UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year ended December 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-25418
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CENTRAL COAST BANCORP
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0367061
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Main Street, Salinas, California 93901
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (831) 422-6642
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock
(no par value)
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 for 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 7, 2001 was $139,592,259. As of March 7, 2001, the
registrant had 7,346,961 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K:
Part III, Items 10 through 13 from registrant's definitive proxy statement
for the 2001 annual meeting of shareholders.
The Index to Exhibits is located at page 66 Page 1 of 67 Pages
1
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS.
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Certain matters discussed or incorporated by reference in this Annual Report
on Form 10-K including, but not limited to, matters described in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Changes to such risks and uncertainties, which could impact
future financial performance, include, among others, (1) competitive
pressures in the banking industry; (2) changes in the interest rate
environment; (3) general economic conditions, nationally, regionally and in
operating market areas, including a decline in real estate values in the
Company's market areas; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; (6) changes in securities
markets; (7) data processing compliance problems; (8) the California power
crisis; (9) variances in the actual versus projected growth in assests; (10)
return on assets; (11) loan losses; (12) expenses; (13) rates charged on
loans and earned on securities investments; (14) rates paid on deposits; and
(15) fee and other noninterest income earned, as well as other factors. This
entire Annual Report should be read to put such forward-looking statements in
context and to gain a more complete understanding of the uncertainties and
risks involved in the Company's business. Therefore, the information set
forth therein should be carefully considered when evaluating the business
prospects of the Company and the Bank.
Central Coast Bancorp (the "Company") is a California corporation, located in
Salinas, California and was organized in 1994 to act as a bank holding
company for Bank of Salinas. In 1996, the Company acquired Cypress Bank,
which was headquartered in Seaside, California. Both banks were
state-charted institutions. In July of 1999, the Company merged Cypress Bank
into the Bank of Salinas and then renamed Bank of Salinas as Community Bank
of Central California (the "Bank"). The Bank is headquartered in Salinas and
serves individuals, merchants, small and medium-sized businesses,
professionals, agribusiness enterprises and wage earners located in the
California Central Coast area.
On February 21, 1997, the former Bank of Salinas purchased certain assets and
assumed certain liabilities of the Gonzales and Castroville branch offices of
Wells Fargo Bank. As a result of the transaction the Bank assumed deposit
liabilities, received cash, and acquired tangible assets. This transaction
resulted in intangible assets, representing the excess of the liabilities
assumed over the fair value of the tangible assets acquired.
In January 1997, the former Cypress Bank opened a new branch office in
Monterey, California, so that it might better serve business and individual
customers on the Monterey Peninsula. In December 1998, the former Bank of
Salinas opened an additional new branch office in Salinas, California, to
better provide services to the growing Salinas community.
In June of 2000, the Bank opened a new branch office in Watsonville, which is
in Santa Cruz County. In October of 2000, another new branch office was
opened in Hollister, which is in San Benito County. The opening of these two
branch offices was a first step in expanding the Bank's service area to
include communities outside of Monterey County. Both of these communities
are
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of similar economic make-up to the agricultural based communities the
Bank serves in Monterey County.
Other than holding the shares of the subsidiary Bank, the Company conducts no
significant activities. Although, it is authorized, with the prior approval
of the Board of Governors of the Federal Reserve System (the "Board of
Governors"), the Company's principal regulator, to engage in a variety of
activities which are deemed closely related to the business of banking.
The Bank operates through its main office in Salinas and through nine branch
offices located in Castroville, Hollister, Gonzales, King City, Marina,
Monterey, Salinas, Seaside and Watsonville, California. The Bank offers a
full range of commercial banking services, including the acceptance of
demand, savings and time deposits, and the making of commercial, real estate
(including residential mortgage), Small Business Administration, personal,
home improvement, automobile and other installment and term loans. The Bank
also currently offers personal and business Visa credit cards. It also
offers ATM and Visa debit cards, travelers' checks, safe deposit boxes,
notary public, customer courier and other customary bank services. Most of
the Bank's offices are open from 9:00 a.m. to 5:00 p.m., Monday through
Thursday and 9:00 a.m. to 6:00 p.m. on Friday. The Westridge and Marina
branch offices are also open from 9:00 a.m. to 1:00 p.m. on Saturdays.
Additionally, on a 24-hour basis, customers can bank by telephone or online
at the Bank's Internet site, www.community-bnk.com. The Bank also operates a
limited service facility in a retirement home located in Salinas,
California. The facility is open from 10:00 a.m. to 12:00 p.m. on Wednesday
of each week. The Bank has automated teller machines (ATMs) located at the
Castroville, Hollister, Gonzales, King City, Marina, Monterey, Salinas,
Seaside and Watsonville offices, the Monterey County Fairgrounds, the Soledad
Correctional Training Facility Credit Union, Salinas Valley Memorial Hospital
and Fort Hunter Liggett which is located in Jolon, California. The Bank is
insured under the Federal Deposit Insurance Act and each depositor's account
is insured up to the legal limits thereon. The Bank is chartered (licensed)
by the California Commissioner of Financial Institutions ("Commissioner") and
has chosen not to become a member of the Federal Reserve System. The Bank
has no subsidiaries.
The Bank operates an on-site computer system, which provides independent
processing of its deposits, loans and financial accounting.
The Bank concentrates its lending activities in four principal areas:
commercial loans (including agricultural loans); consumer loans; real estate
construction loans (both commercial and personal) and real estate-other
loans. At December 31, 2000, these four categories accounted for
approximately 36%, 2%, 12% and 50% of the Bank's loan portfolio, respectively.
The Bank concentrates its lending activities in four principal areas:
commercial loans (including agricultural loans); consumer loans; real estate
construction loans (both commercial and personal) and real estate-other
loans. At December 31, 2000, these four categories accounted for
approximately 36%, 2%, 12% and 50% of the Bank's loan portfolio, respectively.
The Bank's deposits are attracted primarily from individuals, merchants,
small and medium-sized businesses, professionals and agribusiness
enterprises. The Bank's deposits are not received from a single depositor or
group of affiliated depositors the loss of any one of which would have a
materially adverse effect on the business of the Bank. A material portion of
the Bank's deposits is not concentrated within a single industry or group of
related industries.
3
As of December 31, 2000, the Bank served a total of 26 municipality and
governmental agency depositors totaling $48,396,000 in deposits. In
connection with the deposits of municipalities or other governmental agencies
or entities, the Bank is generally required to pledge securities to secure
such deposits, except for the first $100,000 of such deposits which are
insured by the Federal Deposit Insurance Corporation ("FDIC").
As of December 31, 2000, the Bank had total deposits of $633,210,000. Of
this total, $207,002,000 represented noninterest-bearing demand deposits,
$88,285,000 represented interest-bearing demand deposits, and $337,923,000
represented interest-bearing savings and time deposits.
The principal sources of the Bank's revenues are: (i) interest and fees on
loans; (ii) interest on investments (principally government securities); and
(iii) interest on Federal Funds sold (funds loaned on a short-term basis to
other banks). For the fiscal year ended December 31, 2000, these sources
comprised 80.5 percent, 17.4 percent, and 2.1 percent, respectively, of the
Bank's total interest income.
SUPERVISION AND REGULATION
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The common stock of the Company is subject to the registration requirements
of the Securities Act of 1933, as amended, and the qualification requirements
of the California Corporate Securities Law of 1968, as amended. The Bank's
common stock, however, is exempt from such requirements. The Company is also
subject to the periodic reporting requirements of Section 13 of the
Securities Exchange Act of 1934, as amended, which include, but are not
limited to, annual, quarterly and other current reports with the Securities
and Exchange Commission.
The Bank is licensed by the California Commissioner of Financial
Institutions. Its deposits are insured by the FDIC, and it has chosen not to
become a member of the Federal Reserve System. Consequently, the Bank is
subject to the supervision of, and is regularly examined by, the Commissioner
and the FDIC. Such supervision and regulation include comprehensive reviews
of all major aspects of the Bank's business and condition, including its
capital ratios, allowance for possible loan losses and other factors.
However, no inference should be drawn that such authorities have approved any
such factors. The Company and the Bank are required to file reports with the
Commissioner, the FDIC and the Board of Governors and provide such additional
information as the Commissioner, FDIC and the Board of Governors may require.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition of shares, the Company would own or control
more than 5% of the voting shares of such bank. The Bank Holding Company Act
prohibits the Company from acquiring any voting shares of, or interest in,
all or substantially all of the assets of, a bank located outside the State
of California unless such an acquisition is specifically authorized by the
laws of the state in which such bank is located. Any such interstate
acquisition is also subject to the provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994.
The Company, and any subsidiaries, which it may acquire or organize, are
deemed to be "affiliates" of the Bank within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
4
limitations (a) on loans by the Bank to affiliates, and (b) on investments by
the Bank in affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
In addition, regulations of the Board of Governors promulgated under the
Federal Reserve Act require that reserves be maintained by the Bank in
conjunction with any liability of the Company under any obligation (demand
deposits, promissory note, acknowledgement of advance, banker's acceptance or
similar obligation) with a weighted average maturity of less than seven (7)
years to the extent that the proceeds of such obligations are used for the
purpose of supplying funds to the Bank for use in its banking business, or to
maintain the availability of such funds.
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies
and banks. The guidelines are designed to make capital requirements
sensitive to differences in risk profiles among banking organizations,
to take into account off-balance sheet exposures and to aid in making the
definition of bank capital uniform internationally. Under the guidelines,
the Company and the Bank are required to maintain capital equal to at
least 8.0% of its assets and commitments to extend credit, weighted by
risk, of which at least 4.0% must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less
risk than others permit maintenance of capital at less than the 8% ratio.
For example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
The Company and the Bank are subject to regulations issued by the Board of
Governors and the FDIC which require maintenance of a certain level of
capital. 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 which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for loan losses. Tier 2 capital may also include
up to 45% of the pretax net unrealized gains on certain available-for-sale
equity securities having readily determinable fair values (i.e. the excess, if
any, of fair market value over the book value or historical cost of the
investment security). The federal regulatory agencies reserve the right to
exclude all or a portion of the unrealized gains upon a determination that the
equity securities are not prudently valued. Unrealized gains and losses on
other types of assets, such as bank premises and available-for-sale debt
securities, are not included in Tier 2 capital, but may be taken into account
in the evaluation of overall capital adequacy and net unrealized losses on
available-for-sale equity securities will continue to be deducted from Tier 1
capital as a cushion against risk. 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.
5
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. The
Board of Governors and the FDIC have adopted a minimum leverage ratio for
bank holding companies as a supplement to the risk-weighted capital
guidelines. The leverage ratio establishes a minimum Tier 1 ratio of 3%
(Tier 1 capital to total assets) for the highest rated bank holding companies
or those that have implemented the risk-based capital market risk measure.
All other bank holding companies must maintain a minimum Tier 1 leverage
ratio of 4% with higher leverage capital ratios required for bank holding
companies that have significant financial and/or operational weakness, a high
risk profile, or are undergoing or anticipating rapid growth.
At December 31, 2000, the Bank and the Company are in compliance with the
risk-based capital and leverage ratios described above. See Item 8 below for
a listing of the Company's risk-based capital ratios at December 31, 2000 and
1999.
The Board of Governors and FDIC adopted regulations implementing a system of
prompt corrective action pursuant to Section 38 of the Federal Deposit
Insurance Act and Section 131 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). The regulations establish five capital
categories with the following characteristics: (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%; (5) "Critically undercapitalized" - consisting of an
institution with a ratio of tangible equity to total assets that is equal to
or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance
of directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of
the three "undercapitalized" categories, such as declaration of dividends or
other capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are
classified in one of the three "undercapitalized" categories are subject to
certain mandatory and discretionary supervisory actions. Mandatory
supervisory actions include (1) increased monitoring and review by the
appropriate federal banking agency; (2) implementation of a capital
restoration plan; (3) total asset growth restrictions; and (4) limitation
upon acquisitions, branch office expansion, and new business activities
without prior approval of the appropriate federal banking agency.
Discretionary supervisory actions may include (1) requirements to augment
capital; (2) restrictions upon affiliate transactions; (3) restrictions upon
deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of
6
the institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate
federal banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration
plan to be acceptable, the depository institution's parent holding company
must guarantee that the institution will comply with such capital restoration
plan. The aggregate liability of the parent holding company under the
guaranty is limited to the lesser of (i) an amount equal to 5 percent of the
depository institution's total assets at the time it became undercapitalized,
and (ii) the amount that is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan.
If a depository institution fails to submit an acceptable plan, it is treated
as if it were "significantly undercapitalized." FDICIA also restricts the
solicitation and acceptance of and interest rates payable on brokered
deposits by insured depository institutions that are not "well capitalized."
An "undercapitalized" institution is not allowed to solicit deposits by
offering rates of interest that are significantly higher than the prevailing
rates of interest on insured deposits in the particular institution's normal
market areas or in the market areas in which such deposits would otherwise be
accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other
course of action would better serve the purposes of the regulations.
Critically undercapitalized institutions are also prohibited from making (but
not accruing) any payment of principal or interest on subordinated debt
without the prior approval of the FDIC and the FDIC must prohibit a
critically undercapitalized institution from taking certain other actions
without its prior approval, including (1) entering into any material
transaction other than in the usual course of business, including investment
expansion, acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3) amending articles
or bylaws unless required to do so to comply with any law, regulation or
order; (4) making any material change in accounting methods; (5) engaging in
certain affiliate transactions; (6) paying excessive compensation or bonuses;
and (7) paying interest on new or renewed liabilities at rates which would
increase the weighted average costs of funds beyond prevailing rates in the
institution's normal market areas.
Under the FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and
reporting requirements. The FDICIA further generally prohibits an insured
state bank from engaging as a principal in any activity that is impermissible
for a national bank, absent FDIC determination that the activity would not
pose a significant risk to the Bank Insurance Fund, and that the bank is, and
will continue to be, within applicable capital standards. Similar
restrictions apply to subsidiaries of insured state banks. The Company does
not currently intend to engage in any activities which would be restricted or
prohibited under the FDICIA.
The Federal Financial Institution Examination Counsel ("FFIEC") on
December 13, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included
in the so-called "CAMEL" rating system which has been used by bank examiners
for a number of years to classify and evaluate the soundness of financial
7
institutions (including capital adequacy, asset quality, management, earnings
and liquidity), UFIRS includes for all bank regulatory examinations conducted
on or after January1, 1997, a new rating for a sixth category identified as
sensitivity to market risk. Ratings in this category are intended to reflect
the degree to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices may adversely affect an institution's
earnings and capital. The revised rating system is identified as the
"CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital
adequacy in conjunction with the risk-based capital guidelines including
analysis of interest rate risk, concentrations of credit risk, risk posed by
non-traditional activities, and factors affecting overall safety and
soundness. The safety and soundness standards for insured financial
institutions include analysis of (1) internal controls, information systems
and internal audit systems; (2) loan documentation; (3) credit underwriting;
(4) interest rate exposure; (5) asset growth; (6) compensation, fees and
benefits; and (7) excessive compensation for executive officers, directors or
principal shareholders which could lead to material financial loss. If an
agency determines that an institution fails to meet any standard, the agency
may require the financial institution to submit to the agency an acceptable
plan to achieve compliance with the standard. If the agency requires
submission of a compliance plan and the institution fails to timely submit an
acceptable plan or to implement an accepted plan, the agency must require the
institution to correct the deficiency. The agencies may elect to initiate
enforcement action in certain cases rather than rely on an existing plan
particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending to low
and moderate income individuals and businesses across a four-point scale from
"outstanding" to "substantial noncompliance," and are a factor in regulatory
review of applications to merge, establish new branch offices or form bank
holding companies. In addition, any bank rated in "substantial
noncompliance" with the CRA regulations may be subject to enforcement
proceedings.
The Bank has a current rating of "satisfactory" or better for CRA compliance.
The Company's ability to pay cash dividends is subject to restrictions set
forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well
as dividends and/or management fees from the Bank. The payment of cash
8
dividends and/or management fees by the Bank is subject to restrictions set
forth in the California Financial Code, as well as restrictions established
by the FDIC. See Item 5 below for further information regarding the payment
of cash dividends by the Company and the Bank.
COMPETITION
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At June 30, 2000, the competing commercial and savings banks had 71 branch
offices in the cities of Castroville, Hollister, Gonzales, King City, Marina,
Monterey, Salinas, Seaside and Watsonville where the Bank has its ten branch
offices. Additionally, the Bank competes with thrifts and, to a lesser
extent, credit unions, finance companies and other financial service
providers for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage
and insurance services, which the Bank is not authorized nor prepared to
offer currently. The Bank has made arrangements with its correspondent banks
and with others to provide some of these services for its customers. For
borrowers requiring loans in excess of the Bank's legal lending limits, the
Bank has offered, and intends to offer in the future, such loans on a
participating basis with its correspondent banks and with other independent
banks, retaining the portion of such loans which is within its lending
limits. As of December 31, 2000, the Bank's aggregate legal lending limits
to a single borrower and such borrower's related parties were $9,929,000 on
an unsecured basis and $16,549,000 on a fully secured basis based on
regulatory capital of $66,194,000.
The Bank's business is concentrated in its service area, which primarily
encompasses Monterey County, including the Salinas Valley area. With the
branch office expansion in 2000 into Hollister and Watsonville, the Bank has
more actively expanded its service area to include San Benito and Santa Cruz
Counties. The Bank uses couriers to service the southern portion of Santa
Clara County. The economy of the Bank's service area is dependent upon
agriculture, tourism, retail sales, population growth and smaller service
oriented businesses.
Based upon data as of the most recent practicable date (June 30, 2000 [1]),
there were 73 operating commercial and savings bank branch offices in
Monterey County with total deposits of $4,065,119,000. This was an increase
of $215,433,000 over the June 30, 1999 balances. The Bank held a total of
$585,225,000 in deposits, representing approximately 14.4% of total
commercial and savings banks deposits in Monterey County as of June 30,
2000. In the two new expansion areas of Hollister and Watsonville, at June
30, 2000, there were 10 and 12 branch offices with total deposits of
$472,032,000 and $661,886,000, respectively.
In order to compete with the major financial institutions in their primary
service areas, the Bank uses to the fullest extent possible, the flexibility
which is accorded by its independent status. This includes an emphasis on
specialized services, local promotional activity, and personal contacts by
the Bank's officers, directors and employees. The Bank also seeks to provide
special services and programs for individuals in its primary service area who
are employed in the agricultural, professional and business fields, such as
loans for equipment, furniture, tools of the trade or expansion of practices
or businesses. In the event there are customers whose loan demands exceed
the Bank's lending limits, the Bank seeks to arrange for such loans on a
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1 "FDIC Institution Office Deposits", June 30, 2000
9
participation basis with other financial institutions. The Bank also
assists those customers requiring services not offered by the Bank to obtain
such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by the Bank to obtain
their deposits and other borrowings and the interest rate received by the
Bank on loans extended to customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations, credit unions,
other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits.
Commercial banks also compete for loans with savings and loan associations,
credit unions, consumer finance companies, mortgage companies and other
lending institutions.
The interest rate differentials of the Bank, and therefore its earnings, are
affected not only by general economic conditions, both domestic and foreign,
but also by the monetary and fiscal policies of the United States as set by
statutes and as implemented by federal agencies, particularly the Federal
Reserve Board. This Agency can and does implement national monetary policy,
such as seeking to curb inflation and combat recession, by its open market
operations in United States government securities, adjustments in the amount
of interest free reserves that banks and other financial institutions are
required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and timing
of any future changes in monetary policies and their impact on the Bank are
not predictable.
In 1996, pursuant to Congressional mandate, the FDIC reduced bank deposit
insurance assessment rates to a range from $0 to $0.27 per $100 of deposits,
dependent upon a bank's risk. Based upon the above risk-based assessment rate
schedule, the Bank's current capital ratios and the Bank's current levels of
deposits, the Bank anticipates no change in the assessment rate applicable to
the Bank during 2001 from that in 2000.
Since 1996, California law implementing certain provisions of prior federal
law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch office business unit
located in California without acquisition of the whole business unit of the
California bank; and (3) prohibited interstate branching through de novo
establishment of California branch offices. Initial entry into California by
an out-of-state institution must be accomplished by acquisition of or merger
with an existing whole bank which has been in existence for at least five
years.
The federal financial institution agencies, especially the OCC and the Board
of Governors, have taken steps to increase the types of activities in which
national banks and bank holding companies can engage, and to make it easier
to engage in such activities. The OCC has issued regulations permitting
national banks to engage in a wider range of activities through
subsidiaries. "Eligible institutions" (those national banks that are well
capitalized, have a high overall rating and a satisfactory CRA rating, and
are not subject to an enforcement order) may engage in activities related to
banking through operating subsidiaries subject to an expedited application
process. In addition, a national bank may apply to the OCC to engage in an
activity through a subsidiary in which the bank itself may not engage.
10
On November 12, 1999, President Clinton signed into law The Financial
Services Modernization Act of 1999 (the "FSMA"), which is potentially the
most significant banking legislation in many years. The FSMA eliminates most
of the remaining depression-era "firewalls" between banks, securities firms
and insurance companies which was established by The Banking Act of 1933,
also known as the Glass-Steagall Act ("Glass-Steagall). Glass-Steagall
sought to insulate banks as depository institutions from the perceived risks
of securities dealing and underwriting, and related activities. The FSMA
repeals Section 20 of Glass-Steagall which prohibited banks from affiliating
with securities firms. Bank holding companies that can qualify as "financial
holding companies" can now acquire securities firms or create them as
subsidiaries, and securities firms can now acquire banks or start banking
activities through a financial holding company. The FSMA includes provisions
which permit national banks to conduct financial activities through a
subsidiary that are permissible for a national bank to engage in directly, as
well as certain activities authorized by statute, or that are financial in
nature or incidental to financial activities to the same extent as permitted
to a "financial holding company" or its affiliates. This liberalization of
United States banking and financial services regulation applies both to
domestic institutions and foreign institutions conducting business in the
United States. Consequently, the common ownership of banks, securities firms
and insurance firms is now possible, as is the conduct of commercial banking,
merchant banking, investment management, securities underwriting and
insurance within a single financial institution using a "financial holding
company" structure authorized by the FSMA.
Prior to the FSMA, significant restrictions existed on the affiliation of
banks with securities firms and on the direct conduct by banks of securities
dealing and underwriting and related securities activities. Banks were also
(with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The FSMA removes these restrictions and
substantially eliminates the prohibitions under the Bank Holding Company Act
on affiliations between banks and insurance companies. Bank holding companies
which qualify as financial holding companies can now insure, guarantee, or
indemnify against loss, harm, damage, illness, disability, or death; issue
annuities; and act as a principal, agent, or broker regarding such insurance
services.
In order for a commercial bank to affiliate with a securities firm or an
insurance company pursuant to the FSMA, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i)
its banking subsidiaries are "well capitalized" and "well managed" and (ii)
it files with the Board of Governors a certification to such effect and a
declaration that it elects to become a financial holding company. The
amendment of the Bank Holding Company Act now permits financial holding
companies to engage in activities, and acquire companies engaged in
activities, that are financial in nature or incidental to such financial
activities. Financial holding companies are also permitted to engage in
activities that are complementary to financial activities if the Board of
Governors determines that the activity does not pose a substantial risk to
the safety or soundness of depository institutions or the financial system in
general. These standards expand upon the list of activities "closely related
to banking" which have to date defined the permissible activities of bank
holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that financial institutions must
respect the privacy of their customers and protect the security and
confidentiality of customers' non-public personal information. These
regulations require, in general, that financial institutions (1) may not
disclose non-public personal information of customers to non-affiliated third
parties without notice to their customers, who must have opportunity to
direct that such information not be disclosed; (2) may not disclose customer
11
account numbers except to consumer reporting agencies; and (3) must give
prior disclosure of their privacy policies before establishing new customer
relationships.
The Company and the Bank have not determined whether or when either of them
may seek to acquire and exercise new powers or activities under the FSMA, and
the extent to which competition will change among financial institutions
affected by the FSMA has not yet become clear.
Certain legislative and regulatory proposals that could affect the Bank and
the banking business in general are periodically introduced before the United
States Congress, the California State Legislature and Federal and state
government agencies. It is not known to what extent, if any, legislative
proposals will be enacted and what effect such legislation would have on the
structure, regulation and competitive relationships of financial
institutions. It is likely, however, that such legislation could subject the
Company and the Bank to increased regulation, disclosure and reporting
requirements and increase competition and the Bank's cost of doing business.
In addition to legislative changes, the various federal and state financial
institution regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be predicted
whether or in what form any such rules or regulations will be enacted or the
effect that such and regulations may have on the Company and the Bank.
ITEM 2. PROPERTIES
The headquarters office and centralized operations of the Company are located
at 301 Main Street, Salinas, California. The Company owns and leases
properties that house administrative and data processing functions and ten
banking offices. Owned and leased facilities are listed below.
301 Main Street 1658 Fremont Boulevard
Salinas, California Seaside, California
32,500 square feet 2,800 square feet
Leased (term expires 2007, Leased (term expires 2009
with three 7 1/2 year with one 10 year renewal
renewal options) options)
Current month rent of Current month rent of
$21,397.08 $5,483.92
10601 Merritt Street 228 Reservation Road
Castroville, California Marina, California
2,500 square feet 3,000 square feet
Owned Leased (term expires 2004
with three 5 year
renewal options)
Current month rent of
$3,120.00
12
400 Alta Street 599 Lighthouse Avenue
Gonzales, California Monterey, California.
5,175 square feet 2,160 square feet
Leased (term expires 2003 Leased (term expires 2004
with three 5 year renewal with two 10 year renewal
options) options)
Current month rent of Current month rent of
$4,132.00 $6,312.80
532 Broadway 155 Westridge Drive
King City, California Watsonville, California
4,000 square feet 971 square feet
Leased (term expires 2009 Leased (term expires 2003
with two 5 year renewal with two 3 year renewal
options) options)
Current month rent of Current month rent of
$4,920.00 $1,204.04
1285 North Davis Road 491 Tres Pinos Road
Salinas, California. Hollister, California
3,200 square feet 1,400 square feet
Leased (term expires 2008 Leased (term expires 2003
with two 5 year renewal with two 3 year renewal
options) options)
Current month rent of Current month rent of
$7,728.00 $2,101.00
The above leases contain options to extend for three to fifteen years.
Included in the above are two facilities leased from shareholders at terms
and conditions which management believes are consistent with the commercial
lease market. Rental rates are adjusted annually for changes in certain
economic indices. The annual minimum lease commitments are set forth in
Footnote 5 of Item 8 Financial Statements and Supplementary Data included in
this report and incorporated here by reference. The foregoing summary
descriptions of leased premises are qualified in their entirety by reference
to the lease agreements listed as exhibits hereto at page 62.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the Bank to which
any director, officer, affiliate of the Company or 5% shareholder of the
Company or the Bank, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company or Bank are a party, and none of
the above persons has a material interest adverse to the Company or the Bank.
Neither the Company nor the Bank are a party to any pending legal or
administrative proceedings (other than ordinary routine litigation incidental
to the Company's or the Bank's business) and no such proceedings are known to
be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is listed on the Nasdaq National Market exchange
(trading symbol: CCBN). Among the Company's market makers, the most
significant are Sandler O'Neill & Partners, L.P. and Hoefer & Arnett,
Incorporated. The table below presents the range of high and low prices for
the common stock for the two most recent fiscal years based on information
provided to the Company from Nasdaq. The prices have been restated to
reflect the 10% stock dividends paid in February 2000 and 2001.
Calendar Year Low High
- ------------- --- ----
2000
First Quarter $ 13.02 $ 15.23
Second Quarter 13.30 14.55
Third Quarter 13.75 15.45
Fourth Quarter 15.23 16.76
1999
First Quarter $ 11.67 $ 15.21
Second Quarter 12.55 13.58
Third Quarter 12.91 18.18
Fourth Quarter 13.02 17.35
The closing price for the Company's common stock was $19.00 as of March 7,
2001.
(b) Holders
-------
As of March 7, 2001, there wereapproximately 3,200 holders of the common
stock of the Company. There are no other classes of common equity
outstanding.
(c) Dividends
---------
The Company's shareholders are entitled to receive dividends when and as
declared by its Board of Directors, out of funds legally available therefor,
subject to the restrictions set forth in the California General Corporation
Law (the "Corporation Law"). The Corporation Law provides that a corporation
may make a distribution to its shareholders if the corporation's retained
earnings equal at least the amount of the proposed distribution. The
Corporation Law further provides that, in the event that sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if it meets two
conditions, which generally stated are as follows: (1) the corporation's
assets equal at least 1-1/4 times its liabilities; and (2) the
corporation's current assets equal at least its current liabilities or, if
the average of the corporation's earnings before taxes on income and before
interest expenses for the two preceding fiscal years was less than the
14
average of the corporation's interest expenses for such fiscal years, then
the corporation's current assets must equal at least 1-1/4 times its current
liabilities. Funds for payment of any cash dividends by the Company would be
obtained from its investments as well as dividends and/or management fees
from the Bank.
The payment of cash dividends by the subsidiary Bank is subject to
restrictions set forth in the California Financial Code (the "Financial
Code"). The Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lesser of (a) the bank's
retained earnings; or (b) the bank's net income for its last three fiscal
years, less the amount of any distributions made by the bank or by any
majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the Commissioner,
make a distribution to its shareholders in an amount not exceeding the
greater of (a) its retained earnings; (b) its net income for its last fiscal
year; or (c) its net income for its current fiscal year. In the event that
the Commissioner determines that the shareholders' equity of a bank is
inadequate or that the making of a distribution by the bank would be unsafe
or unsound, the Commissioner may order the bank to refrain from making a
proposed distribution.
The FDIC may also restrict the payment of dividends if such payment would be
deemed unsafe or unsound or if after the payment of such dividends, the bank
would be included in one of the "undercapitalized" categories for capital
adequacy purposes pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991. Additionally, while the Board of Governors has no
general restriction with respect to the payment of cash dividends by an
adequately capitalized bank to its parent holding company, the Board of
Governors might, under certain circumstances, place restrictions on the
ability of a particular bank to pay dividends based upon peer group averages
and the performance and maturity of the particular bank, or object to
management fees on the basis that such fees cannot be supported by the value
of the services rendered or are not the result of an arm's length
transaction.
Under these provisions and considering minimum regulatory capital
requirements, the amount available for distribution from the Bank to the
Company was approximately $16,642,000 as of December 31, 2000.
To date, the Company has not paid a cash dividend and presently does not
intend to pay cash dividends in the foreseeable future. The Company
distributed a ten percent stock dividend in February 2001, a ten percent
stock dividend in 2000 and a five-for-four stock split in February 1999. The
Board of Directors will determine payment of dividends in the future after
consideration of various factors including the profitability and capital
adequacy of the Company and the Bank.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain consolidated financial information
concerning the business of the Company and its subsidiary Bank. This
information should be read in conjunction with the Consolidated Financial
Statements, the notes thereto, and Management's Discussion and Analysis
included in this report. Earnings per share information has been adjusted
retroactively for all stock dividends and stock splits.
As of and for the Year Ended December 31
------------------------------------------------------------------------
In thousands (except per share data) 2000 1999 1998 1997 1996
Operating Results
Total Interest Income $ 51,415 $ 41,517 $ 37,354 $ 33,916 $ 29,301
Total Interest Expense 18,290 13,648 13,319 12,041 9,859
------------------------------------------------------------------------
Net Interest Income 33,125 27,869 24,035 21,875 19,442
Provision for Loan Losses 3,983 1,484 159 64 352
------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 29,142 26,385 23,876 21,811 19,090
Noninterest Income 2,433 2,231 2,084 1,765 1,456
Noninterest Expenses 17,408 16,043 13,859 12,573 11,115
------------------------------------------------------------------------
Income before Income Taxes 14,167 12,573 12,101 11,003 9,431
Income Taxes 5,241 4,522 4,948 4,500 3,571
------------------------------------------------------------------------
Net Income $ 8,926 $ 8,051 $ 7,153 $ 6,503 $ 5,860
- ----------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.17 $ 1.03 $ 0.98 $ 0.90 $ 0.83
Diluted Earnings Per Share 1.14 1.00 0.90 0.83 0.78
- ----------------------------------------------------------------------------------------------------------------
Financial Condition and
Capital - Year-End Balances
Net Loans $ 464,024 $ 390,001 $ 307,818 $ 251,271 $ 235,992
Total Assets 706,693 593,445 543,933 497,674 376,832
Deposits 633,209 518,189 489,192 450,301 338,663
Shareholders' Equity 59,854 53,305 51,199 43,724 36,332
- ----------------------------------------------------------------------------------------------------------------
Financial Condition and
Capital - Average Balances
Net Loans $ 417,075 $ 348,086 $ 271,590 $ 238,793 $ 203,117
Total Assets 632,953 562,073 499,354 441,013 355,386
Deposits 565,487 494,266 447,598 396,457 319,110
Shareholders' Equity 55,762 52,069 47,587 39,969 33,228
- ----------------------------------------------------------------------------------------------------------------
Selected Financial Ratios
Rate of Return on:
Average Total Assets 1.41% 1.43% 1.43% 1.47% 1.65%
Average Shareholders' Equity 16.01% 15.46% 15.03% 16.27% 17.64%
Rate of Average Shareholders' Equity
to Total Average Assets 8.81% 9.26% 9.53% 9.06% 9.35%
- ----------------------------------------------------------------------------------------------------------------
16
(a) (1) Distribution of Assets, Liabilities and Equity; Interest Rates and
------------------------------------------------------------------
Interest Differential
---------------------
Table One in Management's Discussion and Analysis included
in this report sets forth the Company's average balance sheets
(based on daily averages) and an analysis of interest rates and the
interest rate differential for each of the three years in the
period ended December 31, 2000 and is incorporated here by
reference.
(2) Volume/Rate Analysis
--------------------
Information as to the impact of changes in average rates
and average balances on interest earning assets and interest
bearing liabilities is set forth in Table Two in Management's
Discussion and Analysis and is incorporated here by reference.
(b) Investment Portfolio
--------------------
(1) The book value of investment securities at December 31, 2000 and
1999 is set forth in Note 3 of Item 8 - "Financial Statements
and Supplementary Data" included in this report and is incorporated
here by reference.
(2) The book value, maturities and weighted average yields of
investment securities as of December 31, 2000 are set forth in
Table Thirteen of Management's Discussion and Analysis included in
this report and is incorporated here by reference.
(3) There were no issuers of securities for which the book value was
greater than 10% of shareholders' equity other than U.S.
Government and U.S. Government Agencies and Corporations.
(c) Loan Portfolio
--------------
(1) The composition of the loan portfolio is summarized in Table Three
of Management's Discussion and Analysis included in this report and
is incorporated here by reference.
(2) The maturity distribution of the loan portfolio at December 31,
2000 is summarized in Table Twelve of Management's Discussion and
Analysis included in this report and is incorporated here by
reference.
(3) Nonperforming Loans
-------------------
The Company's current policy is to cease accruing interest when a
loan becomes 90 days past due as to principal or interest, when the
full timely collection of interest or principal becomes uncertain
or when a portion of the principal balance has been charged off,
unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual status, the accrued and
uncollected 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 or when the loan is both well secured and in process of
collection.
17
A loan is considered to be impaired when it is probable that the
Company will be unable to pay all of the amounts due according to
the contractual terms of the loan agreement
For further discussion of nonperforming loans, refer to Risk
Elements section of Management's Discussion and Analysis in this
report.
(d) Summary of Loan Loss Experience
-------------------------------
(1) An analysis of the allowance for loan losses showing charged off and
recovery activity as of December 31, 2000 is summarized in Table
Five of Management's Discussion and Analysis included in this report
and is incorporated here by reference. Factors used in
determination of the allowance for loan losses are discussed in
greater detail in the "Risk Elements" section of Management's
Discussion and Analysis included in this report and are incorporated
here by reference.
(2) Management believes that any breakdown or allocation of the
allowance for possible loan losses into loan categories lends an
appearance of exactness, which does not exist in that the allowance
is utilized as a single unallocated allowance available for all
loans. Further, management believes that the breakdown of
historical losses in the preceding table is a reasonable
representation of management's expectation of potential losses in
the next full year of operation. However, the allowance for loan
losses should not be interpreted as an indication of when
charge-offs will occur or as an indication of future charge-off
trends.
(e) Deposits
--------
(1) Table One in Management's Discussion and Analysis included in this
report sets forth the distribution of average deposits for the years
ended December 31, 2000, 1999 and 1998 and is incorporated here by
reference.
(2) Table Eleven in Management's Discussion and Analysis included in this
report sets forth the maturities of time certificates of deposit of
$100,000 or more at December 31, 2000 and is incorporated here by
reference.
(f) Return on Equity and Assets
---------------------------
(1) The Selected Financial Data table at page 16 of this section sets
forth the ratios of net income to average assets and average
shareholders' equity, and average shareholders' equity to average
assets. As the Company has never paid a cash dividend, the dividend
payout ratio is not indicated.
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this Annual Report
on Form 10-K including, but not limited to, matters described in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Changes to such risks and uncertainties, which could impact
future financial performance, include, among others, (1) competitive
pressures in the banking industry; (2) changes in the interest rate
environment; (3) general economic conditions, nationally, regionally and in
operating market areas, including a decline in real estate values in the
Company's market areas; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; (6) changes in securities
markets; (7) data processing compliance problems; (8) the California power
crisis; (9) variances in the actual versus projected growth in assests; (10)
return on assets; (11) loan losses; (12) expenses; (13) rates charged on
loans and earned on securities investments; (14) rates paid on deposits; and
(15) fee and other noninterest income earned, as well as other factors. This
entire Annual Report should be read to put such forward-looking statements in
context and to gain a more complete understanding of the uncertainties and
risks involved in the Company's business. Therefore, the information set
forth therein should be carefully considered when evaluating the business
prospects of the Company and the Bank.
Business Organization
Central Coast Bancorp (the "Company") is a California corporation, located in
Salinas, California and was organized in 1994 to act as a bank holding company
for Bank of Salinas. In 1996, the Company acquired Cypress Bank, which was
headquartered in Seaside, California. Both banks were state-charted
institutions. In July of 1999, the Company merged Cypress Bank into the Bank
of Salinas and then renamed Bank of Salinas as Community Bank of Central
California (the "Bank"). As of December 31, 2000, the Bank operated ten
full-service branch offices and one limited-service branch office. The Bank
is headquartered in Salinas and serves individuals, merchants, small and
medium-sized businesses, professionals, agribusiness enterprises and wage
earners located in the tri-county area of Monterey, San Benito and Santa Cruz.
In December 1998, the former Bank of Salinas opened an additional new branch
office in Salinas, California, to better provide services to the growing
Salinas community.
In June of 2000, the Bank opened a new branch office in Watsonville, which is
in Santa Cruz County. In October of 2000, another new branch office was
opened in Hollister, which is in San Benito County. The opening of these two
branch offices was a first step in expanding the Bank's service area to
include communities outside of Monterey County. Both of these communities
are of similar economic make up to the agricultural based communities the
Bank serves in Monterey County.
Other than holding the shares of the subsidiary Bank, the Company conducts no
significant activities. Although, it is authorized, with the prior approval
of the Board of Governors of the Federal Reserve System (the "Board of
Governors"), the Company's principal regulator, to engage in a variety of
activities which are deemed closely related to the business of banking.
The following analysis is designed to enhance the reader's understanding of
the Company's financial condition and the results of its operations as
reported in the Consolidated Financial Statements included in this Annual
Report. Reference should be made to those statements and the Selected
19
Financial Data presented elsewhere in this report for additional detailed
information. Average balances, including such balances used in calculating
certain financial ratios, are generally comprised of average daily balances
for the Company. Except within the "overview" section, interest income and
net interest income are presented on a tax equivalent basis.
Overview
For the 17th consecutive year, Central Coast Bancorp earned record net income
on a year over year basis. Net income in 2000 increased 10.9% to $8,926,000
versus $8,051,000 in 1999. Diluted earnings per share for 2000 was $1.14, up
14.0% from the $1.00 reported for 1999. For 2000, the Company realized a
return on average equity of 16.0% and a return on average assets of 1.41%, as
compared to 15.5% and 1.43% for 1999. The earnings per share for 2000 and
1999 have been adjusted for the 10 percent stock dividend distributed on
February 28, 2001.
During 2000, total assets of the Company increased $113,248,000 (19.1%) to a
total of $706,693,000 at year-end. At December 31, 2000, loans totaled
$473,395,000, up $77,798,000 (19.7%) from the ending balances on December 31,
1999. Deposit growth in 2000, net of returning $20,000,000 of State of
California certificates of deposit, was $135,021,000 (27.1%) resulting in
ending deposit balances of $633,210,000.
The Bank's growth in total assets, loans and deposits reflected in the
previous paragraph came from the hard work and dedication of our employees.
In a time when many banks have been struggling to maintain customer
relationships and their deposit base, Community Bank was able to exceed its
growth goals for the year. Every one of the existing branch offices exceeded
their deposit growth goals for 2000. Most of the branch offices also
exceeded their loan goals. The two new branch offices in Hollister and
Watsonville have been well received as their staffs immersed themselves in
exposing those communities to the benefits of banking with Community Bank. In
both of the new branch offices, deposit and loan growth exceeded the business
plan forecasts.
In its continuing quest to offer products and services to make banking more
convenient for the customer, the Bank introduced "Anytime Online" its
Internet banking product in the spring of 2000. This product compliments and
expands on the functionality of "Anytime Teller", a 24 hour banking by
telephone product, which was introduced in 1999. Both systems provide a
quick and easy way for both business and retail customers to check balances
and account activity, transfer funds between accounts, make loan payments and
order statements. Online banking provides the functionality to pay bills,
open accounts, issue stop payments, purchase savings bonds and more. "Anytime
Online" can be viewed at the Bank's web site address, www.community-bnk.com.
These products along with the VISA Check Card, which was introduced in late
1999, have been well received by the Bank's customers.
As Internet only banks are discovering, bricks and mortar are necessary to
build an effective franchise. We believe that branch offices are the
building blocks of Community Bank. These business units with their front
line employees are critical in providing the service that gives us a
competitive edge against large impersonal financial institutions. As we go
forward, a critical component of our strategic plan is to expand our branch
office base. We believe this strategy will provide continued growth and the
ability to achieve above average returns for our shareholders.
20
(A) Results of Operations
Net Interest Income/Net Interest Margin (fully taxable equivalent)
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for 2000 was $33,927,000, a $5,293,000 (18.5%) increase
over 1999. The interest income component was up $9,935,000 to $52,217,000
(23.5%). About 65% of the increase was attributable to growth in the earning
assets with the balance due to rates. Average outstanding loan balances of
$417,075,000 for 2000 reflected a 19.8% increase over 1999 balances. This
increase contributed an additional $6,388,000 to interest income. From July
1, 1999 through May 15, 2000, the Federal Reserve Board raised interest rates
six times for a total of 175 basis points. The higher interest rates
increased the average yield on loans 67 basis points, which added $2,783,000
to interest income. The securities portfolio average balances decreased
$12,066,000 (7.8%) which offset the increases in interest income by
$757,000. The average yield received on securities was up 44 basis points
and added $613,000 to interest income. Federal Funds sold interest income
increased $908,000 due to both higher average balances and higher rates.
Interest income on variable rate loans and Federal Funds quickly reflect rate
changes. During January of 2001, the Federal Reserve Board twice decreased
the Federal Funds interest rates by 50 basis points for a total reduction of
1.0%. This reduction will negatively impact interest income in 2001 and it
may affect the Bank's ability to attain interest income growth rates achieved
in the past two years.
Interest expense increased $4,642,000 (34.0%) in 2000 over 1999. The average
balances of interest bearing liabilities increased $49,628,000 (13.2%). The
higher average balances resulted from a $58,677,000 (36.8%) increase in time
deposits offset in part by an $8,768,000 decrease in interest bearing
checking accounts. At times during 2000, the Bank had up to $40,000,000 in
time deposits from the State of California. This compares to a maximum of
$20,000,000 in 1999. In early November 2000, the last of the State deposits
matured. Interest paid on time certificates in 2000 increased $4,569,000,
which accounted for most of the overall increase in interest expense.
Interest expense attributable to the higher volume in time deposits was
$2,934,000 and the higher rates added $1,635,000. Average rates paid on time
certificates were 75 basis points higher in 2000. Rates paid on all interest
bearing liabilities were 66 basis points higher in 2000 than in 1999.
Interest paid on interest bearing liabilities generally adjusts more slowly
in response to market rate changes as time deposits and borrowings adjust at
maturity. Net interest margin for 2000 was 5.88% versus 5.65% in 1999.
Net interest income for 1999 was $28,634,000, a $4,504,000 (18.7%) increase
over 1998. The interest income component was up $4,833,000 to $42,282,000
(12.9%). Most of the increase was attributable to growth in the earning
assets. Average outstanding loan balances of $348,086,000 for 1999 reflected
a 28.2% increase over 1998 balances. This increase contributed an additional
$7,619,000 to interest income. However, due to lower rates in the first half
of the year and competitive pressures, the average yield was down 70 basis
points, which offset the increase by $2,422,000. The securities portfolio
average balances grew $30,041,000 (24.0%) which added $2,027,000 to interest
income. The average yield received on securities was up 33 basis points and
added $297,000 to interest income. Federal Funds sold interest income
decreased $2,688,000 as the average balances decreased $50,031,000. Federal
Funds were repositioned into securities and loans during 1999.
21
Interest expense increased $329,000 (2.5%) in 1999 over 1998. The average
balances of interest bearing liabilities increased $43,021,000 (12.9%). The
higher balances were due to internal growth of deposits, $8,125,000 of
average borrowings (including Federal Funds purchased) and approximately
$16,000,000 in average balances of State of California certificates of
deposit. Interest expense attributable to the higher volume was $1,776,000.
Rates paid on all interest bearing liabilities were 36 basis points lower in
1999 than in 1998. The lower rates offset the higher expense by $1,447,000.
Net interest margin for 1999 was 5.65% versus 5.36% in 1998.
Table One, Analysis of Net Interest Margin on Earning Assets, and Table Two,
Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are
provided to enable the reader to understand the components and past trends of
the Banks' interest income and expenses. Table One provides an analysis of
net interest margin on earning assets setting forth average assets,
liabilities and shareholders' equity; interest income earned and interest
expense paid and average rates earned and paid; and the net interest margin
on earning assets. Table Two presents an analysis of volume and rate change
on net interest income and expense.
22
Table One: Analysis of Net Interest Margin on Earning Assets
- -----------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis) 2000 1999 1998
Avg. Avg. Avg. Avg. Avg. Avg.
In thousands (except Balance Interest Yield Balance Interest Yield Balance Interest Yield
percentages) ------- -------- ----- ------- -------- ----- ------- -------- ------
Assets:
Earning Assets
Loans (1) (2) $417,075 $ 41,405 9.93% $ 348,086 $32,234 9.26% $ 271,590 $27,037 9.96%
Taxable investment 106,754 7,340 6.88% 120,422 7,596 6.31% 121,133 7,282 6.01%
securities
Tax-exempt investment 36,601 2,408 6.58% 34,999 2,296 6.56% 4,247 286 6.73%
securities (3)
Federal funds sold 16,857 1,064 6.31% 3,153 156 4.95% 53,184 2,844 5.35%
---------- -------- ---------- -------- ---------- --------
Total Earning Assets 577,287 $ 52,217 9.05% 506,660 $42,282 8.35% 450,154 $37,449 8.32%
-------- -------- --------
Cash & due from banks 39,432 42,595 38,889
Other assets 16,234 12,818 10,311
---------- ---------- ----------
$632,953 $ 562,073 $ 499,354
========== ========== ==========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $94,948 $ 1,551 1.63% $ 103,716 $1,792 1.73% $ 89,637 $1,720 1.92%
Savings 107,075 3,820 3.57% 105,000 3,447 3.28% 101,256 3,774 3.73%
Time deposits 218,330 12,549 5.75% 159,653 7,980 5.00% 142,580 7,825 5.49%
Other borrowings 5,769 370 6.41% 8,125 429 5.28% - - n/a
---------- --------- ---------- -------- ---------- --------
Total interest bearing
liabilities 426,122 18,290 4.29% 376,494 13,648 3.63% 333,473 13,319 3.99%
--------- -------- --------
Demand deposits 145,134 125,897 114,125
Other Liabilities 5,935 7,613 4,169
---------- ---------- ----------
Total Liabilities 577,191 510,004 451,767
Shareholders' Equity 55,762 52,069 47,587
---------- ---------- ----------
$632,953 $ 562,073 $ 499,354
========== ========== ==========
Net interest income & $ 33,927 5.88% $28,634 5.65% $24,130 5.36%
margin (4) ================ ================ ================
- -----------------------------------------------------------------------------------------------------------
1. Loans interest includes loan fees of $997,000, $1,096,000, and
$951,000 in 2000, 1999 and 1998.
2. Average balances of loans include average allowance for loan losses
of $7,097,000, $4,850,000 and $4,260,000 and average deferred
loan fees of $719,000, $796,000 and $587,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
3. Includes taxable-equivalent adjustments for income on securities that
is exempt from federal income taxes. The federal statutory tax rate was
35% for 2000, 1999, and 1998.
4. Net interest margin is computed by dividing net interest income by
total average earning assets.
23
Table Two: Volume/Rate Analysis
- --------------------------------------------------------------------------------------------------------------
(In thousands)Year Ended December 31, 2000 over 1999
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $ 6,388 $ 2,783 $ 9,171
Taxable investment securities (862) 606 (256)
Tax exempt investment securities (3) 105 7 112
Federal funds sold 678 230 908
----------- ----------- -----------
Total 6,309 3,626 9,935
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits (152) (89) (241)
Savings deposits 68 305 373
Time deposits 2,934 1,635 4,569
Other borrowings (124) 65 (59)
----------- ----------- -----------
Total 2,726 1,916 4,642
----------- ----------- -----------
Interest differential $ 3,583 $ 1,710 $ 5,293
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
(In thousands) 1999 over 1998
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $ 7,619 $ (2,422) $ 5,197
Taxable investment securities (43) 357 314
Tax exempt investment securities(3) 2,070 (60) 2,010
Federal funds sold (2,677) (11) (2,688)
----------- ----------- -----------
Total 6,969 (2,136) 4,833
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits 270 (198) 72
Savings deposits 140 (467) (327)
Time deposits 937 (782) 155
Other borrowings 429 - 429
----------- ----------- -----------
Total 1,776 (1,447) 329
----------- ----------- -----------
Interest differential $ 5,193 $ (689) $ 4,504
=========== =========== ===========
- ------------------------------------------------------------------------
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 $997,000, $1,096,000, and $951,000 for the years ended
December 31, 2000, 1999, and 1998, respectively, have been included
in the interest income computation.
3. Includes taxable-equivalent adjustments for income on securities
that is exempt from federal income taxes. The federal
statutory tax rate was 35% for 2000, 1999, and 1998.
4. The rate / volume variance has been included in the rate variance.
24
Provision for Loan Losses
In 2000, the Bank provided $3,983,000 for loan losses as compared to
$1,484,000 in 1999. In providing for the allowance for loan losses the
Company considered the significant growth in the loan portfolio of
$77,798,000 (19.7%), geographic and industry concentrations, expansion into
new geographic markets, and volatility and weaknesses in the local economy,
including potential effects of power shortages, water supply, and volatile
market prices for agricultural products. In addition, approximately $1.2
million was provided as a result of the downward classification to
substandard of several loans to a single borrower. At December 31, 2000,
these loans were performing in accordance with their terms and conditions.
The allowances for loan losses to total loans at December 31, 2000 and 1999
were 1.98% and 1.41%, respectively. Net loans charged-off in 2000 totaled
$208,000 or .05% of average loans outstanding.
In 1999, $1,058,000 of the provision of $1,484,000 was required for the
$77,260,000 loan growth during the year. Additional provision was needed to
replenish the allowance for charged-off loans. Net loans charged-off in 1999
totaled $240,000 or .07% of average loans outstanding. In 1998, net loans
charged-off totaled $30,000 or .01% of average loans outstanding.
Consequently, the Bank made provisions for loan losses of only $159,000.
Service Charges and Fees and Other Income
Noninterest income was up $202,000 (9.1%) in 2000 over the same period in
1999. Service charges and fees related to deposit accounts increased
$401,000 (29.8%) due to higher volumes, the full year effect of new fees
implemented in late 1999 and new products. Noninterest income was negatively
impacted in the fourth quarter of 2000 as the Bank realized a loss of
$194,000 on the sale and repositioning of investment securities. In all of
1999, the Bank had a realized gain of $45,000 on the sale of investment
securities.
Noninterest income was up $147,000 (7.1%) to $2,231,000 in 1999 from the 1998
level. Service charges and fees made up $113,000 of the increase. Several
new fees were implemented late in 1999. These new fees added about $40,000
of the increase. The remainder was due to higher volumes. Other income
increased only $34,000 (4.0%) from the 1998 level. This change reflected
some good growth in certain service fees that was offset in part by lower
mortgage origination fees due to the higher mortgage interest rates and
reduced up-charges on Bank supplied check stock.
Salaries and Benefits
Salary and benefit expenses increased $965,000 (10.6%) in 2000 over 1999.
Salary expenses related to the staffing of the two new branch offices opened
in the second half of the year accounted for $287,000 of the increase.
Salaries and benefits from continuing operations were up $678,000 (7.4%).
Base salaries increased $421,000 (6.2%) due to normal merit reviews,
competitive salary adjustments and staffing additions during the year.
Benefit costs increased commensurate with the salaries. At the end of 2000,
the full time equivalent (FTE) staff was 211 versus 204 at the end of 1999.
For 1999, increases in salaries and benefits totaled $903,000 (11.0%). Base
salaries increased $644,000 (10.4%) due to normal merit reviews, 11
additional months of operations for the Westridge branch office and staffing
additions during the year. Benefit costs increased commensurate with the
salaries. At the end of 1999, the full time equivalent (FTE) staff was 204
versus 197 at the end of 1998.
25
Occupancy and Furniture and equipment
Occupancy and fixed assets expense increased $542,000 (20.5%) in 2000 over
1999. The new Hollister and Watsonville branch offices accounted for $81,000
of the increase. For the rest of the Company occupancy and fixed assets
expense increased $461,000 (17.4%). Much of the increase is attributable to
the full year effect of the relocation of two branch offices and remodeling
of one branch office and operations office space during 1999.
Occupancy and fixed assets expense increased $585,000 (28.5%) in 1999. Much
of the increase was attributable to the remodeling of two branch offices and
operations office space during the year as well as the full year of Westridge
operations and upgrades to the MIS systems and computer network. Additional
costs were incurred for an outside security service during the last quarter
as the Bank increased its vault cash in preparation for year 2000 disruption
concerns.
Other Expenses
Other expenses were down $142,000 (3.3%) in 2000 from 1999. Other expenses
related to the two new branch offices were $45,000. Thus, other expenses for
other operations decreased $187,000 (4.4%). In 1999, the Bank incurred
one-time costs of approximately $263,000 associated with the merger of the
Bank of Salinas and Cypress Bank to form Community Bank of Central
California. Normal price increases and growth in the Bank's operations
accounted for the remaining higher expenses. The efficiency ratio (fully
taxable equivalent), calculated by dividing noninterest expense by the sum of
net interest income and noninterest income, for 2000 was 47.9% as compared to
52.0% in 1999.
In 1999, other expenses increased $696,000 (19.4%). These include one-time
costs of approximately $263,000 associated with merging Bank of Salinas and
Cypress Bank. Also in 1999, the Bank recorded a $73,000 expense to
write-down its former Gonzales branch office building to estimated net
realizable value. Normal price increases and growth in the Bank's operations
accounted for the remaining higher expenses. The efficiency ratio (fully
taxable equivalent), for 1999 was 52.0% as compared to 52.9% in 1998.
Provision for Taxes
The effective tax rate on income was 37.0%, 36.0%, and 40.9% in 2000, 1999
and 1998, respectively. The effective tax rate of the Company was higher in
2000 over 1999 as tax exempt instruments were a smaller percentage of earning
assets. In 1999, the effective tax rate of the Company was reduced 4.9% from
the prior year as a result of investments made in tax qualified municipal
bonds. The effective tax rate was greater than the federal statutory tax
rate due to state tax expense of $1,512,000, $1,326,000 and $1,292,000 in
these years. Tax-exempt income of $2,082,000, $1,998,000 and $266,000 from
investment securities and loans in these years helped to reduce the effective
tax rate.
(B) Balance Sheet Analysis
Central Coast Bancorp's total assets at December 31, 2000 were $706,693,000
compared to $593,445,000 at December 31, 1999, representing an increase of
19.1%. The average balances of total assets of $632,953,000 in 2000
represent an increase of $70,880,000 or 12.6% over $562,073,000 in 1999.
26
Loans
The Bank concentrates its lending activities in four principal areas:
commercial loans (including agricultural loans); consumer loans; real estate
construction loans (both commercial and personal) and real estate-other
loans. At December 31, 2000, these four categories accounted for
approximately 36%, 2%, 12% and 50% of the Bank's loan portfolio,
respectively, as compared to 40%, 3%, 9% and 48% at December 31, 1999. The
year 2000 saw continuing high levels of economic activity in the Bank's
market area. Loan demand was strong throughout the year and remained so in
the first months of 2001. All categories of loans, except consumer, reflect
increased growth in 2000. The largest growth took place in the real
estate-other category. However, the largest percentage gain of 63.5% was in
the real estate-construction category. Table Three summarizes the
composition of the loan portfolio for the past five years as of December 31:
Table Three: Loan Portfolio Composite
- ----------------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Commercial $ 171,631 $ 159,385 $ 136,685 $ 124,714 $ 111,545
Real Estate:
Construction 57,780 35,330 19,929 14,645 27,997
Other 234,890 188,600 144,685 107,354 93,241
Consumer 9,840 13,003 11,545 9,349 8,230
Deferred Loans Fees (746) (721) (674) (568) (649)
- ----------------------------------------------------------------------------------------------------------
Total Loans 473,395 395,597 312,170 255,494 240,364
Allowance for
Loan Losses (9,371) (5,596) (4,352) (4,223) (4,372)
- ----------------------------------------------------------------------------------------------------------
Total $ 464,024 $ 390,001 $ 307,818 $ 251,271 $ 235,992
==========================================================================================================
The majority of the Bank's loans are direct loans made to individuals, local
businesses and agri-businesses. The Bank relies substantially on local
promotional activity, personal contacts by Bank officers, directors and
employees to compete with other financial institutions. The Bank makes loans
to borrowers whose applications include a sound purpose, a viable repayment
source and a plan of repayment established at inception and generally backed
by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan
products. Consumer loans include a range of traditional consumer loan
products offered by the Bank such as personal lines of credit and loans to
finance purchases of autos, boats, recreational vehicles, mobile homes and
various other consumer items. The construction loans are generally composed
of commitments to customers within the Bank's service area for construction
of both commercial properties and custom and semi-custom single family
residences. Other real estate loans consist primarily of loans to the Bank's
depositors secured by first trust deeds on commercial and residential
properties typically with short-term maturities and original loan to value
ratios not exceeding 75%. In general, except in the case of loans with SBA
guarantees, the Bank does not make long-term mortgage loans; however, the
Bank has informal arrangements in place with mortgage lenders to assist
customers in securing single-family mortgage financing.
Average net loans in 2000 were $417,075,000 representing an increase of
$68,989,000 or 19.8% over 1999. The favorable economic conditions provided
27
the impetus for continuing loan growth. Average net loans in 1999 were
$348,086,000 representing an increase of $76,496,000 or 28.2% over 1998.
Risk Elements - The Bank 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 Bank
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 loan 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, the credit quality of the Bank's loans may be influenced by
underlying trends in the national and local economic and business cycles. The
Bank's business is mostly concentrated in Monterey County. The County's
economy is highly dependent on the agricultural and tourism industries. The
agricultural industry is also the major driver of the economies of San Benito
County and the southern portion of Santa Cruz County where the Bank's two
newest branches are located. As a result, the Bank lends money to
individuals and companies dependent upon the agricultural and tourism
industries.
The Bank has significant extensions of credit and commitments to extend
credit which are secured by real estate, totaling approximately $333 million
at December 31, 2000. Although management believes this real estate
concentration has no more that the normal risk of collectability, a
substantial decline in the economy in general, or a decline in real estate
values in the Bank's primary market areas in particular, could have an
adverse impact on the collectability of these loans. The ultimate recovery
of these loans is generally dependent on the successful operation, sale or
refinancing of the real estate. The Bank monitors the effects of current and
expected market conditions and other factors on the collectability of real
estate loans. When, in management's judgement, these loans are impaired, an
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. Not withstanding
the foregoing, abnormally high rates of impairment due to general/local
economic conditions could adversely affect the Company's future prospects and
results of operations.
In extending credit and commitments to borrowers, the Bank 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 Bank'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 Bank secures its collateral by perfecting its interest in
business assets, obtaining deeds of trust, or outright possession among other
means. Loan losses from lending transactions related to real estate and
agriculture compare favorably with the Bank's loan losses on its loan
portfolio as a whole.
Management believes that its lending policies and underwriting standards will
tend to minimize losses in an economic downturn, however, there is no
28
assurance that losses will not occur under such circumstances. The Bank's
loan policies and underwriting standards include, but are not limited to, the
following: 1) maintaining a thorough understanding of the Bank's service area
and limiting investments outside of this area, 2) maintaining a thorough
understanding of borrowers' knowledge and capacity in their field of
expertise, 3) basing real estate construction loan approval not only on
salability of the project, but also on the borrowers' capacity to support the
project financially in the event it does not sell within the original
projected time period, and 4) maintaining conforming and prudent loan to
value and loan to cost ratios based on independent outside appraisals and
ongoing inspection and analysis by the Bank's construction lending officers.
In addition, the Bank strives to diversify the risk inherent in the
construction portfolio by avoiding concentrations to individual borrowers and
on any one project.
Nonaccrual, Past Due and Restructured Loans
Management generally places loans on nonaccrual status when they become 90
days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management,
collection appears unlikely. Table Four sets forth nonaccrual loans, loans
past due 90 days or more, and restructured loans performing in compliance
with modified terms, for December 31:
Table Four: Non-Performing Loans
- ------------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing
Commercial $ 215 $ 51 $ 73 $ 73 $ 60
Real estate 10 303 1,174 6 59
Consumer and other 5 - - - 90
- ------------------------------------------------------------------------------------------------------
230 354 1,247 79 209
- ------------------------------------------------------------------------------------------------------
Nonaccrual:
Commercial 329 11 333 188 184
Real estate - 1,565 543 628 419
Consumer and other - - - - 1
- ------------------------------------------------------------------------------------------------------
329 1,576 876 816 604
- ------------------------------------------------------------------------------------------------------
Restructured (in compliance with modified
terms)- Commercial 1,010 - - - -
- ------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 1,569 $ 1,930 $ 2,123 $ 895 $ 813
======================================================================================================
Interest due but excluded from interest income on nonaccrual loans was
approximately $64,000 in 2000, $82,000 in 1999 and $45,000 in 1998. In 1999
and 1998, interest income recognized from payments received on nonaccrual
loans was $21,000 and $17,000, respectively (none was recognized in 2000).
At December 31, 2000, the recorded investment in loans that are considered
impaired was $1,691,000 of which $215,000 is included in nonaccrual loans,
and $1,010,000 is included in restructured loans above. Such impaired loans
had a valuation allowance of $506,000. The average recorded investment in
impaired loans during 2000 was $2,129,000. The Company recognized interest
income on impaired loans of $161,000, $92,000 and $64,000 in 2000, 1999 and
1998, respectively (including interest income of $98,000 on restructured
loans in 2000).
There were no troubled debt restructurings or loan concentrations in excess
of 10% of total loans not otherwise disclosed as a category of loans as of
December 31, 2000. Management is not aware of any potential problem loans,
29
which were accruing and current at December 31, 2000, where serious doubt
exists as to the ability of the borrower to comply with the present repayment
terms.
The Company held no real estate acquired by foreclosure at December 31, 2000
or 1999.
Allowance for Loan Losses Activity
The provision for loan losses is based upon management's evaluation of the
adequacy of the existing allowance for loans outstanding. This allowance is
increased by provisions charged to expense and reduced by loan charge-offs
net of recoveries. Management determines an appropriate provision based upon
the interaction of three primary factors: (1) the loan portfolio growth in
the period, (2) a comprehensive grading and review formula for total loans
outstanding, and (3) actual previous charge-offs.
The allowance for loan losses totaled $9,371,000 or 1.98% of total loans at
December 31, 2000 compared to $5,596,000 or 1.41% at December 31, 1999 and
$4,352,000 or 1.39% at December 31, 1998. In 2000, the allowance for loan
losses was increased in consideration of the significant growth in the loan
portfolio of $77,798,000 (19.7%), geographic and industry concentrations,
expansion into new geographic markets, and volatility and weaknesses in the
local economy, including potential effects of power shortages, water supply,
and volatile market prices for agricultural products. In addition,
approximately $1.2 million was provided as a result of the downward
classification to substandard of several loans to a single borrower. In 1999,
the loan growth of $77,260,000 necessitated an increase of $1,058,000 in the
allowance for loan losses. It is the policy of management to maintain the
allowance for loan losses at a level adequate for known and future risks
inherent in the loan portfolio. Based on information currently available to
analyze loan loss potential, including economic factors, overall credit
quality, historical delinquency and a history of actual charge-offs,
management believes that the loan loss provision and allowance is prudent and
adequate. However, no prediction of the ultimate level of loans charged off
in future years can be made with any certainty.
30
Table Five summarizes, for the years indicated, the activity in the allowance
for loan losses.
Table Five: Allowance for Loan Losses
- --------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
In thousands (except percentages) 12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
- --------------------------------------------------------------------------------------------------------
Average loans outstanding $424,891 $353,732 $ 276,437 $ 243,593 $ 208,169
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
at beginning of period $ 5,596 $ 4,352 $ 4,223 $ 4,372 $ 4,446
Loans charged off:
Commercial (273) (333) (130) (279) (391)
Real estate - (41) (16) (100) (207)
Consumer (119) (26) (31) (61) (22)
- --------------------------------------------------------------------------------------------------------
(392) (400) (177) (440) (620)
- --------------------------------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial 170 143 116 162 156
Real estate - 7 20 28 11
Consumer 14 10 11 37 27
- --------------------------------------------------------------------------------------------------------
184 160 147 227 194
- --------------------------------------------------------------------------------------------------------
Net loans charged off (208) (240) (30) (213) (426)
Additions to allowance charged
to operating expenses 3,983 1,484 159 64 352
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan
losses at end of period $ 9,371 $ 5,596 $ 4,352 $ 4,223 $ 4,372
- --------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to
average loans outstanding 0.05% 0.07% 0.01% 0.09% 0.20%
Provision of allowance for possible loan
losses to average loans outstanding 0.94% 0.42% 0.06% 0.03% 0.17%
Allowance for possible loan losses to loans
net of deferred fees at year end 1.98% 1.41% 1.39% 1.65% 1.82%
- --------------------------------------------------------------------------------------------------------
31
As part of its loan review process, management has allocated the overall
allowance based on specific identified problem loans and historical loss
data. Table Six summarizes the allocation of the allowance for loan losses at
December 31, 2000 and 1999.
Table Six: Allowance for Loan Losses by Loan Category
- ----------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999
----------------- -----------------
Percent of Percent of
loans in each loans in each
category to category to
In thousands (except percentages) Amount total loans Amount total loans
- ----------------------------------------------------------------------------------------
Commercial $ 5,602 36% $ 3,511 40%
Real estate 2,589 62% 390 57%
Consumer 255 2% 215 3%
- ----------------------------------------------------------------------------------------
Total allocated 8,446 100% 4,116 100%
Total unallocated 925 1,480
- ----------------------------------------------------------------------------------------
Total $ 9,371 $ 5,596
- ----------------------------------------------------------------------------------------
Other Real Estate Owned
The Company held no real estate acquired by foreclosure at December 31, 2000
or 1999.
Deposits
At December 31, 2000, deposits totaled $633,210,000 up from $518,189,000 at
the end of 1999. However, the 1999 ending balance included $20,000,000 in
State of California time deposits. These deposits matured by the end of 2000
and were no longer included in the deposit balances. Thus, the deposit
growth in 2000, net of the $20,000,000 of State of California certificates of
deposit, was $135,021,000 (27.1%). Because there was a large influx of
demand deposits at year-end, management would expect that due to normal
seasonal variations deposits will decrease approximately $30,000,000 to
$50,000,000 in the first quarter of 2001.
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies is reviewed regularly by management.
The Company's capital position represents the level of capital available to
support continued operations and expansion.
Since October of 1998 and through December 31, 2000, the Board of Directors
of the Company has authorized two separate plans to repurchase up to 5% (in
each plan) of the outstanding shares of the Company's common stock.
Purchases are made from time to time, in the open market and negotiated
transactions and are subject to appropriate regulatory and other accounting
requirements. The Company acquired 410,894 shares of its common stock in the
open market during 2000, 200,668 in 1999 and 29,645 in 1998 at average prices
of approximately $14.85, $13.32 and $12.61 per share, respectively. The
Company completed repurchases under the first plan in May 2000. At December
31, 2000, there were 112,240 shares remaining to repurchase under the second
plan. The preceding common share amounts and average prices paid have been
adjusted for the stock split and stock dividends issued from February 1999
through February 2001. These repurchases are made with the intention to
lessen the dilutive impact of issuing new shares to meet stock option plans
as well as for capital management objectives.
32
The Company's primary capital resource is shareholders' equity, which
increased $6.5 million or 12.3% from the previous year-end. The ratio of
total risk-based capital to risk-adjusted assets was 12.3% at December 31,
2000, compared to 13.8% at December 31, 1999. Tier 1 risk-based capital to
risk-adjusted assets was 11.1% at December 31, 2000, compared to 12.6% at
December 31, 1999. The capital ratios are lower in 2000 as compared to 1999
as risked based assets grew at a higher rate than did capital.
Table Seven: Capital Ratios
As of December 31,
---------------------------
2000 1999
---- ----
Tier 1 Capital 11.1% 12.6%
Total Capital 12.3% 13.8%
Leverage 9.1% 9.7%
See the discussion of capital requirements in "Supervision and Regulation" on
page 4 and Note 13 in the financial statements included in Item 8.
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 Bank to attract loan
customers. 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. Inflation did not have a material effect upon
the Company's results of operations during the year 2000.
Market Risk Management
Overview. The goal for managing the assets and liabilities of the Bank is to
maximize shareholder value and earnings while maintaining a high quality
balance sheet without exposing the Bank to undue interest rate risk. The
Board of Directors has overall responsibility for the Company's interest rate
risk management policies. The Bank has an Asset and Liability Management
Committee (ALCO) which establishes and monitors guidelines to control the
sensitivity of earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits, investing in securities and issuing debt. Interest rate risk is
the primary market risk associated with asset/liability management.
Sensitivity of earnings to interest rate changes arises when yields on assets
change in a different time period or in a different amount from that of
interest costs on liabilities. To mitigate interest rate risk, the structure
of the balance sheet is managed with the goal that movements of interest
rates on assets and liabilities are correlated and contribute to earnings
even in periods of volatile interest rates. The asset/liability management
policy sets limits on the acceptable amount of variance in net interest
margin and market value of equity under changing interest environments. The
33
Bank uses simulation models to forecast earnings, net interest margin and
market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, the
Company is able to estimate the potential impact of changing interest rates
on earnings. A balance sheet forecast is prepared quarterly using inputs of
actual loan, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance
sheet is processed against three interest rate scenarios. The scenarios
include a 200 basis point rising rate forecast, a flat rate forecast and a
200 basis point falling rate forecast which take place within a one year time
frame. The net interest income is measured during the first year of the rate
changes and in the year following the rate changes. The Company's 2000 net
interest income, as forecast below, was modeled utilizing a forecast balance
sheet projected from year-end 2000 balances.
The following assumptions were used in the modeling activity:
Earning asset growth of 7.1% based on ending balances
Loan growth of 8.3% based on ending balances
Investment and funds sold growth of 4.0% based on ending balances
Deposit growth of 3.0% based on ending balances
Balance sheet target balances were the same for all rate scenarios
The following table summarizes the effect on net interest income of a (+/-)
200 basis point change in interest rates as measured against a flat rate
(no change) scenario.
Table Eight: Interest Rate Risk Simulation of Net Interest Income as of
December 31, 2000
Estimated Impact on
2001 Net Interest
Income
------
(in thousands)
Variation from flat rate scenario
+200 $2,731
- 200 ($3,310)
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk.
The Company also uses a second simulation scenario that rate shocks the
balance sheet with an immediate parallel shift in interest rates of +/-200
basis points. This scenario provides estimates of the future market value of
equity (MVE) and net interest income (NII). MVE measures the impact on
equity due to the changes in the market values of assets and liabilities as a
result of a change in interest rates. The Bank measures the volatility of
these benchmarks using a twelve month time horizon. Using the December 31,
2000 balance sheet as the base for the simulation, the following table
summarizes the effect on net interest income of a +/-200 basis point change
in interest rates:
34
Table Nine: Interest Rate Risk Simulation of NII as of December 31, 2000
% Change Change
in NII in NII
from Current from Current
12 Mo. Horizon 12 Month Horizon
-------------- ----------------
(in thousands)
+ 200bp 16% $6,374
- 200bp (17%) ($6,618)
These results indicate that the balance sheet is asset sensitive since
earnings increase when interest rates rise. The magnitude of the NII change
is within the Company's policy guidelines. The asset liability management
policy limits aggregate market risk, as measured in this fashion, to an
acceptable level within the context of risk-return trade-offs.
Gap analysis provides another measure of interest rate risk. The Company
does not actively use gap analysis in managing interest rate risk. It is
presented here for comparative purposes. Interest rate sensitivity is a
function of the repricing characteristics of the Bank's portfolio of assets
and liabilities. These repricing characteristics are the time frames within
which the interest-bearing assets and liabilities are subject to change in
interest rates either at replacement, repricing or maturity. Interest rate
sensitivity management focuses on the maturity of assets and liabilities and
their repricing during periods of changes in market interest rates. Interest
rate sensitivity is measured as the difference between the volumes of assets
and liabilities in the Bank's current portfolio that are subject to repricing
at various time horizons. The differences are known as interest sensitivity
gaps.
As reflected in Table Ten, at December 31, 2000, the cumulative gap through
the one-year time horizon indicates a liability sensitive position.
Somewhere between one and five years the Bank moves into an asset sensitive
position. This interest rate sensitivity table categorizes interest-bearing
transaction deposits and savings deposits as repricing immediately. However,
as has been observed through interest rate cycles, the deposit liabilities do
not reprice immediately. Consequently, the Bank's net interest income varies
as though the Bank is asset sensitive, i.e. as interest rates rise net
interest income increases and vice versa. This phenomenon is validated by
the modeling as presented in Tables Eight and Nine.
35
Table Ten: Interest Rate Sensitivity
December 31, 2000
- ----------------------------------------------------------------------------------------------------------------
Assets and Liabilities Over three
which Mature or Reprice: Next day months and Over one
and within within and within Over
In thousands Immediately three months one year five years five years Total
- ----------------------------------------------------------------------------------------------------------------
Interest earning assets:
Investments 1,163 10,158 338 14,268 126,349 152,276
Loans, excluding
nonaccrual loans
and overdrafts 13,479 293,668 31,540 101,732 32,437 472,856
- ----------------------------------------------------------------------------------------------------------------
Total $ 14,642 $ 303,826 $ 31,878 $ 116,000 $ 158,786 $ 625,132
================================================================================================================
Interest bearing
liabilities:
Interest bearing demand $ 88,285 $ - $ - $ - $ - $ 88,285
Savings 110,204 - - - - 110,204
Time certificates - 62,624 135,179 29,910 6 227,719
Other Borrowings - 73 227 2,616 2,290 5,206
- ----------------------------------------------------------------------------------------------------------------
Total $ 198,489 $ 62,697 $ 135,406 $ 32,526 $ 2,296 $ 431,414
================================================================================================================
Interest rate
sensitivity gap $ (183,847) $ 241,129 $(103,528) $ 83,474 $ 156,490
Cumulative interest
rate sensitivity gap $ (183,847) $ 57,282 $ (46,246) $ 37,228 $ 193,718
- ----------------------------------------------------------------------------------------------------------------
December 31, 1999
Interest rate
sensitivity gap $ (198,061) $ 172,782 $ (54,472) $ 80,491 $ 147,262
Cumulative interest
rate sensitivity gap $ (198,061) $ (25,279) $ (79,751) $ 740 $ 148,002
- ----------------------------------------------------------------------------------------------------------------
Liquidity
Liquidity management refers to the Company's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities
contribute to the Company's liquidity position. Federal funds lines,
short-term investments and securities, and loan repayments contribute to
liquidity, along with deposit increases, while loan funding and deposit
withdrawals decrease liquidity. The Bank assesses the likelihood of
projected funding requirements by reviewing historical funding patterns,
current and forecasted economic conditions and individual client funding
needs. Commitments to fund loans and outstanding standby letters of credit
at December 31, 2000, were approximately $145,839,000 and $4,634,000,
respectively. Such loans relate primarily to revolving lines of credit and
other commercial loans, and to real estate construction loans.
The Company's sources of liquidity consist of overnight funds sold to
correspondent banks, unpledged marketable investments and loans held for
sale. On December 31, 2000, consolidated liquid assets totaled $132.0
million or 18.7% of total assets as compared to $91.1 million or 15.4% of
total consolidated assets on December 31, 1999. In addition to liquid
assets, the Bank maintains short term lines of credit with correspondent
banks. At December 31, 2000, the Bank had $80,000,000 available under these
credit lines. Additionally, the Bank is a member of the Federal Home Loan
Bank. At December 31, 2000, the Bank could have arranged for up to
$176,673,000 in secured borrowings from the FHLB. Informal agreements are
36
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
1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities". In
conjunction with the adoption of SFAS 133 the Bank reclassified all
securities into the available-for-sale category. This enables the Bank to
sell any of its unpledged securities to meet liquidity needs. Due to the
rising interest rate environment throughout most of 1999 and the first half
of 2000, much of the investment portfolio experienced price declines, which
resulted in unrealized losses. These unrealized losses limited the Bank's
ability to sell these securities without realizing those losses. Because of
the rapid decrease in interest rates at the end of 2000 and continuing into
January 2001, the unrealized loss in the investment portfolio has greatly
diminished. Further declines in the market rates of interest could result in
net unrealized gains in the portfolio. These securities are available to
pledge as collateral for borrowings if the need should arise. The Bank has
established a master repurchase agreement with a correspondent bank to enable
such transactions.
The maturity distribution of certificates of deposit in denominations of
$100,000 or more is set forth in Table Eleven. These deposits are generally
more rate sensitive than other deposits and, therefore, are more likely to be
withdrawn to obtain higher yields elsewhere if available.
Table Eleven: Certificates of Deposit in Denominations of $100,000 or More
- ------------------------------------------------------------------------------------------------
December 31, 2000
- ------------------------------------------------------------------------------------------------
Three months or less $47,772,000
Over three months through six months 22,759,000
Over six months through twelve months 70,019,000
Over twelve months 26,131,000
- ------------------------------------------------------------------------------------------------
Total $166,681,000
================================================================================================
37
Loan demand also affects the Bank's liquidity position. Table Twelve
presents the maturities of loans for the period indicated.
Table Twelve: Loan Maturities - December 31, 2000
- ------------------------------------------------------------------------------------------
One year
One year through Over
In thousands or less five years five years Total
- ------------------------------------------------------------------------------------------
Commercial $ 87,906,000 $ 57,024,000 $ 26,701,000 $171,631,000
Real estate -
construction 35,939,000 12,005,000 9,836,000 57,780,000
Real estate -
other 26,784,000 86,275,000 121,831,000 234,890,000
Consumer 5,633,000 4,042,000 165,000 9,840,000
- ------------------------------------------------------------------------------------------
Total $156,262,000 $159,346,000 $158,533,000 $474,141,000
- ------------------------------------------------------------------------------------------
Loans shown above with maturities greater than one year include $235,059,000 of
floating interest rate loans and $82,820,000 of fixed rate loans.
38
The maturity distribution and yields of the investment portfolios are
presented in Table Thirteen:
Table Thirteen: Securities Maturities and Weighted Average Yields - December 31, 2000 and 1999
- -----------------------------------------------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market Average
In thousands (except percentages) Cost Gain Loss Value Yield
- -----------------------------------------------------------------------------------------------------------
December 31, 2000
Available for sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 300 $ - $ - $ 300 5.79%
Maturing after 1 year but within 5 years 12,963 2 63 12,902 6.28%
Maturing after 5 years but within 10 years 61,846 167 454 61,559 6.45%
Maturing after 10 years 10,480 - 114 10,366 6.42%
State & Political Subdivision
Maturing within 1 year 243 - 5 238 3.80%
Maturing after 1 year but within 5 years 1,356 15 5 1,366 7.92%
Maturing after 5 year but within 10 Years 16,915 - 353 16,562 6.61%
Maturing after 10 years 27,337 78 744 26,671 6.88%
Corporate Debt Securities
Maturing within 1 year 9,968 - 11 9,957 8.24%
Maturing after 10 years 11,505 - 313 11,192 7.75%
Other 1,163 - - 1,163 0.00%
- -----------------------------------------------------------------------------------------------------------
Total investment securities $ 154,076 $ 262 $ 2,062 $ 152,276 6.70%
===========================================================================================================
December 31, 1999
Available for sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 12,002 $ - $ 35 $ 11,967 6.03%
Maturing after 1 year but within 5 years 6,462 8 217 6,253 5.62%
Maturing after 5 years but within 10 years 72,639 - 3,629 69,010 6.24%
Maturing after 10 years 12,265 - 625 11,640 6.27%
State & Political Subdivision
Maturing after 1 year but within 5 years 247 - 25 222 5.70%
Maturing after 5 year but within 10 Years 11,513 - 888 10,625 6.45%
Maturing after 10 years 25,091 - 2,436 22,655 6.73%
Corporate Debt Securities
Maturing after 10 years 11,500 - 121 11,379 7.18%
Other 1,684 - - 1,684 0.00%
- -----------------------------------------------------------------------------------------------------------
Total investment securities $ 153,403 $ 8 $ 7,976 $ 145,435 6.36%
===========================================================================================================
The principal cash requirements of the Company are for expenses incurred in
the support of administration and operations of the Bank. These cash
requirements are funded through direct reimbursement billings to the Bank.
For non-banking functions, the Company is dependent upon the payment of cash
dividends by the Bank to service its commitments. The Company expects that
the cash dividends paid by the Bank to the Company will be sufficient to meet
this payment schedule.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating leases. (See Note 5
of the financial statements for the terms.) These commitments do not
significantly impact operating results.
As of December 31, 2000, commitments to extend credit were the only financial
instruments with off-balance sheet risk. The Bank has not entered into any
contracts for financial derivative instruments such as futures, swaps,
39
options etc. Loan and letter of credit commitments increased to $150,473,000
from $131,398,000 at December 31, 1999. The commitments represent 31.8% of
total loans at year-end 2000 versus 33.2% a year ago.
Disclosure of Fair Value
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Statements, requires the disclosure of fair value of most financial
instruments, whether recognized or not recognized in the financial
statements. The intent of presenting the fair values of financial instruments
is to depict the market's assessment of the present value of net future cash
flows discounted to reflect both current interest rates and the market's
assessment of the risk that the cash flows will not occur.
In determining fair values, the Company used the carrying amount for cash,
short-term investments, accrued interest receivable, short-term borrowings
and accrued interest payable as all of these instruments are short term in
nature. Securities are reflected at quoted market values. Loans and
deposits have a long term time horizon which required more complex
calculations for fair value determination. Loans are grouped into
homogeneous categories and broken down between fixed and variable rate
instruments. Loans with a variable rate, which reprice immediately, are
valued at carrying value. The fair value of fixed rate instruments is
estimated by discounting the future cash flows using current rates. Credit
risk and repricing risk factors are included in the current rates. Fair
value for nonaccrual loans is reported at carrying value and is included in
the net loan total. Since the allowance for loan losses exceeds any
potential adjustment for nonaccrual valuation, no further valuation
adjustment has been made.
Demand deposits, savings and certain money market accounts are short term in
nature so the carrying value equals the fair value. For deposits that extend
over a period in excess of four months, the fair value is estimated by
discounting the future cash payments using the rates currently offered for
deposits of similar remaining maturities.
At year-end 2000 and year end 1999, the fair values calculated on the Bank's
assets were 0.4% below the carrying values.
Accounting Pronouncements
The Financial Standards Accounting Board released for comment on February 14,
2001, a revised proposal for the elimination of "pooling of interests"
accounting. The FASB indicated that it will accept comments through March
16, 2001. As proposed, it is currently anticipated that the FASB will issue
a final statement in June 2001, which would likely require, among other
matters, that all mergers initiated after the issuance of the final statement
be accounted for as "purchase" transactions. As proposed, a merger or
business combination would be considered initiated if the major terms of the
transaction, including the exchange or conversion ratio, are publicly
announced or otherwise disclosed to shareholders of the combining companies.
The revised proposal contemplates that goodwill will not be amortized to
earnings as originally proposed. Instead, goodwill would be recognized as an
asset in the financial statements, measured as the excess of the cost of an
acquired entity over the net of the amounts assigned to identifiable assets
acquired and liabilities assumed, and then tested for impairment to assess
losses and expensed against earnings only in the periods in which the
recorded value of goodwill exceeded its implied fair value, based on
standards to be specified in the final statement. The effect of the proposal
upon bank mergers is uncertain, however, the goodwill in a purchase
accounting transaction may not be included in the calculation of regulatory
capital requirements and some investment bankers have expressed the view that
40
the elimination of "pooling of interests" accounting will result in lower
merger premiums for sellers with the possibility of fewer transactions
occurring after the effective date of the final statement.
For additional discussion of accounting pronouncements, see Note 1 in the
Consolidated Financial Statements at Item 8.
Other Matters
The State of California is presently experiencing serious periodic electric
power shortages. It is uncertain whether or when these shortages will be
discontinued. The Company and the Bank could be materially and adversely
affected either directly or indirectly by a severe electric power shortage if
such a shortage caused any of its critical data processing or computer
systems and related equipment to fail, or if the local infrastructure systems
such as telephone systems should fail, or the Company's and the Bank's
significant vendors, suppliers, service providers, customers, borrowers, or
depositors are adversely impacted by their internal systems or those of their
respective customers or suppliers. Material increases in the expenses
related to electric power consumption and the related increase in operating
expense could also have an adverse effect on the Company's and the Bank's
future results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A of Form 10-K is contained in the Market
Risk Management section of Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 33.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 42
Consolidated Balance Sheets, December 31, 2000 and 1999 43
Consolidated Statements of Income for theyears ended
December 31, 2000, 1999 and 1998 44
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 45
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998 46
Notes to Consolidated Financial Statements 47-60
All schedules have been omitted since the required information is not present
in amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements or
notes thereto.
41
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Central Coast Bancorp:
We have audited the accompanying consolidated balance sheets of Central Coast
Bancorp and subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Coast Bancorp and subsidiary at December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Salinas, California
January 22, 2001
(February 28, 2001 as to the stock dividend information in Note 1)
42
Consolidated Balance Sheets
Central Coast Bancorp and Subsidiary
- -----------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 51,411,000 $ 39,959,000
Federal funds sold 23,081,000 -
- -----------------------------------------------------------------------------------------------------------------
Total cash and equivalents 74,492,000 39,959,000
Available-for-sale securities 152,276,000 145,435,000
Loans:
Commercial 171,631,000 159,385,000
Real estate-construction 57,780,000 35,330,000
Real estate-other 234,890,000 188,600,000
Consumer 9,840,000 13,003,000
Deferred loan fees, net (746,000) (721,000)
- -----------------------------------------------------------------------------------------------------------------
Total loans 473,395,000 395,597,000
Allowance for loan losses (9,371,000) (5,596,000)
- -----------------------------------------------------------------------------------------------------------------
Net Loans 464,024,000 390,001,000
- -----------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,735,000 3,888,000
Accrued interest receivable and other assets 12,166,000 14,162,000
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 706,693,000 $ 593,445,000
=================================================================================================================
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $ 207,002,000 $ 141,389,000
Demand, interest bearing 88,285,000 100,871,000
Savings 110,204,000 97,833,000
Time 227,719,000 178,096,000
- -----------------------------------------------------------------------------------------------------------------
Total Deposits 633,210,000 518,189,000
Accrued interest payable and other liabilities 13,629,000 21,951,000
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 646,839,000 540,140,000
- -----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 11)
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: 6,721,998 shares in 2000
and 6,440,257 shares in 1999 44,472,000 40,223,000
Shares held in deferred compensation trust (271,862 shares in 2000
and 247,148 shares in 1999), net of deferred obligation - -
Retained earnings 16,444,000 17,784,000
Accumulated other comprehensive income (loss), net of taxes of
$738,000 in 2000 and $3,267,000 in 1999 (1,062,000) (4,702,000)
- -----------------------------------------------------------------------------------------------------------------
Shareholders' equity 59,854,000 53,305,000
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 706,693,000 $ 593,445,000
=================================================================================================================
See notes to Consolidated Financial Statements
43
Consolidated Statements of Income
Central Coast Bancorp and Subsidiary
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Interest Income
Loans (including fees) $ 41,405,000 $ 32,234,000 $ 27,037,000
Investment securities 8,945,000 9,127,000 7,473,000
Fed funds sold 1,065,000 156,000 2,844,000
- ------------------------------------------------------------------------------------------------------------
Total interest income 51,415,000 41,517,000 37,354,000
- ------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 17,921,000 13,218,000 13,319,000
Other 369,000 430,000 -
- ------------------------------------------------------------------------------------------------------------
Total interest expense 18,290,000 13,648,000 13,319,000
- ------------------------------------------------------------------------------------------------------------
Net Interest Income 33,125,000 27,869,000 24,035,000
Provision for Loan Losses (3,983,000) (1,484,000) (159,000)
- ------------------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 29,142,000 26,385,000 23,876,000
- ------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposits 1,749,000 1,348,000 1,235,000
Other income 684,000 883,000 849,000
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 2,433,000 2,231,000 2,084,000
- ------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and benefits 10,081,000 9,116,000 8,213,000
Occupancy 1,479,000 1,301,000 1,049,000
Furniture and equipment 1,702,000 1,338,000 1,005,000
Other 4,146,000 4,288,000 3,592,000
- ------------------------------------------------------------------------------------------------------------
Total noninterest expenses 17,408,000 16,043,000 13,859,000
- ------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 14,167,000 12,573,000 12,101,000
Provision for Income Taxes 5,241,000 4,522,000 4,948,000
- ------------------------------------------------------------------------------------------------------------
Net Income $ 8,926,000 $ 8,051,000 $ 7,153,000
============================================================================================================
Basic Earnings per Share $ 1.17 $ 1.03 $ 0.98
Diluted Earnings per Share $ 1.14 $ 1.00 $ 0.90
============================================================================================================
See Notes to Consolidated Financial Statements
44
Consolidated Statements of Cash Flows
Central Coast Bancorp and Subsidiary
- ----------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operations:
Net income $ 8,926,000 $ 8,051,000 $ 7,153,000
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 3,983,000 1,484,000 159,000
Depreciation 1,266,000 936,000 656,000
Amortization and accretion 8,000 136,000 (6,000)
Deferred income taxes (1,852,000) (871,000) (333,000)
Loss (gain) on sale of securities 194,000 (45,000) (58,000)
Net loss on sale of equipment 19,000 126,000 -
Gain on other real estate owned (67,000) - (20,000)
Decrease (increase) in accrued interest receivable
and other assets 1,077,000 (2,241,000) 129,000
Increase in accrued interest payable and other liabilities 3,492,000 2,110,000 364,000
Increase in deferred loan fees 25,000 47,000 106,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 17,071,000 9,733,000 8,150,000
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturities of available-for-sale securities 70,751,000 100,042,000 107,423,000
Proceeds from maturities of held-to-maturity securities - - 20,959,000
Proceeds from sale of available-for-sale securities 19,806,000 5,988,000 9,119,000
Purchase of available-for-sale securities (91,174,000) (89,498,000) (176,593,000)
Net change in loans held for sale - 6,168,000 (4,837,000)
Net increase in loans (78,031,000) (84,049,000) (56,812,000)
Proceeds from sale of other real estate owned - 387,000 125,000
Proceeds from sale of equipment - 26,000 -
Purchases of equipment (1,132,000) (2,087,000) (1,724,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (79,780,000) (63,023,000) (102,340,000)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts 115,021,000 28,997,000 38,891,000
Net increase (decrease) in other borrowings (11,744,000) 16,950,000 (289,000)
Proceeds from sale of stock 76,000 1,098,000 264,000
Shares repurchased (6,111,000) (2,682,000) (387,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 97,242,000 44,363,000 38,479,000
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 34,533,000 (8,927,000) (55,711,000)
Cash and equivalents, beginning of year 39,959,000 48,886,000 104,597,000
- ----------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 74,492,000 $ 39,959,000 $ 48,886,000
======================================================================================================================
Noncash Investing and Financing Activities:
The Company obtained $335,000 of real estate (OREO) in 1999 in connection with forclosures of delinquent loans
(none in 2000 or 1998). In 2000, 1999 and 1998 stock option exercises and stock repurchases totaling $20,000,
$666,000 and $384,000, respectively were performed through a "stock for stock" exercise under the Company's stock
option and deferred compensation plans (see Note 9).
- ----------------------------------------------------------------------------------------------------------------------
Other Cash Flow Information:
Interest paid $ 17,121,000 $ 13,733,000 $ 13,100,000
Income taxes paid 5,970,000 3,569,000 4,619,000
======================================================================================================================
See Notes to Consolidated Financial Statements
45
Consolidated Statements of Shareholders' Equity
Central Coast Bancorp and Subsidiary
- ------------------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income (Loss) -
Net Unrealized
Gain (Loss)
on Available-
Years Ended December 31, Common Stock Retained For-Sale
2000, 1999 and 1998 Shares Amount Earnings Securities Total
- ------------------------------------------------------------------------------------------------------
Balances, January 1, 1998 5,460,586 $ 31,644,000 $11,979,000 $ 101,000 $ 43,724,000
Net income - - 7,153,000 - 7,153,000
Changes in unrealized gains
on securities available for sale,
net of taxes of $223,000 - - - 320,000 320,000
Reclassification adjustment for
gains included in income,
net of taxes of $40,000 - - - (58,000) (58,000)
------------
Comprehensive income 7,415,000
------------
10% stock dividend 546,059 9,399,000 (9,399,000) - -
Stock options and warrants
exercised 153,019 647,000 - - 647,000
Shares repurchased (47,619) (770,000) - - (770,000)
Tax benefit of stock options
exercised - 183,000 - - 183,000
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 6,112,045 41,103,000 9,733,000 363,000 51,199,000
Net income - - 8,051,000 - 8,051,000
Changes in unrealized gains (losses)
on securities available for sale,
net of taxes of $3,502,000 - - - (5,039,000) (5,039,000)
Reclassification adjustment for
gains included in income,
net of taxes of $19,000 - - - (26,000) (26,000)
------------
Comprehensive income 2,986,000
------------
Stock options and warrants
exercised 534,232 1,764,000 - - 1,764,000
Shares repurchased (206,020) (3,348,000) - - (3,348,000)
Tax benefit of stock options
exercised - 704,000 - - 704,000
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 6,440,257 40,223,000 17,784,000 (4,702,000) 53,305,000
Net income - - 8,926,000 - 8,926,000
Changes in unrealized gains
on securities available for sale,
net of taxes of $2,449,000 - - - 3,526,000 3,526,000
Reclassification adjustment for
gains included in income,
net of taxes of $80,000 - - - 114,000 114,000
------------
Comprehensive income 12,566,000
------------
10% stock dividend 644,026 10,266,000 (10,266,000) -
Stock options exercised 12,998 96,000 - - 96,000
Shares repurchased (375,283) (6,131,000) (6,131,000)
Tax benefit of stock options
exercised - 18,000 - - 18,000
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 6,721,998 $ 44,472,000 $16,444,000 $(1,062,000)$ 59,854,000
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Central Coast Bancorp and Subsidiary
Years ended December 31, 2000, 1999 and 1998
Note 1. Significant Accounting Policies and Operations. The consolidated
financial statements include Central Coast Bancorp (the "Company") and its
wholly-owned subsidiary, Community Bank of Central California (the "Bank").
All material intercompany accounts and transactions are eliminated in
consolidation. The accounting and reporting policies of the Company and the
Bank conform to accounting principles generally accepted in the United
States of America and prevailing practices within the banking industry. 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.
Community Bank of Central California operates ten full service branch
offices in Monterey, Santa Cruz and San Benito Counties, serving small and
medium sized business customers, as well as individuals. The Bank focuses
on business loans and deposit services to customers throughout its service
area.
Investment Securities are classified at the time of purchase 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. Accretion of discounts and amortization of premiums arising
at acquisition are included in income using methods approximating the
effective interest method. Gains and losses on sales of investments, if
any, are determined on a specific identification basis.
Loans are stated at the principal amount outstanding, reduced by any
charge-offs or specific valuation allowance. Loan origination fees and
certain direct loan origination costs are deferred and the net amount is
recognized using the effective yield method, generally over the contractual
life of the loan.
Interest income is accrued as earned. The accrual of interest on loans is
discontinued and any accrued and unpaid interest is reversed when principal
or interest is ninety days past due, when payment in full of principal or
interest is not expected or when a portion of the principal balance has been
charged off. Income on such loans is then recognized only to the extent
that cash is received and where the future collection of principal is
probable. Senior management may grant a waiver from nonaccrual status if a
loan is well secured and in the process of collection. 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 original terms of the loan
agreement or when the loan is both well secured and in process of collection.
47
The allowance for loan losses is an amount that management believes will be
adequate to absorb losses inherent in existing loans and commitments to
extend credit, based on evaluations of collectibility and prior loss
experience. The allowance is established through a provision charged to
expense. Loans are charged against the allowance when management believes
that the collectibility of the principal is unlikely. In evaluating the
adequacy of the allowance, management considers numerous factors such as
changes in the composition of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current and anticipated local
economic conditions that may affect the borrowers' ability to pay.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired loans
are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent.
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 loan amount is treated as a loan loss. Costs of maintaining other
real estate owned, subsequent write downs and gains or losses on the
subsequent sale are reflected in current earnings.
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the lesser of the lease terms or estimated useful lives of the
assets, which are generally 3 to 30 years.
Intangible assets representing the excess of the purchase price over the
fair value of tangible net assets acquired, are being amortized on a
straight-line basis over seven years and are included in other assets.
Stock Compensation. The Company accounts for its stock-based awards using
the intrinsic value method in accordance with Accounting Principles Board
No. 25, Accounting for Stock Issued to Employees and its related
interpretations. No compensation expense has been recognized in the
financial statements for employee stock arrangements. Note 9 to the
Consolidated Financial Statements contains a summary of the pro forma
effects to reported net income and earnings per share as if the Company had
elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Income taxes are provided using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future
tax consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities arise principally from differences in
reporting provisions for loan losses, interest on nonaccrual loans,
depreciation, state franchise taxes and accruals related to the salary
continuation plan. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average of common shares outstanding for the period
(7,612,000, 7,779,000 and 7,305,000 in 2000, 1999 and 1998, 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
48
weighted average common shares outstanding for the period plus the dilutive
effect of options and warrants (225,000, 270,000, and 661,000 in 2000, 1999
and 1998, respectively). All earnings per share information has been
adjusted retroactively for stock dividends of 10% in January 2001, 2000 and
1998, and a 5-for-4 stock split in January 1999.
Stock dividend. On January 29, 2001 the Board of Directors declared a 10%
stock dividend which was distributed on February 28, 2001, to shareholders
of record as of February 14, 2001. All share and per share data including
stock option and warrant information have been retroactively adjusted to
reflect the stock dividend.
Comprehensive income. In 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) 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 have been reported in the accompanying statements of
shareholders' equity.
Segment reporting. In 1998 the Company adopted Financial Accounting
Standards Statement (FAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Management has determined that since all of the commercial
banking products and services offered by the Company are available in each
branch office of the Bank, all branch offices are located within the same
economic environment and management does not allocate resources based on the
performance of different lending or transaction activities, it is
appropriate to aggregate the Bank branch offices and report them as a single
operating segment.
Reclassification of investment securities. Effective July 1, 1998 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments
and hedging activities. In connection with the adoption of SFAS 133 the
Company reclassified certain securities with an amortized cost of
$18,085,000 and a fair value of $18,202,000 from held-to-maturity to
available-for-sale. Adoption of this statement did not have any other
impact on the Company's consolidated financial position and had no impact on
the Company's results of operations or cash flows.
Note 2. Cash and Due from Banks. The Company, through its bank subsidiary,
is required to maintain reserves with the Federal Reserve Bank. Reserve
requirements are based on a percentage of deposits. At December 31, 2000
the Company maintained reserves of approximately $703,000 in the form of
vault cash and balances at the Federal Reserve to satisfy regulatory
requirements.
49
Note 3. Securities. The Company's investment securities portfolio as of
December 31, 2000 and 1999 consisted of the following:
- ---------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
In thousands Cost Gain Loss Value
- ---------------------------------------------------------------------------------------------
December 31, 2000
Available for sale securities:
U.S. Treasury and Agency securities $ 85,589 $ 169 $ 631 $ 85,127
State & Political Subdivision 45,851 93 1,107 44,837
Corporate Debt Securities 21,473 - 324 21,149
Other 1,163 - - 1,163
- ---------------------------------------------------------------------------------------------
Total investment securities $ 154,076 $ 262 $ 2,062 $ 152,276
=============================================================================================
December 31, 1999
Available for sale securities:
U.S. Treasury and Agency securities $ 103,368 $ 8 $ 4,506 $ 98,870
State & Political Subdivision 36,851 - 3,349 33,502
Corporate Debt Securities 11,500 - 121 11,379
Other 1,684 - - 1,684
- ---------------------------------------------------------------------------------------------
Total investment securities $ 153,403 $ 8 $ 7,976 $ 145,435
=============================================================================================
At December 31, 2000 and 1999, securities with a book value of $95,908,000
and $80,593,000 were pledged as collateral for deposits of public funds and
other purposes as required by law or contract.
U.S. Treasury Securities with a market value of $19,806,000, $6,033,000 and
$9,119,000, and an amortized cost of $20,000,000, $5,988,000 and $9,061,000
were sold during the fiscal years ended December 31, 2000, 1999 and 1998,
respectively. In 2000, such sales resulted in gross realized losses of
$194,000 and no gross unrealized gains. In 1999 and 1998, such sales
resulted in gross realized gains of $45,000 and $58,000, respectively and no
gross unrealized losses.
Note 4. Loans and allowance for loan losses. 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, the
ultimate recovery of which is generally dependent on the successful
operation, sale or refinancing of real estate, totaling approximately $333
million. 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 judgment, these loans are impaired, appropriate
provisions for losses are 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. Loan losses from lending transactions
related to real estate and agriculture compare favorably with the Company's
loan losses on its loan portfolio as a whole.
50
The activity in the allowance for loan losses is summarized as follows:
- -------------------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
Balances, beginning of year $ 5,596 $ 4,352 $ 4,223
Provision charged to expense 3,983 1,484 159
Loans charged off (392) (400) (177)
Recoveries 184 160 147
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 9,371 $ 5,596 $ 4,352
=============================================================================================================
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 December 31, 2000
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.
Non-performing loans at December 31 are summarized below:
- ----------------------------------------------------------------------------------------------------------
In thousands 2000 1999
- -----------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Real estate $ 10 $ 303
Commercial 215 51
Consumer and other 5 -
- -----------------------------------------------------------------------------------------------------------
230 354
- -----------------------------------------------------------------------------------------------------------
Nonaccrual:
Real estate - 1,565
Commercial 329 11
Consumer and other - -
- -----------------------------------------------------------------------------------------------------------
329 1,576
- -----------------------------------------------------------------------------------------------------------
Restructured (in compliance with modified
terms)- Commercial 1,010 -
- -----------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 1,569 $ 1,930
===========================================================================================================
Interest due but excluded from interest income on nonaccrual loans was
approximately $64,000, $82,000, and $45,000 in 2000, 1999 and 1998
respectively. In 1999 and 1998, interest income recognized from payments
received on nonaccrual loans was $21,000 and $17,000, respectively (none was
recognized in 2000).
At December 31, 2000, the recorded investment in loans that are considered
impaired under SFAS No. 114 was $1,691,000 of which $215,000 are included as
nonaccrual loans above, and $1,010,000 are included as restructured loans
above. At December 31, 1999, the recorded investment in loans that are
considered impaired was $2,165,000 of which $1,568,000 are included as
nonaccrual loans above. Such impaired loans had valuation allowances
totalling $809,000 and $821,000, in 2000 and 1999, respectively, based on
51
the estimated fair values of the collateral. The average recorded
investment in impaired loans during 2000 and 1999, was $2,129,000 and
$2,357,000, respectively. The Company recognized interest income on
impaired loans of $161,000, $92,000 and $64,000 in 2000, 1999 and 1998,
respectively (including interest income of $98,000 on restructured loans in
2000).
The Company held no real estate acquired by foreclosure at December 31, 2000
or 1999.
Note 5. Premises and equipment. Premises and equipment at December 31 are
summarized as follows:
- --------------------------------------------------------------------------------------------------------------------
In thousands 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Land $ 121 $ 121
Building 260 215
Furniture and equipment 6,390 5,982
Leasehold improvement 2,223 2,067
- --------------------------------------------------------------------------------------------------------------------
8,994 8,385
Accumulated depreciation and amortization (5,259) (4,497)
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 3,735 $ 3,888
- --------------------------------------------------------------------------------------------------------------------
The Company's facilities leases expire in March 2003 through October 2009
with options to extend for five to fifteen years. These include two
facilities leased from shareholders at terms and conditions which management
believes are consistent with the market. Rental rates are adjusted annually
for changes in certain economic indices. Rental expense was approximately
$634,000, $565,000 and $456,000, including lease expense to shareholders of
$122,000, $121,000 and $134,000 in 2000, 1999 and 1998 respectively. The
minimum annual rental commitments under these leases, including the
remaining rental commitment under the leases to shareholders, are as follows:
- ---------------------------------------------------------------------------------------------------------
Operating
In thousands Leases
- ---------------------------------------------------------------------------------------------------------
2001 $ 665
2002 665
2003 607
2004 573
2005 467
Thereafter 1,111
- ---------------------------------------------------------------------------------------------------------
Total $ 4,088
- ---------------------------------------------------------------------------------------------------------
Note 6. Income Taxes. The provision for income taxes is as follows:
- -----------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Current:
Federal $ 5,160 $ 3,863 $ 3,946
State 1,933 1,530 1,335
- -----------------------------------------------------------------------------------------------------
Total 7,093 5,393 5,281
- -----------------------------------------------------------------------------------------------------
Deferred:
Federal (1,432) (667) (290)
State (420) (204) (43)
- ---------------------------------------------------------------------------------------------------
Total (1,852) (871) (333)
- ---------------------------------------------------------------------------------------------------
Total $ 5,241 $ 4,522 $ 4,948
- -----------------------------------------------------------------------------------------------------
52
A reconciliation of the Federal income tax rate to the effective tax rate is
as follows:
- ----------------------------------------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income taxes (net of
Federal income tax benefit) 7.1% 7.0% 7.1%
Tax exempt interest income (5.0%) (5.4%) (0.8%)
Other (0.1%) (0.6%) (0.4%)
- ----------------------------------------------------------------------------------------------------------
Effective tax rate 37.0% 36.0% 40.9%
- ----------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2000 and 1999, are presented below:
- ----------------------------------------------------------------------------------------------------------
In thousands 2000 1999
- ----------------------------------------------------------------------------------------------------------
Deferred Tax assets (liabilities):
Provision for loan losses $ 4,053 $ 2,287
Unrealized (gain) loss on available for sale securities 738 3,267
Salary continuation plan 618 438
Depreciation and amortization 258 308
State income taxes 251 196
Excess serving rights 15 74
Interest on nonaccrual loans 51 72
Accrual to cash adjustments - 15
Other 26 33
- ----------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 6,010 $ 6,690
- ----------------------------------------------------------------------------------------------------------
Note 7. Detail of Other Expense. Other expense for the years ended
December 31, 2000, 1999 and 1998 consists of the following:
- -----------------------------------------------------------------------------------------------------------------
In thousands 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Marketing $ 644 $ 475 $ 335
Professional fees 430 452 461
Customer expenses 413 398 431
Stationary and supplies 377 444 326
Data processing 314 306 386
Amortization of intangibles 257 257 257
Shareholder and director 253 250 262
Insurance 216 180 196
Dues and assessments 179 139 109
Other 1,063 1,387 829
- -----------------------------------------------------------------------------------------------------------------
Total $ 4,146 $ 4,288 $ 3,592
- -----------------------------------------------------------------------------------------------------------------
Note 8. Stock Purchase Warrants. During 1995 and 1994, warrants were
issued in connection with the sale of the Company's common stock at a rate
of one warrant for every share of stock purchased. The warrants expired on
June 30, 1999. During 1999 and 1998, respectively 159,845 and 19,200
warrants were exercised. During 1999, 7,129 options expired.
Note 9. Employee Benefit Plans. The Company has two stock option plans
under which incentive stock options or nonqualified stock options may be
granted to certain key employees or directors to purchase authorized, but
53
unissued, common stock. Shares may be purchased at a price not less than
the fair market value of such stock on the date of grant. Options vest
over various periods not in excess of ten years from date of grant and
expire not more than ten years from date of grant.
Activity under the stock option plans adjusted for stock dividends and stock
splits is as follows:
- ------------------------------------------------------------------------------------------------------
Weighted
Average
Shares Price per share Price
- ------------------------------------------------------------------------------------------------------
Balances, January 1, 1998 1,264,814 $ 1.92 - 13.64 $ 4.91
Granted (wt. avg. fair value $4.63 per share) 82,430 12.73 - 15.54 13.81
Canceled (26,620) 8.12 - 8.12 8.12
Exercised (165,951) 1.92 - 8.12 3.50
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 1,154,673 1.92 - 15.54 5.67
Granted (wt. avg. fair value $4.60 per share) 22,914 13.72 - 13.72 13.72
Expired (12,727) 8.12 - 8.12 8.12
Exercised (486,574) 1.92 - 8.12 2.49
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 678,286 3.90 - 15.54 8.18
Granted (wt. avg. fair value $5.28 per share) 192,775 14.55 - 16.36 14.63
Expired (6,600) 14.55 - 14.55 14.55
Exercised (14,297) 3.90 - 8.22 6.67
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 850,164 $ 3.90 - 16.36 $ 9.62
- ------------------------------------------------------------------------------------------------------
Additional information regarding options outstanding as of December 31, 2000
is as follows:
- ----------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------- -------------------------
Weighted Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------
$ 3.90 - 6.65 203,941 4.1 $ 5.26 201,526 $ 5.27
8.12 - 8.22 348,879 5.9 8.13 348,879 8.13
12.73 - 16.36 297,344 8.5 14.36 76,885 13.89
- ----------------------------------------------------------------------------------------------
$ 3.90 - 16.36 850,164 6.4 $ 9.62 627,290 $ 7.92
- ----------------------------------------------------------------------------------------------
At December 31, 2000, 1,433,399 shares were available for additional grants.
401(k) Savings Plan
The Company has a 401(k) Savings Plan under which eligible employees may
elect to make tax deferred contributions from their annual salary, to a
maximum established annually by the IRS. The Company matches 25% of the
employees' contributions. The Company may make additional contributions to
the plan at the discretion of the Board of Directors. All employees
meeting age and service requirements are eligible to participate in the
Plan. Company contributions vest after 3 years of service. Company
contributions during 2000, 1999 and 1998 which are funded currently,
totaled $114,000, $94,000 and $68,000, respectively.
54
Salary Continuation Plan
The Company has a salary continuation plan for three officers which provides
for retirement benefits upon reaching age 63. The Company accrues such
post-retirement benefits over the vesting periods (of five or ten years)
based on a discount rate of 7.5%. In the event of a change in control of the
Company, the officers' benefits will fully vest. The Company recorded
compensation expense of $292,000, $256,000 and $225,000 in 2000, 1999 and
1998 respectively. Accrued compensation payable under the salary
continuation plan totaled $1,140,000 and $848,000 at December 31, 2000 and
1999, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan for the benefit of the Board of
Directors and certain officers. In addition to the deferral of compensation,
the plan allows participants the opportunity to defer taxable income derived
from the exercise of stock options. The participant's may, after making an
election to defer receipt of the option shares for a specified period of
time, use a "stock-for-stock" exercise to tender to the Company mature shares
with a fair value equal to the exercise price of the stock options
exercised. The Company simultaneously delivers new shares to the participant
equal to the value of shares surrendered and the remaining shares under
option are placed in a trust administered by the Company, to be distributed
in accordance with the terms of each participant's election to defer. During
1999 and 1998, respectively, 48,101 and 27,140 shares with a fair value of
approximately $666,000 and $384,000 were tendered to the Company using a
"stock-for-stock" exercise and, at December 31, 2000, 271,862 shares (with a
fair value of approximately $4,861,000 at December 31, 2000) were held in the
Deferred Compensation Trust.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees and its
related interpretations. No compensation expense has been recognized in the
financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, four years following vesting; average stock
volatility of 15.3%; risk free interest rates ranging from 4.52% to 6.57%;
and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are recognized
as they occur. If the computed fair values of the 2000, 1999 and 1998 awards
had been amortized to expense over the vesting period of the awards, pro
forma net income would have been $8,548,000 000 ($1.12 basic and $1.09
diluted earnings per share), $7,939,000 ($1.02 basic and $0.99 diluted
earnings per share) and $6,957,000 ($0.95 basic and $0.87 diluted earnings
per share) in 2000, 1999 and 1998, respectively. The impact of outstanding
non-vested stock options granted prior to 1995 has been excluded from the pro
forma calculation; accordingly, the 2000, 1999 and 1998 pro forma adjustments
are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
55
Note 10. Disclosures About Fair Value of Financial Instruments. The
following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments". The estimated fair value amounts have
been determined by using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
assumptions and/or estimation techniques may have a material effect on the
estimated fair value amounts.
- ------------------------------------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and equivalents $ 74,492 $ 74,492 $ 39,959 $ 39,959
Securities 152,276 152,276 145,435 145,435
Loans, net 464,024 461,060 390,001 387,581
Financial Liabilities
Demand deposits 295,287 295,287 242,260 242,260
Time Deposits 227,719 228,724 178,096 178,147
Savings 110,204 110,204 97,833 97,833
Other borrowings 5,206 5,206 16,950 16,950
- ------------------------------------------------------------------------------------------------------------------
The following estimates and assumptions were used to estimate the fair value
of the financial instruments.
Cash and equivalents - The carrying amount is a reasonable estimate of fair
value.
Securities - Fair values of securities are based on quoted market prices or
dealer quotes. If a quoted market price was not available, fair value was
estimated using quoted market prices for similar securities.
Loans, net - Fair values for certain commercial, construction, revolving
customer credit and other loans were estimated by discounting the future cash
flows using current rates at which similar loans would be made to borrowers
with similar credit ratings and similar maturities, adjusted for the
allowance for loan losses.
Certain adjustable rate loans have been valued at their carrying values, if
no significant changes in credit standing have occurred since origination and
the interest rate adjustment characteristics of the loan effectively adjust
the interest rate to maintain a market rate of return. For adjustable rate
loans which have had changes in credit quality, appropriate adjustments to
the fair value of the loans are made.
Demand, time and savings deposits - The fair value of noninterest-bearing and
adjustable rate deposits and savings is the amount payable upon demand at the
reporting date. The fair value of fixed-rate interest-bearing deposits with
fixed maturity dates was estimated by discounting the cash flows using rates
currently offered for deposits of similar remaining maturities.
Off-balance sheet instruments - The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present credit-worthiness of the counterparties. The fair values of standby
and commercial letters of credit are based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties. The fair values of such
56
off-balance sheet instruments were not significant at December 31, 2000 and
1999, therefore, have not been included in the table above.
Note 11. Commitments and Contingencies. In the normal course of business
there are various commitments outstanding to extend credit which are not
reflected in the financial statements, including loan commitments of
approximately $145,839,000 and standby letters of credit and financial
guarantees of $4,634,000 at December 31, 2000. The Bank does not anticipate
any losses as a result of these transactions.
Approximately $27,223,000 of loan commitments outstanding at December 31,
2000 relate to 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. Many of these loan commitments are expected to
expire without being drawn upon. Therefore the total commitments do not
necessarily represent future cash requirements.
Stand-by letters of credit are commitments written by the Bank to guarantee
the performance of a customer to a third party. These guarantees are issued
primarily relating to purchases of inventory by the Bank's commercial
customers, are typically short-term in nature and virtually all such
commitments are collateralized.
Most of the outstanding commitments to extend credit are at variable rates
tied to the Bank's reference rate of interest. The Company's exposure to
credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of
credit issued is the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The Company
controls the credit risk of the off-balance sheet financial instruments
through the normal credit approval and monitoring process.
Note 12. Related Party Loans. The Company makes loans to officers and
directors and their associates subject to loan committee approval and
ratification by the Board of Directors. These transactions are on
substantially the same terms as those prevailing at the time for comparable
transactions with unaffiliated parties and do not involve more than normal
risk of collectibility. An analysis of changes in related party loans for
the year ended December 31, 2000 is as follows:
- -----------------------------------------------------------------------------------------
Beginning Balance Additions Repayments Ending Balance
- -----------------------------------------------------------------------------------------
$ 6,972,000 $ 7,067,000 $ 9,157,000 $ 4,882,000
- -----------------------------------------------------------------------------------------
Committed lines of credit, undisbursed loans and standby letters of credit to
directors and officers at December 31, 2000 were approximately $2,461,000.
Note 13. Regulatory Matters. The Company is subject to various regulatory
capital requirements administered by federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly, additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Capital adequacy guidelines and the regulatory framework for prompt
corrective action require that the Company meet specific capital adequacy
guidelines that involve quantitative measures of the Company's assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weighting and other factors.
57
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum ratios of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined) and a
minimum leverage ratio of Tier 1 capital to average assets (as defined).
Management believes, as of December 31, 2000 that the Company meets all
capital adequacy requirements to which it is subject.
As of December 31, 2000 and 1999, the most recent notifications from the
Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The following table shows the Company's and the Bank's actual capital amounts
and ratios at December 31, as well as the minimum capital ratios to be
categorized as "well capitalized" under the regulatory framework:
- ----------------------------------------------------------------------------------------------------------------------------------
To Be Categorized
Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000:
Total Capital (to Risk Weighted Assets):
Company $ 66,892,000 12.3% $ 43,490,000 8.0% N/A
Community Bank 63,866,000 11.8% 43,273,000 8.0% $ 54,092,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 60,098,000 11.1% 21,745,000 4.0% N/A
Community Bank 57,073,000 10.6% 21,637,000 4.0% 32,455,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 60,098,000 9.1% 26,344,000 4.0% N/A
Community Bank 57,073,000 8.7% 26,251,000 4.0% 32,814,000 5.0%
As of December 31, 1999:
Total Capital (to Risk Weighted Assets):
Company 62,489,000 13.8% 36,125,000 8.0% N/A
Community Bank 60,151,000 13.3% 36,173,000 8.0% 45,216,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 56,938,000 12.6% 18,062,000 4.0% N/A
Community Bank 54,600,000 12.1% 18,086,000 4.0% 27,130,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 56,938,000 9.7% 23,593,000 4.0% N/A
Community Bank 54,600,000 9.2% 23,686,000 4.0% 29,608,000 5.0%
- ----------------------------------------------------------------------------------------------------------------------------------
The ability of the Company to pay cash dividends in the future will largely
depend upon the cash dividends paid to it by its subsidiary Bank. Under
State and Federal law regulating banks, cash dividends declared by a Bank in
any calendar year generally may not exceed its net income for the preceding
three fiscal years, less distributions to the Company, or its retained
earnings. Under these provisions, and considering minimum regulatory capital
requirements, the amount available for distribution from the Bank to the
Company was approximately $16,642,000 as of December 31, 2000.
58
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In
particular, the Bank is prohibited from lending to the Company unless the
loans are secured by specified types of collateral. Such secured loans and
other advances from the Bank is limited to 10% of Bank shareholders' equity,
or a maximum of $5,682,000 at December 31, 2000. No such advances were made
during 2000 or 1999.
Note 14. Central Coast Bancorp (Parent Company Only)
The condensed financial statements of Central Coast Bancorp follow (in
thousands):
Condensed Balance Sheets
- ---------------------------------------------------------------------------------------------------
December 31, 2000 1999
- ---------------------------------------------------------------------------------------------------
Assets:
Cash - interest bearing account with Bank $ 1,944 $ 893
Investment in Bank 56,823 50,906
Premises and equipment, net 1,730 1,896
Other Assets 1,142 1015
- ---------------------------------------------------------------------------------------------------
Total assets $ 61,639 $ 54,710
===================================================================================================
Liabilities and Shareholders' Equity
Liabilities $ 1,785 $ 1,405
Shareholders' Equity 59,854 53,305
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 61,639 $ 54,710
===================================================================================================
Condensed Income Statements
- ------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Management fees $ 8,700 $ 7,704 $ 5,957
Other income - 14 1
Cash dividends received from the Bank 7,000 500 1,500
- ------------------------------------------------------------------------------------------------------
Total income 15,700 8,218 7,458
Operating expenses 9,257 8,212 7,435
- ------------------------------------------------------------------------------------------------------
Income(loss) before income taxes and equity
in undistributed net income of Bank 6,443 6 23
Provision (credit) for income taxes (206) (206) (604)
Equity in undistributed
net income of Bank 2,277 7,839 6,526
- ------------------------------------------------------------------------------------------------------
Net income 8,926 8,051 7,153
Other comprehensive income (loss) 3,640 (5,065) 262
- ------------------------------------------------------------------------------------------------------
Comprehensive income $ 12,566 $ 2,986 $ 7,415
======================================================================================================
59
Condensed Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash:
Operations:
Net income $ 8,926 $ 8,051 $ 7,153
Adjustments to reconcile net
income to net cash provided
by operations:
Equity in undistributed
net income of Bank (2,277) (7,839) (6,526)
Depreciation 778 546 213
Gain on sale of equipment - (10) -
(Increase) decrease in other assets (127) 31 1,367
Increase (decrease) in liabilities 380 285 1,292
- ---------------------------------------------------------------------------------------------------
Net cash provided by operations 7,680 1,064 3,499
- ---------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sale of equipment - 18 -
Purchases of equipment (612) (944) (1,228)
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (612) (926) (1,228)
- ---------------------------------------------------------------------------------------------------
Financing Activities:
Stock repurchases (6,111) (2,682) (387)
Stock options and warrants exercised 94 1,098 264
- ---------------------------------------------------------------------------------------------------
Net cash used by financing activities (6,017) (1,584) (123)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,051 (1,446) 2,148
Cash balance, beginning of year 893 2,339 191
- ---------------------------------------------------------------------------------------------------
Cash balance, end of year $ 1,944 $ 893 $ 2,339
===================================================================================================
Note 15. Selected Quarterly Information (unaudited)
In thousands (except pershare data)
- ----------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------- ---------------------------------
Three months ended Dec.31 Sep.30 June 30 Mar.31 Dec.31 Sep.30 June 30 Mar.31
- ----------------------------------------------------------------------------------------------------------
Interest revenue $ 13,656 $ 13,576 $12,618 $11,565 $11,269 $10,755 $10,031 $ 9,462
Interest expense 4,890 4,901 4,437 4,062 3,681 3,525 3,329 3,113
- ----------------------------------------------------------------------------------------------------------
Net interest revenue 8,766 8,675 8,181 7,503 7,588 7,230 6,702 6,349
Provision for loan losses 1,127 1,530 800 526 529 418 410 127
- ----------------------------------------------------------------------------------------------------------
Net interest revenue after
provision for loan losses 7,639 7,145 7,381 6,977 7,059 6,812 6,292 6,222
Total noninterest revenues 584 672 631 546 569 529 591 542
Total noninterest expenses 4,654 4,298 4,336 4,120 4,285 4,111 3,824 3,823
- ----------------------------------------------------------------------------------------------------------
Income before taxes 3,569 3,519 3,676 3,403 3,343 3,230 3,059 2,941
Income taxes 1,215 1,266 1,433 1,327 1,014 1,227 1,065 1,216
- ----------------------------------------------------------------------------------------------------------
Net income $ 2,354 $ 2,253 $ 2,243 $ 2,076 $ 2,329 $ 2,003 $ 1,994 $ 1,725
==========================================================================================================
Per common share:
Basic earnings per share $ 0.32 $ 0.30 $ 0.29 $ 0.26 $ 0.31 $ 0.26 $ 0.25 $ 0.22
Dilutive earnings per share 0.31 0.29 0.28 0.26 0.29 0.25 0.25 0.21
- ----------------------------------------------------------------------------------------------------------
The principal market on which the company's common stock is traded is Nasdaq.
The earnings per share amounts in the preceding table have been adjusted
retroactively for stock dividends of 10% in January 2001 and 2000, and a
5-for-4 stock split in January 1999.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for
the 2001 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference
to the information contained in the Company's Proxy Statement for the 2001
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference
to the information contained in the Company's Proxy Statement for the 2001
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference
to the information contained in the Company's Proxy Statement for the 2001
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Listed and included in Part II,
Item 8.
(2)Financial Statement Schedules. Not applicable.
(3)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 December5, 1995,
incorporated by reference from Exhibit 99.1 to Form 8-K,
filed with the Commission on December 7, 1995.
(3.1) Articles of Incorporation, incorporated by reference from
Exhibit 4.8 to Registration Statement on Form S-8, No.
33-89948, filed with the Commission on March 3, 1995.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit
3.2 to the Company's 1999 Annual Report on Form 10-K,
filed with the commission on March 28, 2000.
(4.1) Specimen form of Central Coast Bancorp stock certificate,
incorporated by reference from the Company's 1994 Annual
Report on Form 10-K, filed with the Commission on March
31, 1995.
(10.1) Lease agreement dated December 12, 1994, related to
301 Main Street, Salinas, California, incorporated by
reference from the Company's 1994 Annual Report on Form
10K, filed with the Commission on March 31, 1995.
(10.2) King City Branch Office 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 Office 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.
62
*(10.7) 1994 Stock Option Plan, incorporated by reference from
Exhibit 4.1 to Registration Statement on Form S-8, No.
33-89948, filed with the Commission on March 3, 1995.
*(10.8) Form of Nonstatutory Stock Option Agreement under the
1994 Stock Option Plan, incorporated by reference from
Exhibit 4.3 to Registration Statement on Form S-8, No.
33-89948, filed with Commission on March 3, 1995.
*(10.9) Form of Incentive Stock Option Agreement under the 1994
Stock Option Plan, incorporated by reference from Exhibit
4.4 to Registration Statement on Form S-8, No. 33-89948,
filed with the Commission on March 3, 1995.
*(10.10) Form of Director Nonstatutory Stock Option Agreement
under the 1994 Stock Option Plan, incorporated by
reference from Exhibit 4.5 to Registration Statement on
Form S-8, No. 33-89948, filed with the Commission on
March 3, 1995.
*(10.11) Form of Bank of Salinas Indemnification Agreement for
directors and executive officers, incorporated by
reference from Exhibit 10.9 to Amendment No. 1 to
Registration Statement on Form S-4, No. 33-76972, filed
with the Commission on April 15, 1994.
*(10.12) 401(k) Pension and Profit Sharing Plan Summary Plan
Description, incorporated by reference from Exhibit 10.8
to Registration Statement on Form S-4, No. 33-76972,
filed with the Commission on March 28, 1994.
*(10.13) Form of Employment Agreement, incorporated by reference
from Exhibit 10.13 to the Company's 1996 Annual Report on
Form 10-K, filed with the Commission on March 31, 1997.
*(10.14) Form of Executive Salary Continuation Agreement,
incorporated by reference from Exhibit 10.14 to the
Company's 1996 Annual Report on Form 10-K, filed with the
Commission on March 31, 1997.
*(10.15) 1994 Stock Option Plan, as amended, incorporated by
reference from Exhibit A to the Proxy Statement filed
with the Commission on September 3, 1996, in connection
with Central Coast Bancorp's 1996 Annual Shareholders'
Meeting held on September 23, 1996.
(10.16) Form of Indemnification Agreement, incorporated by
reference from Exhibit D to the Proxy Statement filed
with the Commission on September 3, 1996, in connection
with Central Coast Bancorp's 1996 Annual Shareholders'
Meeting held on September 23, 1996.
(10.17) Purchase and Assumption Agreement for the Acquisition of
Wells Fargo Bank Branch Offices, incorporated by
reference from Exhibit 10.17 to the Company's 1996 Annual
Report on Form 10-K, filed with the Commission on March
31, 1997.
(10.18) Employee Stock Ownership Plan and Trust Agreement,
incorporated by reference from Exhibit 10.18 to the
Company's 1996 Annual Report on Form 10-K, filed with the
Commission on March 31, 1997.
63
(10.19) Lease agreement dated March 7, 1997, related to 484
Lighthouse Avenue, Monterey, California, incorporated by
reference from Exhibit 10.19 to the Company's 1997 Annual
Report on Form 10-K, filed with the Commission on March
27, 1998.
(21.1) The Registrant's only subsidiary is Community Bank of
Central California (the successor entity resulting from
the merger of Registrant's wholly-owned subsidiaries,
Bank of Salinas and Cypress Bank, as referenced in
Exhibit 2.1 above).
(23.1) Independent auditors' consent
*Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K. Not Applicable.
An Annual Report for the fiscal year ended December 31, 2000, and Notice
of Annual Meeting and Proxy Statement for the Company's 2001 Annual Meeting
will be mailed to security holders subsequent to the date of filing this
Report. Copies of said materials will be furnished to the Commission in
accordance with the Commission's Rules and Regulations.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CENTRAL COAST BANCORP
Date: March 15, 2001 By: /S/ NICK VENTIMIGLIA
------------------------
Nick Ventimiglia, President and Chief
Executive Officer (Principal Executive
Officer)
Date: March 15, 2001 By: /S/ ROBERT STANBERRY
------------------------
Robert Stanberry, Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/ C. EDWARD BOUTONNET Director 3/15/01
- -----------------------
(C. Edward Boutonnet)
/S/ BRADFORD G. CRANDALL Director 3/15/01
- ------------------------
(Bradford G. Crandall)
/S/ ALFRED P. GLOVER Director 3/15/01
- --------------------
(Alfred P. Glover)
/S/ MICHAEL T. LAPSYS
- --------------------- Director 3/15/01
(Michael T. Lapsys)
/S/ ROBERT M. MRAULE Director 3/15/01
- --------------------
(Robert M. Mraule)
/S/ DUNCAN L. MCCARTER Director 3/15/01
- ----------------------
(Duncan L. McCarter)
/S/ LOUIS A. SOUZA Director 3/15/01
- ------------------
(Louis A. Souza)
/S/ MOSE E. THOMAS Director 3/15/01
- ------------------
(Mose E. Thomas)
/S/ NICK VENTIMIGLIA Chairman, President 3/15/01
- --------------------
(Nick Ventimiglia) and CEO
65
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
23.1 Independent auditors' consent. 67
66