 as well as competitive pricing pressures caused this change. Due to a 50 basis point decrease in average rates paid offset in part by a $22,919,000 (7.0%) increase in balances of interest bearing liabilities, interest expense was down $222,000 (6.7%) in the first quarter of 1999 versus the same period in 1998. The net interest margin increased to 5.6% for the first quarter of 1999 from 5.3% in the year earlier period. Provision for Loan Losses The Banks provided $127,000 for loan losses in the first quarter of 1999 versus $17,000 in 1998. Net charge-offs for all loans in the first quarter of 1999 totaled $81,000 versus $39,000 in the year earlier period. The additional provision in 1999 was made as a result of increases in loan balances. Noninterest Income Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. Noninterest income totaled $542,000 in the first quarter of 1999, which was up $148,000 (37.6%) over the same period in 1998. Service charges on deposits were up $58,000 (21.5%) due to higher volumes and some selective fee increases implemented in the second and fourth quarters in 1998. Also, fees from mortgage originations increased $55,000 (271%) on quarter over quarter basis as the Company added another commissioned mortgage lending officer. Noninterest Expense First quarter 1999 noninterest expense increased $371,000 to $3,823,000 from the first quarter 1998 results. Salary and employee benefits increased $176,000 (8.2%) due to increased staff for the Westridge branch which opened in December 1998, additional staff due to growth, higher commissions on mortgage originations, higher benefit costs and normal salary increases. On a quarter over quarter basis, premise and fixed asset expenses were higher by $157,000 (37.9%). Costs associated with the Westridge branch, the new computer system and network upgrades installed in the second half of 1998 were the major factors contributing to the increased premise and fixed asset expenses. The overhead efficiency ratio for the first quarter of 1999 was 55.5% as compared to 57.0% in the same quarter of 1998. Provision for Income Taxes The Company recorded income tax expense of $1,216,000 in the first quarter of 1999 versus $1,068,000 in the first quarter of 1998. The effective tax rate for the three months ended March 31, 1999 is 41.3%, which is essentially unchanged from the year earlier results. Loans Ending loan balances at March 31, 1999 were $320,119,000, which was an increase of $7,949,000 from year-end 1998 balances. The March 31, 1999 loan balances were $69,670,000 (28%) higher than the year earlier totals. All categories of loans were higher on year over year basis. Loan demand remains strong heading into the second quarter of 1999. Nonperforming Assets Nonperforming assets are comprised of loans delinquent 90 days or more with respect to interest or principal, loans for which the accrual of interest has been discontinued, and other real estate which has been acquired through foreclosure and is awaiting disposition. Unless well secured and in the process of collection, loans are placed on nonaccrual status when a loan becomes 90 days past due as to interest or principal, when the payment of interest or principal in accordance with the contractual terms of the loan becomes uncertain or when a portion of the principal balance has been charged off. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement and remaining principal is considered collectible or when the loan is both well secured and in 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) March 31, December 31, 1999 1998 ---- ---- Past due 90 days or more and still accruing Real estate $ 71 $ 1,174 Commercial 1,104 73 Installment and other - - ----- ------- 1,175 1,247 ----- ------- Nonaccrual: Real estate 622 543 Commercial 70 333 Installment and other - - ----- ------- 692 876 ----- ------- Total nonperforming loans 1,867 2,123 ----- ------- Other real estate owned 61 - ----- ------- Total nonperforming assets $ 1,928 $ 2,123 ===== ======= Allowance for loan losses as a percentage of 236% 205% nonperforming loans Nonperforming loans to total loans 0.58% 0.68%
Nonperforming loans decreased $256,000 during the first quarter of 1999. This decrease coupled with a small increase in the allowance for loan losses resulted in the improvement in the coverage ratio of the allowance for loan losses to nonperforming loans from 205% at year-end to 236%. Overall loan quality remains high. Allowance for Loan Losses The allowance for loan losses reflects management's judgement as to the level considered adequate to absorb probable losses inherent in the loan portfolio. The allowance is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Management determines an appropriate provision based upon information currently available to analyze loan loss potential, including (1) the loan portfolio balance in the period; (2) a comprehensive grading and review of new and existing loans outstanding; (3) actual previous charge-offs; and, (4) changes in economic conditions. In determining the provision for estimated losses related to specific major loans, management evaluates its allowance on an individual loan basis, including an analysis of the credit worthiness, cash flows and financial status of the borrower, and the condition and the estimated value of the collateral. Specific valuation allowances for secured loans are determined by the excess of recorded investment in the loan over the fair market value or net realizable value where appropriate, of the collateral. In determining overall general valuation allowances to be maintained and the loan loss allowance ratio, management evaluates many factors including prevailing and forecasted economic conditions, regular reviews of the quality of loans, industry experience, historical loss experience, composition and geographic concentrations of the loan portfolio, the borrowers' ability to repay and repayment performance and estimated collateral values. Management believes that the allowance for loan losses at March 31,1999 is adequate, based on information currently available. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.
The following table summarizes activity in the allowance for loan losses for the periods indicated: (In thousands) Three months ended March 31, 1999 1998 ---- ---- Beginning balance $ 4,352 $ 4,223 Provision charged to expense 127 17 Loans charged off (90) (69) Recoveries 9 30 ------- ------- Ending balance $ 4,398 $ 4,201 ======= ======= Ending loan portfolio $ 320,119 $ 250,449 ======= ======= Allowance for loan losses as percentage 1.37% 1.68% of ending loan portfolio
Liquidity Liquidity management refers to the Company's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Company's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Banks assess the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. Commitments to fund loans and outstanding standby letters of credit at March 31,1999 were approximately $125,601,000 and $1,135,000, respectively. Such loans relate primarily to revolving lines of credit and other commercial loans, and to real estate construction loans. The Company's sources of liquidity consist of its deposits with other banks, overnight funds sold to correspondent banks, unpledged short-term, marketable investments and loans available for sale. On March 31, 1999 consolidated liquid assets totaled $163.6 million or 30.6% of total assets as compared to $153.5 million or 28.2% of total consolidated assets on December 31, 1998. In addition to liquid assets, the Banks maintain lines of credit with correspondent banks for up to $60,000,000 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 $52,147,000 at March 31, 1999 compared to $51,199,000 at December 31, 1998. The Company and the Banks are subject to regulations issued by the Board of Governors and the FDIC which require maintenance of a certain level of capital. A bankinig organization's total qualifying capital includes two components, core capital(Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, trust preferred securities and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, trust preferred securities, certain other capital instruments and term subordinated debt. The Company's major capital components are shareholders' equity and TPS in core capital, and the allowance for loan losses and subordinated debt in supplementary capital. The following table shows the Company's actual capital amounts and ratios at March 31, 1999 and December 31, 1998 as well as the minimum capital ratios for capital adequacy under the regulatory framework:
For Capital Actual Adequacy Purposes Amount Ratio Amount Ratio ----------------- -------------------- As of March 31, 1999 Total Capital (to Risk Weighted Assets): 55,414,000 15.7% 28,321,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 51,118,000 14.4% 14,160,000 4.0% Tier 1 Capital (to Average Assets): 51,118,000 9.7% 21,155,000 4.0% As of December 31, 1998: Total Capital (to Risk Weighted Assets): 53,588,000 14.8% 29,004,000 8.0% Tier 1 Capital (to Risk Weighted Assets): 49,326,000 13.6% 14,502,000 4.0% Tier 1 Capital (to Average Assets): 49,326,000 9.9% 19,935,000 4.0%
Year 2000 As the year 2000 approaches, a critical issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. In brief, many existing application software products in the marketplace were designed to only accommodate a two digit date position which represents the year (e.g.,"95"is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., "99") could be the maximum date value these systems will be able to accurately process. This is not just a banking problem, as corporations around the world and in all industries are similarly impacted. The Company is uncertain regarding the consequences of the Year 2000 (Y2K) issue on the future results of operations, liquidity and financial condition; but believes that failure to ensure that its systems are in compliance with Y2K requirements could have a material adverse effect on its business. As a result, the Company has made addressing Y2K issues a priority of management and the Board. Based upon actions implemented to date, the Company currently anticipates that it will be successful in addressing Y2K issues and anticipates no materially adverse processing problems. The Company is subject to examination by the Federal Deposit Insurance Corporation and the Federal Reserve Bank under their Y2K Phase I and Phase II programs. Management is not currently aware of any conditions cited as unsatisfactory by such federal bank regulatory agencies. All mission critical systems have been identified by the Company, and the Company is currently testing, or developing contingency plans, for each. The term "mission critical" refers to an application or system that is vital to the successful continuance of core business activity. Significantly all mission critical hardware and software utilized by the Company are provided by third parties. This requires that the Company is in close contact with relevant vendors and contractors as it conducts testing and contingency planning. Testing on the Company's mission critical systems is substantially complete and monitoring of vendor and customer relationships is ongoing. The Company has made disclosures to all existing and new customers regarding the importance of the Y2K issue and its relevance to the Company and the customer. The Company is conducting an ongoing effort to identify customers that represent material risk exposure to the institution, to evaluate their Y2K preparedness and risk to the Company and to implement appropriate risk controls. The Company also continues to evaluate the cost to address Y2K issues. Most costs incurred to date are in conjunction with the planned replacement of systems. The cost of system replacements accelerated to meet Y2K requirements and Y2K project specific costs have not been significant to the operations of Company as a whole. Management estimates that the incremental cost of mitigating Year 2000 risk exclusive of management time that has been redirected to focus on this matter will be approximately $171,000. Despite efforts undertaken to date and as projected, there can be no assurance that problems will not arise which could have an adverse impact upon the Company due, among other matters, to the complexities involved in computer programming related to resolution of Year 2000 problems and the fact that the systems of other companies on which Central Coast Bancorp and its subsidiaries, Bank of Salinas and Cypress Bank, may rely must also be corrected on a timely basis. Many phases of the Company's Y2K preparedness plan have been completed: the Company has identified, assessed and prioritized mission critical systems; developed Year 2000 testing strategies and plans; implemented a customer due diligence program; and tested most mission critical systems. But, delays, mistakes or failures in correcting Y2K system problems by other companies on which Central Coast Bancorp and its subsidiaries may rely, could have a significant adverse impact upon Central Coast Bancorp and its subsidiaries, Bank of Salinas and Cypress Bank, and their ability to mitigate the risk of adverse impact of Y2K problems for their customers. The disclosure set forth above contains forward-looking statements. Specifically, such statements are contained in sentences including the words "expect" or "anticipate" or "could" or "should". Such forward-looking statements are subject to inherent risks and uncertainties that may cause actual results to differ materially from those contemplated by such forward-looking statements. The factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include the failure by third parties to remedy Y2K issues or the inability of the Company to complete testing software changes on the time schedules currently expected. Nevertheless, the Company currently expects that its Y2K compliance efforts will be successful without material adverse effects on its business. Item 3. MARKET RISK MANAGEMENT The reader is referred to Item 7A of the Company's 1998 Annual Report on Form 10-K for information on market risk. There have been no significant changes since December 31, 1998. PART II - OTHER INFORMATION Item 1. Legal proceedings. None. Item 2. Changes in securities. None. Item 3. Defaults upon senior securities. None. Item 4. Submission of matters to a vote of security holders. None. Item 5. Other information. None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits (2.1) Agreement and Plan of Reorganization and Merger by and between Central Coast Bancorp, CCB Merger Company and Cypress Coast Bank dated as of December 5,1995, incorporated by reference from Exhibit 99.1 to Form 8-K filed with the Commission on December 7, 1995. (3.1) Articles of Incorporation, incorporated by reference from Exhibit 4.8 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. (3.2) Bylaws, as amended, incorporated by reference from the Company's 1998 Annual Report on Form 10K filed with the Commission on March 29,1999. (4.1) Specimen form of Central Coast Bancorp stock certificate incorporated by reference from the Company's 1994 Annual Report on Form 10K filed with the Commission on March 31, 1995. (10.1) Lease agreement dated December 12, 1994, related to 301 Main Street, Salinas, California incorporated by reference from the Company's 1994 Annual Report on Form 10K filed with the Commission on March 31, 1995. (10.2) King City Branch Lease incorporated by reference from Exhibit 10.3 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on March 28, 1994. (10.3) Amendment to King City Branch Lease incorporated by reference from Exhibit 10.4 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on March 28, 1994. *(10.4) 1982 Stock Option Plan, as amended, incorporated by reference from Exhibit 4.2 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.5) Form of Nonstatutory Stock Option Agreement under the 1982 Stock Option Plan incorporated by reference from Exhibit 4.6 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.6) Form of Incentive Stock Option Agreement under the 1982 Stock Option Plan incorporated by reference from Exhibit 4.7 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.7) 1994 Stock Option Plan incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-8 No. 33-89948, filed with the Commission on March 3, 1995. *(10.8) Form of Nonstatutory Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.3 to Registration Statement on Form S-8 No. 33-89948, filed with Commission on March 3, 1995. *(10.9) Form of Incentive Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.4 to Registration Statement on Form S-8 No. 33-89948, filed with the commission on March 3, 1995. *(10.10) Form of Director Nonstatutory Stock Option Agreement under the 1994 Stock Option Plan incorporated by reference from Exhibit 4.5 to Registration Statement on Form S-8 No. 33-89948, filed with the commission on March 3, 1995. *(10.11) Form of Bank of Salinas Indemnification Agreement for directors and executive officers incorporated by reference from Exhibit 10.9 to Amendment No. 1 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on April 15, 1994. *(10.12) 401(k) Pension and Profit Sharing Plan Summary Plan Description incorporated by reference from Exhibit 10.8 to Registration Statement on Form S-4 No. 33-76972, filed with the Commission on March 28, 1994. *(10.13) Specimen form of Employment Agreement incorporated by reference from Exhibit 10.13 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. *(10.14) Specimen form of Executive Salary Continuation Agreement incorporated by reference from Exhibit 10.14 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. *(10.15) 1994 Stock Option Plan, as amended, incorporated by reference from Exhibit A to the Proxy Statement filed with the Commission on September 3, 1996 in connection with Central Coast Bancorp's 1996 Annual Shareholders' Meeting held on September 23, 1996. (10.16) Specimen of Indemnification Agreement, incorporated by reference from Exhibit D to the Proxy Statement filed with the Commission on September 3, 1996 in connection with Central Coast Bancorp's 1996 Annual Shareholders' Meeting held on September 23, 1996. (10.17) Purchase and Assumption Agreement for the Acquisition of Wells Fargo Bank Branches incorporated by reference from Exhibit 10.17 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. *(10.18) Employee Stock Ownership Plan and Trust Agreement incorporated by reference from Exhibit 10.18 to the Company's 1996 Annual Report on Form 10K filed with the Commission on March 31, 1997. (10.19) Lease agreement dated March 7, 1997, related to 484 Lighthouse Avenue, Monterey, California incorporated by reference from Exhibit 10.19 to the Company's 1997 Annual Report on Form 10K filed with the Commission on march 27, 1998. (21.1) The Registrant's only subsidiaries are its wholly-owned subsidiaries, Bank of Salinas and Cypress Bank. (27.1) Financial Data Schedule *Denotes management contracts, compensatory plans or arrangements. (b) Reports on Form 8-K None SIGNATURES - --------------------------------------------------------------------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. April 29, 1999 CENTRAL COAST BANCORP By: /S/ ROBERT M. STANBERRY ---------------------------- (Chief Financial Officer, Principal Accounting Officer) EXHIBIT INDEX Exhibit Number Description Page 27.1 Financial Data Schedule 21 EX-27 2 ARTICLE 9 FDS FOR 10-Q
9 This Schedule Contains Summary Financial Information Extracted >From (a) Item 7 - 'Financial Statements And Supplementary Data" And Is Qualified In Its Entirety By Reference To Such (b) Financial Statements Included In This Report And Incorporated Herein By Reference. 0000921085 CENTRAL COAST BANCORP 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 36,938 0 0 0 165,961 0 0 325,410 4,398 536,004 475,468 3,740 4,649 0 0 0 41,106 11,041 536,004 7,140 2,249 73 9,462 3,086 3,113 6,349 127 0 3,823 2,941 2,941 0 0 1,725 0.27 0.26 5.6 692 1,175 0 0 4,352 90 9 4,398 4,398 0 0
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