SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25418
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CENTRAL COAST BANCORP
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0367061
---------- ----------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
301 Main Street, Salinas, California 93901
------------------------------------ -----
(Address of principal executive offices) (Zip code)
(831) 422-6642
--------------
(Registrant's telephone number,
including area code)
not applicable
------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
No par value Common Stock - 7,201,125 shares outstanding at May 8, 2001.
Page 1 of 19
The Index to the Exhibits is located at Page 16
1
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
March 31, December 31,
(In thousands) 2001 2000
---- ----
Assets
Cash and due from banks $ 42,727 $ 51,411
Federal funds sold 20,128 23,081
------- -------
Total cash and equivalents 62,855 74,492
Available-for-sale securities (amortized cost of $148,324 148,600 152,276
at March 31, 2001 and $154,076 at December 31 2000)
Loans:
Commercial 165,841 171,631
Real estate-construction 69,681 57,780
Real estate-other 231,123 234,890
Consumer 15,936 9,840
Deferred loan fees, net (972) (746)
------- -------
Total loans 481,609 473,395
Allowance for loan losses (9,427) (9,371)
------- -------
Net Loans 472,182 464,024
------- -------
Premises and equipment, net 3,535 3,735
Accrued interest receivable and other assets 11,054 12,166
------- -------
Total assets $698,226 $706,693
======= =======
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $168,654 $207,002
Demand, interest bearing 90,405 88,285
Savings 126,021 110,204
Time 239,589 227,719
------- -------
Total Deposits 624,669 633,210
Accrued interest payable and other liabilities 11,889 13,629
------- -------
Total liabilities 636,558 646,839
------- -------
Commitments and contingencies (Note 2)
Shareholders' Equity:
Preferred stock - no par value; authorized 1,000,000 shares;
no shares issued
Common stock - no par value; authorized 25,000,000 shares;
issued and outstanding: 7,293,761 shares at March 31, 2001
and 6,721,998 shares at December 31, 2000 53,577 44,472
Shares held in deferred compensation trust (299,048 at March 31, 2001
and 271,000 at December 31, 2000), net of deferred obligation - -
Retained earnings 7,902 16,444
Accumulated other comprehensive gain (loss) - net of taxes
of $87,171 at March 31, 2001 and $(738,000) at December 31, 2000 189 (1,062)
------- -------
Shareholders' equity 61,668 59,854
------- -------
Total liabilities and shareholders' equity $698,226 $706,693
======= =======
See notes to Consolidated Condensed Financial Statements
2
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
(In thousands)
Three Months Ended March 31, 2001 2000
---- ----
Interest Income
Loans (including fees) $ 11,025 $ 9,213
Investment securities 2,203 2,236
Other 192 116
--------- --------
Total interest income 13,420 11,565
--------- --------
Interest Expense
Interest on deposits 4,834 3,914
Other 92 148
--------- --------
Total interest expense 4,926 4,062
--------- --------
Net Interest Income 8,494 7,503
Provision for Loan Losses 120 526
--------- --------
Net Interest Income after
Provision for Loan Losses 8,374 6,977
--------- --------
Noninterest Income 650 546
--------- --------
Noninterest Expenses
Salaries and benefits 3,002 2,380
Occupancy 437 333
Furniture and equipment 455 388
Other 1,045 1,019
--------- --------
Total other expenses 4,939 4,120
--------- --------
Income Before Income Taxes 4,085 3,403
Provision for Income Taxes 1,526 1,327
--------- --------
Net Income $ 2,559 $ 2,076
========= ========
Basic Earnings per Share $ 0.35 $ 0.27
Diluted Earnings per Share $ 0.33 $ 0.26
See Notes to Consolidated Condensed Financial Statements
3
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended March 31, 2001 2000
---- ----
Cash Flows from Operations:
Net income $ 2,559 $ 2,076
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 120 526
Depreciation 349 296
Amortization and accretion (9) 61
Loss on sale of securities 2 -
Loss on sale of fixed assets 1 -
(Increase) decrease in accrued interest receivable and other assets 223 1,869
Increase (decrease) in accrued interest payable and other liabilities (1,667) (136)
Increase (decrease) in deferred loan fees 226 (24)
--------- ---------
Net cash provided by operations 1,804 4,668
--------- ---------
Cash Flows from Investing Activities:
Purchases of investment securities (67,195) (20)
Proceeds from maturities
of investment securities 33,805 5,624
Proceeds from sale of investment securities 39,213
Net increase in loans (8,504) (295)
Purchases of equipment (150) (175)
--------- ---------
Net cash provided (used) in investing activities (2,831) 5,134
--------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposit accounts (8,541) 28,353
Net increase (decrease) in short-term borrowings (73) (12,662)
Proceeds from sale of stock 2 -
Shares repurchased (1,998) (1,117)
--------- ---------
Net cash provided (used) by financing activities (10,610) 14,574
--------- ---------
Net increase (decrease) in cash and equivalents (11,637) 24,376
Cash and equivalents, beginning of period 74,492 39,959
--------- ---------
Cash and equivalents, end of period $ 62,855 $ 64,335
========= =========
Other Cash Flow Information:
Interest paid $ 4,914 $ 4,005
Income taxes paid 5,970 2,640
See Notes to Consolidated Condensed Financial Statements
4
CENTRAL COAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated condensed
financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
Company's consolidated financial position at March 31, 2001 and
December 31, 2000, the results of operations for the three month
periods ended March 31, 2001 and 2000, and cash flows for the three
month periods ended March 31, 2001 and 2000.
Certain disclosures normally presented in the notes to the annual
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been omitted. These interim consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
2000 Annual Report to Shareholders. The results of operations for
the three-month periods ended March 31, 2001 and 2000 may not
necessarily be indicative of the operating results for the full
year.
In preparing such financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant changes in the near term
relate to the determination of the allowance for loan losses and
the carrying value of other real estate owned. Management uses
information provided by an independent loan review service in
connection with the determination of the allowance for loan losses.
Management has determined that since all of the commercial banking
products and services offered by the Company are available in each
branch of the Community Bank of Central California, its bank
subsidiary (the "Bank"), all branches are located within the same
economic environment and management does not allocate resources
based on the performance of different lending or transaction
activities, it is appropriate to aggregate the Bank branches and
report them as a single operating segment.
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various
commitments to extend credit which are not reflected in the
financial statements, including loan commitments of approximately
$164,490,000 and standby letters of credit of $4,340,000 at March
31, 2001. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2001.
Approximately $46,842,000 of loan commitments outstanding at March
31, 2001 relate to real estate construction loans and are expected
to fund within the next twelve months. The remainder relate
primarily to revolving lines of credit or other commercial loans,
and many of these commitments are expected to expire without being
drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements. Each potential borrower and
the necessary collateral are evaluated on an individual basis.
Collateral varies, but may include real property, bank deposits,
debt or equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the
performance of a customer to a third party. These guarantees are
issued primarily relating to purchases of inventory by commercial
customers and are typically short-term in nature. Credit risk is
similar to that involved in extending loan commitments to customers
and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such
commitments are collateralized.
5
3. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period
(7,358,000 for the three month period ended March 31, 2001, and
7,776,000 for the three month period ended March 31, 2000).
Diluted earnings per share reflects the potential dilution that
could occur if outstanding stock options were exercised. Diluted
earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period plus the
dilutive effect of options (294,000 for the three month period
ended March 31, 2001 and 218,000 for the three month period ended
March 31, 2000).
4. COMPREHENSIVE EARNINGS
Three Months Ended March 31,
(In thousands) 2001 2000
---- ----
Net Earnings $ 2,559 $ 2,076
Other comprehensive income (loss) - net unrealized
gain (loss) on available-for-sale securities. 1,250 (56)
Reclassification adjustment for losses included in
income, net of taxes of $1 for the three
month period ended March 31, 2001 1 -
--------- ---------
Total comprehensive earnings $ 3,810 $ 2,020
========= =========
5. STOCK DIVIDEND
On January 29, 2001, the Board of Directors declared a ten percent
stock dividend, which was distributed on February 28, 2001, to
shareholders of record as of February 14, 2001. All share and per
share data have been retroactively adjusted to reflect the stock
dividend.
6. STOCK REPRUCHASE PLAN
The Board of Directors has authorized a stock repurchase program
under which repurchases will be made from time to time by the
Company in the open market, or in block purchases, or in privately
negotiated transactions, in compliance with Securities and Exchange
Commission rules. At March 31, 2001 the Company is authorized to
repurchase approximately another 369,440 shares under the program.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical information contained herein, this
report on Form 10-Q contains certain forward-looking statements.
The reader of this report should understand that all such
forward-looking statements are subject to various uncertainties and
risks that could affect their outcome. The Company's actual
results could differ materially from those suggested by such
forward-looking statements. Changes to such risks and
uncertainties, which could impact future financial performance,
include, among others, (1) competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3) general
economic conditions, nationally, regionally and in operating market
areas, including a decline in real estate values in the Company's
market areas; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; (6) changes in
securities markets; (7) data processing compliance problems; (8)
the California power crisis; (9) variances in the actual versus
projected growth in assests; (10) return on assets; (11) loan
losses; (12) expenses; (13) rates charged on loans and earned on
securities investments; (14) rates paid on deposits; and (15) fee
and other noninterest income earned, as well as other factors. This
entire report should be read to put such forward-looking statements
in context. To gain a more complete understanding of the
uncertainties and risks involved in the Company's business this
report should be read in conjunction with Central Coast Bancorp's
annual report on Form 10-K for the year ended December 31, 2000.
Within the Management's Discussion and Analysis, interest income,
net interest income, net interest margin and the efficiency ratio
are presented on a fully taxable equivalent basis (FTE).
Business Organization
- ---------------------
Central Coast Bancorp (the "Company") is a California corporation
organized in 1994, and is the parent company for Community Bank of
Central California, a state-chartered bank, headquartered in
Salinas, California (the "Bank"). Other than its investment in the
Bank, the Company currently conducts no other significant business
activities, although it is authorized to engage in a variety of
activities which are deemed closely related to the business of
banking upon prior approval of the Board of Governors of the
Federal Reserve System (the "FRB"), the Company's principal federal
regulator.
The Bank offers a full range of commercial banking services,
including a diverse range of traditional banking products and
services to individuals, merchants, small and medium-sized
businesses, professionals and agribusiness enterprises located in
the counties of Monterey, San Benito and Santa Cruz, which are in
the central coastal area of California.
Overview
- --------
Central Coast Bancorp reported a 26.9% increase in diluted earnings
per share of $0.33 for the three months ended March 31, 2001 versus
$0.26 in the first quarter last year. Net income for the first
quarters of 2001 and 2000 were $2,559,000 and $2,076,000,
respectively. The first quarter 2001 net income was a quarterly
record and was 23.3% higher than year ago net income. The earnings
per share for the 2000 first quarter have been adjusted for the 10%
stock dividend distributed in February 2001.
Total assets of the Company at March 31, 2001 were $698,226,000 up
$88,324,000 (14.5%) over the ending balance at March 31, 2000. At
quarter end, loans totaled $481,609,000, up $85,680,000 (21.6%)
from the ending balances on March 31, 2000. Deposit balances at
quarter end totaled $624,669,000 up $78,127,000 (14.3%) from the
year earlier balances. The deposit balances in 2000 included
$40,000,000 of State of California certificates of deposit. At its
option, the Bank returned these certificates of deposit in the last
half of 2000.
7
For the first quarter 2001, the Company realized a return on
average equity of 16.9% and a return on average assets of 1.52%, as
compared to 15.4% and 1.40% in the first quarter of 2000. Central
Coast Bancorp ended the first quarter of 2001 with a Tier 1 capital
ratio of 11.0% and a total risk-based capital ratio of 12.3% versus
12.2% and 13.4%, respectively at the end of the first quarter of
2000.
The following table provides a summary of the major elements of
income and expense on a tax equivalent basis for the periods
indicated.
Condensed Comparative Income Statement Percentage
Change
Three months ended March 31, Increase
(In thousands, except percentages) 2001 2000 (Decrease)
-------------- ---------------- ----------------
Interest income (1) $ 13,678 $ 11,760 16%
Interest expense 4,926 4,062 21%
-------------- ---------------- ----------------
Net interest income 8,752 7,698 14%
Provision for loan losses 120 526 -77%
-------------- ---------------- ----------------
Net interest income after
provision for loan losses 8,632 7,172 20%
Noninterest income 650 546 19%
Noninterest expense 4,939 4,120 20%
-------------- ---------------- ----------------
Income before income taxes 4,343 3,598 21%
Income taxes 1,526 1,327 15%
Tax equivalent adjustment 258 195 32%
-------------- ---------------- ----------------
Net income $ 2,559 $ 2,076 23%
============== ================ ================
1) Interest on tax-free securities is reported on tax equivalent basis.
8
Net interest income
- -------------------
Net interest income, the difference between interest earned on
loans and investments and interest paid on deposits and other
borrowings, is the principal component of the Bank's earnings. The
following table provides a summary of the components of net
interest income and the changes within the components for the
periods indicated. The second table sets forth a summary of the
changes in interest income and interest expense from changes in
average asset and liability balances (volume) and changes in
average interest rates.
(Unaudited)
Three months ended March 31,
(Taxable Equivalent Basis) 2001 2000
Average Average Average Avg
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
Assets:
Earning Assets
Loans (1) (2) $ 461,548 $ 11,025 9.69% $ 389,616 $ 9,213 9.48%
Taxable investments 102,607 1,687 6.67% 107,673 1,844 6.87%
Tax-exempt securities (tax equiv. basis) 45,666 774 6.88% 35,825 587 6.57%
Federal funds sold 13,495 192 5.77% 8,335 116 5.58%
------- ------ ------- ------
Total Earning Assets 623,316 $ 13,678 8.90% 541,449 $ 11,760 8.71%
------ ------
Cash & due from banks 41,674 37,206
Other assets 15,733 16,665
------- -------
$ 680,723 $ 595,320
======= =======
Liabilites & Shareholders'
Equity:
Interest bearing liabilities:
Demand deposits $ 88,591 $ 328 1.50% $ 96,688 $ 405 1.68%
Savings 120,812 1,086 3.65% 102,204 875 3.43%
Time deposits 233,062 3,420 5.95% 197,194 2,634 5.36%
Other borrowings 5,708 92 6.54% 9,474 148 6.27%
------- ----- ------- -----
Total interest bearing
liabilities 448,173 4,926 4.46% 405,560 4,062 4.02%
----- -----
Demand deposits 163,674 130,637
Other Liabilities 7,627 5,221
------- -------
Total Liabilities 619,474 541,418
Shareholders' Equity 61,249 53,902
------- -------
$ 680,723 $ 595,320
======= =======
Net interest income & margin (3) $ 8,752 5.69% $ 7,698 5.70%
===== =====
- -------------------------------------------------------------------------------------------------------------------
1) Loan interest income includes fee income of $332,000 and $236,000 for the three month periods ended March 31, 2001
and 2000, respectively.
2) Includes the average allowance for loan losses of $9,413,000 and $5,795,000 and average deferred loan fees of
$875,000 and $686,000 for the three months ended March 31, 2001 and 2000, respectively.
3) Net interest margin is computed by dividing net interest income by the total average earning assets.
9
Volume/Rate Analysis
(in thousands) Three Months Ended March 31, 2001 over 2000
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $1,681 $ 131 $ 1,812
Taxable investment securities (86) (71) (157)
Tax exempt investment securities (3) 159 28 187
Federal funds sold 71 5 76
----- ---- -----
Total 1,825 93 1,918
----- ---- -----
Interest-bearing liabilities:
Demand deposits (34) (43) (77)
Savings deposits 157 54 211
Time deposits 474 312 786
Other borrowings (58) 2 (56)
---- ---- -----
Total 539 325 864
--- ---- -----
Interest differential $1,286 $ (232) $ 1,054
===== ==== =====
1) Loan interest income includes fee income of $332,000 and $236,000 for the three
month periods ended March 31, 2001 and 2000, respectively.
2) The average balance of non-accruing loans is immaterial as a percentage of total
loans and, as such, has been included in net loans.
3) Includes taxable-equivalent adjustments that relate to income on certain securities
that is exempt from federal income taxes. The effective federal statutory tax rate
was 34% for 2001 and 2000.
4) The rate / volume variance has been included in the rate variance.
Net interest income for the first quarter of 2001 was $8,752,000, a
$1,054,000 (13.7%) increase over 2000. Interest income was up
$1,918,000 (16.3%). Average earning assets in the first quarter of
2001 were $623,316,000, which was $81,867,000 (15.1%) higher than
the prior year period. The increased volume of earning assets
added $1,825,000 to interest income. Of that amount $1,681,000 was
due to a $71,932,000 increase in average loans outstanding. The
average yield on earning assets for the first quarter of 2001 was
8.90%, which was an increase 19 basis points over the yield in the
first quarter of 2000. The higher yield added $93,000 to interest
income. The higher yield resulted from the blended effect of 100
basis points in lending rate increases in the first half of 2000
offset in part by 150 basis points in lending rate decreases in the
first quarter of 2001. However, the average yield on earning
assets for the first quarter was down 26 basis points from the
fourth quarter of 2000. The average yields on loans decreased from
10.08% in the fourth quarter to 9.69% in the first quarter of
2001. Since the decreases in the lending rates took place within
the first quarter coupled with the fact that SBA loans reprice at
the beginning of a quarter, the full effect of the rate decreases
will be reflected in the second quarter average loan yields.
Interest expense was $864,000 (21.3%) higher in the first quarter
of 2001 versus the prior year period. Average balances of
interest-bearing liabilities were higher by $42,613,000 (10.5%),
which added $539,000 to interest expense. Average rates paid on
interest-bearing liabilities were up 44 basis points on a quarter
over quarter basis. The higher rates added $325,000 to interest
expense. Average rates paid in interest-bearing liabilities
decreased slightly to 4.46% in the first quarter of 2001 versus
4.49% in the fourth quarter of 2001.
The net interest margin for the first quarter of 2001 was 5.69% as
compared to 5.70% in the year earlier period. As compared to the
net interest margin for the fourth quarter 2000, the first
quarter's net interest margin was down 24 basis points. As the
Bank's loan assets reprice more quickly than do its deposit
liabilities, a declining rate environment puts downward pressure on
the net interest margin. The full effect of the three 50 basis
point decreases in the first quarter will be reflected in net
interest margins in the future quarters.
10
Provision for Loan Losses
- -------------------------
The Bank provided $120,000 for loan losses in the first quarter of
2001 as compared to $526,000 in the first quarter of 2000 and
$1,127,000 in the fourth quarter of 2000. Significant additions
were made to the allowance for loan losses throughout 2000 based on
management's analysis of the loan portfolio and in accordance with
regulatory guidelines. At March 31, 2001, nonperforming loans
totaled $475,000 as compared to $1,022,000 at March 31, 2000. The
ratios of the allowance for loan losses to total loans on those two
dates were 1.96% and 1.55%, respectively. The ratio at December
31, 2000 was 1.98%.
Noninterest Income
- ------------------
Noninterest income consists primarily of service charges on deposit
accounts and fees for miscellaneous services. Noninterest income
totaled $650,000 in the first quarter of 2000, which was up
$104,000 (19.0%) over the same period in 2000. Two categories
accounted for most of the increases. Service charges on deposit
accounts were up $65,000 due to volume increases. Fees from
mortgage originations increased $25,000 (68.8%) as lower interest
rates for home mortgages increased the demand for those loans.
Noninterest Expense
- -------------------
Noninterest expenses increased $819,000 (19.9%) to a total of
$4,939,000 in the first quarter of 2001 versus first quarter 2000.
The new Watsonville and Hollister branches, which were not in
operation the first quarter of last year, accounted for $192,000 of
the increase. Increased salary and benefit expense due to normal
salary progression, internal growth and higher benefit costs added
$470,000 on a quarter over quarter basis. The remaining increase
was generally due to higher business volumes and price increases.
The efficiency ratio (FTE) for the two quarters was 52.5% and
50.0%, respectively.
Provision for Income Taxes
- --------------------------
The Company recorded income tax expense of $1,526,000 in the first
quarter of 2001 versus $1,327,000 in the first quarter of 2000.
The effective tax rate for the three months ended March 31, 2001
was 37.4% as compared to 39.0% in the year earlier period. The
effective tax rate was lower in 2001 as the result of the effect of
investments in tax exempt securities and loans.
Securities
- ----------
At March 31, 2001, available-for-sale securities had a market value
of $148,600,000 with an amortized cost basis of $148,324,000. The
pretax unrealized gain of $276,000 at March 31, 2001 was a change
of $2,076,000 from the $1,800,000 unrealized loss at December 31,
2000. The increase in securities valuation resulted from lower
interest rates in the securities markets in the first quarter of
2001.
Loans
- -----
Ending loan balances at March 31, 2001 were $481,609,000, which was
an increase of $8,214,000 from year-end 2000 balances. The March
31, 2001 loan balances were $85,680,000 (21.6%) higher than the
year earlier totals. On a year over year basis commercial loans
were up 7%; construction loans were up 130%; and real estate-other
loans were up 15%. The balances at March 31, 2001 for these loan
categories were $165,841,000, $69,681,000 and $231,123,000,
respectively. Loan demand remained steady heading into the second
quarter of 2001.
Non-performing Assets
- ---------------------
Non-performing assets are comprised of loans delinquent 90 days or
more with respect to interest or principal, loans for which the
accrual of interest has been discontinued, and other real estate
which has been acquired through foreclosure and is awaiting
disposition.
11
Unless well secured and in the process of collection, loans are
placed on nonaccrual status when a loan becomes 90 days past due as
to interest or principal, when the payment of interest or principal
in accordance with the contractual terms of the loan becomes
uncertain or when a portion of the principal balance has been
charged off. When a loan is placed on nonaccrual status, the
accrued and unpaid interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until
qualifying for return to accrual status. Generally, a loan may be
returned to accrual status when all delinquent interest and
principal become current in accordance with the terms of the loan
agreement and remaining principal is considered collectible or when
the loan is both well secured and in the process of collection.
Real estate and other assets acquired in satisfaction of
indebtedness are recorded at the lower of estimated fair market
value net of anticipated selling costs or the recorded loan amount,
and any difference between this and the amount is treated as a loan
loss. Costs of maintaining other real estate owned and gains or
losses on the subsequent sale are reflected in current earnings.
The following is a summary of non-performing assets:
(In thousands, except percentages) March 31, December 31,
2001 2000
-------------- ---------------
Past due 90 days or more and still accruing :
Real estate $ 160 $ 10
Commercial 29 215
Consumer and other 50 5
------------- -----------
239 230
------------- -----------
Nonaccrual:
Real estate - -
Commercial 236 329
Consumer and other - -
------------- -----------
236 329
------------- -----------
Total nonperforming assets $ 475 $ 559
============= ===========
Allowance for loan losses as a percentage of nonperforming loans 1985% 1676%
Nonperforming loans to total loans 0.10% 0.12%
Non-performing loans decreased $84,000 during the first quarter of
2001. This decrease coupled with the quarterly provision in the
allowance for loan losses resulted in the improvement in the
coverage ratio of the allowance for loan losses to nonperforming
loans from 1,676% at year-end to 1,985%.
At March 31, 2001, the recorded investment in loans that are
considered impaired under SFAS No. 114 was $578,000 of which
$201,000 are included in nonaccrual loans above. Such impaired
loans had valuation allowances totaling $253,000 based on the
estimated fair value of the collateral. At December 31, 2000,
the recorded investment in loans considered impaired was
$1,691,000, including $215,000 of nonaccrual loans above and
$1,010,000 of restructured loans performing in compliance with
modified terms. Management is not aware of any potential problem
loans, other than the impaired loans disclosed above, which were
accruing and current at March 31, 2001, where serious doubt exists as
to the ability of the borrower to comply with the present repayment
terms.
Credit Risk and Allowance for Loan Losses
The Company assesses and manages credit risk on an ongoing basis
through stringent credit review and approval policies, extensive
internal monitoring and established formal lending policies.
Additionally, the Company contracts with an outside loan review
consultant to periodically grade new loans and to review the
existing loan portfolio. Management believes its ability to
identify and assess risk and return characteristics of the
12
Company's loan portfolio is critical for profitability and
growth. Management strives to continue the historically low level
of credit losses by continuing its emphasis on credit quality in
the loan approval process, active credit administration and regular
monitoring. With this in mind, management has designed and
implemented a comprehensive loan review and grading system that
functions to continually assess the credit risk inherent in the
loan portfolio.
Ultimately, credit quality may be influenced by underlying trends
in economic and business cycles. The Company's business is
concentrated in Monterey, San Benito and Santa Cruz counties in
California. These counties are heavily dependent on agriculture
and tourism industries as their main economic base. As a result,
the Company lends money to individuals and companies dependent upon
these two industries. In addition, the Company has significant
extensions of credit and commitments to extend credit which are
secured by real estate. At March 31, 2001, the Company had
outstanding real estate and real estate construction loans totaling
approximately $300,804,000, which represented 62% of the loan
portfolio. Although management believes the concentration to have
no more than the normal risk of collectibility, a substantial
decline in the economy in general, or a decline in real estate
values in the Company's primary market areas in particular, could
have an adverse impact on the collectibility of these loans.
Adverse economic conditions could require an increase in the
provision for loan and lease losses which in turn could adversely
affect the Company's future prospects, results of operations,
profitability and stock price."
The allowance for loan losses reflects management's judgement as to
the level considered adequate to absorb probable losses inherent in
the loan portfolio. The allowance is increased by provisions
charged to expense and reduced by loan charge-offs net of
recoveries. Management determines an appropriate provision based
upon information currently available to analyze loan loss
potential, including (1) the loan portfolio balance in the period;
(2) a comprehensive grading and review of new and existing loans
outstanding; (3) actual previous charge-offs; and, (4) changes in
economic conditions.
In determining the provision for estimated losses related to
specific major loans, management evaluates its allowance on an
individual loan basis, including an analysis of the credit
worthiness, cash flows and financial status of the borrower, and
the condition and the estimated value of the collateral. Specific
valuation allowances for secured loans are determined by the excess
of recorded investment in the loan over the fair market value or
net realizable value where appropriate, of the collateral. In
determining overall general valuation allowances to be maintained
and the loan loss allowance ratio, management evaluates many
factors including prevailing and forecasted economic conditions,
regular reviews of the quality of loans, industry experience,
historical loss experience, composition and geographic
concentrations of the loan portfolio, the borrowers' ability to
repay and repayment performance and estimated collateral values.
Management believes that the allowance for loan losses at March 31,
2001 is adequate, based on information currently available.
However, no prediction of the ultimate level of loans charged off
in future years can be made with any certainty.
13
The following table summarizes activity in the allowance for loan
losses for the periods indicated:
(In thousands, except percentages) Three months ended March 31,
2001 2000
--------------- ---------------
Beginning balance $ 9,371 $ 5,596
Provision charged to expense 120 526
Loans charged off (87) (16)
Recoveries 23 30
--------------- ---------------
Ending balance $ 9,427 $ 6,136
=============== ===============
Ending loan portfolio $ 481,609 $ 395,929
=============== ===============
Allowance for loan losses as percentage of ending loan portfolio 1.96% 1.55%
Liquidity
- ---------
Liquidity management refers to the Company's ability to provide
funds on an ongoing basis to meet fluctuations in deposit levels as
well as the credit needs and requirements of its clients. Both
assets and liabilities contribute to the Company's liquidity
position. Federal funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along with
deposit increases, while loan funding and deposit withdrawals
decrease liquidity. The Bank assesses the likelihood of projected
funding requirements by reviewing historical funding patterns,
current and forecasted economic conditions and individual client
funding needs. Commitments to fund loans and outstanding standby
letters of credit at March 31, 2001 were approximately $164,490,000
and $4,340,000, respectively. Such loans relate primarily to
revolving lines of credit and other commercial loans, and to real
estate construction loans.
The Company's sources of liquidity consist of its deposits with
other banks, overnight funds sold to correspondent banks, unpledged
short-term marketable investments, and salable government
guaranteed loans. On March 31, 2001 consolidated liquid assets
totaled $119.2 million or 17.1% of total assets as compared to
$132.0 million or 18.7% (per the Annual Report) of total
consolidated assets on December 31, 2000. In addition to liquid
assets, the Bank maintains lines of credit with correspondent banks
for up to $80,000,000 available on a short-term basis. Informal
agreements are also in place with various other banks to purchase
participations in loans, if necessary. The Company serves
primarily a business and professional customer base and, as such,
its deposit base is susceptible to economic fluctuations.
Accordingly, management strives to maintain a balanced position of
liquid assets to volatile and cyclical deposits.
Capital Resources
- -----------------
The Company's total shareholders' equity was $61,668,000 at March
31, 2001 compared to $59,854,000 at December 31, 2000.
The Company and the Bank are subject to regulations issued by the
Board of Governors and the FDIC which require maintenance of a
certain level of capital. Under the regulations, capital
requirements are based upon the composition of an institution's
asset base and the risk factors assigned to those assets. The
guidelines characterize an institution's capital as being "Tier 1"
capital (defined to be principally shareholders' equity less
intangible assets) and "Tier 2" capital (defined to be principally
the allowance for loan losses, limited to one and one-fourth
percent of gross risk weighted assets). The guidelines require the
Company and the Bank to maintain a risk-based capital target ratio
of 8%, one-half or more of which should be in the form of Tier 1
capital.
14
The following table shows the Company's and the Bank's actual
capital amounts and ratios at March 31, 2001 and December 31, 2000
as well as the minimum capital ratios for capital adequacy under the
regulatory framework:
For Capital
Actual Adequacy Purpose:
Company Amount Ratio Amount Ratio
- ------- ------ ----- ------ -----
As of March 31, 2001
- --------------------
Total Capital (to Risk Weighted Assets): 67,624,000 12.3% 44,126,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 60,731,000 11.0% 22,063,000 4.0%
Tier 1 Capital (to Average Assets): 60,731,000 8.9% 27,229,000 4.0%
As of December 31, 2000:
- ------------------------
Total Capital (to Risk Weighted Assets): 66,892,000 12.3% 43,490,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 60,098,000 11.1% 21,745,000 4.0%
Tier 1 Capital (to Average Assets): 60,098,000 9.1% 26,344,000 4.0%
For Capital
Actual Adequacy Purpose:
Community Bank Amount Ratio Amount Ratio
- -------------- ------ ----- ------ -----
As of March 31, 2001:
Total Capital (to Risk Weighted Assets): 66,668,000 12.10% 43,916,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 59,774,000 10.90% 21,958,000 4.0%
Tier 1 Capital (to Average Assets): 59,774,000 8.80% 27,136,000 4.0%
As of December 31, 2000:
Total Capital (to Risk Weighted Assets): 63,866,000 11.80% 43,273,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 57,073,000 10.60% 21,637,000 4.0%
Tier 1 Capital (to Average Assets): 57,073,000 8.70% 26,251,000 4.0%
Item 3. MARKET RISK MANAGEMENT
Overview
- --------
The goal for managing the assets and liabilities of the Bank is to
maximize shareholder value and earnings while maintaining a high
quality balance sheet without exposing the Bank to undue interest
rate risk. The Board of Directors has overall responsibility for
the Company's interest rate risk management policies. The Bank has
an Asset and Liability Management Committee (ALCO) which
establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management
- --------------------------
Activities involved in asset/liability management include but are
not limited to lending, accepting and placing deposits, investing
in securities and issuing debt. Interest rate risk is the primary
market risk associated with asset/liability management.
Sensitivity of earnings to interest rate changes arises when yields
on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate
interest rate risk, the structure of the balance sheet is managed
with the goal that movements of interest rates on assets and
liabilities are correlated and contribute to earnings even in
periods of volatile interest rates. The asset/liability management
policy sets limits on the acceptable amount of variance in net
interest margin and market value of equity under changing interest
environments. The Bank uses simulation models to forecast
earnings, net interest margin and market value of equity.
15
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer
modeling techniques, the Company is able to estimate the potential
impact of changing interest rates on earnings. A balance sheet
forecast is prepared using inputs of actual loan, securities and
interest bearing liabilities (i.e. deposits/borrowings) positions
as the beginning base. The forecast balance sheet is processed
against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200
basis point falling rate forecast which take place within a one
year time frame. The net interest income is measured during the
first year of the rate changes and in the year following the rate
changes. Based on a forecast using year-end 2000 balances and
measuring against a flat rate environment, in a one-year horizon an
increase in interest rates of 200 basis points would result in an
increase of $2,731,000 in net interest income. Conversely, a 200
basis point decrease would result in a decrease of $3,310,000 in
net interest income.
The simulations of earnings do not incorporate any management
actions, which might moderate the negative consequences of interest
rate deviations. Therefore, they do not reflect likely actual
results, but serve as conservative estimates of interest rate
risk. The risk profile of the Bank has not changed materially from
that at year-end 2000.
Other Matters
- -------------
The State of California is presently experiencing serious periodic
electric power shortages. It is uncertain whether or when these
shortages will be discontinued. The Company and the Bank could be
materially and adversely affected either directly or indirectly by
a severe electric power shortage if such a shortage caused any of
its critical data processing or computer systems and related
equipment to fail, or if the local infrastructure systems such as
telephone systems should fail, or the Company's and the Bank's
significant vendors, suppliers, service providers, customers,
borrowers, or depositors are adversely impacted by their internal
systems or those of their respective customers or suppliers.
Material increases in the expenses related to electric power
consumption and the related increase in operating expense could
also have an adverse effect on the Company's and the Bank's future
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
None.
Item 2. Changes in securities.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None.
Item 5. Other information.
None.
16
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
(2.1) Agreement and Plan of Reorganization and Merger by
and between Central Coast Bancorp, CCB Merger
Company and Cypress Coast Bank dated as of
December 5, 1995, incorporated by reference from
Exhibit 99.1 to Form 8-K, filed with the Commission
on December 7, 1995.
(3.1) Articles of Incorporation, incorporated by reference
from Exhibit 4.8 to Registration Statement on Form
S-8, No. 33-89948, filed with the Commission on
March 3, 1995.
(3.2) Bylaws, as amended, incorporated by reference from
Exhibit 4.8 to Registration Statement on Form S-8,
No. 33-89948, filed with the Commission on March 3,
1995.
(4.1) Specimen form of Central Coast Bancorp stock
certificate, incorporated by reference from the
Company's 1994 Annual Report on Form 10-K, filed with
the Commission on March 31, 1995.
(10.1) Lease agreement dated December 12, 1994, related
to 301 Main Street, Salinas, California,
incorporated by reference from the Company's 1994
Annual Report on Form 10K, filed with the Commission
on March 31, 1995.
(10.2) King City Branch Lease, incorporated by
reference from Exhibit 10.3 to Registration
Statement on Form S-4, No. 33-76972, filed with the
Commission on March 28, 1994.
(10.3) Amendment to King City Branch Lease, incorporated by
reference from Exhibit 10.4 to Registration
Statement on Form S-4, No. 33-76972, filed with the
Commission on March 28, 1994.
*(10.4) 1982 Stock Option Plan, as amended, incorporated by
reference from Exhibit 4.2 to Registration Statement
on Form S-8, No. 33-89948, filed with the Commission
on March 3, 1995.
*(10.5) Form of Nonstatutory Stock Option Agreement under
the 1982 Stock Option Plan, incorporated by
reference from Exhibit 4.6 to Registration Statement
on Form S-8, No. 33-89948, filed with the Commission
on March 3, 1995.
*(10.6) Form of Incentive Stock Option Agreement under the
1982 Stock Option Plan, incorporated by reference
from Exhibit 4.7 to Registration Statement on Form
S-8, No. 33-89948, filed with the Commission on
March 3, 1995.
*(10.7) 1994 Stock Option Plan, incorporated by reference
from Exhibit 4.1 to Registration Statement on Form
S-8, No. 33-89948, filed with the Commission on
March 3, 1995.
*(10.8) Form of Nonstatutory Stock Option Agreement under
the 1994 Stock Option Plan, incorporated by
reference from Exhibit 4.3 to Registration Statement
on Form S-8, No. 33-89948, filed with Commission on
March 3, 1995.
*(10.9) Form of Incentive Stock Option Agreement under the
1994 Stock Option Plan, incorporated by reference
from Exhibit 4.4 to Registration Statement on Form
S-8, No. 33-89948, filed with the Commission on
March 3, 1995.
17
*(10.10)Form of Director Nonstatutory Stock Option Agreement
under the 1994 Stock Option Plan, incorporated by
reference from Exhibit 4.5 to Registration Statement
on Form S-8, No. 33-89948, filed with the Commission
on March 3, 1995.
*(10.11)Form of Bank of Salinas Indemnification Agreement for
directors and executive officers, incorporated by
reference from Exhibit 10.9 to Amendment No. 1 to
Registration Statement on Form S-4, No. 33-76972,
filed with the Commission on April 15, 1994.
*(10.12)401(k) Pension and Profit Sharing Plan Summary Plan
Description, incorporated by reference from Exhibit
10.8 to Registration Statement on Form S-4,
No. 33-76972, filed with the Commission on March 28,
1994.
*(10.13)Form of Employment Agreement, incorporated by
reference from Exhibit 10.13 to the Company's 1996
Annual Report on Form 10-K, filed with the Commission
on March 31, 1997.
*(10.14)Form of Executive Salary Continuation Agreement,
incorporated by reference from Exhibit 10.14 to the
Company's 1996 Annual Report on Form 10-K, filed with
the Commission on March 31, 1997.
*(10.15)1994 Stock Option Plan, as amended, incorporated by
reference from Exhibit A to the Proxy Statement filed
with the Commission on September 3, 1996, in
connection with Central Coast Bancorp's 1996 Annual
Shareholders' Meeting held on September 23, 1996.
*(10.16)Form of Indemnification Agreement for directors and
executive officers, incorporated by reference from
Exhibit D to the Proxy Statement filed with the
Commission on September 3, 1996, in connection with
Central Coast Bancorp's 1996 Annual Shareholders'
Meeting held on September 23, 1996.
(10.17) Purchase and Assumption Agreement for the
Acquisition of Wells Fargo Bank Branches,
incorporated by reference from Exhibit 10.17 to the
Company's 1996 Annual Report on Form 10-K, filed
with the Commission on March 31, 1997.
(21.1) The Registrant's only subsidiary is its wholly-owned
subsidiary, Community Bank of Central California.
*Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the
first quarter of 2001 as follows:
(1) Report on Form 8-K filed January 23, 2001 reporting a
press release dated January 23, 2001 regarding the
Company's operating results for the year ended
December 31, 2000.
(2) Report on Form 8-K filed February 28, 2001 reporting
a press release dated February 28, 2001 regarding the
announcement of a new stock repurchase program upon
the completion of the previous stock repurchase
program.
18
SIGNATURES
- ---------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
May 8, 2001 CENTRAL COAST BANCORP
By:/S/ ROBERT M. STANBERRY
------------------------
Robert M. Stanberry
(Chief Financial Officer and
Principal Accounting Officer)
19