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 September 30, 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 - 7,165,936 shares outstanding at November 7, 2001.
Page 1 of 23
1
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
September 30, December 31,
(Dollars in thousands) 2001 2000
---- ----
Assets
Cash and due from banks $ 44,262 $ 51,411
Federal funds sold - 23,081
------------------ --------------
Total cash and equivalents 44,262 74,492
Available-for-sale securities (amortized cost of $142,070 at
September 30,2001 and $154,076 at December 31, 2000) 144,166 152,276
Loans:
Commercial 175,401 171,631
Real estate-construction 76,444 57,780
Real estate-other 305,861 234,890
Consumer 13,754 9,840
Deferred loan fees, net (1,081) (746)
------------------ --------------
Total loans 570,379 473,395
Allowance for loan losses (10,224) (9,371)
------------------ --------------
Net Loans 560,155 464,024
------------------ --------------
Premises and equipment, net 3,089 3,735
Accrued interest receivable and other assets 11,142 12,166
------------------ --------------
Total assets $ 762,814 $ 706,693
================== ==============
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $ 179,876 $ 207,002
Demand, interest bearing 99,444 88,285
Savings 135,620 110,204
Time 253,280 227,719
------------------ --------------
Total Deposits 668,220 633,210
Accrued interest payable and other liabilities 28,982 13,629
------------------ --------------
Total liabilities 697,202 646,839
------------------ --------------
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: 7,194,221 shares at September 30, 2001
and 6,721,998 shares at December 31, 2000 51,591 44,472
Shares held in deferred compensation trust (299,048 at September 30, 2001
and 271,862 at December 31, 2000), net of deferred obligation - -
Retained earnings 12,795 16,444
Accumulated other comprehensive income (loss) - net of taxes of $870
at September 30, 2001 and $738 at December 31, 2000 1,226 (1,062)
------------------ --------------
Total shareholders' equity 65,612 59,854
------------------ --------------
Total liabilities and shareholders' equity $ 762,814 $ 706,693
================== ==============
See Notes to Consolidated Condensed Financial Statements
2
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2001 2000 2001 2000
---- ---- ---- ----
Interest Income
Loans (including fees) $ 10,916 $ 10,830 $ 32,651 $ 30,193
Investment securities 2,042 2,353 6,367 6,785
Other 94 393 399 781
------- ------- ------- -------
Total interest income 13,052 13,576 39,417 37,759
------- ------- ------- -------
Interest Expense
Interest on deposits 4,574 4,834 14,136 13,113
Other 107 67 293 287
------- ------- ------- -------
Total interest expense 4,681 4,901 14,429 13,400
------- ------- ------- -------
Net Interest Income 8,371 8,675 24,988 24,359
Provision for Loan Losses 760 1,530 955 2,856
------- ------- ------- -------
Net Interest Income after
Provision for Loan Losses 7,611 7,145 24,033 21,503
------- ------- ------- -------
Noninterest Income 927 672 2,352 1,849
------- ------- ------- -------
Noninterest Expenses
Salaries and benefits 2,907 2,561 8,778 7,408
Occupancy 408 385 1,230 1,063
Furniture and equipment 474 404 1,386 1,204
Other 960 948 3,071 3,079
------- ------- ------- -------
Total noninterest expenses 4,749 4,298 14,465 12,754
------- ------- ------- -------
Income Before Income Taxes 3,789 3,519 11,920 10,598
Provision for Income Taxes 1,421 1,266 4,470 4,027
------- ------- ------- -------
Net Income $ 2,368 $ 2,253 $ 7,450 $ 6,571
======= ======= ======= =======
Basic Earnings per Share $ 0.33 $ 0.30 $ 1.03 $ 0.85
Diluted Earnings per Share $ 0.32 $ 0.29 $ 0.98 $ 0.83
See Notes to Consolidated Condensed Financial Statements
3
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine months ended September 30, 2001 2000
---- ----
Cash Flows from Operations:
Net income $ 7,450 $ 6,571
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 955 2,856
Net gain on sale of investments (168) -
Net loss on sale of fixed assets 3 21
Depreciation 1,035 871
Amortization and accretion 440 (39)
Effect of changes in:
Accrued interest receivable and other assets (785) 1,428
Accrued interest payable and other liabilities (1,427) 807
Deferred loan fees 335 10
--------------- -------------
Net cash provided by operations 7,838 12,525
--------------- -------------
Cash Flows from Investing Activities:
Purchases of available-for-sale securities (108,553) (56,346)
Proceeds from maturities or calls of avialable-for-sale securities 42,468 64,114
Proceeds from sale of available-for-sale securities 78,011 -
Net increase in loans (97,421) (44,314)
Purchases of premises and equipment-net (392) (915)
--------------- -------------
Net cash used in investing activities (85,887) (37,461)
--------------- -------------
Cash Flows from Financing Activities:
Net increase in deposits 35,010 57,912
Net change in short-term borrowings - (12,662)
Net change in long-term borrowings 16,789 (210)
Proceeds from stock options exercised 113 89
Repurchase of common stock (4,093) (4,394)
--------------- -------------
Net cash provided by financing activities 47,819 40,735
--------------- -------------
Net increase (decrease) in cash and equivalents (30,230) 15,799
Cash and equivalents, beginning of period 74,492 39,959
--------------- -------------
Cash and equivalents, end of period $ 44,262 $ 55,758
=============== =============
Other Cash Flow Information:
Interest paid $ 13,991 $ 12,506
Income taxes paid $ 6,257 $ 4,660
See Notes to Consolidated Condensed Financial Statements
4
CENTRAL COAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2001 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated condensed financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly Central Coast Bancorp's (the
"Company's") consolidated financial position at September 30, 2001 and
December 31, 2000, the results of operations for the three and nine month
periods ended September 30, 2001 and 2000 and cash flows for the nine month
periods ended September 30, 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 and nine month periods ended September 30, 2001 and 2000 may not
necessarily be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
The material estimate that is particularly susceptible to significant change
in the near term relates to 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.
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.
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 $183,783,000 and standby letters of credit
of $877,000 at September 30, 2001. However, all such commitments will not
necessarily culminate in actual extensions of credit by the Company during
2001.
Approximately $49,059,000 of loan commitments outstanding at September 30,
2001 are for real estate construction loans and are expected to fund within
the next twelve months. The remaining commitments primarily relate to
revolving lines of credit or other commercial loans, and many of these are
expected to expire without being drawn upon. Therefore, the total
commitments do not necessarily represent future cash requirements. Each
potential borrower and the necessary collateral are evaluated on an
individual basis. Collateral varies, but may include real property, bank
deposits, debt or equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the
performance of a customer to a third party. These guarantees are issued
primarily relating to purchases of inventory by commercial customers and are
typically short-term in nature. Credit risk is similar to that involved in
extending loan commitments to customers and accordingly, evaluation and
collateral requirements similar to those for loan commitments are used.
Virtually all such commitments are collateralized.
5
3. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (7,212,000 and 7,259,000 for
the three and nine month periods ended September 30, 2001, and 7,576,000 and
7,671,000 for the three and nine month periods ended September 30, 2000).
Diluted earnings per share reflect the potential dilution that could occur if
outstanding stock options were exercised. Diluted earnings per share is
computed by dividing net income by the weighted average common shares
outstanding for the period plus the dilutive effect of options (348,000 and
333,000 for the three and nine month periods ended September 30, 2001 and
216,000 and 215,000 for the three and nine month periods ended September 30,
2000).
4. COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Net Earnings $ 2,368 $ 2,253 $ 7,450 $ 6,571
Other comprehensive income (loss)- Net unrealized
gain (loss) on available-for-sale securities 1,453 1,210 2,387 1,370
Reclassification adjustment for gains included in
income, net of taxes of $68 and $69 for the three
and nine month periods ended September 30, 2001 (97) - (99) -
-------- -------- -------- --------
Total comprehensive earnings $ 3,724 $ 3,463 $ 9,738 $ 7,941
======== ======== ======== ========
5. STOCK REPURCHASE PLAN
The Board of Directors authorized stock repurchase programs under which
repurchases will be made from time to time by the Company in the open market,
or in block purchases, or in privately negotiated transactions, in compliance
with Securities and Exchange Commission rules. As of September 30, 2001,
approximately 102,846 shares have been repurchased at an average cost of
$19.53 per share and approximately 262,100 shares remain under the program
for possible repurchase.
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) the effects of terrorism, including the events of
September 11, 2001 and thereafter; (5) changes in the regulatory environment;
(6) changes in business conditions and inflation; (7) changes in securities
markets; (8) data processing compliance problems; (9) the California power
crisis; (10) variances in the actual versus projected growth in assets; (11)
return on assets; (12) loan losses; (13) expenses; (14) rates charged on
loans and earned on securities investments; (15) rates paid on deposits; and
(16) fee and other noninterest income earned, as well as other factors. This
entire report should be read to put such forward-looking statements in
context. To gain a more complete understanding of the uncertainties and
risks involved in the Company's business this report should be read in
conjunction with Central Coast Bancorp's annual report on Form 10-K for the
year ended December 31, 2000.
Within the Management's Discussion and Analysis, interest income, net
interest income, net interest margin and the efficiency ratio are presented
on a fully taxable equivalent basis (FTE).
Business Organization
- ---------------------
Central Coast Bancorp (the "Company") is a California corporation organized
in 1994, and is the parent company for Community Bank of Central California,
a state-chartered bank, headquartered in Salinas, California (the "Bank").
Other than its investment in the Bank, the Company currently conducts no
other significant business activities, although it is authorized to engage in
a variety of activities which are deemed closely related to the business of
banking upon prior approval of the Board of Governors of the Federal Reserve
System (the "FRB"), the Company's principal federal regulator.
The Bank offers a full range of commercial banking services, including a
diverse range of traditional banking products and services to individuals,
merchants, small and medium-sized businesses, professionals and agribusiness
enterprises located in the counties of Monterey, San Benito and Santa Cruz,
which are in the central coastal area of California.
Overview
- --------
For the third quarter 2001, Central Coast Bancorp reported diluted earnings
per share of $0.32, a 10.3% increase over the $0.29 reported in the year
earlier period. Net income for the quarter ended September 30, 2001 was
$2,368,000, which is a 5.1% increase over the $2,253,000 reported for the
same period of 2000. The return on equity (ROE) and the return on assets
(ROA) for the third quarter 2001 were 14.7% and 1.25% as compared to 15.8%
and 1.36% for the same period in 2000.
Net income for the nine months ended September 30, 2001 and 2000 was
$7,450,000 and $6,571,000 with diluted earnings per share of $0.98 and $0.83,
respectively. For the first nine months of 2001 ROE was 16.1% and ROA was
1.40% as compared to 15.9% and 1.40% for the same period in 2000. The
earnings per share for the 2000 periods have been adjusted for the 10% stock
dividend distributed in February 2001.
At September 30, 2001, the Company had assets totaling $762,814,000, another
record level. On a year over year basis, internal growth has generated an
increase in assets of $119,886,000 (18.6%); an increase in loans of
$130,551,000 (29.7%); and an increase in deposits of $92,119,000 (16.0%).
The increase in deposits was in spite of a reduction in the level of State of
California certificates of deposit from $22,000,000 at September 30, 2000 to
$5,000,000 at September 30, 2001. Replacing this difference of $17,000,000
represents additional growth in the Company's core customer base.
7
Central Coast Bancorp ended the third quarter of 2001 with a Tier 1 capital
ratio of 10.2% and a total risk-based capital ratio of 11.4% versus 11.8% and
13.0%, respectively, at the end of the third quarter of 2000.
The following table provides a summary of the major elements of income and
expense for the periods indicated.
Condensed Comparative Income Statement
Percentage Percentage
Three Months Ended Change Nine Months Ended Change
September 30, Increase September 30, Increase
(In thousands, except percentages) 2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ---- ---- ----------
Interest Income (1) $13,333 $13,777 -3% $40,238 $38,352 5%
Interest Expense 4,681 4,901 -4% 14,429 13,400 8%
--------- --------- ----------- --------- ---------- -----------
Net interest income 8,652 8,876 -3% 25,809 24,952 3%
Provision for Loan Losses 760 1,530 -50% 955 2,856 -67%
--------- --------- ----------- --------- ---------- -----------
Net interest income after
provision for loan losses 7,892 7,346 7% 24,854 22,096 12%
Noninterest Income 927 672 38% 2,352 1,849 27%
Noninterest Expense 4,749 4,298 10% 14,465 12,754 13%
--------- --------- ----------- --------- ---------- -----------
Income before income taxes 4,070 3,720 9% 12,741 11,191 14%
Income Taxes 1,421 1,266 12% 4,470 4,027 11%
Tax Equivalent Adjustment 281 201 40% 821 593 38%
--------- --------- ----------- --------- ---------- -----------
Net income $2,368 $2,253 5% $7,450 $6,571 13%
========= ========= =========== ========= ========== ===========
1) Interest on tax-free securities is reported on tax equivalent basis.
Net interest income / net interest margin
- -----------------------------------------
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits and other borrowings, is the
principal component of the Bank's earnings. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for the third quarter of 2001 was $8,653,000, which was
$223,000 less than the third quarter of 2000 and $250,000 greater than the
second quarter of this year. Interest income was down $444,000 (3.2%) from
the third quarter of 2000 even with an increase in average loan balances of
$106,114,000 (24.9%), which added $2,709,000 to interest income. As of
September 30, there had been eight prime rate decreases totaling 350 basis
points as a result of actions taken by the Federal Reserve Board since the
beginning of 2001. Due to the lower rates and the mix between fixed and
variable rate loans in the portfolio, the average loan yield for the third
quarter of 2001 was 198 basis points lower than the average yield in the year
earlier quarter resulting in a decrease in interest income of $2,623,000.
The average balance of investment securities in the third quarter of 2001
was $1,005,000 (0.7%) higher than the third quarter of 2000. Average
balances for Federal funds sold for the third quarter of 2001 decreased
$15,135,000 to $9,324,000. As a result of the overall volume and rate
decreases interest income on investments decreased $530,000 on a period over
period basis.
Interest expense was $221,000 (4.5%) lower in the third quarter of 2001
versus the prior year period. Average balances of interest-bearing
liabilities were higher by $56,548,000 (12.7%), which added $653,000 to
interest expense. The average rate paid on interest-bearing liabilities was
3.71% for the quarter. This was down 68 basis points from the third quarter
of 2000. The lower rates decreased interest expense by $874,000.
8
The net interest margin for the third quarter of 2001 reflects the declining
interest rate environment and was 4.96% as compared to 5.89% in the year
earlier period and was down 24 basis points from the second quarter 2001. 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. Additional rate decreases of 75 basis points were made during the
third quarter of 2001 and another decrease of 50 basis points was made in
early October. These rate cuts and any additional cuts may put continuing
downward pressure on the net interest margin for the fourth quarter 2001.
For the nine month period ending September 30, 2001, net interest income
increased $857,000 (3.4%) over the first nine months of 2000. The interest
income component increased $1,886,000 to $40,238,000. Average balances of
earning assets were $84,753,000 (14.9%) higher in the first nine months of
2001 than the same period in 2000. The average balance of loans was
$83,912,000 higher, which provided for $6,188,000 of the increase in interest
income. The average yield received on loans in the first nine months of 2001
of 8.86% was 100 basis points lower than the 9.86% received in the year
earlier period. The lower yield on loans decreased interest income by
$3,730,000. The average balances of investment securities and Federal funds
sold in the first nine months of 2001 were basically flat to the year earlier
period. Interest income for these investing activities decreased $572,000 on
a period over period basis primarily due to the lower interest rate
environment. In the first half of 2000, the prime interest rate was raised
three times for a total of 100 basis points. In the first nine months of
2001 interest rates were lowered eight times for a total of 350 basis
points. The blended effect of these changes has resulted in a 78 basis point
decrease in average rates received on earning assets in the first nine months
of 2001 versus the yields earned in the same period of 2000.
Interest expense for the nine month period increased $1,029,000 (7.7%) from
the expense for the same period in 2000. Volume increases in deposits added
$1,752,000 of interest expense. Overall average rates paid on
interest-bearing liabilities in the first nine months of 2001 decreased 15
basis points to 4.07% from the same period in 2000. The interest expense
decrease as a result of the lower rates was $766,000.
Net interest margin for the first nine months of 2001 was 5.27% versus 5.85%
in the year earlier period.
The first two following tables provide a summary of the components of net
interest income and the changes within the components for the periods
indicated. The second two tables set forth a summary of the changes in
interest income and interest expense from changes in average asset and
liability balances (volume) and changes in average interest rates.
9
(Unaudited)
Three Months Ended September 30 ,
(Taxable Equivalent Basis) 2001 2000
---------------------------------- --------------------------------
Avg. Avg. Avg. Avg.
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
Assets:
Earning Assets
Loans (1) (2) $ 531,538 $ 10,917 8.15% $ 425,424 $ 10,830 10.13%
Taxable investments 100,899 1,479 5.82% 113,002 1,952 6.87%
Tax-exempt securities (tax equiv. basis) 49,683 843 6.73% 36,572 602 6.54%
Federal funds sold 9,324 94 4.00% 24,459 393 6.39%
------------ -------- ------------ --------
Total Earning Assets 691,444 $ 13,333 7.65% 599,457 $13,777 9.14%
Cash & due from banks 43,140 -------- 39,561 --------
Other assets 14,998 16,037
------------ ------------
$ 749,582 $ 655,055
============ ============
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $ 100,466 $ 314 1.24% $ 97,569 $ 403 1.64%
Savings 140,387 1,080 3.05% 112,054 1,026 3.64%
Time deposits 251,315 3,180 5.02% 230,299 3,405 5.88%
Other borrowings 8,415 107 5.04% 4,113 67 6.48%
------------ -------- ------------ --------
Total interest bearing liabilities 500,583 4,681 3.71% 444,035 4,901 4.39%
Demand deposits 177,727 -------- 148,324 --------
Other Liabilities 7,546 6,004
------------ ------------
Total Liabilities 685,856 598,363
Shareholders' Equity 63,726 56,692
------------ ------------
$ 749,582 $ 655,055
============ ============
Net interest income & margin (3) $ 8,652 4.96% $ 8,876 5.89%
======== ====== ======== ======
1. Loan interest income includes fee income of $346,000 and $271,000 for the three month periods
ended September 30, 2001 and 2000, respectively.
2. Includes the average allowance for loan losses of $9,668,000 and $7,460,000 and average deferred
loan fees of $1,027,000 and $717,000 for the three months ended September 30, 2001 and 2000, respectively.
3. Net interest margin is computed by dividing net interest income by the total average earning assets.
10
(Unaudited)
Nine Months Ended September 30,
(Taxable Equivalent Basis) 2001 2000
------------------------------ ------------------------------
Avg. Avg. Avg. Avg.
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
Assets:
Earning Assets
Loans (1) (2) $ 492,797 $ 32,651 8.86% $ 408,885 $ 30,193 9.86%
Taxable investments 101,842 4,726 6.20% 107,999 5,602 6.93%
Tax-exempt securities (tax equiv. basis) 48,367 2,462 6.80% 36,067 1,776 6.58%
Federal funds sold 11,254 399 4.74% 16,556 781 6.30%
------------ ---------- ----------- ----------
Total Earning Assets 654,260 $ 40,238 8.22% 569,507 $ 38,352 9.00%
Cash & due from banks 42,439 ---------- 38,327 ----------
Other assets 15,267 16,511
------------ -----------
$ 711,966 $ 624,345
============ ===========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $ 95,876 $ 974 1.36% $ 97,338 $ 1,200 1.65%
Savings 128,364 3,150 3.28% 104,459 2,757 3.53%
Time deposits 243,402 10,013 5.50% 216,447 9,156 5.65%
Other borrowings 6,911 292 5.65% 6,015 287 6.37%
------------ ---------- ----------- ----------
Total interest bearing liabilities 474,553 14,429 4.07% 424,259 13,400 4.22%
Demand deposits 168,309 ---------- 139,590 ----------
Other Liabilities 7,181 5,466
------------ -----------
Total Liabilities 650,043 569,315
Shareholders' Equity 61,923 55,030
------------ -----------
$ 711,966 $ 624,345
============ ===========
Net interest income & margin (3) $ 25,809 5.27% $ 24,952 5.85%
========== ======= ========== =======
1. Loan interest income includes fee income of $1,025,000 and $745,000 for the nine month
periods ended September 30, 2001 and 2000, respectively
2. Includes the average allowance for loan losses of $9,513,000 and $6,563,000 and average deferred
loan fees of $957,000 and $714,000 for the nine months ended September 30, 2001 and 2000, respectively.
3. Net interest margin is computed by dividing net interest income by the total average earning assets.
11
Volume/Rate Analysis
(in thousands) Three Months Ended September 30, 2001 over 2000
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $ 2,709 $ (2,623) $ 86
Taxable investment securities (210) (263) (473)
Tax exempt investment securities (3) 216 26 242
Federal funds sold (244) (55) (299)
----------- ----------- -----------
Total 2,471 (2,915) (444)
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits 12 (101) (89)
Savings deposits 260 (206) 54
Time deposits 311 (536) (225)
Other borrowings 70 (30) 40
----------- ----------- -----------
Total 653 (873) (220)
----------- ----------- -----------
Interest differential $ 1,818 $ (2,042) $ (224)
=========== =========== ===========
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 $345,000 and $271,000 for the quarters ended September 30, 2001 and 2000, respectively have
been included in the interest income computation.
3. Includes taxable-equivalent adjustments that relate to income on certain securities that is exempt from
federal income taxes. The effective federal statutory tax rate was 35% for 2001 and 2000.
4. The rate / volume variance has been included in the rate variance.
12
Volume/Rate Analysis
(in thousands) Nine Months Ended September 30, 2001 over 2000
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $ 6,188 $ (3,730) $ 2,458
Taxable investment securities (319) (557) (876)
Tax exempt investment securities (3) 605 81 686
Federal funds sold (250) (132) (382)
---------- ---------- ----------
Total 6,224 (4,338) 1,886
---------- ---------- ----------
Interest-bearing liabilities:
Demand deposits (18) (208) (226)
Savings deposits 631 (238) 393
Time deposits 1,139 (282) 857
Other borrowings 43 (38) 5
---------- ---------- ----------
Total 1,795 (766) 1,029
---------- ---------- ----------
Interest differential $ 4,429 $ (3,572) $ 857
========== ========== ==========
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 $1,025,000 and $745,000 for the nine months ended September 30, 2001 and 2000, respectively, have
been included in the interest income computation.
3. Includes taxable-equivalent adjustments that relate to income on certain securities that is exempt from
federal income taxes. The effective federal statutory tax rate was 35% for 2001 and 2000.
4. The rate / volume variance has been included in the rate variance.
Provision for Loan Losses
- -------------------------
The Bank provided $760,000 for loan losses in the third quarter of 2001 as
compared to $1,530,000 in the third quarter of 2000. For the nine month
period ended September 30, 2001, the Bank provided $955,000 versus $2,856,000
in the year earlier period. The provision for loan losses that has been
recorded in 2001 and 2000 is based on factors which consider the loan growth,
changing portfolio mix and prevailing local and national economic conditions
to establish the required level of loan loss reserves. The ratios of the
allowance for loan losses to total loans at each quarter end were 1.79% and
1.91%, respectively. (See the "Credit Risk and Allowance for Loan Loss"
section for additional discussion).
Noninterest Income
- ------------------
Noninterest income consists primarily of service charges on deposit accounts
and fees for miscellaneous services. Noninterest income totaled $927,000 in
the third quarter of 2001, which was up $255,000 over the same period in
2000. The Bank realized $165,000 in gains on the sale of investment
securities in the third quarter of 2001 versus none in the prior year
quarter. Commissions on mortgage originations were up $60,000 (196.9%) as
refinance activity continued to be very active. Other increases were
generally due to increased activity.
For the first nine months of 2001, noninterest income was $2,352,000 versus
$1,849,000 in the same period last year. Service charges on deposits were
up $136,000 (10.7%) due to increased activity. Other fees were $202,000
(47.3%) higher in the first half of 2001. Approximately 75% of other fees
increase was due to the growth in commission on mortgage originations. As
the interest rates declined during 2001, the activity in residential mortgage
lending has picked up significantly. Gains on the sale of investment
securities have added $168,000 to noninterest income in 2001.
13
Noninterest Expense
- -------------------
Noninterest expenses increased $451,000 (10.5%) to a total of $4,749,000 in
the third quarter of 2001 versus third quarter 2000. Salary and employee
benefits expenses increased $346,000 (13.5%) primarily due to additional
staff for the new Hollister branch opened in October 2000, internal growth,
higher benefit costs, and normal salary increases. On a quarter over quarter
basis, premises and fixed asset expenses were higher by $93,000 (11.8%).
Costs of the new branch, higher prices and increased activity contributed to
the increase. Other expenses for the third quarter of 2001 were $960,000 up
slightly from $948,000 in the prior year quarter. Management has implemented
expense control measures in view of the weaker economy and lower interest
rates. The efficiency ratio for the two quarters was 49.6% and 45.0%,
respectively.
Noninterest expenses for the nine month period ending September 30, 2001 were
$14,465,000 versus $12,754,000 for the same period in 2000. Salaries and
benefits increased $1,370,000 (18.5%) and premises and fixed asset expenses
were up $349,000 (15.4%) due to the factors discussed in the previous
paragraph plus the additional costs of operating the Watsonville branch,
which was opened in June 2000. Other expenses were essentially flat between
the two periods. The efficiency ratio for the first nine months of 2001 was
51.4% as compared to 47.6% in the same period of 2000.
Provision for Income Taxes
- --------------------------
The effective tax rate for the third quarter and first nine months of 2001
was 37.5% for both periods, versus 36.0% and 38.0% for the same periods of
2000, respectively. The year-to-date estimated tax rate in 2001 is lower as
tax exempt loans and investment securities represent a higher percentage of
income.
Securities
- ----------
At September 30, 2001, available-for-sale securities had a market value of
$144,166,000 with an amortized cost basis of $142,071,000. The unrealized
gain of $2,095,000 at September 30, 2001 represented an increase of
$2,364,000 from the unrealized loss of $269,000 at June 30, 2001. The
unrealized gain was the result of the changes in the yield curve and market
spreads in the securities markets in the third quarter.
Loans
- -----
Ending loan balances at September 30, 2001 were $570,379,000, which was an
increase of $96,984,000 (20.5%) from year-end 2000 balances and $119,886,000
(18.6%) from September 30, 2000 balances. All categories of loans were higher
on a year over year basis. The real estate-other category had the highest
growth in outstanding balances as it increased $74,479,000 (32.2%). Real
estate construction has also shown strong growth of $38,297,000 (100.4%) over
September 30, 2000 balances. The construction projects cover a broad
spectrum of economic activity in the Bank's market including the tourism
industry, agricultural industry, other commercial enterprises as well as
residential construction. Loan demand was very strong in the third quarter
as over half of the year over year growth occurred during the past three
months. Management does not expect such vigorous growth to continue in the
fourth quarter.
Nonperforming Assets
- --------------------
Non-performing assets are comprised of loans delinquent 90 days or more with
respect to interest or principal, loans for which the accrual of interest has
been discontinued, and other real estate, which has been acquired through
foreclosure and is awaiting disposition.
Unless well secured and in the process of collection, loans are placed on
nonaccrual status when a loan becomes 90 days past due as to interest or
principal, when the payment of interest or principal in accordance with the
contractual terms of the loan becomes uncertain or when a portion of the
principal balance has been charged off. When a loan is placed on nonaccrual
status, the accrued and unpaid interest receivable is reversed and the loan
is accounted for on the cash or cost recovery method thereafter, until
qualifying for return to accrual status. Generally, a loan may be returned
to accrual status 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.
14
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, with any difference treated as a
loan loss. Costs of maintaining other real estate owned and gains or losses
on the subsequent sale are reflected in current earnings.
The following is a summary of nonperforming assets:
(In thousands, except percentages) September 30, June 30, December 31,
2001 2001 2000
---- ---- ----
Past due 90 days or more and still accruing :
Real estate $ 450 $ 3,055 $ 10
Commercial 245 721 215
Consumer and other - 1 5
---------------- --------------- --------------
695 3,777 230
---------------- --------------- --------------
Nonaccrual:
Real estate 592 101 -
Commercial 214 109 329
Consumer and other 14 15 -
---------------- --------------- --------------
820 225 329
---------------- --------------- --------------
Total nonperforming loans $ 1,515 $ 4,002 $ 559
================ =============== ==============
Allowance for loan losses as a percentage of nonperforming loans 675% 238% 1676%
Nonperforming loans to total loans 0.27% 0.79% 0.12%
Nonperforming loans decreased $2,487,000 during the third quarter of 2001
compared to June 30, 2001 primarily as a result of a single loan for $2.8
million, which was no longer classified as 90 days past due at the end of
third quarter. Excluding that loan, the net increase was $313,000. On October
1, a real estate loan in the amount of $450,000 listed in past due 90 days
was brought current. Adjusting for that payment, the nonperforming loans to
total loans would have been 0.19%. While the agricultural economy in the
Bank's service area has seemingly not been affected by the national economic
slow down, tourism in the Monterey area has seen a reduction in occupancy
rates and general level of activity. Management is closely monitoring the
loan portfolio for any indications of weakness that could manifest into loan
problems. At quarter end, the nonperforming loans were 0.20% of total assets
and 0.27% of total loans. This compared to 0.54% and 0.79% at June 30, 2001
and 0.08% and 0.12% at December 31, 2001.
At September 30, 2001, the recorded investment in loans that are considered
impaired under SFAS No. 114 was $1,228,000 of which $45,000 are included in
nonaccrual loans above. Valuation allowances were computed on all impaired
loans and totaled $353,000 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 September 30, 2001, where serious doubt exists as to the ability
of the borrower to comply with the present repayment terms.
15
Credit Risk and Allowance for Loan Losses
- -----------------------------------------
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring
and established formal lending policies. Additionally, the Company contracts
with an outside loan review consultant to periodically grade new loans and to
review the existing loan portfolio. Management believes its ability to
identify and assess risk and return characteristics of the Company's loan
portfolio is critical for profitability and growth. Management strives to
continue the historically low level of credit losses experienced 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 September 30, 2001, the Company had outstanding real estate
and real estate construction loans totaling $382,305,000, which represented
67.0% of the loan portfolio. Approximately 8.7% of the portfolio is for
loans for hotels and motels. Although management believes the concentration
does not have more than the normal risk of collectibility, a substantial
decline in the national or local 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 judgment 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 allowance 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 allowance for estimated losses related to specifically
identified loans, management evaluates its allowance on an individual loan
basis, including an analysis of the creditworthiness, cash flows and
financial status of the borrower, and the condition and the estimated value
of the collateral. Specific valuation allowances for secured loans are
determined by the excess of recorded investment in the loan over the fair
market value or net realizable value where appropriate, of the collateral.
In determining overall general valuation allowances to be maintained and the
loan loss allowance ratio, management evaluates many factors including
prevailing and forecasted economic conditions, regular reviews of the quality
of loans, industry experience, historical loss experience, composition and
geographic concentrations of the loan portfolio, the borrowers' ability to
repay and repayment performance and estimated collateral values.
Management believes that the allowance for loan losses at September 30, 2001
is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
16
The following table summarizes activity in the allowance for loan losses for
the periods indicated:
Three months ended Nine months ended
September 30, September 30,
(In thousands, except percentages) 2001 2000 2001 2000
---- ---- ---- ----
Beginning balance $ 9,509 $ 7,018 $ 9,371 $ 5,596
Provision charged to expense 760 1,530 955 2,856
Loans charged off (62) (181) (166) (200)
Recoveries 17 22 64 137
--------- -------- --------- ---------
Ending balance $ 10,224 $ 8,389 $ 10,224 $ 8,389
========= ======== ========= =========
Ending loan portfolio $ 570,379 $ 439,838
========= =========
Allowance for loan losses as percentage of ending loan portfolio 1.79% 1.91%
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 September 30, 2001 were approximately $183,783,000 and $877,000,
respectively. Such loans relate primarily to revolving lines of credit and
other commercial loans, and to real estate construction loans.
The Company's sources of liquidity consist of overnight funds sold to
correspondent banks, unpledged short-term marketable investments, and salable
SBA loans. On September 30, 2001 consolidated liquid assets totaled $107.6
million or 14.1% of total assets as compared to $140.0 million or 19.8% of
total consolidated assets on December 31, 2000. In addition to liquid
assets, the Bank maintains lines of credit with correspondent banks for up to
$80,000,000 available on a short-term basis. Informal agreements are also in
place with various other banks to purchase participations in loans, if
necessary. The Company serves primarily a business and professional customer
base and, as such, its deposit base is susceptible to economic fluctuations.
Accordingly, management strives to maintain a balanced position of liquid
assets to volatile and cyclical deposits.
Capital Resources
- -----------------
The Company's total shareholders' equity was $65,612,000 at September 30,
2001 compared to $59,854,000 at December 31, 2000.
The Company and the Bank are subject to regulations issued by the Board of
Governors and the FDIC, which require maintenance of a certain level of
capital. Under the regulations, capital requirements are based upon the
composition of an institution's asset base and the risk factors assigned to
those assets. The guidelines characterize an institution's capital as being
"Tier 1" capital (defined to be principally shareholders' equity less
intangible assets) and "Tier 2" capital (defined to be principally the
allowance for loan losses, limited to one and one-fourth percent of gross
risk weighted assets). The guidelines require the Company and the Bank to
maintain a risk-based capital target ratio of 8%, one-half or more of which
should be in the form of Tier 1 capital.
The following table shows the Company's actual capital amounts and ratios at
September 30, 2001 and December 31, 2000 as well as the minimum capital
ratios for capital adequacy under the regulatory framework:
17
For Capital
Actual Adequacy Purpose:
Company Amount Ratio Amount Ratio
- ------- ------ ----- ------ -----
As of September 30, 2001:
- -------------------------
Total Capital (to Risk Weighted Assets): $ 71,631,000 11.4% $ 50,143,558 8.0%
Tier 1 Capital (to Risk Weighted Assets): 63,767,000 10.2% 25,071,779 4.0%
Tier 1 Capital (to Average Assets): 63,767,000 8.5% 29,983,263 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 September 30, 2001:
- -------------------------
Total Capital (to Risk Weighted Assets): $ 62,014,000 10.1% $ 49,354,263 8.0%
Tier 1 Capital (to Risk Weighted Assets): 54,272,000 8.8% 24,677,132 4.0%
Tier 1 Capital (to Average Assets): 54,272,000 7.3% 29,764,634 4.0%
As of December 31, 2000:
- ------------------------
Total Capital (to Risk Weighted Assets): 63,866,000 11.8% 43,273,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 57,073,000 10.6% 21,637,000 4.0%
Tier 1 Capital (to Average Assets): 57,073,000 8.7% 26,251,000 4.0%
Item 3. MARKET RISK MANAGEMENT
Overview
- --------
The goal for managing the assets and liabilities of the Bank is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Bank to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Bank has an Asset and Liability Management Committee (ALCO),
which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management
- --------------------------
Activities involved in asset/liability management include but are not limited
to lending, accepting and placing deposits, investing in securities and
issuing debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a
different amount from that of interest costs on liabilities. To mitigate
interest rate risk, the structure of the balance sheet is managed with the
goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Bank uses simulation models to forecast
earnings, net interest margin and market value of equity.
18
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, the
Company is able to estimate the potential impact of changing interest rates
on earnings. A balance sheet forecast is prepared using inputs of actual
loan, securities and interest bearing liabilities (i.e. deposits/borrowings)
positions as the beginning base. The forecast balance sheet is processed
against three interest rate scenarios. The scenarios include a 200 basis
point rising rate forecast, a flat rate forecast and a 200 basis point
falling rate forecast which take place within a one year time frame. The net
interest income is measured during the first year of the rate changes and in
the year following the rate changes. The latest simulation forecast using
May 31, 2001 balances and measuring against a flat rate environment,
calculated that in a one-year horizon an increase in interest rates of 200
basis points would result in an increase of $2,869,000 in net interest
income. Conversely, a 200 basis point decrease would result in a decrease of
$3,451,000 in net interest income. The basic structure of the balance sheet
has not changed significantly from the last simulation run.
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk. The risk profile of the Bank
has not changed materially from that at year-end 2000.
OTHER MATTERS
California Power Crisis
- -----------------------
The State of California has recently experienced periodic electric power
shortages. It is uncertain whether these shortages will continued. However,
conservation efforts and unanticipated cooler weather during the second and
third quarters of 2001 have resulted in lower demand for electricity
throughout California and an electricity surplus. California also initiated
action to supplement conservation efforts including acceleration of the
approval process for development of new energy production facilities and
entering into long-term energy contracts for the supply of electricity. If
electric power shortages occur in the future, the Company and its
subsidiaries could be materially and adversely affected either directly or
indirectly by a severe electric power shortage if such a shortage caused any
of its critical data processing or computer systems and related equipment to
fail, or if the local infrastructure systems such as telephone systems should
fail, or the Company's and its subsidiaries' significant vendors, suppliers,
service providers, customers, borrowers, or depositors are adversely impacted
by their internal systems or those of their respective customers or
suppliers. Material increases in the expenses related to electric power
consumption and the related increase in operating expense could also have an
adverse effect on the Company's future results of operations.
Accounting Pronouncements
- -------------------------
The Financial Standards Accounting Board ("FASB") adopted Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations"
covering elimination of pooling accounting treatment in business combinations
and financial accounting and reporting for acquired goodwill and other
intangible assets at acquisition. SFAS No. 141 supersedes APB Opinion No.
16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and is effective for transactions
initiated after June 30, 2001. Under SFAS No. 141, all mergers and business
combinations initiated after the effective date must be accounted for as
"purchase" transactions. A merger or business combination was considered
initiated if the major terms of the transaction, including the exchange or
conversion ratio, were publicly announced or otherwise disclosed to
shareholders of the combining companies prior to the effective date.
Goodwill in any merger or business combination which was not initiated prior
to the effective date will be recognized as an asset in the financial
statements, measured as the excess of the cost of an acquired entity over the
net of the amounts assigned to identifiable assets acquired and liabilities
assumed, and then tested for impairment to assess losses and expensed against
earnings only in the periods in which the recorded value of goodwill exceeded
its implied fair value. The FASB concurrently adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" to address financial accounting and
reporting for acquired goodwill and other intangible assets at acquisition in
transactions other than business combinations covered by SFAS No. 141, and
the accounting treatment of goodwill and other intangible assets after
acquisition and initial recognition in the financial statements. SFAS No.
142 supersedes APB Opinion No. 17, "Intangible Assets" and is required to be
19
applied at the beginning of an entity's fiscal year to all goodwill and other
intangible assets recognized in its financial statements at that date, for
fiscal years beginning after December 15, 2001. It is not certain what
effect SFAS No. 141 and SFAS No. 142 may have upon the pace of business
combinations in the banking industry in general or upon prospects of any
merger or business combination opportunities involving the Company in the
future. The Company is required to adopt SFAS No. 142 beginning January 1,
2002. Early adoption is not permitted. The Company does not expect the
adoption of SFAS No. 142 to have a material effect on its financial position,
results of operations, or cash flows as the Company had no goodwill as of
September 30, 2001 and all of the Company's intangible assets at September
30, 2001 will continue to be amortized.
Effects of Terrorism
- --------------------
The terrorist actions on September 11, 2001 and thereafter have had
significant adverse effects upon the United States economy. Whether the
terrorist activities in the future and the actions of the United States and
its allies in combating terrorism on a worldwide basis will adversely impact
the Company and the extent of such impact is uncertain. However, such events
have had and may continue to have an adverse effect on the economy in the
Company's market areas. Such continued economic deterioration could
adversely affect the Company's future results of operations by, among other
matters, reducing the demand for loans and other products and services
offered by the Company, increasing nonperforming loans and the amounts
reserved for loan losses, and causing a decline in the Company's stock price.
20
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
None.
Item 2. Changes in securities.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None
Item 5. Other information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
(2.1) Agreement and Plan of Reorganization and Merger by and between
Central Coast Bancorp, CCB Merger Company and Cypress Coast Bank
dated as of December 5, 1995, incorporated by reference from
Exhibit 99.1 to Form 8-K filed with the Commission on December 7,
1995.
(3.1) Articles of Incorporation, incorporated by reference from Exhibit
3.1 to Form 10-Q, filed with the Commission on August 13, 2001.
(3.2) Bylaws, as amended, incorporated by reference from Exhibit 3.2 to
Form 10-Q, filed with the Commission on August 13, 2001.
(4.1) Specimen form of Central Coast Bancorp stock certificate
incorporated by reference from the Registrant's 1994 Annual
Report on Form 10-K filed with the Commission on March 31, 1995.
(10.1) Lease agreement dated December 12, 1994, related to 301 Main
Street, Salinas, California incorporated by reference from the
Registrant's 1994 Annual Report on Form 10-K filed with the
Commission on March 31, 1995.
(10.2) King City Branch Lease incorporated by reference from Exhibit
10.3 to Registration Statement on Form S-4, No. 33-76972, filed
with the Commission on March 28, 1994.
(10.3) Amendment to King City Branch Lease incorporated by
reference from Exhibit 10.4 to Registration Statement on Form
S-4, No. 33-76972, filed with the Commission on March 28, 1994.
*(10.4) 1982 Stock Option Plan, as amended, incorporated by reference
from Exhibit 4.2 to Registration Statement on Form S-8, No.
33-89948, filed with the Commission on March 3, 1995.
21
*(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, as amended and restated,
incorporated by reference from Exhibit 99 to Registration
Statement on Form S-8, No. 333-16257, filed with the Commission
on November 15, 1996.
*(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) Form of Indemnification Agreement, incorporated by
reference from Exhibit D to the Proxy Statement filed with the
Commission on September 3, 1996 in connection with Registrant's
1996 Annual Shareholders' Meeting held on September 23, 1996.
(10.16) Purchase and Assumption Agreement for the
Acquisition of Wells Fargo Bank Branches incorporated by
reference from Exhibit 10.17 to Registrant's 1996 Annual Report
on Form 10-K filed with the Commission on March 31, 1997.
(21.1) The Registrant's only subsidiary is its wholly-owned
subsidiary, Community Bank of Central California.
*Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K - A current report on Form 8-K was filed with the
Commission on October 29, 2001 reporting a press release dated October
18, 2001 regarding the Company's operating results for the quarter and
nine month periods ended September 30, 2001.
22
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.
Novemer 7, 2001 CENTRAL COAST BANCORP
By: /s/ ROBERT M. STANBERRY
---------------------------------
Robert M. Stanberry
(Chief Financial Officer, Principal
Financial and Accounting Officer)
23