1
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, 1998 .
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ___________________to ________________
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)
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 - 4,903,970 shares outstanding at July 31, 1998.
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Page 1 of 63
The Index to the Exhibits is located at Page 27
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
CENTRAL COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
June 30, 1998 December 31, 1997
------------- -------------
ASSETS
Cash and due from banks $ 47,127,000 $ 39,891,000
Federal funds sold 40,687,000 64,706,000
------------- -------------
Total cash and equivalents 87,814,000 104,597,000
Securities:
Available-for-sale 113,013,000 91,481,000
Held-to-maturity 18,085,000 39,048,000
(Market value: $18,202,000 at June 30, 1998
and $39,105,000 at December 31, 1997)
Loans held for sale 4,339,000 1,331,000
Loans:
Commercial 118,889,000 124,714,000
Real estate-construction 20,939,000 14,645,000
Real estate-other 125,075,000 107,354,000
Installment 7,673,000 9,349,000
------------- -------------
Total loans 272,576,000 256,062,000
Allowance for credit losses (4,228,000) (4,223,000)
Deferred loan fees, net (570,000) (568,000)
------------- -------------
Net Loans 267,778,000 251,271,000
------------- -------------
Premises and equipment, net 2,454,000 2,001,000
Accrued interest receivable and other assets 8,397,000 7,945,000
------------- -------------
Total assets $ 501,880,000 $ 497,674,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 112,819,000 $ 126,818,000
Demand, interest bearing 91,887,000 89,107,000
Savings 104,299,000 99,748,000
Time 141,798,000 134,628,000
------------- -------------
Total Deposits 450,803,000 450,301,000
Accrued interest payable and other liabilities 3,891,000 3,649,000
------------- -------------
Total liabilities 454,694,000 453,950,000
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COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' EQUITY:
Preferred stock-no par value; authorized
1,000,000 shares; no shares issued
Common stock - no par value; authorized 30,000,000 shares;
issued and outstanding: 4,834,327 shares at June 30, 1998
and 4,368,469 shares at December 31, 1997 41,168,000 31,644,000
Retained earnings 5,802,000 11,979,000
Accumulated other comprehensive income - Net unrealized
gain (loss) on available-for-sale securities, net of tax 216,000 101,000
------------- -------------
Shareholders' equity 47,186,000 43,724,000
------------- -------------
Total liabilities and shareholders' equity $ 501,880,000 $ 497,674,000
============= =============
See Notes to Consolidated Condensed Financial Statements
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CENTRAL COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
INTEREST INCOME
Loans (including fees) $ 6,669,000 $ 6,324,000 $12,936,000 $12,256,000
Investment securities 2,027,000 1,513,000 3,807,000 2,623,000
Other 585,000 717,000 1,530,000 1,307,000
----------- ----------- ----------- -----------
Total interest income 9,281,000 8,554,000 18,273,000 16,186,000
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 3,415,000 2,929,000 6,750,000 5,539,000
Other -- 70,000 -- 72,000
----------- ----------- ----------- -----------
Total interest expense 3,415,000 2,999,000 6,750,000 5,611,000
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,866,000 5,555,000 11,523,000 10,575,000
PROVISION FOR CREDIT LOSSES 24,000 -- 41,000 --
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 5,842,000 5,555,000 11,482,000 10,575,000
----------- ----------- ----------- -----------
OTHER INCOME 530,000 420,000 924,000 806,000
----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and benefits 2,053,000 1,909,000 4,208,000 3,742,000
Occupancy 273,000 237,000 492,000 441,000
Furniture and equipment 235,000 209,000 430,000 387,000
Other 897,000 889,000 1,780,000 1,623,000
----------- ----------- ----------- -----------
Total other expenses 3,458,000 3,244,000 6,910,000 6,193,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,914,000 2,731,000 5,496,000 5,188,000
PROVISION FOR INCOME TAXES 1,205,000 1,123,000 2,273,000 2,129,000
----------- ----------- ----------- -----------
NET INCOME $ 1,709,000 $ 1,608,000 $ 3,223,000 $ 3,059,000
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.36 $ 0.34 $ 0.67 $ 0.64
DILUTED EARNINGS PER SHARE $ 0.32 $ 0.31 $ 0.62 $ 0.59
=========== =========== =========== ===========
See Notes to Consolidated Condensed Financial Statements
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CENTRAL COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, 1998 1997
- ------------------------- ------------- -------------
CASH FLOWS FROM OPERATIONS:
Net income $ 3,223,000 $ 3,059,000
Reconciliation of net income to net cash provided
by operating activities:
Provision for credit losses 41,000 --
Net gain on sale of fixed assets (1,000) (11,000)
Gain on sale of other real estate owned (21,000) --
Depreciation 278,000 205,000
Amortization and accretion (52,000) (88,000)
Increase in accrued interest receivable and other assets (762,000) (1,549,000)
Increase in accrued interest payable and other liabilities 366,000 469,000
Increase (decrease) in deferred loan fees 2,000 (161,000)
------------- -------------
Net cash provided by operations 3,074,000 1,924,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing
deposits in financial institutions -- 999,000
Purchases of investment securities (72,237,000) (73,480,000)
Proceeds from maturities
of investment securities 72,040,000 27,386,000
Net increase in loans held for sale (3,008,000) (114,000)
Net increase in loans (16,550,000) (5,646,000)
Proceeds from sale of other real estate owned 126,000 446,000
Proceeds from sale of fixed assets 1,000 11,000
Capital expenditures (731,000) (1,009,000)
------------- -------------
Net cash used in investing activities (20,359,000) (51,407,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 502,000 68,305,000
Net increase (decrease) in short-term borrowings (124,000) 5,198,000
Proceeds from sale of stock 136,000 267,000
Fractional shares repurchased (12,000) (8,000)
------------- -------------
Net cash provided by financing activities 502,000 73,762,000
------------- -------------
Net increase (decrease) in cash and equivalents (16,783,000) 24,279,000
Cash and equivalents, beginning of period 104,597,000 60,657,000
------------- -------------
Cash and equivalents, end of period $ 87,814,000 $ 84,936,000
============= =============
OTHER CASH FLOW INFORMATION:
Interest paid $ 6,712,000 $ 5,126,000
Income taxes paid 1,125,000 1,540,000
============= =============
See Notes to Consolidated Condensed Financial Statements
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CENTRAL COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1998 (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 June 30, 1998 and December 31, 1997, the results of operations for
the three and six month periods ended June 30, 1998 and 1997, and cash flows for
the six month periods ended June 30, 1998 and 1997.
Certain disclosures normally presented in the notes to the 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 1997 Annual Report to Shareholders. The results of
operations for the three and six month periods ended June 30, 1998 and 1997 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 credit losses and the carrying value of
other real estate owned. Management uses information provided by an independent
loan review service in connection with the determination of the allowance for
loan losses.
2. INVESTMENT SECURITIES
The Company is required under Financial Accounting Standards Board (FASB)
Statement No. 115, "Accounting for Investments in Certain Debt and Equity
Securities", to classify debt and equity securities into one of three
categories: held-to-maturity, trading or available-for-sale. Investment
securities classified as held-to-maturity are measured at amortized cost based
on the Company's positive intent and ability to hold such securities to
maturity. Trading securities are bought and held principally for the purpose of
selling them in the near term and are carried at market value with a
corresponding recognition of unrecognized holding gain or loss in the results of
operations. The remaining investment securities are classified as
available-for-sale and are measured at market value with a corresponding
recognition of the unrealized holding gain or loss (net of tax effect) as a
separate component of shareholders' equity until realized. Any gains and losses
on sales of investments are computed on a specific identification basis.
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The carrying value and approximate market value of securities at June 30, 1998
and December 31, 1997 are as follows:
Amortized Unrealized Unrealized Market
In thousands Cost Gain Losses Value
- ---------------------------------------------- -------- -------- -------- --------
JUNE 30, 1998
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 6,994 $ 13 $ 3 $ 7,004
Maturing after 1 year but within 5 years 80,766 220 30 80,956
Maturing after 10 years 24,883 166 -- 25,049
Other 4 -- -- 4
-------- -------- -------- --------
Total available for sale $112,647 $ 399 $ 33 $113,013
-------- -------- -------- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 15,010 $ 56 $ -- $ 15,066
Maturing after 1 year but within 5 years 242 3 -- 245
Maturing after 5 years but within 10 years 41 1 -- 42
Maturing after 10 years 741 57 -- 798
State & Political Subdivision
Maturing after 5 years but within 10 years 2,051 -- -- 2,051
-------- -------- -------- --------
Total held to maturity $ 18,085 $ 117 $ -- $ 18,202
-------- -------- -------- --------
Total investment securities $130,732 $ 516 $ 33 $131,215
======== ======== ======== ========
DECEMBER 31, 1997
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 32,861 $ -- $ 5 $ 32,856
Maturing after 1 year but within 5 years 48,410 184 7 48,587
Bankers' Acceptances
Maturing within 1 year 10,034 -- -- 10,034
Other 4 -- -- 4
-------- -------- -------- --------
Total available for sale $ 91,309 $ 184 $ 12 $ 91,481
-------- -------- -------- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury and agency securities
Maturing within 1 year $ 27,484 $ 7 $ 11 $ 27,480
Maturing after 1 year but within 5 years 8,495 66 2 8,559
Maturing after 5 years but within 10 years 20 -- -- 20
Maturing after 10 years 857 6 9 854
State & Political Subdivision
Maturing after 5 years but within 10 years 2,192 -- -- 2,192
-------- -------- -------- --------
Total held to maturity $ 39,048 $ 79 $ 22 $ 39,105
-------- -------- -------- --------
Total investment securities $130,357 $ 263 $ 34 $130,586
======== ======== ======== ========
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3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The activity in the allowance for credit losses is summarized as follows:
Three months ended June 30, Six months ended June 30,
In thousands 1998 1997 1998 1997
- ------------------------------- ------- ------- ------- -------
Beginning balance $ 4,201 $ 4,313 $ 4,223 $ 4,372
Provision charged to expense 24 -- 41 --
Loans charged off (21) (155) (90) (243)
Recoveries 24 45 54 74
------- ------- ------- -------
Ending balance $ 4,228 $ 4,203 $ 4,228 $ 4,203
======= ======= ======= =======
The allowance for credit losses reflects management's judgement as to the level
considered adequate to absorb potential 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 credit 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 credit losses at June 30, 1998 is
prudent and warranted, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
Nonperforming 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
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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.
Nonperforming loans and other real estate owned (foreclosed properties) are
summarized below:
June 30, December 31,
In thousands 1998 1997
- ------------------------------------------- ------ ------
Past due 90 days or more and still accruing
Real estate $ -- $ 6
Commercial 1,089 73
Installment and other 1 --
------ ------
1,090 79
------ ------
Nonaccrual:
Real estate 706 628
Commercial 244 188
Installment and other -- --
------ ------
950 816
------ ------
Total nonperforming loans $2,040 $ 895
====== ======
Other real estate owned $ -- $ 105
====== ======
4. 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 $101,697,000 and standby letters of credit of
$1,363,000 at June 30, 1998. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 1998.
Approximately $17,657,000 of loan commitments outstanding at June 30, 1998
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. The Banks evaluate each potential borrower
and the necessary collateral on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities or business
assets.
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Stand-by letters of credit are commitments written by the Banks to guarantee the
performance of a customer to a third party. These guarantees are issued
primarily relating to purchases of inventory by the Banks' commercial customers
and are typically short-term in nature. Credit risk is similar to that involved
in extending loan commitments to customers and accordingly, the Banks use
evaluation and collateral requirements similar to those for loan commitments.
Virtually all such commitments are collateralized.
5. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (4,820,000 and 4,813,000 for
the three and six month periods ended June 30, 1998, and 4,774,000 and 4,746,000
for the three and six month periods ended June 30, 1997, respectively). Diluted
earnings per share reflects the potential dilution that could occur if
outstanding stock options and stock purchase warrants were exercised. Diluted
earnings per share is computed by dividing net income by the weighted average
common shares outstanding for the period plus the dilutive effect of options and
warrants (472,000 and 419,000 for the three and six month periods ended June 30,
1998 and 428,000 and 402,000 for the three and six month periods ended June 30,
1997, respectively).
6. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, Central Coast Bancorp adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. Central Coast
Bancorp's total comprehensive earnings were as follows:
Three Months Ended June 30, Six Months Ended June 30,
In thousands 1998 1997 1998 1997
- -------------------------------------------- ------ ------ ------ ------
Net Earnings $1,709 $1,608 $3,223 $3,059
Other comprehensive income - Net unrealized
gain on available-for-sale securities 230 95 115 43
------ ------ ------ ------
Total comprehensive earnings $1,939 $1,703 $3,338 $3,102
====== ====== ====== ======
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and reporting standards
for derivative instruments and for hedging activities. This statement becomes
effective in the third quarter of 1999, with earlier application permitted.
Adoption of this statement will not significantly impact the Company's
consolidated financial position, results of operations or cash flows.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this Quarterly Report
on Form 10-Q are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, matters
described in Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Therefore, the information set forth therein should
be carefully considered when evaluating the business prospects of the Company
and the Banks.
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.
Summary of Financial Results
At June 30, 1998, total assets of Central Coast Bancorp were $501,880,000, an
increase of $4,206,000 or 0.8% from December 31, 1997 total assets of
$497,674,000. Average total assets for the quarters ended June 30, 1998 and 1997
were $490,747,000 and $447,386,000, respectively.
On February 21, 1997, the Bank of Salinas purchased certain assets and assumed
certain liabilities of the Gonzales and Castroville offices of Wells Fargo Bank
(including total deposit liabilities of approximately $34 million). As a result
of the transaction the Bank assumed deposit liabilities, received cash and
acquired tangible assets. In addition, the transaction resulted in intangible
assets, representing the excess of the liabilities assumed over the fair value
of the tangible assets acquired.
Net loans at June 30, 1998 were $267,778,000 compared to $251,271,000 at
December 31, 1997, an increase of $16,507,000 or 6.6%. The increase in loan
balances is primarily the result of decreases in commercial loan categories
offset by increases in term real estate loan
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categories. Commercial loans decreased $5,825,000 or 4.7% to $118,889,000 at
June 30, 1998 from $124,714,000 at December 31, 1997. The decrease in commercial
loan balances is primarily due to seasonal fluctuation related to the
agribusiness sector of the local economy.
Offsetting this decrease, was an increase in term real estate, real estate
construction and land development loans. Real estate mortgage loan balances of
$125,075,000 at June 30, 1998 represented an increase of $17,721,000 or 16.5%
over $107,354,000 at December 31, 1997. Real estate construction and land
development loans of $20,939,000 at June 30, 1998 represented an increase of
$6,294,000 or 43.0% from $14,645,000 at December 31, 1997.
The Company designated securities with an estimated market value of $113,013,000
as available-for-sale at June 30, 1998. The amortized cost of securities
designated as available-for-sale on that date was $112,647,000. The
available-for-sale portfolio at June 30, 1998 consisted primarily of U.S.
Treasury bills and notes and securities issued by U.S. government-sponsored
agencies (FNMA, FHLMC and FHLB) with maturities within five years and U.S.
government-sponsored agencies mortgage backed securities with maturities greater
than ten years. During the six months ended June 30, 1998, the Company made
securities purchases of $72,237,000 to replace $51,081,000 of maturities and to
more fully employ excess liquidity.
Securities designated as held-to-maturity at June 30, 1998 were carried at an
amortized cost of $18,085,000. The estimated market value of the
held-to-maturity portfolio at June 30, 1998 was $18,202,000. The
held-to-maturity portfolio at June 30, 1998 consists primarily of U.S. Treasury
bills and notes and securities issued by U.S. government-sponsored agencies with
maturities within five years. Investment securities classified as
held-to-maturity are measured at amortized cost based on the Company's intent
and ability to hold such securities to maturity. During the six months ended
June 30, 1998, $20,959,000 held-to-maturity securities matured and were not
replaced.
Other earning assets are comprised of Federal funds sold. Federal funds sold
balances of $40,687,000 at June 30, 1998 represent a decrease of $24,019,000
over $64,706,000 at December 31, 1997. The decrease in federal funds sold
primarily reflects the growth in the loan portfolio.
Total deposits were $450,803,000 at June 30, 1998 which represented an increase
of $502,000 or 0.1% over balances of $450,301,000 at December 31, 1997. The
increase in total deposits includes increases in all deposit categories, except
noninterest bearing demand. Noninterest-bearing demand deposits were
$112,819,000 at June 30, 1998 compared to $126,818,000 at December 31, 1997, a
decrease of $13,999,000 or 11.0%. The decrease in noninterest bearing demand
balances is partially due to seasonal fluctuation. Interest bearing demand
balances increased $2,780,000 or 3.1% to $91,887,000 at June 30, 1998 from
$89,107,000 at December 31, 1997. Savings balances of $104,299,000 represent an
increase of $4,551,000 or 4.6% from $99,748,000 at December 31, 1997. Time
deposits increased $7,170,000 or 5.3% to $141,798,000 at June 30, 1998 from
$134,628,000 at December 31, 1997.
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THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for the three months ended June 30, 1998 was $1,709,000 ($.36 basic
and $.32 diluted earnings per share) compared to $1,608,000 ($.34 basic and $.31
diluted earnings per share) for the comparable period in 1997. The following
discussion highlights changes in certain items in the consolidated condensed
statements of income.
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 components of net interest income are as
follows:
(Unaudited)
Three months ended June 30,
In thousands (except percentages) 1998 1997
------------------------------- ----------------------------------
Avg Avg Avg Avg
Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
ASSETS:
Earning Assets
Loans (1)(2) $264,547 $ 6,669 10.1% $240,074 $ 6,324 10.6%
Investment Securities 133,792 2,027 6.1% 104,078 1,513 5.8%
Fed Funds Sold 43,119 585 5.4% 58,741 717 4.9%
-------- -------- -------- --------
Total Earning Assets 441,458 9,281 8.4% 402,893 8,554 8.5%
-------- --------
Cash and due from banks 38,502 34,577
Other assets 10,787 9,916
------ -----
$490,747 $447,386
======== ========
LIABILITIES & SHAREHOLDERS'
EQUITY:
Interest bearing liabilities:
Demand deposits $ 86,377 $ 416 1.9% $101,411 $ 515 2.0%
Savings 97,424 925 3.8% 93,546 935 4.0%
Time deposits 148,518 2,074 5.6% 107,074 1,479 5.5%
Other borrowings -- -- n/a 11,874 70 2.4%
-------- -------- -------- --------
Total interest bearing
liabilities 332,319 3,415 4.1% 313,905 2,999 3.8%
-------- --------
Demand deposits 108,111 93,632
Other Liabilities 4,036 1,064
-------- --------
Total Liabilities 444,466 408,601
Shareholders' Equity 46,281 38,785
-------- --------
$490,747 $447,386
======== ========
Net interest income and
margin (net yield) (3) $ 5,866 5.3% $ 5,555 5.5%
======== ==== ======== ====
1 Loan interest income includes fee income of $262,000 and $337,000 for the
three month periods ended June 30, 1998 and 1997, respectively.
2 Includes the average allowance for loan losses of $4,206,000 and $4,276,000
and average deferred loan fees of $528,000 and $526,000 for the three
months ended June 30, 1998 and 1997, respectively.
3 Net interest margin is computed by dividing net interest income by the
total average earning assets.
12
13
Net interest income for the three months ended June 30, 1998 was $5,866,000
representing an improvement of $311,000 or 5.6% over $5,555,000 for the
comparable period in 1997. The increase in net interest income is comprised of
an increase of $727,000 or 8.5% in interest income partially offset by an
increase in interest expense of $416,000 or 13.9%.
As a percentage of average earning assets, the net interest margin for the
second quarter of 1998 was 5.3% and compares to 5.5% in the same period one year
earlier. On average, the loan to deposit ratio of the Company increased to 61.0%
in the second quarter of 1998 from 60.0% in the same period last year.
Interest income recognized in the three months ended June 30, 1998 was
$9,281,000 representing an increase of $727,000 or 8.5% over $8,554,000 for the
same period of 1997. The increase in interest income was primarily due to an
increase in the volume of average earning assets. Earning assets averaged
$441,458,000 in the three months ended June 30, 1998 compared to $402,893,000 in
the same period in 1997, representing an increase of $38,565,000 or 9.6%. The
increase in average earning assets included an increase in average loans of
$24,473,000 or 10.2% and in investment securities of $29,714,000 or 28.5%,
partially offset by a decrease of $15,622,000 or 26.6% in fed funds sold.
The average yield on interest earning assets decreased to 8.4% in the three
months ended June 30, 1998 compared to 8.5% for the same period of 1997. The
decrease in average yield is attributed to a decrease in the yield on average
loans, net of the average allowance for loan losses and average deferred loan
fees, to 10.1% for the three months ended June 30, 1998, from 10.6% for the same
period in 1997. Included in the net yield on loans were fees of $262,000 and
$337,000 for the three month periods ended June 30, 1998 and 1997, respectively.
Partially offsetting this decrease, were increases in the average yield on
investment securities and other earning assets to 6.1% and 5.4%, respectively,
for the quarter ended June 30, 1998, from 5.8% and 4.9%, respectively, for the
same period in the prior year.
Partially offsetting the increase in interest income was an increase in the cost
of liabilities funding the growth in average earning assets. Interest expense
for the three months ended June 30, 1998 was $3,415,000 and represented an
increase of $416,000 or 13.9% over $2,999,000 for the comparable period in 1997.
During the three months ended June 30, 1998, the average rate paid by the Banks
on interest-bearing liabilities was 4.1% compared to 3.8% for the same period in
1997. The increase in interest expense for the second quarter of 1998 reflects
an increase in the proportion of time deposits to total interest bearing
liabilities to 44.7% in the second quarter of 1998 from 34.1% in the same period
in 1997. Average interest bearing liabilities were $332,319,000 in the three
months ended June 30, 1998 compared to $313,905,000 for the same period in 1997,
an increase of $18,414,000 or 5.9%. Partially offsetting the impact on net
interest income resulting from the increase in interest bearing liabilities was
an increase in average noninterest bearing demand deposits. Average noninterest
bearing demand deposits of $108,111,000 for the quarter ended June 30, 1998
represented an increase of $14,479,000 or 15.5% over $93,632,000 for the same
period one year earlier.
13
14
Credit Risk and Provision for Credit 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.
Ultimately, credit quality may be influenced by underlying trends in the
economic and business cycles. The Company's business is concentrated in Monterey
County, California whose economy is highly dependent on the agricultural
industry. As a result, the Company lends money to individuals and companies
dependent upon the agricultural industry. In addition, the Company has
significant extensions of credit and commitments to extend credit which are
secured by real estate, totaling approximately $184,770,000. The ultimate
recovery of these loans is generally dependent on the successful operation, sale
or refinancing of the real estate. The Company monitors the effects of current
and expected market conditions and other factors on the collectibility of real
estate loans. When, in management's judgement, these loans are impaired,
appropriate provision for losses is recorded. The more significant assumptions
management considers involve estimates of the following: lease, absorption and
sale rates; real estate values and rates of return; operating expenses;
inflation; and sufficiency of collateral independent of the real estate
including, in limited instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally requires
collateral and/or guarantees as security. The repayment of such loans is
expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the credit worthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its interest in business assets, obtaining
deeds of trust, or outright possession among other means. Credit losses from
lending transactions related to real estate and agriculture compare favorably
with the Company's credit losses on its loan portfolio as a whole.
The Company recorded a $24,000 provision for loan losses through a charge to
earnings in the quarter ended June 30, 1998 and no provision was recorded during
that period in 1997. The small amount of increase in the provision reflects the
strengthening economy, continued strong credit performance and an increase in
the rate of recovery of loan balances previously charged off. Loan balances of
$21,000, which were previously identified and fully reserved for, were
charged-off in the second quarter of 1998 compared to $155,000 charged-off in
the same period one year earlier. Recoveries of loan balances previously
charged-off were $24,000 for the quarter ended June 30, 1998 compared to $45,000
for the same period in 1997. See Note 3 of the consolidated condensed financial
statements for further discussion of
14
15
nonperforming loans and the allowance for credit losses.
At June 30, 1998 the allowance for credit losses was $4,228,000 or 1.55% of
total loans, compared to $4,223,000 or 1.65% at December 31, 1997.
Management believes that the allowance for loan losses is maintained at an
adequate level for known and anticipated future risks inherent in the loan
portfolio. However, the Company's loan portfolio, particularly the real estate
related segments, may be adversely affected if California's economic conditions
and the Monterey County real estate market were to weaken. As a result, the
level of nonperforming loans, the provision for loan losses and the level of the
allowance for loan losses may increase.
Noninterest Income and Expense
Noninterest income consists primarily of service charges on deposit accounts and
fees for miscellaneous services. Total other income was $530,000 for the three
months ended June 30, 1998 as compared to $420,000 for the same period of 1997.
Noninterest income for the second quarter of 1998 represented an increase of
26.2% over the second quarter of 1997. The increase in noninterest income is
primarily attributed to an increase in service charges on deposit accounts of
$40,000 and mortgage referral fees of $46,000.
Noninterest expense increased $214,000 or 6.6% to $3,458,000 in the quarter
ended June 30, 1998 from $3,244,000 in the same period one year earlier. The
increase in noninterest expenses is primarily due to increases in salaries and
benefits, and occupancy and equipment expense. As a percentage of average
earning assets, other expenses, on an annualized basis, decreased to 3.1% in the
three months ended June 30, 1998 from 3.2% in the comparable period of 1997.
Salary and benefits expense was $2,052,000 in the three months ended June 30,
1998 compared to $1,909,000 in the same period one year earlier, an increase of
$144,000 or 7.5%. The increase in salary and benefits expense is primarily due
to increased headcount related to the branch acquisition by Bank of Salinas
during the first quarter of 1997.
Occupancy expense for the quarter ended June 30, 1998 was $273,000 and
represented an increase of $36,000 or 15.2% over $237,000 for the same period
last year. The increase in occupancy expense relates to the branch acquisition
by Bank of Salinas during the first quarter of 1997 and the relocation of a Bank
of Salinas branch during the second quarter of 1998.
Furniture and equipment expense for the first quarter of 1998 increased $26,000
or 12.4% to $235,000 from $209,000 for the same period last year. The increase
in furniture and equipment expense is the result of a program for upgrading the
Company's internal systems in addition to the impact of facilities moves and
expansion by the Banks.
Other expenses increased $8,000 or 0.9% to $897,000 in the three months ended
June 30, 1998 from $889,000 for the comparable period one year earlier.
Increases in advertising and operating expenses were partially offset by
decreases in loan and supplies expenses.
15
16
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for the six months ended June 30, 1998 was $3,223,000 ($.67 basic and
$.62 diluted earnings per share) compared to $3,059,000 ($.64 basic and $.59
diluted earnings per share) for the comparable period in 1997. The following
discussion highlights changes in certain items in the consolidated condensed
statements of income.
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 components of net interest income are as
follows:
(Unaudited)
Six months ended June 30,
In thousands (except percentages) 1998 1997
---------------------------------- ------------------------------------------
Avg Avg Avg Avg
Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
ASSETS:
Earning Assets
Loans (1)(2) $ 255,039 $ 12,936 10.2% $ 235,820 $ 12,256 10.5%
Investment Securities 127,682 3,807 6.0% 91,480 2,623 5.8%
Fed Funds Sold 56,590 1,530 5.5% 49,022 1,307 5.4%
------------ ---------- ----------- ----------
Total Earning Assets 439,311 18,273 8.4% 376,322 16,186 8.7%
---------- ----------
Cash and due from banks 38,112 30,801
Other assets 10,446 9,202
------------ -----------
$ 487,869 $ 416,325
============ ===========
LIABILITIES & SHAREHOLDERS'
EQUITY:
Interest bearing liabilities:
Demand deposits $ 86,486 $ 837 2.0% $ 94,141 $ 952 2.0%
Savings 98,492 1,867 3.8% 93,075 1,861 4.0%
Time deposits 145,289 4,046 5.6% 99,743 2,726 5.5%
Other borrowings -- -- n/a 3,420 72 4.2%
------------ ---------- ----------- ----------
Total interest bearing
liabilities 330,267 6,750 4.1% 290,379 5,611 3.9%
---------- ----------
Demand deposits 108,344 86,057
Other Liabilities 3,705 2,051
------------ -----------
Total Liabilities 442,316 378,487
Shareholders' Equity 45,553 37,838
------------ -----------
$ 487,869 $ 416,325
============ ===========
Net interest income and
margin (net yield) (3) $ 11,523 5.3% $ 10,575 5.7%
========== === ========== ===
1 Loan interest income includes fee income of $506,000 and $613,000 for the
six month periods ended June 30, 1998 and 1997, respectively.
2 Includes the average allowance for loan losses of $4,207,000 and $4,318,000
and average deferred loan fees of $538,000 and $586,000 for the six months
ended June 30, 1998 and 1997, respectively.
3 Net interest margin is computed by dividing net interest income by the
total average earning assets.
16
17
Net interest income for the six months ended June 30, 1998 was $11,528,000
representing an improvement of $948,000 or 9.0% over $10,575,000 for the
comparable period in 1997. The increase in net interest income is comprised of
an increase of $2,087,000 or 12.9% in interest income partially offset by an
increase in interest expense of $1,139,000 or 20.3%.
As a percentage of average earning assets, the net interest margin for the first
half of 1998 was 5.3% and compares to 5.7% in the same period one year earlier.
On average, the loan to deposit ratio of the Company decreased to 59.1% in the
first half of 1998 from 63.8% in the same period last year.
Interest income recognized in the six months ended June 30, 1998 was $18,273,000
representing an increase of $2,087,000 or 12.9% over $16,186,000 for the same
period of 1997. The increase in interest income was primarily due to an increase
in the volume of average earning assets. Earning assets averaged $439,311,000 in
the six months ended June 30, 1998 compared to $376,322,000 in the same period
in 1997, representing an increase of $62,989,000 or 16.7%. The increase in
average earning assets included an increase in average loans of $19,219,000 or
8.1% and increases in investment securities and fed funds sold of $36,202,000
and $7,568,000 or 39.6% and 15.4%, respectively.
The average yield on interest earning assets decreased to 8.4% in the six months
ended June 30, 1998 compared to 8.7% for the same period of 1997. The decrease
in average yield is attributed to a decrease in the proportion of loans to total
earning assets to 58.1% in the first half of 1998 from 62.7% in the same period
in 1997. Loan fees recognized during the six months ended June 30, 1998 were
$506,000 compared to $613,000 one year earlier.
Partially offsetting the increase in interest income was an increase in the cost
of liabilities funding the growth in average earning assets. Interest expense
for the six months ended June 30, 1998 was $6,750,000 and represented an
increase of $1,139,000 or 20.3% over $5,611,000 for the comparable period in
1997. During the six months ended June 30, 1998, the average rate paid by the
Banks on interest-bearing liabilities was 4.1% compared to 3.9% for the same
period in 1997. The increase in interest expense for the first half of 1998
reflects an increase in the proportion of time deposits to total interest
bearing liabilities to 44.0% in the first half of 1998 from 34.3% in the same
period in 1997. Average interest bearing liabilities were $330,267,000 in the
six months ended June 30, 1998 compared to $290,379,000 for the same period in
1997, an increase of $39,888,000 or 13.7%. Partially offsetting the impact on
net interest income resulting from the increase in interest bearing liabilities
was an increase in average noninterest bearing demand deposits. Average
noninterest bearing demand deposits of $108,344,000 for the six months ended
June 30, 1998 represented an increase of $22,287,000 or 25.9% over $86,057,000
for the same period one year earlier.
Provision for Credit Losses
The Company recorded a $41,000 provision for loan losses through a charge to
earnings in the six months ended June 30, 1998 and no provision was recorded
during that period in 1997. The small amount of increase in the provision
reflects the strengthening economy, continued strong credit performance and an
increase in the rate of recovery of loan balances
17
18
previously charged off. Loan balances of $90,000, which were previously
identified and fully reserved for, were charged-off in the first two quarters of
1998 compared to $243,000 charged-off in the same period one year earlier.
Recoveries of loan balances previously charged-off were $54,000 for the two
quarters ended June 30, 1998 compared to $74,000 for the same period in 1997.
See Note 3 of the consolidated condensed financial statements for further
discussion of nonperforming loans and the allowance for credit losses.
Noninterest Income and Expense
Total other income was $924,000 for the six months ended June 30, 1998 as
compared to $806,000 for the same period of 1997. Noninterest income for the
first two quarters of 1998 represented an increase of 14.6% over that for 1997.
The increase in noninterest income is primarily attributed to an increase in
service charges on deposit accounts of $109,000 and mortgage referral fees of
$52,000 offsetting nonrecurring revenues in the prior year.
Noninterest expense increased $717,000 or 11.6% to $6,910,000 in the two
quarters ended June 30, 1998 from $6,193,000 in the same period one year
earlier. The increase in noninterest expenses is primarily due to increases in
salaries and benefits, and occupancy and equipment expense. As a percentage of
average earning assets, other expenses, on an annualized basis, decreased to
3.2% in the six months ended June 30, 1998 from 3.3% in the comparable period of
1997.
Salary and benefits expense was $4,208,000 in the six months ended June 30, 1998
compared to $3,742,000 in the same period one year earlier, an increase of
$466,000 or 12.5%. The increase in salary and benefits expense is primarily due
to increased headcount related to the branch acquisition by Bank of Salinas
during the first quarter of 1997.
Occupancy expense for the two quarters ended June 30, 1998 was $492,000 and
represented an increase of $51,000 or 11.6% over $441,000 for the same period
last year. The increase in occupancy expense relates to the branch acquisition
by Bank of Salinas during the first quarter of 1997 and the relocation of a
branch by Bank of Salinas during the second quarter of 1998.
Furniture and equipment expense for the first two quarters of 1998 increased
$43,000 or 11.1% to $430,000 from $387,000 for the same period last year. The
increase in furniture and equipment expense is the result of a program for
upgrading the Company's internal systems in addition to the impact of facilities
moves and expansion by the Banks.
Other expenses increased $157,000 or 9.7% to $1,780,000 in the six months ended
June 30, 1998 from $1,623,000 for the comparable period one year earlier. The
increase in other expenses is comprised of increases in advertising and
operating expenses and amortization of intangibles. Partially offsetting these
increases were decreases in loan expenses and stationery and supplies.
18
19
LIQUIDITY AND INTEREST RATE SENSITIVITY
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 June 30, 1998, were approximately $101,697,000 and
$1,363,000, 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 held for sale. On June 30, 1998, consolidated liquid
assets totaled $128 million or 25.7% of total assets as compared to $164.2
million or 33.0% of total consolidated assets on December 31, 1997. In addition
to liquid assets, the Banks maintain lines of credit with correspondent banks
for up to $20,000,000 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.
Liquidity is also affected by portfolio maturities and the effect of interest
rate fluctuations on the marketability of both assets and liabilities. In
addition, it has been the Company's policy to restrict average maturities in the
investment portfolio to not more than three years. The short-term repricing
characteristics of the loan and investment portfolios, and loan agreements which
generally require monthly interest payments, provide the Banks with additional
secondary sources of liquidity. Another key liquidity ratio is the ratio of
gross loans to total deposits, which was 60.5% at June 30, 1998 and 56.9% at
December 31, 1997.
Interest rate sensitivity
Interest rate sensitivity is a measure of the exposure to fluctuations in the
Banks' future earnings caused by fluctuations in interest rates. Such
fluctuations result from the mismatch in repricing characteristics of assets and
liabilities at a specific point in time. This mismatch, or interest rate
sensitivity gap, represents the potential mismatch in the change in the rate of
accrual of interest revenue and interest expense from a change in market
interest rates. Mismatches in interest rate repricing among assets and
liabilities arise primarily from the interaction of various customer businesses
(i.e., types of loans versus the types of deposits maintained) and from
management's discretionary investment and funds gathering activities. The
Company attempts to manage its exposure to interest rate sensitivity, but due to
its size and direct competition from the major banks, it must offer products
which are competitive in the market place, even if less than optimum with
respect to its interest rate exposure.
19
20
The Company's natural position is asset-sensitive (based upon the significant
amount of variable rate loans and the repricing characteristics of its deposit
accounts). This natural position provides a hedge against rising interest rates,
but has a detrimental effect during times of interest rate decreases.
The following table sets forth the distribution of repricing opportunities,
based on contractual terms, of the Banks' earning assets and interest-bearing
liabilities at June 30, 1998, the interest rate sensitivity gap (i.e. interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive liabilities)
and the cumulative interest rate sensitivity gap ratio.
June 30, 1998
In thousands (except ratios)
Over three
Assets and Liabilities Next day months and Over one
which Mature or and within within and within Over
Reprice Immediately three months one year five years five years Total
- ------------------------ --------- --------- --------- --------- --------- ---------
Interest earning assets:
Federal funds sold $ 40,687 $ -- $ -- $ -- $ -- $ 40,687
Investment securities 4 7,999 14,015 81,199 27,881 131,098
Loans, excluding
nonaccrual loans
and overdrafts 14,911 174,834 16,202 61,565 7,650 275,162
--------- --------- --------- --------- --------- ---------
Total $ 55,602 $ 182,833 $ 30,217 $ 142,764 $ 35,531 $ 446,947
========= ========= ========= ========= ========= =========
Interest bearing
liabilities:
Interest bearing demand $ 91,887 $ -- $ -- $ -- $ -- $ 91,887
Savings 104,299 -- -- -- -- 104,299
Time certificates 83 49,464 73,790 18,418 43 141,798
Other Borrowings -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total $ 196,269 $ 49,464 $ 73,790 $ 18,418 $ 43 $ 337,984
========= ========= ========= ========= ========= =========
Interest rate
sensitivity gap $(140,667) $ 133,369 $ (43,573) $ 124,346 $ 35,488
Cumulative interest
rate sensitivity gap $(140,667) $ (7,298) $ (50,871) $ 73,475 $ 108,963
Ratios:
Interest rate
sensitivity gap 0.28 3.07 0.41 7.75 826.30
Cumulative interest
rate sensitivity gap 0.28 0.97 0.84 1.22 1.32
--------- --------- --------- --------- ---------
It is management's objective to maintain stability in the net interest margin in
times of fluctuating interest rates by maintaining an appropriate mix of
interest sensitive assets and liabilities. The Banks strive to achieve this goal
through the composition and maturities of the
20
21
investment portfolio and by adjusting pricing of interest-bearing liabilities,
however, as noted above, the ability to manage interest rate exposure may be
constrained by competitive pressures.
CAPITAL RESOURCES
The Company's total shareholders' equity was $47,186,000 at June 30, 1998
compared to $43,724,000 at December 31, 1997.
The Company and the Banks are subject to regulations issued by the Board of
Governors and the FDIC which require maintenance of a certain level of capital.
These regulations impose two capital standards: a risk-based capital standard
and a leverage capital standard.
Under the Board of Governors' risk-based capital guidelines, assets reported on
an institution's balance sheet and certain off-balance sheet items are assigned
to risk categories, each of which has an assigned risk weight. Capital ratios
are calculated by dividing the institution's qualifying capital by its
period-end risk-weighted assets. The guidelines establish two categories of
qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital defined
to include limited life (and in the case of banks, cumulative) preferred stock,
mandatory convertible securities, subordinated debt and a limited amount of
reserves for loan and lease losses. Each institution is required to maintain a
risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%, of which
at least half must be Tier 1 capital.
Under the Board of Governors' leverage capital standard an institution is
required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. A minimum
leverage ratio of 3% is required for institutions which have been determined to
be in the highest of five categories used by regulators to rate financial
institutions and which are not experiencing or anticipating significant growth.
All other organizations are required to maintain leverage ratios of at least 100
to 200 basis points above the 3% minimum.
The following table shows the Company's actual capital amounts and ratios at
June 30, 1998 and December 31, 1997 as well as the minimum capital ratios for
capital adequacy under the regulatory framework:
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22
For Capital
Actual Adequacy Purposes:
----------------------- -----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
AS OF JUNE 30, 1998
Total Capital (to Risk Weighted Assets): 49,517,000 15.6% 25,468,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 45,514,000 14.3% 12,734,000 4.0%
Tier 1 Capital (to Average Assets): 45,514,000 9.2% 19,897,000 4.0%
AS OF DECEMBER 31, 1997
Total Capital (to Risk Weighted Assets): 45,782,000 15.2% 24,046,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 41,968,000 14.0% 12,023,000 4.0%
Tier 1 Capital (to Average Assets): 41,968,000 9.6% 17,570,000 4.0%
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
substantially revised banking regulations and established a framework for
determination of capital adequacy of financial institutions. Under the FDICIA,
financial institutions are placed into one of five capital adequacy categories
as follows: (1) "well capitalized" consisting of institutions with a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of
6% or greater and a leverage ratio of 5% or greater, and the institution is not
subject to an order, written agreement, capital directive or prompt corrective
action directive; (2) "adequately capitalized" consisting of institutions with a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4% or greater, and the
institution does not meet the definition of a "well capitalized" institution;
(3) "undercapitalized" consisting of institutions with a total risk-based
capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%,
or a leverage ratio of less than 4%; (4) "significantly undercapitalized"
consisting of institutions with a total risk-based capital ratio of less than
6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of
less than 3%; and, (5) "critically undercapitalized" consisting of an
institution with a ratio of tangible equity to total assets that is equal to or
less than 2%.
Financial institutions classified as undercapitalized or below are subject to
various limitations including, among other matters, certain supervisory actions
by bank regulatory authorities and restrictions related to (i) growth of assets,
(ii) payment of interest on subordinated indebtedness, (iii) payment of
dividends or other capital distributions, and (iv) payment of management fees to
a parent holding company. The FDICIA requires the bank regulatory authorities to
initiate corrective action regarding financial institutions which fail to meet
minimum capital requirements. Such action may, among other matters, require that
the financial institution augment capital and reduce total assets. Critically
undercapitalized financial institutions may also be subject to appointment of a
receiver or conservator unless the financial institution submits an adequate
capitalization plan.
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on manufacturing, or other commercial concerns, primarily because
its assets and liabilities are largely monetary. In general, inflation primarily
affects the Company indirectly through its effect on market rates of interest,
and thus the ability of the Banks to attract loan customers.
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23
Inflation affects the growth of total assets by increasing the level of loan
demand, and potentially adversely affects the Company's capital adequacy because
loan growth in inflationary periods can increase at rates higher than the rate
that capital grows through retention of earnings which the Company may generate
in the future. In addition to its effects on interest rates, inflation directly
affects the Company by increasing the Company's operating expenses.
The effect of inflation was not material to the Company's results of operations
during the periods covered by this report.
OTHER MATTERS
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.
Management is in the process of working with its software vendors to assure that
the Company is prepared for the year 2000. Also, the Company has put procedures
in place to inquire whether the system of key borrowers are year 2000 compliant.
However, there can be no assurance that problems will not arise which could have
such an adverse impact 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. Delays, mistakes or failures in correcting Year 2000 system
problems by such other companies 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 Year 2000 problems
for their customers. At present, the Company does not have an estimate of the
total cost of evaluating and fixing any potential year 2000 problems.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The reader is referred to pages 28 to 29 of the Annual Report on Form 10-K
for information on market risk. There have been no significant changes since
December 31, 1997.
23
24
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 ANNUAL MEETING OF THE SHAREHOLDERS WAS HELD ON MAY 21, 1998.
PROPOSAL NO. 1: ELECTION OF DIRECTORS
Number of Affirmative Votes
---------------------------
C. EDWARD BOUTONNET 3,034,879
BRADFORD G. CRANDALL 3,031,687
ALFRED P. GLOVER 3,044,359
RICHARD C. GREEN 3,035,481
MICHAEL T. LAPSYS 3,036,537
DUNCAN L. McCARTER 3,036,537
ROBERT M. MRAULE, D.D.S., M.D. 3,035,437
LOUIS M. SOUZA 3,032,411
MOSE E. THOMAS, JR. 3,046,493
NICK VENTIMIGLIA 3,050,434
Number of Number of Number of Shares
Votes Cast For Votes Cast Against Indicated As Abstentions
-------------- ------------------ ------------------------
PROPOSAL NO. 2: APPROVAL OF DELOITTE & TOUCHE LLP
AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE
1998 FISCAL YEAR.
2,973,082 52,447 58,102
TOTAL NUMBER OF SHARES FOR WHICH PROXIES HAVE BEEN RECEIVED:
3,084,716
Item 5. Other information.
None.
24
25
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
(10.20) Lease agreement dated April 16, 1998, related
to Cypress Bank Plaza, Marina, California
(27.1) Financial Data Schedules
Reports on Form 8-K - None
25
26
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 31, 1998 CENTRAL COAST BANCORP
By: \s\JAYME C. FIELDS
---------------------------------
Jayme C. Fields, Controller
(Principal Financial and
Accounting Officer)
26
27
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
10.20 Lease Agreement Dated April 16, 1998, 28
related to Cypress Bank Plaza, Marina, California
27.1 Financial Data Schedule 61
27