UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year ended December 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-25418
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CENTRAL COAST BANCORP
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0367061
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(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
301 Main Street, Salinas, California 93901
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (831) 422-6642
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock
(no par value)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by
non-affiliates of the registrant at March 7, 2002 was
$167,025,775.70. As of March 7, 2002, the registrant had
8,970,235 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this
Form 10-K: Part III, Items 10 through 13 from registrant's
definitive proxy statement for the 2002 annual meeting of
shareholders.
The Index to Exhibits is located at page 72 Page 1 of 200 Pages
1
CENTRAL COAST BANCORP
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2001
Part I. Page
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Part II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 7a. Quantitative and Qualitative Disclosures About
Market Risks 45
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 67
Part III.
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 67
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 68
Signatures 71
2
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS.
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Certain matters discussed or incorporated by reference in this
Annual Report on Form 10-K including, but not limited to, matters
described in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations," are
forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. Changes to such risks and
uncertainties, which could impact future financial performance,
include, among others, (1) competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3)
general economic conditions, nationally, regionally and in
operating market areas, including a decline in real estate values
in the Company's market areas; (4) 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 Annual
Report should be read to put such forward-looking statements in
context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company
and the Bank.
Central Coast Bancorp (the "Company") is a California
corporation, located in Salinas, California and was organized in
1994 to act as a bank holding company for Bank of Salinas. In
1996, the Company acquired Cypress Bank, which was headquartered
in Seaside, California. Both banks were state-charted
institutions. In July of 1999, the Company merged Cypress Bank
into the Bank of Salinas and then renamed Bank of Salinas as
Community Bank of Central California (the "Bank"). The Bank is
headquartered in Salinas and serves individuals, merchants, small
and medium-sized businesses, professionals, agribusiness
enterprises and wage earners located in the California Central
Coast area.
On February 21, 1997, the former Bank of Salinas purchased
certain assets and assumed certain liabilities of the Gonzales
and Castroville branch offices of Wells Fargo Bank. As a result
of the transaction the Bank assumed deposit liabilities, received
cash, and acquired tangible assets. This transaction resulted in
intangible assets, representing the excess of the liabilities
assumed over the fair value of the tangible assets acquired.
In January 1997, the former Cypress Bank opened a new branch
office in Monterey, California, so that it might better serve
business and individual customers on the Monterey Peninsula. In
December 1998, the former Bank of Salinas opened an additional
new branch office in Salinas, California, to better provide
services to the growing Salinas community.
In June of 2000, the Bank opened a new branch office in
Watsonville, which is in Santa Cruz County. In October of 2000,
another new branch office was opened in Hollister, which is in
San Benito County. The opening of these two branch offices was a
first step in expanding the Bank's service area to include
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communities in contiguous counties outside of Monterey County.
In February 2002, the Bank received regulatory approval to open a
new branch in Gilroy, California. The estimated opening date for
the branch is April 15, 2002. Gilroy is located at the southern
end of the Santa Clara Valley in Santa Clara County. These three
communities are of similar economic make-up to the agricultural
based communities the Bank serves in Monterey County.
Until August 16, 2001, the Company conducted no significant
activities other than holding the shares of the subsidiary Bank.
On August 16, 2001 the Company notified the Board of Governors of
the Federal Reserve System (the "Board of Governors"), the
Company's principal regulator, that the Company was engaged in
certain lending activities. The Company purchased a loan from
the Bank that the Bank had originated for a local agency that was
categorized as a large issuer for taxation purposes. The Company
is able to use the tax benefits of such loans. The Company may
purchase similar loans in the future. Upon prior notification to
the Board of Governors, the Company is authorized to engage in a
variety of activities, which are deemed closely related to the
business of banking.
The Bank operates through its main office in Salinas and through
nine branch offices located in Castroville, Hollister, Gonzales,
King City, Marina, Monterey, Salinas, Seaside and Watsonville,
California. The Bank offers a full range of commercial banking
services, including the acceptance of demand, savings and time
deposits, and the making of commercial, real estate (including
residential mortgage), Small Business Administration, personal,
home improvement, automobile and other installment and term
loans. The Bank also currently offers personal and business Visa
credit cards. It also offers ATM and Visa debit cards,
travelers' checks, safe deposit boxes, notary public, customer
courier and other customary bank services. Most of the Bank's
offices are open from 9:00 a.m. to 5:00 p.m., Monday through
Thursday and 9:00 a.m. to 6:00 p.m. on Friday. The Westridge and
Marina branch offices are also open from 9:00 a.m. to 1:00 p.m.
on Saturdays. Additionally, on a 24-hour basis, customers can
bank by telephone or online at the Bank's Internet site,
www.community-bnk.com. The Bank also operates a limited service
facility in a retirement home located in Salinas, California.
The facility is open from 10:00 a.m. to 12:00 p.m. on Wednesday
of each week. The Bank has automated teller machines (ATMs)
located at the Castroville, Hollister, Gonzales, King City,
Marina, Monterey, Salinas, Seaside and Watsonville offices, the
Monterey County Fairgrounds, the Soledad Correctional Training
Facility Credit Union, Salinas Valley Memorial Hospital and Fort
Hunter Liggett which is located in Jolon, California. The Bank
is insured under the Federal Deposit Insurance Act and each
depositor's account is insured up to the legal limits thereon.
The Bank is chartered (licensed) by the California Commissioner
of Financial Institutions ("Commissioner") and has chosen not to
become a member of the Federal Reserve System. The Bank has no
subsidiaries.
The Company operates an on-site computer system, which provides
independent processing of its deposits, loans and financial
accounting.
The Bank concentrates its lending activities in four principal
areas: commercial loans (including agricultural loans); consumer
loans; real estate construction loans (both commercial and
personal) and real estate-other loans. At December 31, 2001,
these four categories accounted for approximately 33%, 3%, 14%
and 50% of the Bank's loan portfolio, respectively.
The Bank's deposits are attracted primarily from individuals,
merchants, small and medium-sized businesses, professionals and
agribusiness enterprises. The Bank's deposits are not received
from a single depositor or group of affiliated depositors the
loss of any one of which would have a materially adverse effect
on the business of the Bank. A material portion of the Bank's
deposits is not concentrated within a single industry or group of
related industries.
4
As of December 31, 2001, the Bank served a total of 27 state,
municipality and governmental agency depositors totaling
$82,559,000 in deposits. Of this amount $30,000,000 is
attributable to certificates of deposit for the State of
California. In connection with the deposits of municipalities or
other governmental agencies or entities, the Bank is generally
required to pledge securities to secure such deposits, except for
the first $100,000 of such deposits, which are insured by the
Federal Deposit Insurance Corporation ("FDIC").
As of December 31, 2001, the Bank had total deposits of
$724,862,000. Of this total, $231,501,000 represented
noninterest-bearing demand deposits, $105,949,000 represented
interest-bearing demand deposits, and $387,412,000 represented
interest-bearing savings and time deposits.
The principal sources of the Bank's revenues are: (i) interest
and fees on loans; (ii) interest on investments (principally
government securities); and (iii) interest on Federal Funds sold
(funds loaned on a short-term basis to other banks). For the
fiscal year ended December 31, 2001, these sources comprised 83.3
percent, 15.9 percent, and 0.8 percent, respectively, of the
Bank's total interest income.
SUPERVISION AND REGULATION
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The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the
qualification requirements of the California Corporate Securities
Law of 1968, as amended. The Bank's common stock, however, is
exempt from such requirements. The Company is also subject to
the periodic reporting requirements of Section 13 of the
Securities Exchange Act of 1934, as amended, which include, but
are not limited to, annual, quarterly and other current reports
with the Securities and Exchange Commission.
The Bank is licensed by the California Commissioner of Financial
Institutions. Its deposits are insured by the FDIC, and it has
chosen not to become a member of the Federal Reserve System.
Consequently, the Bank is subject to the supervision of, and is
regularly examined by, the Commissioner and the FDIC. Such
supervision and regulation include comprehensive reviews of all
major aspects of the Bank's business and condition, including its
capital ratios, allowance for probable loan losses and other
factors. However, no inference should be drawn that such
authorities have approved any such factors. The Company and the
Bank are required to file reports with the Commissioner, the FDIC
and the Board of Governors and provide such additional
information as the Commissioner, FDIC and the Board of Governors
may require.
The Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"), and is registered as such with, and subject to the
supervision of, the Board of Governors. The Company is required
to obtain the approval of the Board of Governors before it may
acquire all or substantially all of the assets of any bank, or
ownership or control of the voting shares of any bank if, after
giving effect to such acquisition of shares, the Company would
own or control more than 5% of the voting shares of such bank.
The Bank Holding Company Act prohibits the Company from acquiring
any voting shares of, or interest in, all or substantially all of
the assets of, a bank located outside the State of California
unless such an acquisition is specifically authorized by the laws
of the state in which such bank is located. Any such interstate
acquisition is also subject to the provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994.
5
The Company, and any subsidiaries, which it may acquire or
organize, are deemed to be "affiliates" of the Bank within the
meaning of that term as defined in the Federal Reserve Act. This
means, for example, that there are limitations (a) on loans by
the Bank to affiliates, and (b) on investments by the Bank in
affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiaries are also subject to certain
restrictions with respect to engaging in the underwriting, public
sale and distribution of securities.
In addition, regulations of the Board of Governors promulgated
under the Federal Reserve Act require that reserves be maintained
by the Bank in conjunction with any liability of the Company
under any obligation (demand deposits, promissory note,
acknowledgement of advance, banker's acceptance or similar
obligation) with a weighted average maturity of less than seven
(7) years to the extent that the proceeds of such obligations are
used for the purpose of supplying funds to the Bank for use in
its banking business, or to maintain the availability of such
funds.
The Board of Governors and the FDIC have adopted risk-based
capital guidelines for evaluating the capital adequacy of bank
holding companies and banks. The guidelines are designed to make
capital requirements sensitive to differences in risk profiles
among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank
capital uniform internationally. Under the guidelines, the
Company and the Bank are required to maintain capital equal to at
least 8.0% of its assets and commitments to extend credit,
weighted by risk, of which at least 4.0% must consist primarily
of common equity (including retained earnings) and the remainder
may consist of subordinated debt, cumulative preferred stock, or
a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items
are categorized according to risk and certain assets considered
to present less risk than others permit maintenance of capital at
less than the 8% ratio. For example, most home mortgage loans
are placed in a 50% risk category and therefore require
maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore
require maintenance of capital equal to 8% of such loans.
The Company and the Bank are subject to regulations issued by the
Board of Governors and the FDIC, which require maintenance of a
certain level of capital. These regulations impose two capital
standards: a risk-based capital standard and a leverage capital
standard.
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance
sheet items are assigned to risk categories, each of which has an
assigned risk weight. Capital ratios are calculated by dividing
the institution's qualifying capital by its period-end risk-
weighted assets. The guidelines establish two categories of
qualifying capital: Tier 1 capital (defined to include common
shareholders' equity and noncumulative perpetual preferred stock)
and Tier 2 capital which includes, among other items, limited life
(and in case of banks, cumulative) preferred stock, mandatory
convertible securities, subordinated debt and a limited amount of
reserve for loan losses. Tier 2 capital may also include up to 45%
of the pretax net unrealized gains on certain available-for-sale
6
equity securities having readily determinable fair values (i.e. the
excess, if any, of fair market value over the book value or
historical cost of the investment security). The federal regulatory
agencies reserve the right to exclude all or a portion of the
unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other
types of assets, such as bank premises and available-for-sale debt
securities, are not included in Tier 2 capital, but may be taken
into account in the evaluation of overall capital adequacy and net
unrealized losses on available-for-sale equity securities will
continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital
ratio (including Tier 1 and Tier 2 capital) of 8%, of which at
least half must be Tier 1 capital.
Under the Board of Governors' leverage capital standard an
institution is required to maintain a minimum ratio of Tier 1
capital to the sum of its quarterly average total assets and
quarterly average reserve for loan losses, less intangibles not
included in Tier 1 capital. Period-end assets may be used in
place of quarterly average total assets on a case-by-case basis.
The Board of Governors and the FDIC have also adopted a minimum
leverage ratio for bank holding companies as a supplement to the
risk-weighted capital guidelines. The leverage ratio establishes
a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets) for
the highest rated bank holding companies or those that have
implemented the risk-based capital market risk measure. All other
bank holding companies must maintain a minimum Tier 1 leverage
ratio of 4% with higher leverage capital ratios required for bank
holding companies that have significant financial and/or
operational weakness, a high risk profile, or are undergoing or
anticipating rapid growth.
At December 31, 2001, the Bank and the Company are in compliance
with the risk-based capital and leverage ratios described above.
See Footnote 14 to the Consolidated Financial Statements in Item
8 "Financial Statements and Supplementary Data" below for a
listing of the Company's and the Bank's risk-based capital ratios
at December 31, 2001 and 2000.
The Board of Governors and FDIC adopted regulations implementing
a system of prompt corrective action pursuant to Section 38 of
the Federal Deposit Insurance Act and Section 131 of the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The regulations establish five capital categories
with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio
of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a
total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of
4% or greater, and the institution does not meet the definition
of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio
less than 8%, a Tier 1 risk-based capital ratio of less than 4%,
or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total
risk-based capital ratio of less than 6%, a Tier 1 risk-based
capital ratio of less than 3%, or a leverage ratio of less than
3%; (5) "Critically undercapitalized" - consisting of an
institution with a ratio of tangible equity to total assets that
is equal to or less than 2%.
The regulations established procedures for classification of
financial institutions within the capital categories, filing and
reviewing capital restoration plans required under the
regulations and procedures for issuance of directives by the
appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain
from certain actions which would cause an institution to be
classified within any one of the three "undercapitalized"
categories, such as declaration of dividends or other capital
distributions or payment of management fees, if following the
distribution or payment the institution would be classified
within one of the "undercapitalized" categories. In addition,
institutions which are classified in one of the three
"undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory
7
actions include (1) increased monitoring and review by the
appropriate federal banking agency; (2) implementation of a
capital restoration plan; (3) total asset growth restrictions;
and (4) limitation upon acquisitions, branch office expansion,
and new business activities without prior approval of the
appropriate federal banking agency. Discretionary supervisory
actions may include (1) requirements to augment capital; (2)
restrictions upon affiliate transactions; (3) restrictions upon
deposit gathering activities and interest rates paid; (4)
replacement of senior executive officers and directors; (5)
restrictions upon activities of the institution and its
affiliates; (6) requiring divestiture or sale of the institution;
and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of
the regulations. Further, the federal banking agencies may not
accept a capital restoration plan without determining, among
other things, that the plan is based on realistic assumptions and
is likely to succeed in restoring the depository institution's
capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company
must guarantee that the institution will comply with such capital
restoration plan. The aggregate liability of the parent holding
company under the guaranty is limited to the lesser of (i) an
amount equal to 5 percent of the depository institution's total
assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards
applicable with respect to such institution as of the time it
fails to comply with the plan. If a depository institution fails
to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the
solicitation and acceptance of and interest rates payable on
brokered deposits by insured depository institutions that are not
"well capitalized." An "undercapitalized" institution is not
allowed to solicit deposits by offering rates of interest that
are significantly higher than the prevailing rates of interest on
insured deposits in the particular institution's normal market
areas or in the market areas in which such deposits would
otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or
receivership within 90 days of such determination unless it is
also determined that some other course of action would better
serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making
(but not accruing) any payment of principal or interest on
subordinated debt without the prior approval of the FDIC and the
FDIC must prohibit a critically undercapitalized institution from
taking certain other actions without its prior approval,
including (1) entering into any material transaction other than
in the usual course of business, including investment expansion,
acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material change
in accounting methods; (5) engaging in certain affiliate
transactions; (6) paying excessive compensation or bonuses; and
(7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and
maintain comprehensive written real estate policies which address
certain lending considerations, including loan-to-value limits,
loan administrative policies, portfolio diversification
standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured
state bank from engaging as a principal in any activity that is
impermissible for a national bank, absent FDIC determination that
the activity would not pose a significant risk to the Bank
Insurance Fund, and that the bank is, and will continue to be,
within applicable capital standards. Similar restrictions apply
to subsidiaries of insured state banks. The Company does not
8
currently intend to engage in any activities which would be
restricted or prohibited under the FDICIA.
The Federal Financial Institution Examination Counsel ("FFIEC")
on December 13, 1996, approved an updated Uniform Financial
Institutions Rating System ("UFIRS"). In addition to the five
components traditionally included in the so-called "CAMEL" rating
system which has been used by bank examiners for a number of
years to classify and evaluate the soundness of financial
institutions (including capital adequacy, asset quality,
management, earnings and liquidity), UFIRS includes for all bank
regulatory examinations conducted on or after January 1, 1997, a
new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect
the degree to which changes in interest rates, foreign exchange
rates, commodity prices or equity prices may adversely affect an
institution's earnings and capital. The revised rating system is
identified as the "CAMELS" system.
The federal financial institution agencies have established bases
for analysis and standards for assessing a financial
institution's capital adequacy in conjunction with the risk-based
capital guidelines including analysis of interest rate risk,
concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness.
The safety and soundness standards for insured financial
institutions include analysis of (1) internal controls,
information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate
exposure; (5) asset growth; (6) compensation, fees and benefits;
and (7) excessive compensation for executive officers, directors
or principal shareholders which could lead to material financial
loss. If an agency determines that an institution fails to meet
any standard, the agency may require the financial institution to
submit to the agency an acceptable plan to achieve compliance
with the standard. If the agency requires submission of a
compliance plan and the institution fails to timely submit an
acceptable plan or to implement an accepted plan, the agency must
require the institution to correct the deficiency. The agencies
may elect to initiate enforcement action in certain cases rather
than rely on an existing plan particularly where failure to meet
one or more of the standards could threaten the safe and sound
operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks'
lending to low and moderate income individuals and businesses
across a four-point scale from "outstanding" to "substantial
noncompliance," and are a factor in regulatory review of
applications to merge, establish new branch offices or form bank
holding companies. In addition, any bank rated in "substantial
noncompliance" with the CRA regulations may be subject to
enforcement proceedings.
The Bank has a current rating of "outstanding" for CRA compliance.
The Company's ability to pay cash dividends is subject to
restrictions set forth in the California General Corporation
Law. Funds for payment of any cash dividends by the Company
would be obtained from its investments as well as dividends
and/or management fees from the Bank. The payment of cash
dividends and/or management fees by the Bank is subject to
restrictions set forth in the California Financial Code, as well
as restrictions established by the FDIC. See Item 5 below for
further information regarding the payment of cash dividends by
the Company and the Bank.
9
COMPETITION
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At June 30, 2001, the competing commercial and savings banks had
67 branch offices in the cities of Castroville, Hollister,
Gonzales, King City, Marina, Monterey, Salinas, Seaside and
Watsonville where the Bank has its ten branch offices.
Additionally, the Bank competes with thrifts and, to a lesser
extent, credit unions, finance companies and other financial
service providers for deposit and loan customers.
Larger banks may have a competitive advantage because of higher
lending limits and major advertising and marketing campaigns.
They also perform services, such as trust services, international
banking, discount brokerage and insurance services, which the
Bank is not authorized nor prepared to offer currently. The Bank
has made arrangements with its correspondent banks and with
others to provide some of these services for its customers. For
borrowers requiring loans in excess of the Bank's legal lending
limits, the Bank has offered, and intends to offer in the future,
such loans on a participating basis with its correspondent banks
and with other independent banks, retaining the portion of such
loans which is within its lending limits. As of December 31,
2001, the Bank's aggregate legal lending limits to a single
borrower and such borrower's related parties were $10,351,000 on
an unsecured basis and $17,252,000 on a fully secured basis based
on regulatory capital of $69,007,000
The Bank's business is concentrated in its service area, which
primarily encompasses Monterey County, including the Salinas
Valley area. In 2000 the Bank expanded its service area to
include Hollister and Watsonville in San Benito and Santa Cruz
Counties, respectively. As previously mentioned, the Bank has
received FDIC and State approval to open a branch in Gilroy,
which is in Santa Clara County. The Gilroy branch is expected to
open in April 2002. The economy of the Bank's service area is
dependent upon agriculture, tourism, retail sales, population
growth and smaller service oriented businesses.
Based upon data as of the most recent practicable date (June 30,
20011), there were 71 operating commercial and savings bank
branch offices in Monterey County with total deposits of
$4,474,913,000. This was an increase of $409,794,000 over the
June 30, 2000 balances. The Bank held a total of $643,094,000 in
deposits, representing approximately 14.4% of total commercial
and savings banks deposits in Monterey County as of June 30,
2001. In the two new expansion areas of Hollister and
Watsonville, at June 30, 2001, there were 8 and 12 branch offices
with total deposits of $516,569,000 and $716,450,000,
respectively. At that date, the Bank had deposits of $23,022,000
and $8,612,000 in those two communities.
In order to compete with the major financial institutions in
their primary service areas, the Bank uses to the fullest extent
possible, the flexibility which is accorded by its independent
status. This includes an emphasis on specialized services, local
promotional activity, and personal contacts by the Bank's
officers, directors and employees. The Bank also seeks to
provide special services and programs for individuals in its
primary service area who are employed in the agricultural,
professional and business fields, such as loans for equipment,
furniture, tools of the trade or expansion of practices or
businesses. In the event there are customers whose loan demands
exceed the Bank's lending limits, the Bank seeks to arrange for
such loans on a participation basis with other financial
institutions. The Bank also assists those customers requiring
services not offered by the Bank to obtain such services from
correspondent banks.
- --------
1. "FDIC Institution Office Deposits:, June 30, 2001
10
Banking is a business that depends on interest rate
differentials. In general, the difference between the interest
rate paid by the Bank to obtain their deposits and other
borrowings and the interest rate received by the Bank on loans
extended to customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations,
credit unions, other financial institutions and other entities
for funds. For instance, yields on corporate and government debt
securities and other commercial paper affect the ability of
commercial banks to attract and hold deposits. Commercial banks
also compete for loans with savings and loan associations, credit
unions, consumer finance companies, mortgage companies and other
lending institutions.
The interest rate differentials of the Bank, and therefore its
earnings, are affected not only by general economic conditions,
both domestic and foreign, but also by the monetary and fiscal
policies of the United States as set by statutes and as
implemented by federal agencies, particularly the Federal Reserve
Board. This Agency can and does implement national monetary
policy, such as seeking to curb inflation and combat recession,
by its open market operations in United States government
securities, adjustments in the amount of interest-free reserves
that banks and other financial institutions are required to
maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These
activities influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid
on deposits. The nature and timing of any future changes in
monetary policies and their impact on the Bank are not
predictable. In 2001 the Federal Reserve Board lowered rates
eleven times for a total of 475 basis points. The Federal Funds
rate went from 6.50% at the beginning of the year to 1.75% at the
end of the year. Such rate changes were not anticipated and they
adversely impacted the Bank's net interest income for 2001 and
will continue to do so in 2002.
In 1996, pursuant to Congressional mandate, the FDIC reduced bank
deposit insurance assessment rates to a range from $0 to $0.27
per $100 of deposits, dependent upon a bank's risk. Based upon
the above risk-based assessment rate schedule, the Bank's current
capital ratios and the Bank's current levels of deposits, the
Bank anticipates no change in the assessment rate applicable to
the Bank during 2002 from that in 2001.
Since 1996, California law implementing certain provisions of
prior federal law has (1) permitted interstate merger
transactions; (2) prohibited interstate branching through the
acquisition of a branch office business unit located in
California without acquisition of the whole business unit of the
California bank; and (3) prohibited interstate branching through
de novo establishment of California branch offices. Initial
entry into California by an out-of-state institution must be
accomplished by acquisition of or merger with an existing whole
bank which has been in existence for at least five years.
The federal financial institution agencies, especially the Office
of the Comptroller of the Currency ("OCC") and the Board of
Governors, have taken steps to increase the types of activities
in which national banks and bank holding companies can engage,
and to make it easier to engage in such activities. The OCC has
issued regulations permitting national banks to engage in a wider
range of activities through subsidiaries. "Eligible
institutions" (those national banks that are well capitalized,
have a high overall rating and a satisfactory CRA rating, and are
not subject to an enforcement order) may engage in activities
related to banking through operating subsidiaries subject to an
expedited application process. In addition, a national bank may
apply to the OCC to engage in an activity through a subsidiary in
which the bank itself may not engage.
11
On November 12, 1999, President Clinton signed into law The
Financial Services Modernization Act of 1999 (the "FSMA"), which
is potentially the most significant banking legislation in many
years. The FSMA eliminates most of the remaining depression-era
"firewalls" between banks, securities firms and insurance
companies which was established by The Banking Act of 1933, also
known as the Glass-Steagall Act ("Glass-Steagall").
Glass-Steagall sought to insulate banks as depository
institutions from the perceived risks of securities dealing and
underwriting, and related activities. The FSMA repeals Section
20 of Glass-Steagall which prohibited banks from affiliating with
securities firms. Bank holding companies that can qualify as
"financial holding companies" can now acquire securities firms or
create them as subsidiaries, and securities firms can now acquire
banks or start banking activities through a financial holding
company. The FSMA includes provisions which permit national
banks to conduct financial activities through a subsidiary that
are permissible for a national bank to engage in directly, as
well as certain activities authorized by statute, or that are
financial in nature or incidental to financial activities to the
same extent as permitted to a "financial holding company" or its
affiliates. This liberalization of United States banking and
financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the
United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the
conduct of commercial banking, merchant banking, investment
management, securities underwriting and insurance within a single
financial institution using a "financial holding company"
structure authorized by the FSMA.
Prior to the FSMA, significant restrictions existed on the
affiliation of banks with securities firms and on the direct
conduct by banks of securities dealing and underwriting and
related securities activities. Banks were also (with minor
exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The FSMA removes these restrictions
and substantially eliminates the prohibitions under the Bank
Holding Company Act on affiliations between banks and insurance
companies. Bank holding companies which qualify as financial
holding companies can now insure, guarantee, or indemnify against
loss, harm, damage, illness, disability, or death; issue
annuities; and act as a principal, agent, or broker regarding
such insurance services.
In order for a commercial bank to affiliate with a securities
firm or an insurance company pursuant to the FSMA, its bank
holding company must qualify as a financial holding company. A
bank holding company will qualify if (i) its banking subsidiaries
are "well capitalized" and "well managed" and (ii) it files with
the Board of Governors a certification to such effect and a
declaration that it elects to become a financial holding
company. The amendment of the Bank Holding Company Act now
permits financial holding companies to engage in activities, and
acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial
holding companies are also permitted to engage in activities that
are complementary to financial activities if the Board of
Governors determines that the activity does not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system in general. These standards
expand upon the list of activities "closely related to banking"
which have to date defined the permissible activities of bank
holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that financial
institutions must respect the privacy of their customers and
protect the security and confidentiality of customers' non-public
personal information. These regulations require, in general, that
financial institutions (1) may not disclose non-public personal
information of customers to non-affiliated third parties without
12
notice to their customers, who must have an opportunity to direct
that such information not be disclosed; (2) may not disclose
customer account numbers except to consumer reporting agencies;
and (3) must give prior disclosure of their privacy policies
before establishing new customer relationships.
The Company and the Bank have not determined whether or when
either of them may seek to acquire and exercise new powers or
activities under the FSMA, and the extent to which competition
will change among financial institutions affected by the FSMA has
not yet become clear.
On October 26, 2001, President Bush signed the USA Patriot Act
(the "Patriot Act"), which includes provisions pertaining to
domestic security, surveillance procedures, border protection,
and terrorism laws to be administered by the Secretary of the
Treasury. Title III of the Patriot Act entitled, "International
Money Laundering Abatement and Anti-Terrorist Financing Act of
2001" includes amendments to the Bank Secrecy Act which expand
the responsibilities of financial institutions in regard to
anti-money laundering activities with particular emphasis upon
international money laundering and terrorism financing activities
through designated correspondent and private banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act
prohibits any insured financial institution such as the Bank,
from providing correspondent accounts to foreign banks which do
not have a physical presence in any country (designated as "shell
banks"), subject to certain exceptions for regulated affiliates
of foreign banks. Section 313(a) also requires financial
institutions to take reasonable steps to ensure that foreign bank
correspondent accounts are not being used to indirectly provide
banking services to foreign shell banks, and Section 319(b)
requires financial institutions to maintain records of the owners
and agent for service of process of any such foreign banks with
whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act creates a
requirement for special due diligence for correspondent accounts
and private banking accounts. Under Section 312, each financial
institution that establishes, maintains, administers, or manages
a private banking account or a correspondent account in the
United States for a non-United States person, including a foreign
individual visiting the United States, or a representative of a
non-United States person shall establish appropriate, specific,
and, where necessary, enhanced, due diligence policies,
procedures, and controls that are reasonably designed to detect
and record instances of money laundering through those accounts.
The Company and the Bank are not currently aware of any account
relationships between the Bank and any foreign bank or other
person or entity as described above under Sections 313(a) or 312
of the Patriot Act. The terrorist attacks on September 11, 2001
have realigned national security priorities of the United States
and it is reasonable to anticipate that the United States
Congress may enact additional legislation in the future to combat
terrorism including modifications to existing laws such as the
Patriot Act to expand powers as deemed necessary. The effects
which the Patriot Act and any additional legislation enacted by
Congress may have upon financial institutions is uncertain;
however, such legislation would likely increase compliance costs
and thereby potentially have an adverse effect upon the Company's
results of operations.
Certain legislative and regulatory proposals that could affect
the Bank and the banking business in general are periodically
13
introduced before the United States Congress, the California
State Legislature and Federal and state government agencies. It
is not known to what extent, if any, legislative proposals will
be enacted and what effect such legislation would have on the
structure, regulation and competitive relationships of financial
institutions. It is likely, however, that such legislation could
subject the Company and the Bank to increases in regulation,
disclosure and reporting requirements, competition and the
Bank's cost of doing business.
In addition to legislative changes, the various federal and state
financial institution regulatory agencies frequently propose
rules and regulations to implement and enforce already existing
legislation. It cannot be predicted whether or in what form any
such rules or regulations will be enacted or the effect that such
and regulations may have on the Company and the Bank.
As of December 31, 2001, the Company employed 221 persons
primarily on a full time basis. None of the Company's employees
are represented by a labor union and the Company considers its
employee relations to be good
ITEM 2. PROPERTIES
The headquarters office and centralized operations of the Company
are located at 301 Main Street, Salinas, California. The Company
owns and leases properties that house administrative and data
processing functions and ten banking offices. Owned and leased
facilities are listed below.
301 Main Street 1658 Fremont Boulevard
Salinas, California Seaside, California
32,500 square feet 2,800 square feet
Leased (term expires 2007, Leased (term expires 2009
With two 7 1/2 year renewal with one 10 year renewal
options) options)
Current monthly rent of Current monthly rent of
$21,397.08 $5,273.04
10601 Merritt Street 228 Reservation Road
Castroville, California Marina, California
2,500 square feet 3,000 square feet
Owned Leased (term expires 2004
with three 5 year
renewal options)
Current monthly rent of
$3,090.00
400 Alta Street 599 Lighthouse Avenue
Gonzales, California Monterey, California.
5,175 square feet 2,160 square feet
Leased (term expires 2003 Leased (term expires 2004
with three 5 year renewal with two 10 year renewal
options) options)
Current monthly rent of Current monthly rent of
$4,132.00 $6,271.92
14
532 Broadway 155 Westridge Drive
King City, California Watsonville, California
4,000 square feet 971 square feet
Leased (term expires 2009 Leased (term expires 2003
with two 5 year renewal with two 3 year renewal
options) options)
Current monthly rent of Current monthly rent of
$5,160.00 $1,602.15
1285 North Davis Road 491 Tres Pinos Road
Salinas, California. Hollister, California
3,200 square feet 2,800 square feet
Leased (term expires 2008 Leased (term expires 2006
with two 5 year renewal with one 3 year renewal
options) option)
Current monthly rent of Current monthly rent of
$7,728.00 $3,920.00
761 First Street
Gilroy, California
2,670 square feet
Leased (dated February 2002)
term expires
2007 with one five year
renewal option)
Current monthly rent of
$5,206
The above leases contain options to extend for three to fifteen
years. Included in the above are two facilities leased from
shareholders at terms and conditions which management believes
are consistent with the commercial lease market. Rental rates
are adjusted annually for changes in certain economic indices.
The annual minimum lease commitments are set forth in Footnote 5
of Item 8 Financial Statements and Supplementary Data included in
this report and incorporated here by reference. The foregoing
summary descriptions of leased premises are qualified in their
entirety by reference to the lease agreements listed as exhibits
hereto at page 72.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the
Bank to which any director, officer, affiliate of the Company or
5% shareholder of the Company or the Bank, or any associate of
any such director, officer, affiliate or 5% shareholder of the
Company or Bank are a party, and none of the above persons has a
material interest adverse to the Company or the Bank.
Neither the Company nor the Bank are a party to any pending legal
or administrative proceedings (other than ordinary routine
litigation incidental to the Company's or the Bank's business)
and no such proceedings are known to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 2001.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is listed on the Nasdaq National
Market exchange (trading symbol: CCBN). The table below presents
the range of high and low prices for the common stock for the two
most recent fiscal years based on information provided to the
Company from Nasdaq. The prices have been restated to reflect
the 10% stock dividends paid in February 2000 and 2001 and the 5
for 4 stock split in February 2002.
Calendar Year Low High
- ------------- --- ----
2001
First Quarter $13.00 $ 15.80
Second Quarter 14.80 21.00
Third Quarter 15.40 20.08
Fourth Quarter 15.72 18.34
2000
First Quarter $10.42 $ 12.18
Second Quarter 10.64 11.64
Third Quarter 11.00 12.36
Fourth Quarter 12.18 13.41
The closing price for the Company's common stock was $18.62 as of
March 7, 2002.
(b) Holders
-------
As of March 7, 2002, there were approximately 2,300 holders of
the common stock of the Company. There are no other classes of
common equity outstanding.
(c) Dividends
---------
The Company's shareholders are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally
available therefor, subject to the restrictions set forth in the
California General Corporation Law (the "Corporation Law"). The
Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporation's retained
earnings equal at least the amount of the proposed distribution.
The Corporation Law further provides that, in the event that
sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution
to its shareholders if it meets two conditions, which generally
stated are as follows: (1) the corporation's assets equal at
least 1-1/4 times its liabilities; and (2) the corporation's
current assets equal at least its current liabilities or, if the
average of the corporation's earnings before taxes on income and
before interest expenses for the two preceding fiscal years was
less than the average of the corporation's interest expenses for
such fiscal years, then the corporation's current assets must
equal at least
16
1-1/4 times its current liabilities. Funds for payment of any
cash dividends by the Company would be obtained from its
investments as well as dividends and/or management fees from the
Bank.
The payment of cash dividends by the subsidiary Bank is subject
to restrictions set forth in the California Financial Code (the
"Financial Code"). The Financial Code provides that a bank may
not make a cash distribution to its shareholders in excess of the
lesser of (a) the bank's retained earnings; or (b) the bank's net
income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned
subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the
Commissioner, make a distribution to its shareholders in an
amount not exceeding the greater of (a) its retained earnings;
(b) its net income for its last fiscal year; or (c) its net
income for its current fiscal year. In the event that the
Commissioner determines that the shareholders' equity of a bank
is inadequate or that the making of a distribution by the bank
would be unsafe or unsound, the Commissioner may order the bank
to refrain from making a proposed distribution.
The FDIC may also restrict the payment of dividends if such
payment would be deemed unsafe or unsound or if after the payment
of such dividends, the bank would be included in one of the
"undercapitalized" categories for capital adequacy purposes
pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991. Additionally, while the Board of Governors has no
general restriction with respect to the payment of cash dividends
by an adequately capitalized bank to its parent holding company,
the Board of Governors might, under certain circumstances, place
restrictions on the ability of a particular bank to pay dividends
based upon peer group averages and the performance and maturity
of the particular bank, or object to management fees on the basis
that such fees cannot be supported by the value of the services
rendered or are not the result of an arm's length transaction.
Under these provisions and considering minimum regulatory capital
requirements, the amount available for distribution from the Bank
to the Company was approximately $9,003,000 as of December 31,
2001.
To date, the Company has not paid a cash dividend and presently
does not intend to pay cash dividends in the foreseeable future.
The Company distributed a five-for-four stock split in February
2002, a ten percent stock dividend in February 2001 and a ten
percent stock dividend in 2000. The Board of Directors will
determine payment of dividends in the future after consideration
of various factors including the profitability and capital
adequacy of the Company and the Bank.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data
concerning the business of the Company and its subsidiary Bank.
This information should be read in conjunction with the
Consolidated Financial Statements, the notes thereto, and
Management's Discussion and Analysis included in this report.
Earnings per share information has been adjusted retroactively
for all stock dividends and stock splits.
As of and for the Year Ended December 31
------------------------------------------------------------------------
In thousands (except per share data) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating Results
- -----------------
Total Interest Income $ 51,747 $ 51,415 $ 41,517 $ 37,354 $ 33,916
Total Interest Expense 18,360 18,290 13,648 13,319 12,041
------------------------------------------------------------------------
Net Interest Income 33,387 33,125 27,869 24,035 21,875
Provision for Loan Losses 2,635 3,983 1,484 159 64
------------------------------------------------------------------------
Net Interest Income After
Provision for Credit Losses 30,752 29,142 26,385 23,876 21,811
Noninterest Income 3,129 2,433 2,231 2,084 1,765
Noninterest Expenses 19,223 17,408 16,043 13,859 12,573
------------------------------------------------------------------------
Income before Income Taxes 14,658 14,167 12,573 12,101 11,003
Income Taxes 5,149 5,241 4,522 4,948 4,500
------------------------------------------------------------------------
Net Income $ 9,509 $ 8,926 $ 8,051 $ 7,153 $ 6,503
- ----------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.05 $ 0.94 $ 0.82 $ 0.78 $ 0.72
Diluted Earnings Per Share 1.01 0.91 0.80 0.72 0.66
- ----------------------------------------------------------------------------------------------------------------
Financial Condition and
Capital - Year-End Balances
Total Loans $ 606,300 $ 473,395 $ 395,597 $ 312,170 $ 255,494
Total Assets 802,266 706,693 593,445 543,933 497,674
Total Deposits 724,862 633,209 518,189 489,192 450,301
Shareholders' Equity 65,336 59,854 53,305 51,199 43,724
- ----------------------------------------------------------------------------------------------------------------
Financial Condition and
Capital - Average Balances
Total Loans $ 522,884 $ 424,172 $ 352,936 $ 275,850 $ 243,022
Total Assets 727,198 632,953 562,073 499,354 441,013
Total Deposits 648,664 565,487 494,266 447,598 396,457
Shareholders' Equity 62,918 55,762 52,069 47,587 39,969
- ----------------------------------------------------------------------------------------------------------------
Selected Financial Ratios
Rate of Return on:
Average Total Assets 1.31% 1.41% 1.43% 1.43% 1.47%
Average Shareholders' Equity 15.11% 16.01% 15.46% 15.03% 16.27%
Rate of Average Shareholders' Equity
to Total Average Assets 8.65% 8.81% 9.26% 9.53% 9.06%
- ----------------------------------------------------------------------------------------------------------------
18
(a) Average Balance Sheet and Net Interest Margin
---------------------------------------------
(1) Distribution of Assets, Liabilities and Equity;
Interest Rates and Interest Differential - Table One
in Item 7. - "Management's Discussion and Analysis"
included in this report sets forth the Company's
average balance sheets (based on daily averages) and an
analysis of interest rates and the interest rate
differential for each of the three years in the period
ended December 31, 2001 and is incorporated here by
reference.
(2) Volume/Rate Analysis - Information as to the impact of
changes in average rates and average balances on
interest earning assets and interest bearing
liabilities is set forth in Table Two in Item 7. -
"Management's Discussion and Analysis" and is
incorporated here by reference.
(b) Investment Portfolio
--------------------
(1) The book value of investment securities at December 31,
2001 and 2000 is set forth in Note 4 to the
Consolidated Financial Statements included in Item 8 -
"Financial Statements and Supplementary Data" included
in this report and is incorporated here by reference.
(2) The book value, maturities and weighted average yields
of investment securities as of December 31, 2001 are
set forth in Table Thirteen of Item 7. - "Management's
Discussion and Analysis" included in this report and is
incorporated here by reference.
(3) There were no issuers of securities for which the book
value was greater than 10% of shareholders' equity
other than U.S. Government and U.S. Government Agencies
and Corporations.
(c) Loan Portfolio
--------------
(1) The composition of the loan portfolio is summarized in
Table Three of Item 7. - "Management's Discussion and
Analysis" included in this report and is incorporated
here by reference.
(2) The maturity distribution of the loan portfolio at
December 31, 2001 is summarized in Table Twelve of Item
7. - "Management's Discussion and Analysis" included in
this report and is incorporated here by reference.
(3) Nonperforming Loans
-------------------
The Company's current policy is to cease accruing
interest when a loan becomes 90 days past due as to
principal or interest, when the full timely collection
of interest or principal becomes uncertain or when a
portion of the principal balance has been charged off,
unless the loan is well secured and in the process of
collection. When a loan is placed on nonaccrual
status, the accrued and uncollected interest receivable
is reversed and the loan is accounted for on the cash
or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be
returned to accrual status when all delinquent interest
and principal become current in accordance with the
terms of the loan agreement or when the loan is both
well secured and in process of collection.
19
A loan is considered to be impaired when it is probable
that the borrower will be unable to pay all of the
amounts due according to the contractual terms of the
loan agreement
For further discussion of nonperforming loans, refer to
Table Four and the "Risk Elements" section of Item 7. -
"Management's Discussion and Analysis" in this report.
(d) Summary of Loan Loss Experience
-------------------------------
(1) An analysis of the allowance for loan losses showing
charged off and recovery activity as of December 31,
2001 is summarized in Table Five of Item 7- "Management's
Discussion and Analysis" included in this report and is
incorporated here by reference. Factors used in
determination of the allowance for loan losses are
discussed in greater detail in the "Risk Elements"
section of Management's Discussion and Analysis included
in this report and are incorporated here by reference.
(2) Management believes that any allocation of the allowance
for probable loan losses into loan categories lends an
appearance of exactness, which does not exist in that
the allowance is utilized in total and is available for
all loans. Further, management believes that the
breakdown of historical losses as shown in Table Five of
Item 7 - "Management's Discussion and Analysis" included
in this report is a reasonable representation of
management's expectation of potential losses inherent in
the portfolio. However, the allowance for loan losses
should not be interpreted as an indication of when
charge-offs will occur or as an indication of future
charge-off trends.
For further discussion, refer to Table Six of Item 7. -
"Management's Discussion and Analysis" in this report.
(e) Deposits
--------
(1) Table One in Item 7. - "Management's Discussion and
Analysis" included in this report sets forth the
distribution of average deposits for the years ended
December 31, 2001, 2000 and 1999 and is incorporated here
by reference.
(2) Table Eleven in Item 7. - "Management's Discussion and
Analysis" included in this report sets forth the
maturities of time certificates of deposit of $100,000 or
more at December 31, 2001 and is incorporated here by
reference.
(f) Return on Equity and Assets
---------------------------
(1) The Selected Financial Data table at page 16 of this
section sets forth the ratios of net income to average
assets and average shareholders' equity, and average
hareholders' equity to average assets. As the Company
has never paid a cash dividend, the dividend payout ratio
is not indicated.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this
Annual Report on Form 10-K including, but not limited to, matters
described in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations," are
forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. Changes to such risks and
uncertainties, which could impact future financial performance,
include, among others, (1) competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3)
general economic conditions, nationally, regionally and in
operating market areas, including a decline in real estate values
in the Company's market areas; (4) 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 Annual
Report should be read to put such forward-looking statements in
context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company
and the Bank.
Critical Accounting Policies
- ----------------------------
General
Central Coast Bancorp's financial statements are prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). The financial information
contained within our statements is, to a significant extent,
financial information that is based on measures of the financial
effects of transactions and events that have already occurred.
We use historical loss factors as one factor in determining the
inherent loss that may be present in our loan portfolio. Actual
losses could differ significantly from the historical factors
that we use. Other estimates that we use are related to the
expected useful lives of our depreciable assets. In addition GAAP
itself may change from one previously acceptable method to
another method. Although the economics of our transactions would
be the same, the timing of events that would impact our
transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that
may be sustained in our loan portfolio. The allowance is based
on two basic principles of accounting. (1) Statement of Financial
Accountings Standards (SFAS) No. 5 "Accounting for
Contingencies", which requires that losses be accrued when they
are probable of occurring and estimable and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", which requires
that losses be accrued based on the differences between the value
of collateral, present value of future cash flows or values that
are observable in the secondary market and the loan balance.
Our allowance for loan losses has three basic components: the
formula allowance, the specific allowance and the unallocated
allowance. Each of these components is determined based upon
21
estimates that can and do change when the actual events occur.
The formula allowance uses an historical loss view as an
indicator of future losses and as a result could differ from the
loss incurred in the future. However, since this history is
updated with the most recent loss information, the errors that
might otherwise occur are mitigated. The specific allowance uses
various techniques to arrive at an estimate of loss. Historical
loss information, and fair market value of collateral are used to
estimate those losses. The use of these values is inherently
subjective and our actual losses could be greater or less than
the estimates. The unallocated allowance captures losses that
are attributable to various economic events, industry or
geographic sectors whose impact on the portfolio have occurred
but have yet to be recognized in either the formula or specific
allowances. For further information regarding our allowance for
credit losses, see page 33.
Business Organization
Central Coast Bancorp (the "Company") is a California corporation,
located in Salinas, California and was organized in 1994 to act as
a bank holding company for Bank of Salinas. In 1996, the Company
acquired Cypress Bank, which was headquartered in Seaside,
California. Both banks were state-charted institutions. In July
of 1999, the Company merged Cypress Bank into the Bank of Salinas
and then renamed Bank of Salinas as Community Bank of Central
California (the "Bank"). As of December 31, 2001, the Bank
operated ten full-service branch offices and one limited-service
branch office. The Bank is headquartered in Salinas and serves
individuals, merchants, small and medium-sized businesses,
professionals, agribusiness enterprises and wage earners located
in the tri-county area of Monterey, San Benito and Santa Cruz.
In June of 2000, the Bank opened a new branch office in
Watsonville, which is in Santa Cruz County. In October of 2000,
another new branch office was opened in Hollister, which is in
San Benito County. The opening of these two branch offices was a
first step in expanding the Bank's service area to include
communities in contiguous counties outside of Monterey County. In
February 2002, the Bank received regulatory approval to open a new
branch in Gilroy, California. The estimated opening date for the
branch is April 15, 2002. Gilroy is located at the southern end of
the Santa Clara Valley in Santa Clara County. These three
communities are of similar economic make-up to the agricultural
based communities the Bank serves in Monterey County.
Until August 16, 2001, the Company conducted no significant
activities other than holding the shares of the subsidiary Bank.
On August 16, 2001 the Company notified the Board of Governors of
the Federal Reserve System (the "Board of Governors"), the
Company's principal regulator, that the Company was engaged in
certain lending activities. The Company purchased a loan from
the Bank that the Bank had originated for a local agency that was
categorized as a large issuer for taxation purposes. The Company
is able to use the tax benefits of such loans. The Company may
purchase similar loans in the future. Upon prior notification to
the Board of Governors, the Company is authorized to engage in a
variety of activities, which are deemed closely related to the
business of banking.
The following analysis is designed to enhance the reader's
understanding of the Company's financial condition and the
results of its operations as reported in the Consolidated
Financial Statements included in this Annual Report. Reference
should be made to those statements and the "Selected Financial
Data" presented elsewhere in this report for additional detailed
information. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of
average daily balances for the Company. Except within the
"overview" section below, interest income and net interest income
are presented on a tax equivalent basis.
22
Overview
For the 18th consecutive year, Central Coast Bancorp earned
record net income on a year-over-year basis. Net income in 2001
increased 6.5% to $9,509,000 versus $8,926,000 in 2000. Diluted
earnings per share for 2001, after giving effect to the 5 for 4
stock split distributed on February 28, 2002, was $1.01, up
11.0% from the $0.91 reported for 2000. For 2001, the Company
realized a return on average equity of 15.1% and a return on
average assets of 1.31%, as compared to 16.0% and 1.41% for 2000.
During 2001, total assets of the Company increased $95,573,000
(13.5%) to a total of $802,266,000 at year-end. At December 31,
2001, loans totaled $606,300,000, up $132,905,000 (28.1%) from
the ending balances on December 31, 2000. Deposit growth in 2001,
which includes $30,000,000 of State of California certificates of
deposit, was $91,652,000 (14.5%). Deposits totaled $724,862,000
at year-end 2001.
These past two years have presented very different economic
conditions for the banking business. In 2000, interest rates
were increasing with the prime rate ending the year at 9.50%.
Competition for deposits was strong and by December 31, 2000
typical rates on one-year certificates of deposit exceeded 6%.
On January 4, 2001, the Federal Reserve Bank made the first of
eleven rate cuts during the year, which totaled 475 basis points
resulting in a in a prime rate of 4.75% at December 31, 2001. At
each rate cut variable rate loans repriced immediately or by the
quarter end. Rates paid on deposit products were lowered as
market conditions allowed and generally lagged the reduction in
loan rates. The market rate for a one-year certificate at
December 31, 2001was approximately 2.25%. However, certificates
of deposit with longer average maturities will not reflect the
decline in rates until they reprice at maturity. Thus, throughout
2001 as earning assets repriced more quickly than
interest-bearing liabilities, the net interest margin declined
with a resulting downward pressure on earnings. The increase in
earning assets helped to offset the decline in yields. While the
economic conditions for the past two years were very different,
our community based banking model has provided the Company with
continued growth in customer base, assets and earnings. We are
proud of our record of 18 consecutive years of increased
earnings, particularly in the face of the current economic and
interest rate environment.
In June and October of 2000, the Bank opened new branch offices
in Hollister and Watsonville. Both of these branches exceeded
their budgeted loan and deposit targets. The San Benito Chamber
of Commerce designated the Hollister branch as the "Professional
Service Business of the Year." The award is an extraordinary
accomplishment for a business in its first year of operation. We
are very proud of the way in which both of these new branches
have become an integral part of their respective community in
such a short time. The success of these branches reinforces our
strategy of expanding the Bank's footprint by opening traditional
branches in communities with a similar economic base and
structure to our existing markets. As announced, the Bank will
open a new branch in Gilroy early in 2002. We anticipate opening
one additional branch later this year.
Looking forward into 2002, it appears the year will provide
another challenging economic environment. If the short-term
interest rates do not decrease further, we would expect the
Bank's net interest margin to be slightly lower than the fourth
quarter 2001 rate of about 4.81%. Current economic data suggests
that the country will have a slow recovery. With these factors
in mind, the key for earnings growth is to continue to develop
solid banking relationships, emphasize loan quality and control
costs. In this, the Bank's twentieth year of operations, we
expect to continue our record of continued earnings growth based
on our current evaluation of economic data available to us.
23
(A) Results of Operations
Net Interest Income/Net Interest Margin (fully taxable equivalent)
Net interest income represents the excess of interest and fees
earned on interest-earning assets (loans, securities and federal
funds sold) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a
percentage of average earning assets.
Net interest income for 2001 was $34,489,000, a $562,000 (1.7%)
increase over 2000. The rapidly changing interest rates in 2001
had a significant impact on the Bank's interest income and
interest expense during the year. Interest income increased
$632,000 (1.2%) to total $52,849,000 in 2001. The average balance
of loans outstanding in 2001 was $96,002,000 (23.0%) higher than
it was in 2000. This higher volume of loans contributed
$9,559,000 to interest income from the prior year results. The
average rate received on loans decreased from 9.93% in 2000 to
8.41% in 2001. This decrease of 152 basis points reduced
interest income $7,829,000. In December of 2000 and during the
first quarter of 2001, the Bank increased its holdings of tax
exempt securities. This resulted in an increase of $899,000 in
interest earned on tax-exempt securities in 2001, of which,
$798,000 was due do higher volume and $101,000 was due to higher
rates. Both the average rate and balance decreased on taxable
investment securities resulting in a decrease of $1,340,000 in
interest income. Interest earned on Fed funds sold was down
$657,000 due both to the volume and rates. Overall, the average
rate received on earning assets in 2001 decreased 116 basis
points to 7.89% from the 9.05% received in 2000.
Interest expense was $70,000 higher in 2001 over 2000, as the
lower rates paid approximately offset the increase in the volume
of interest bearing liabilities. Average balances of
interest-bearing liabilities were higher in 2001 by $56,905,000,
which added $2,694,000 to interest expense. Average rates paid
on interest-bearing liabilities were down 49 basis points for the
year. The lower rates reduced interest expense in 2001 by
$2,624,000. Interest paid on interest bearing liabilities
generally adjusts more slowly in response to market rate changes
as time deposits and borrowings adjust at maturity.
As rates continued to come down in the fourth quarter of 2001,
the average rates received on earning assets and the rates paid
on interest-bearing liabilities decreased accordingly. In the
fourth quarter, the average rate received on earning assets was
6.98% down from 9.16% in the year-ago period. The average rate
paid on interest-bearing liabilities was 3.07% versus 4.49% in
the fourth quarter of 2000. The net interest margin for the two
periods was 4.81% and 5.93%, respectively. With no further rate
cuts in the first quarter of 2002, management expects the net
interest margin will be slightly lower than the 4.81% achieved in
the fourth quarter.
Net interest income for 2000 was $33,927,000, a $5,293,000
(18.5%) increase over 1999. The interest income component was up
$9,935,000 to $52,217,000 (23.5%). About 65% of the increase was
attributable to growth in the earning assets with the balance due
to rates. Average outstanding loan balances of $417,075,000 for
2000 reflected a 19.8% increase over 1999 balances. This
increase contributed an additional $6,388,000 to interest
income. From July 1, 1999 through May 15, 2000, the Federal
24
Reserve Board raised interest rates six times for a total of 175
basis points. The higher interest rates increased the average
yield on loans 67 basis points, which added $2,783,000 to
interest income. The securities portfolio average balances
decreased $12,066,000 (7.8%), which offset the increases in
interest income by $757,000. The average yield received on
securities was up 44 basis points and added $613,000 to interest
income. Federal Funds sold interest income increased $908,000
due to both higher average balances and higher rates.
Interest expense increased $4,642,000 (34.0%) in 2000 over 1999.
The average balances of interest bearing liabilities increased
$49,628,000 (13.2%). The higher average balances resulted from a
$58,677,000 (36.8%) increase in time deposits offset in part by
an $8,768,000 decrease in interest bearing checking accounts. At
times during 2000, the Bank had up to $40,000,000 in time
deposits from the State of California. This compares to a maximum
of $20,000,000 in 1999. Interest paid on time certificates in
2000 increased $4,569,000, which accounted for most of the
overall increase in interest expense. Interest expense
attributable to the higher volume in time deposits was $2,934,000
and the higher rates added $1,635,000. Average rates paid on
time certificates were 75 basis points higher in 2000. Rates
paid on all interest bearing liabilities were 66 basis points
higher in 2000 than in 1999. Net interest margin for 2000 was
5.88% versus 5.65% in 1999.
Table One, Analysis of Net Interest Margin on Earning Assets, and
Table Two, Analysis of Volume and Rate Changes on Net Interest
Income and Expenses, are provided to enable the reader to
understand the components and past trends of the Banks' interest
income and expenses. Table One provides an analysis of net
interest margin on earning assets setting forth average assets,
liabilities and shareholders' equity; interest income earned and
interest expense paid and average rates earned and paid; and the
net interest margin on earning assets. Table Two presents an
analysis of volume and rate change on net interest income and
expense.
25
Table One: Analysis of Net Interest Margin on Earning Assets
- -----------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis) 2001 2000 1999
Avg. Avg. Avg. Avg. Avg. Avg.
In thousands (except Balance Interest Yield Balance Interest Yield Balance Interest Yield
percentages) ------- -------- ----- ------- -------- ------ ------- -------- -----
Assets:
Earning Assets
Loans (1) (2) $513,077 $ 43,135 8.41% $417,075 $ 41,405 9.93% $ 348,086 $ 32,234 9.26%
Taxable investment
securities 99,488 6,000 6.03% 106,754 7,340 6.88% 120,422 7,596 6.31%
Tax-exempt investment
securities (3) 48,691 3,307 6.79% 36,601 2,408 6.58% 34,999 2,296 6.56%
Federal funds sold 8,745 407 4.65% 16,857 1,064 6.31% 3,153 156 4.95%
--------------------- -------------------- --------------------
Total Earning Assets 670,001 $ 52,849 7.89% 577,287 $ 52,217 9.05% 506,660 $ 42,282 8.35%
---------- --------- ----------
Cash & due from banks 42,551 39,432 42,595
Other assets 14,646 16,234 12,818
----------- ----------- ----------
$727,198 $632,953 $ 562,073
=========== =========== ==========
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $ 97,785 $ 1,254 1.28% $ 94,948 $ 1,551 1.63% $ 103,716 $ 1,792 1.73%
Savings 129,358 3,940 3.05% 107,075 3,820 3.57% 105,000 3,447 3.28%
Time deposits 247,388 12,732 5.15% 218,330 12,549 5.75% 159,653 7,980 5.00%
Other borrowings 8,496 434 5.11% 5,769 370 6.41% 8,125 429 5.28%
--------------------- -------------------- --------------------
Total interest bearing
liabilities 483,027 18,360 3.80% 426,122 18,290 4.29% 376,494 13,648 3.63%
---------- --------- ----------
Demand deposits 174,133 145,134 125,897
Other Liabilities 7,120 5,935 7,613
----------- ----------- ----------
Total Liabilities 664,280 577,191 510,004
Shareholders' Equity 62,918 55,762 52,069
----------- ----------- ----------
$727,198 $632,953 $ 562,073
=========== =========== ==========
Net interest income &
Margin (4) $ 34,489 5.15% $ 33,927 5.88% $ 28,634 5.65%
================= =============== ===================
- -----------------------------------------------------------------------------------------------------------------
1. Loans interest includes loan fees of $1,387,000, $997,000 and $1,096,000 in 2001, 2000 and 1999.
2. Average balances of loans include average allowance for loan losses of $9,807,000, $7,097,000 and $4,850,000 and average deferred
loan fees of $978,000, $719,000 and $796,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
3. Includes taxable-equivalent adjustments for income on securities that is exempt from
federal income taxes. The federal statutory tax rate was 35% for 2001, 2000 and 1999.
4. Net interest margin is computed by dividing net interest income by total average earning assets.
26
Table Two: Volume/Rate Analysis
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 over 2000 (In thousands)
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $ 9,559 $ (7,829) $ 1,730
Taxable investment securities (501) (839) (1,340)
Tax-exempt investment securities (3) 798 101 899
Federal funds sold (513) (144) (657)
----------- ----------- -----------
Total 9,343 (8,711) 632
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits 46 (343) (297)
Savings deposits 798 (678) 120
Time deposits 1,675 (1,492) 183
Other borrowings 175 (111) 64
----------- ----------- -----------
Total 2,694 (2,624) 70
----------- ----------- -----------
Interest differential $ 6,649 $ (6,087) $ 562
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000 over 1999 (In thousands)
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $ 6,388 $ 2,783 $ 9,171
Taxable investment securities (862) 606 (256)
Tax-exempt investment securities(3) 105 7 112
Federal funds sold 678 230 908
----------- ----------- -----------
Total 6,309 3,626 9,935
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits (152) (89) (241)
Savings deposits 68 305 373
Time deposits 2,934 1,635 4,569
Other borrowings (124) 65 (59)
----------- ----------- -----------
Total 2,726 1,916 4,642
----------- ----------- -----------
Interest differential $ 3,583 $ 1,710 $ 5,293
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
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 $1,387,000, $997,000 and $1,096,000 for the years ended December 31, 2001, 2000 and 1999, respectively, have
been included in the interest income computation.
3. Includes taxable-equivalent adjustments for income on securities that is exempt from federal income taxes. The federal statutory
tax rate was 35% for 2001, 2000 and 1999.
4. The rate / volume variance has been included in the rate variance.
27
Provision for Loan Losses
The Bank provided $2,635,000 for loan losses in 2001 as compared
to $3,983,000 in 2000. The 2000 provision included $1,185,000 as
a reserve for certain classified loans to a single borrower.
During 2001, reductions in outstanding balances on those loans
allowed for a reallocation of $370,000 of that allowance. The
remaining decrease in the amount of the provision for loan losses
is due to the change of loans inside the loan portfolio and the
individual analysis of loan loss allowance required for each. Net
loan charge-offs were $253,000 in 2001 compared to $208,000 in
2000. The ratio of net charge-offs to average loans outstanding
was 0.05% in each of the two years. The ratios of the allowance
for loan losses to total loans - net of deferred fees were 1.94%
at December 31, 2001 and 1.98% at December 31, 2000.
In 2000, the Bank provided $3,983,000 for loan losses as compared
to $1,484,000 in 1999. In providing for the allowance for loan
losses the Company considered the significant growth in the loan
portfolio of $77,798,000 (19.7%), geographic and industry
concentrations, expansion into new geographic markets, and
volatility and weaknesses in the local economy, including
potential effects of power shortages, water supply, and volatile
market prices for agricultural products. In addition, as
mentioned in the preceding paragraph, $1,185,000 was provided for
classified loans to a single borrower. Net loans charged-off in
1999 totaled $240,000 or 0.07% of average loans outstanding. The
allowance for loan losses to total loans - net of deferred fees
at December 31, 1999 was 1.41%.
Service Charges and Fees and Other Income
Noninterest income in 2001 increased $696,000 (28.6%) over 2000
to a total of $3,129,000. Service charges and fees related to
deposit accounts increased $175,000 (10.0%) due to increased
business activity. The low interest rates generated increased
business for the Bank's mortgage origination activities. Fees
related to this activity doubled to $334,000 in 2001 from
$167,000 in 2000. The activity in mortgage refinancing is
expected to decline somewhat in 2002. Of the total increase,
$362,000 is related to securities transactions. In 2001, the
Bank realized gains of $168,000 on the sale of investment
securities versus a loss of $194,000 in 2000.
Noninterest income was up $202,000 (9.1%) in 2000 over the same
period in 1999. Service charges and fees related to deposit
accounts increased $401,000 (29.8%) due to higher volumes, the
full year effect of new fees implemented in late 1999 and new
products. Noninterest income was negatively impacted in the
fourth quarter of 2000 as the Bank realized a loss of $194,000 on
the sale and repositioning of investment securities. In all of
1999, the Bank had a realized gain of $45,000 on the sale of
investment securities.
Salaries and Benefits
Salary and benefit expenses increased $1,538,000 (15.3%) in 2001
over 2000. The two new branches opened in mid to late 2000
accounted for $567,000 of the increase on a year-over-year
basis. Salaries and benefits from all other operations were up
$971,000 (9.9%). Due to normal merit reviews and staffing
additions during the year, base salaries increased $653,000
(9.0%) Benefit costs increased commensurate with the salaries. At
the end of 2001, the full time equivalent (FTE) staff was 221
versus 211 at the end of 2000.
For 2000, increases in salaries and benefits totaled $965,000
(10.6%). Salary expenses related to the staffing of the two new
branch offices opened in the second half of the 2000 accounted
28
for $287,000 of the increase. Salaries and benefits from
continuing operations were up $678,000 (7.4%). Base salaries
increased $421,000 (6.2%) due to normal merit reviews,
competitive salary adjustments and staffing additions during the
year. Benefit costs increased commensurate with the salaries.
At the end of 2000, the full time equivalent (FTE) staff was 211
versus 204 at the end of 1999.
Occupancy and Furniture and Equipment
Occupancy and furniture and equipment expense increased $294,000
(9.2%) to total $3,475,000 in 2001. The two branches opened in
mid to late 2000 accounted for $121,000 of the increase on a
year-over-year basis. Higher energy costs added $45,000, an
increase of 29.2% exclusive of the new branches. Equipment
related expenses and depreciation increased $108,000 (6.5%) after
adjustment for the new branches.
Occupancy and fixed assets expense increased $542,000 (20.5%) in
2000 over 1999. The new Hollister and Watsonville branch offices
accounted for $81,000 of the increase. For the rest of the
Company, occupancy and fixed assets expense increased $461,000
(17.4%). Much of the increase is attributable to the full year
effect of the relocation of two branch offices and remodeling of
one branch office and operations office space during 1999.
Other Expenses
For the second consecutive year, other expenses declined slightly
from the prior year level. In 2001, other expenses totaled
$4,129,000 down $17,000 from 2000. Adjusted for the two new
branches added in 2000, other expenses were down $29,000. With
the declining interest rate environment and the weak economic
conditions in 2001, management made a concerted effort to control
these costs. Cost control will be a continuing theme in 2002.
The efficiency ratio (fully taxable equivalent), calculated by
dividing noninterest expense by the sum of net interest income
and noninterest income, for 2001 was 51.1% as compared to 47.9%
in 2000.
Other expenses were down $142,000 (3.3%) in 2000 from 1999. The
two new branch offices incurred other expenses totaling $45,000.
Thus, other expenses for other operations decreased $187,000
(4.4%). In 1999, the Bank incurred one-time costs of
approximately $263,000 associated with the merger of the Bank of
Salinas and Cypress Bank to form Community Bank of Central
California. Normal price increases and growth in the Bank's
operations accounted for the remaining higher expenses. The
efficiency ratio (fully taxable equivalent) for 1999 was 52.0%.
Provision for Taxes
The effective tax rate on income was 35.1%, 37.0% and 36.0% in
2001, 2000 and 1999, respectively. In November and December of
2000 and in the first quarter of 2001, the Bank purchased
approximately $12,600,000 of fixed rate municipal bonds. As a
result, in 2001 tax-exempt interest income on a tax equivalent
basis increased to be 6.26% of total interest income from 4.61%
in 2000. Accordingly, the effective tax rate fell 1.9% in 2001.
The effective tax rate of the Company was higher in 2000 over
1999 as tax-exempt instruments were a smaller percentage of
earning assets. The effective tax rate was greater than the
federal statutory tax rate due to state tax expense of
$1,858,000, $1,513,000 and $1,326,000 in these years. Tax-exempt
income of $2,754,000 $2,082,000 and $1,998,000 from investment
securities and loans in these years helped to reduce the
effective tax rate.
29
(B) Balance Sheet Analysis
Central Coast Bancorp's total assets at December 31, 2001 were
$802,266,000 compared to $706,693,000 at December 31, 2000,
representing an increase of 13.5%. The average balance of total
assets was $727,198,000 in 2001, which represents an increase of
14.9% totaling $94,245,000 over the average total asset balance
of $632,953,000 in 2000.
Loans
The Bank concentrates its lending activities in four principal
areas: commercial loans (including agricultural loans); real
estate construction loans (both commercial and personal); real
estate-other loans and consumer loans. At December 31, 2001,
these four categories accounted for approximately 33%, 14%, 50%
and 3% of the Bank's loan portfolio, respectively, as compared to
36%, 12%, 50% and 2% at December 31, 2000. The Bank has
developed a very successful loan calling officer program. On a
year-over-year basis beginning in 1997, the annual percentage of
loan growth has been 6%, 22%, 27%, 20% and 28%. The Bank has
attracted many new loan customers as well as better serving
existing customers. All categories of loans reflect increased
growth in 2001. The largest growth took place in the real
estate-other category. However, the largest percentage gain of
59.1% was in the consumer category. A concerted effort was made
in 2001 to offer a broader and more competitive package of
consumer loans. Table Three summarizes the composition of the
loan portfolio for the past five years as of December 31:
Table Three: Loan Portfolio Composite
- -------------------------------------------------------------------------------------------------------------
In thousands 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Commercial $ 199,761 $ 171,631 $ 159,385 $ 136,685 $ 124,714
Real Estate:
Construction 85,314 57,780 35,330 19,929 14,645
Other 306,622 234,890 188,600 144,685 107,354
Consumer 15,653 9,840 13,003 11,545 9,349
Deferred Loans Fees (1,050) (746) (721) (674) (568)
- -------------------------------------------------------------------------------------------------------------
Total Loans 606,300 473,395 395,597 312,170 255,494
Allowance for
Loan Losses (11,753) (9,371) (5,596) (4,352) (4,223)
- -------------------------------------------------------------------------------------------------------------
Total $ 594,547 $ 464,024 $ 390,001 $ 307,818 $ 251,271
=============================================================================================================
The majority of the Bank's loans are direct loans made to
individuals, local businesses and agri-businesses. The Bank
relies substantially on local promotional activity, personal
contacts by Bank officers, directors and employees to compete
with other financial institutions. The Bank makes loans to
borrowers whose applications include a sound purpose, a viable
repayment source and a plan of repayment established at inception
and generally backed by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs,
loans for equipment purchases, working capital, and various other
business loan products. Consumer loans include a range of
traditional consumer loan products offered by the Bank such as
personal lines of credit and loans to finance purchases of autos,
boats, recreational vehicles, mobile homes and various other
consumer items. The construction loans are generally composed of
commitments to customers within the Bank's service area for
30
construction of both commercial properties and custom and
semi-custom single family residences. Other real estate loans
consist primarily of loans to the Bank's depositors secured by
first trust deeds on commercial and residential properties
typically with short-term maturities and original loan to value
ratios not exceeding 75%. In general, except in the case of
loans with SBA guarantees, the Bank does not make long-term
mortgage loans; however, the Bank has informal arrangements in
place with mortgage lenders to assist customers in securing
single-family mortgage financing.
Average net loans in 2001 were $513,077,000 representing an
increase of $96,002,000 or 23.0% over 2000. Average net loans in
2000 were $417,075,000 representing an increase of $68,989,000 or
19.8% over 1999.
Risk Elements - The Bank assesses and manages credit risk on an
ongoing basis through stringent credit review and approval
policies, extensive internal monitoring and established formal
lending policies. Additionally, the Bank contracts with an
outside loan review consultant to periodically grade new loans
and to review the existing loan portfolio. Management believes
its ability to identify and assess risk and return
characteristics of the Company's loan portfolio is critical for
profitability and growth. Management strives to continue the
historically low level of loan losses by continuing its emphasis
on credit quality in the loan approval process, active credit
administration and regular monitoring. With this in mind,
management has designed and implemented a comprehensive loan
review and grading system that functions to continually assess
the credit risk inherent in the loan portfolio.
Ultimately, the credit quality of the Bank's loans may be
influenced by underlying trends in the national and local
economic and business cycles. The Bank's business is mostly
concentrated in Monterey County. The County's economy is highly
dependent on the agricultural and tourism industries. The
agricultural industry is also a major driver of the economies of
San Benito County and the southern portions of Santa Cruz and
Santa Clara Counties, which represent the areas of the Bank's
branch expansion plan. As a result, the Bank lends money to
individuals and companies dependent upon the agricultural and
tourism industries.
The Company has significant extensions of credit and commitments
to extend credit which are secured by real estate, totaling
approximately $453 million at December 31, 2001. Although
management believes this real estate concentration has no more
that the normal risk of collectibility, a substantial decline in
the economy in general, or a decline in real estate values in the
Bank's primary market areas in particular, could have an adverse
impact on the collectibility of these loans. The ultimate
recovery of these loans is generally dependent on the successful
operation, sale or refinancing of the real estate. The Bank
monitors the effects of current and expected market conditions
and other factors on the collectibility of real estate loans.
When, in management's judgment, these loans are impaired, an
appropriate provision for losses is recorded. The more
significant assumptions management considers involve estimates of
the following: lease, absorption and sale rates; real estate
values and rates of return; operating expenses; inflation; and
sufficiency of collateral independent of the real estate
including, in limited instances, personal guarantees. Not
withstanding the foregoing, abnormally high rates of impairment
due to general/local economic conditions could adversely affect
the Company's future prospects and results of operations.
In extending credit and commitments to borrowers, the Bank
generally requires collateral and/or guarantees as security. The
repayment of such loans is expected to come from cash flow or
from proceeds from the sale of selected assets of the borrowers.
The Bank's requirement for collateral and/or guarantees is
determined on a case-by-case basis in connection with
management's evaluation of the credit-worthiness of the borrower.
31
Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, income-producing
properties, residences and other real property. The Bank secures
its collateral by perfecting its interest in business assets,
obtaining deeds of trust, or outright possession among other
means. Loan losses from lending transactions related to real
estate and agriculture compare favorably with the Bank's loan
losses on its loan portfolio as a whole.
Management believes that its lending policies and underwriting
standards will tend to mitigate losses in an economic downturn,
however, there is no assurance that losses will not occur under
such circumstances. The Bank's loan policies and underwriting
standards include, but are not limited to, the following: 1)
maintaining a thorough understanding of the Bank's service area
and limiting investments outside of this area, 2) maintaining a
thorough understanding of borrowers' knowledge and capacity in
their field of expertise, 3) basing real estate construction loan
approval not only on salability of the project, but also on the
borrowers' capacity to support the project financially in the
event it does not sell within the original projected time period,
and 4) maintaining conforming and prudent loan to value and loan
to cost ratios based on independent outside appraisals and
ongoing inspection and analysis by the Bank's construction
lending officers. In addition, the Bank strives to diversify the
risk inherent in the construction portfolio by avoiding
concentrations to individual borrowers and on any one project.
Nonaccrual, Past Due and Restructured Loans
Management generally places loans on nonaccrual status when they
become 90 days past due, unless the loan is well secured and in
the process of collection. Loans are charged off when, in the
opinion of management, collection appears unlikely. Table Four
sets forth nonaccrual loans, loans past due 90 days or more, and
restructured loans performing in compliance with modified terms,
for December 31:
Table Four: Non-Performing Loans
- -------------------------------------------------------------------------------------------------------
In thousands 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing
Commercial $ 68 $ 215 $ 51 $ 73 $ 73
Real estate - 10 303 1,174 6
Consumer and other 12 5 - - -
- -------------------------------------------------------------------------------------------------------
80 230 354 1,247 79
- -------------------------------------------------------------------------------------------------------
Nonaccrual:
Commercial 702 329 11 333 188
Real estate 592 - 1,565 543 628
Consumer and other - - - - -
- -------------------------------------------------------------------------------------------------------
1,294 329 1,576 876 816
- -------------------------------------------------------------------------------------------------------
Restructured (in compliance with modified
terms)- Commercial 955 1,010 - - -
- -------------------------------------------------------------------------------------------------------
Total $ 2,329 $ 1,569 $ 1,930 $ 2,123 $ 895
=======================================================================================================
Interest due but excluded from interest income on nonaccrual
loans was approximately $45,000 in 2001, $64,000 in 2000 and
$82,000 in 1999. In 2001 and 1999, interest income recognized
from payments received on nonaccrual loans was $69,000 and
$21,000, respectively (none was recognized in 2000).
A loan is impaired when, based on current information and events,
it is probable that the Company will be unable to collect all
32
amounts due according to the contractual terms of the loan
agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent.
At December 31, 2001, the recorded investment in loans that are
considered impaired was $2,418,000 of which $1,294,000 is
included in nonaccrual loans, and $955,000 is included in
restructured loans above. Impaired loans had a valuation
allowance of $536,000. The average recorded investment in
impaired loans during 2001 was $2,638,000. The Company
recognized interest income on impaired loans of $191,000,
$161,000 and $92,000 in 2001, 2000 and 1999, respectively
(including interest income of $98,000 on restructured loans in
2001 and in 2000).
There were no troubled debt restructurings or loan concentrations
in excess of 10% of total loans not otherwise disclosed as a
category of loans as of December 31, 2001. Management is not
aware of any potential problem loans, which were accruing and
current at December 31, 2001, where serious doubt exists as to
the ability of the borrower to comply with the present repayment
terms.
The Company held no real estate acquired by foreclosure at
December 31, 2001 or 2000.
Allowance for Loan Losses
The Bank maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance is based on our
regular assessments of the probable estimated losses inherent in
the loan portfolio and to a lesser extent, unused commitments to
provide financing. Determining the adequacy of the allowance is
a matter of careful judgment, which reflects consideration of all
significant factors that affect the collectibility of the
portfolio as of the evaluation date. Our methodology for
measuring the appropriate level of the allowance relies on
several key elements, which include the formula allowance,
specific allowances for identified problem loans and the
unallocated reserve. The unallocated allowance contains amounts
that are based on management's evaluation of conditions that are
not directly measured in the determination of the formula and
specific allowances.
The formula allowance is calculated by applying loss factors to
outstanding loans and certain unused commitments, in each case
based on the internal risk grade of such loans and commitments.
Changes in risk grades of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are
based on our historical loss experience and may be adjusted for
significant factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date. At
December 31, 2001 the formula allowance was $9,043,000 compared
to $7,336,000 at December 31, 2000. The increase in the formula
allowance was primarily a result of the growth in loan balances
in this category of $134,904,000 in 2001.
In addition to the formula allowance calculated by the
application of the loss factors to the standard loan categories,
certain specific allowances may also be calculated. Quarterly,
all criticized loans are analyzed individually based on the
source and adequacy of repayment and specific type of collateral,
and an assessment is made of the adequacy of the formula reserve
relative to the individual loan. A specific allocation higher
than the formula reserve will be calculated based on the
higher-than-normal probability of loss and/or a collateral
shortfall. At December 31, 2001 the specific allowance was
$1,678,000 on loan base of $18,922,000 compared to a specific
33
allowance of $1,111,000 on a loan base of $8,076,000 at December
31, 2000. The increase in the specific allowance in 2001 was
primarily attributable to one credit, which was performing at
year-end.
The unallocated allowance contains amounts that are based on
management's evaluation of conditions that are not directly
measured in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem loans or
portfolio segments. At December 31, 2001 the unallocated
allowance was $1,032,000 compared to $925,000 at December 31,
2000. The conditions evaluated in connection with the unallocated
allowance include the following at the balance sheet date:
o The current national and local economic and business conditions,
trends and developments, including the condition of various
market segments within our lending area;
o Changes in lending policies and procedures, including
underwriting standards and collection, charge-off, and recovery
practices;
o Changes in the nature, mix, concentrations and volume of the
loan portfolio;
o The effect of other external factors such as competition and
legal and regulatory requirements on the level of estimated
credit losses in the Bank's current portfolio.
There can be no assurance that the adverse impact of any of these
conditions on the Bank will not be in excess of the unallocated
allowance as determined by Management at December 31 2001 and set
forth in the preceding paragraph.
The allowance for loan losses totaled $11,753,000 or 1.94% of
total loans at December 31, 2001 compared to $9,371,000 or 1.98%
at December 31, 2000. At those two dates, the allowance
represented 505 and 597 percent of nonperforming loans.
In 2000, the allowance for loan losses was increased in
consideration of the significant growth in the loan portfolio of
$77,798,000 (19.7%), geographic and industry concentrations,
expansion into new geographic markets, and volatility and
weaknesses in the local economy, including potential effects of
power shortages, water supply, and volatile market prices for
agricultural products. In addition, approximately $1.2 million
was provided as a result of the downward classification to
substandard of several loans to a single borrower.
It is the policy of management to maintain the allowance for loan
losses at a level adequate for risks inherent in the loan
portfolio. Based on information currently available to analyze
loan loss potential, including economic factors, overall credit
quality, historical delinquency and a history of actual
charge-offs, management believes that the loan loss provision and
allowance are adequate. However, no prediction of the ultimate
level of loans charged off in future years can be made with any
certainty.
34
Table Five summarizes, for the years indicated, the activity in
the allowance for loan losses.
Table Five: Allowance for Loan Losses
- --------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
In thousands (except percentages) 12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
- --------------------------------------------------------------------------------------------------------
Average loans outstanding $523,862 $424,891 $ 353,732 $ 276,437 $ 243,593
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
at beginning of period $ 9,371 $ 5,596 $ 4,352 $ 4,223 $ 4,372
Loans charged off:
Commercial (349) (273) (333) (130) (279)
Real estate (2) - (41) (16) (100)
Consumer (79) (119) (26) (31) (61)
- --------------------------------------------------------------------------------------------------------
(430) (392) (400) (177) (440)
- --------------------------------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial 162 170 143 116 162
Real estate - - 7 20 28
Consumer 15 14 10 11 37
- --------------------------------------------------------------------------------------------------------
177 184 160 147 227
- --------------------------------------------------------------------------------------------------------
Net loans charged off (253) (208) (240) (30) (213)
Additions to allowance charged
to operating expenses 2,635 3,983 1,484 159 64
- --------------------------------------------------------------------------------------------------------
Allowance for possible loan
losses at end of period $ 11,753 $ 9,371 $ 5,596 $ 4,352 $ 4,223
- --------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to
average loans outstanding 0.05% 0.05% 0.07% 0.01% 0.09%
Provision of allowance for possible loan
losses to average loans outstanding 0.50% 0.94% 0.42% 0.06% 0.03%
Allowance for possible loan losses to loans
net of deferred fees at year end 1.94% 1.98% 1.41% 1.39% 1.65%
- --------------------------------------------------------------------------------------------------------
35
As part of its loan review process, management has allocated the
overall allowance based on specific identified problem loans and
historical loss data. Table Six summarizes the allocation of the
allowance for loan losses at December 31, 2001 and 2000.
Table Six: Allowance for Loan Losses by Loan Category
- ----------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
----------------- -----------------
Percent of Percent of
loans in each loans in each
category to category to
In thousands (except percentages) Amount total loans Amount total loans
- ----------------------------------------------------------------------------------------
Commercial $ 7,397 33% $ 5,602 36%
Real estate 3,019 64% 2,589 62%
Consumer 305 3% 255 2%
- ----------------------------------------------------------------------------------------
Total allocated 10,721 100% 8,446 100%
Total unallocated 1,032 925
- ----------------------------------------------------------------------------------------
Total $ 11,753 $ 9,371
- ----------------------------------------------------------------------------------------
Other Real Estate Owned
The Company held no real estate acquired by foreclosure at
December 31, 2001 or 2000.
Deposits
At December 31, 2001, deposits totaled $724,862,000 up from
$633,210,000 at the end of 2000. The 2001 year-end balances
included $30,000,000 in certificates from the State of
California. These deposits are placed in the Bank at its request
and are secured by pledged investment securities. The deposit
growth in 2001, exclusive of the State certificates, was
$61,652,000 (9.7%).
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed
regularly by management. The Company's capital position
represents the level of capital available to support continued
operations and expansion.
Since October of 1998 and through December 31, 2001, the Board of
Directors of the Company has authorized three separate plans to
repurchase up to 5% (in each plan) of the outstanding shares of
the Company's common stock. Purchases are made from time to
time, in the open market and negotiated transactions and are
subject to appropriate regulatory and other accounting
requirements. The following common share amounts and average
prices paid have been adjusted to give effect to all applicable
stock dividends and splits. The Company acquired 313,419 shares
of its common stock in the open market during 2001, 513,618 in
2000 and 250,835 in 1999 at average prices of approximately
$15.31, $11.88 and $10.66 per share, respectively. The Company
completed repurchases under the first and second plans in May
2000 and April 2001, respectively. At December 31, 2001, there
were 279,904 shares remaining to repurchase under the third plan.
These repurchases are made with the intention to lessen the
dilutive impact of issuing new shares to meet stock option plans
as well as for capital management objectives.
The Company's primary capital resource is shareholders' equity,
which increased $5.5 million or 9.2% from the previous year-end.
36
The ratio of total risk-based capital to risk-adjusted assets was
11.1% at December 31, 2001, compared to 12.3% at December 31,
2000. Tier 1 risk-based capital to risk-adjusted assets was 9.9%
at December 31, 2001, compared to 11.1% at December 31, 2000.
The capital ratios are lower in 2001 as compared to 2000 as
risked-based assets grew at a higher rate than did capital.
Table Seven: Capital Ratios
As of December 31,
-----------------
2001 2000
---- ----
Tier 1 Capital 9.9% 11.1%
Total Capital 11.1% 12.3%
Leverage 8.4% 9.1%
See the discussion of capital requirements in "Supervision and
Regulation" and in Footnote 13 - Regulatory Matters in the
Consolidated Financial Statements.
Inflation
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other
commercial concerns, primarily because its assets and liabilities
are largely monetary. In general, inflation primarily affects
the Company indirectly through its effect on market rates of
interest, and thus the ability of the Bank to attract loan
customers. Inflation affects the growth of total assets by
increasing the level of loan demand, and potentially adversely
affects the Company's capital adequacy because loan growth in
inflationary periods can increase faster than the corresponding
rate that capital grows through retention of earnings the Company
generates in the future. In addition to its effects on interest
rates, inflation directly affects the Company by increasing the
Company's operating expenses. Inflation did not have a material
effect upon the Company's results of operations during the year
2001.
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.
37
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer
modeling techniques, the Company is able to estimate the
potential impact of changing interest rates on earnings. A
balance sheet forecast is prepared quarterly using inputs of
actual loan, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The
forecast balance sheet is processed against three interest rate
scenarios. The scenarios include a 200 basis point rising rate
forecast, a flat rate forecast and a 200 basis point falling rate
forecast which take place within a one year time frame. The net
interest income is measured during the first year of the rate
changes and in the year following the rate changes. The
Company's 2002 net interest income, as forecast below, was modeled
utilizing a forecast balance sheet projected from year-end 2001
balances.
The following assumptions were used in the modeling activity:
Earning asset growth of 5.6% based on ending balances
Loan growth of 4.0% based on ending balances
Investment and funds sold growth of 8.2% based on ending
balances
Deposit growth of 4.0% based on ending balances
Balance sheet target balances were the same for all rate
scenarios
The following table summarizes the effect on net interest income
of a (+/- 200) basis point change in interest rates as measured
against a flat rate (no change) scenario.
Table Eight: Interest Rate Risk Simulation of Net Interest Income
as of December 31, 2001
Estimated Impact on
2001 Net Interest
Income
------
(in thousands)
Variation from flat rate scenario
+200 $3,149
-200 ($3,569)
The simulations of earnings do not incorporate any management
actions, which might moderate the negative consequences of
interest rate deviations. Therefore, they do not reflect likely
actual results, but serve as conservative estimates of interest
rate risk.
The Company also uses a second simulation scenario that rate
shocks the balance sheet with an immediate parallel shift in
interest rates of +/-200 basis points. This scenario provides
estimates of the future market value of equity (MVE) and net
interest income (NII). MVE measures the impact on equity due to
the changes in the market values of assets and liabilities as a
result of a change in interest rates. The Bank measures the
volatility of these benchmarks using a twelve month time
horizon. Using the December 31, 2001 balance sheet as the base
for the simulation, the following table summarizes the effect on
net interest income of a +/-200 basis point change in interest
rates:
38
Table Nine: Interest Rate Risk Simulation of NII as of December
31, 2001
% Change Change
in NII in NII
from Current from Current
12 Mo. Horizon 12 Month Horizon
-------------- ----------------
(in thousands)
+ 200bp 16% $5,413
- 200bp (20%) ($6,981)
These results indicate that the balance sheet is asset sensitive
since earnings increase when interest rates rise. The magnitude
of the NII change is within the Company's policy guidelines. The
asset liability management policy limits aggregate market risk,
as measured in this fashion, to an acceptable level within the
context of risk-return trade-offs.
Gap analysis provides another measure of interest rate risk. The
Company does not actively use gap analysis in managing interest
rate risk. It is presented here for comparative purposes.
Interest rate sensitivity is a function of the repricing
characteristics of the Bank's portfolio of assets and
liabilities. These repricing characteristics are the time frames
within which the interest-bearing assets and liabilities are
subject to change in interest rates either at replacement,
repricing or maturity. Interest rate sensitivity management
focuses on the maturity of assets and liabilities and their
repricing during periods of changes in market interest rates.
Interest rate sensitivity is measured as the difference between
the volumes of assets and liabilities in the Bank's current
portfolio that are subject to repricing at various time
horizons. The differences are known as interest sensitivity gaps.
As reflected in Table Ten, at December 31, 2001, the cumulative
gap through the one-year time horizon indicates a slightly
liability sensitive position. Somewhere between one and five
years the Bank moves into an asset sensitive position. This
interest rate sensitivity table categorizes interest-bearing
transaction deposits and savings deposits as repricing
immediately. However, as has been observed through interest rate
cycles, the deposit liabilities do not reprice immediately.
Consequently, the Bank's net interest income varies as though the
Bank is asset sensitive, i.e. as interest rates rise net interest
income increases and vice versa. The asset sensitivity is
validated by the modeling as presented in Tables Eight and Nine
and the actual operating results in 2001 as the net interest
margin decreased during a rapidly falling interest rate
environment.
39
Table Ten: Interest Rate Sensitivity
December 31, 2001
- ---------------------------------------------------------------------------------------------------------------
Assets and Liabilities Over three
which Mature or Reprice: Next day months and Over one
and within within and within Over
(In thousands) Immediately three months one year five years five years Total
- ---------------------------------------------------------------------------------------------------------------
Interest earning assets:
Investments $ 1,236 $ 10,590 $ 103 $ 51,061 $ 74,163 $ 137,153
Loans, excluding
nonaccrual loans
and overdrafts 13,874 373,040 60,292 108,898 47,594 603,698
- ---------------------------------------------------------------------------------------------------------------
Total $ 15,110 $ 383,630 $ 60,395 $ 159,959 $ 121,757 $ 740,851
===============================================================================================================
Interest bearing
liabilities:
Interest bearing demand $ 105,949 $ - $ - $ - $ - $ 105,949
Savings 122,861 - - - - 122,861
Time certificates - 96,153 145,990 22,240 168 264,551
Other Borrowings - 78 243 2,710 3,110 6,141
- ---------------------------------------------------------------------------------------------------------------
Total $ 228,810 $ 96,231 $ 146,233 $ 24,950 $ 3,278 $ 499,502
===============================================================================================================
Interest rate
sensitivity gap $ (213,700) $ 287,399 $ (85,838) $ 135,009 $ 118,479
Cumulative interest
rate sensitivity gap $ (213,700) $ 73,699 $ (12,139) $ 122,870 $ 241,349
- ---------------------------------------------------------------------------------------------------------------
December 31, 2000
Interest rate
sensitivity gap $ (183,847) $ 241,129 $(103,528) $ 83,474 $ 156,490
Cumulative interest
rate sensitivity gap $ (183,847) $ 57,282 $ (46,246) $ 37,228 $ 193,718
- ---------------------------------------------------------------------------------------------------------------
Liquidity
Liquidity management refers to the Company's ability to provide
funds on an ongoing basis to meet fluctuations in deposit levels
as well as the credit needs and requirements of its clients.
Both assets and liabilities contribute to the Company's liquidity
position. Federal funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along
with deposit increases, while loan funding and deposit
withdrawals decrease liquidity. The Bank assesses the likelihood
of projected funding requirements by reviewing historical funding
patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and
outstanding standby letters of credit at December 31, 2001, were
approximately $166,386,000 and $3,690,000, respectively. Such
loans relate primarily to revolving lines of credit and other
commercial loans, and to real estate construction loans.
The Company's sources of liquidity consist of overnight funds
sold to correspondent banks, unpledged marketable investments,
loans pledged to the Federal Home Loan Bank of San Francisco
("FHLB-SF") and sellable SBA loans. On December 31, 2001,
consolidated liquid assets totaled $110.0 million or 13.7% of
total assets as compared to $132.0 million or 18.7% of total
consolidated assets on December 31, 2000. In addition to liquid
assets, the Bank maintains short term lines of credit with
correspondent banks. At December 31, 2001, the Bank had
$80,000,000 available under these credit lines. Informal
40
agreements are also in place with various other banks to purchase
participations in loans, if necessary. The Company serves
primarily a business and professional customer base and, as such,
its deposit base is susceptible to economic fluctuations.
Accordingly, management strives to maintain a balanced position
of liquid assets to volatile and cyclical deposits.
Liquidity is affected by portfolio maturities as well as the
affect interest rate fluctuations have on the market values of
both assets and liabilities. The Bank holds all of its
investment securities in the available-for-sale category. This
enables the Bank to sell any of its unpledged securities to meet
liquidity needs. In periods of rising interest rates, such as
experienced throughout most of 1999 and the first half of 2000,
bond prices decreased, which resulted in large unrealized losses
within the Bank's investment portfolio. Unrealized losses limit
the Bank's ability to sell these securities to provide liquidity
without realizing those losses. As a means for providing
liquidity from the investment portfolio when there are unrealized
losses, the Bank has a master repurchase agreement with a
correspondent bank. Such a repurchase agreement allows the Bank
to pledge securities as collateral for borrowings to obtain
liquidity without having to sell a security at a loss. In a
declining interest rate environment such as experienced in 2001,
as bond prices increase, liquidity is more easily obtained
through security sales.
The maturity distribution of certificates of deposit in
denominations of $100,000 or more is set forth in Table Eleven.
These deposits are generally more rate sensitive than other
deposits and, therefore, are more likely to be withdrawn to
obtain higher yields elsewhere if available.
Table Eleven: Certificates of Deposit in Denominations
of $100,000 or More
- ---------------------------------------------------------------
In thousands December 31, 2001
- ---------------------------------------------------------------
Three months or less $ 75,503
Over three months through six months 42,833
Over six months through twelve months 65,889
Over twelve months 17,405
- -----------------------------------------------------------
Total $ 201,630
===========================================================
41
Loan demand also affects the Bank's liquidity position. Table
Twelve presents the maturities of loans for the period indicated.
Table Twelve: Loan Maturities - December 31, 2001
- ------------------------------------------------------------------------------------------
One year
One year through Over
In thousands or less five years five years Total
- ------------------------------------------------------------------------------------------
Commercial $ 100,100 $ 77,547 $ 22,114 $ 199,761
Real estate -
construction 72,141 916 12,257 85,314
Real estate -
other 40,602 95,263 170,757 306,622
Consumer 10,081 4,951 621 15,653
- ------------------------------------------------------------------------------------------
Total $ 222,924 $ 178,677 $ 205,749 $ 607,350
- ------------------------------------------------------------------------------------------
Loans shown above with maturities greater than one year include $290,459,000 of floating
interest rate loans and $93,967,000 of fixed rate loans.
The maturity distribution and yields of the investment portfolios
(on a taxable equivalent basis) are presented in Table Thirteen:
Table Thirteen: Securities Maturities and Weighted Average Yields
- -----------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
Weighted Weighted
Market Average Market Average
In thousands (except percentages) Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------------
Available for sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 103 2.27% $ 300 5.79%
Maturing after 1 year but within 5 years 47,223 6.21% 12,902 6.28%
Maturing after 5 years but within 10 years 17,898 4.62% 61,559 6.45%
Maturing after 10 years 10,262 6.87% 10,366 6.42%
State & Political Subdivision
Maturing within 1 year - - 238 3.80%
Maturing after 1 year but within 5 years 3,823 7.05% 1,366 7.92%
Maturing after 5 year but within 10 Years 23,151 6.58% 16,562 6.61%
Maturing after 10 years 22,867 6.95% 26,671 6.88%
Corporate Debt Securities
Maturing within 1 year - - 9,957 8.24%
Maturing after 10 years 10,590 3.01% 11,192 7.75%
Other 1,236 - 1,163 -
- -----------------------------------------------------------------------------------------------------------
Total investment securities $ 137,153 5.96% $ 152,276 6.70%
===========================================================================================================
42
The principal cash requirements of the Company are for expenses
incurred in the support of administration and operations of the
Bank. These cash requirements are funded through direct
reimbursement billings to the Bank. For non-banking functions,
the Company is dependent upon the payment of cash dividends by
the Bank to service its commitments. The Company expects that
the cash dividends paid by the Bank to the Company will be
sufficient to meet this payment schedule.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating leases.
(See Note 5 of the financial statements for the terms.) These
commitments do not significantly impact operating results.
As of December 31, 2001, commitments to extend credit were the
only financial instruments with off-balance sheet risk. The Bank
has not entered into any contracts for freestanding financial
derivative instruments such as futures, swaps, options etc and
did not identify any embedded derivatives. Loan and letter of
credit commitments increased to $170,076,000 from $150,473,000 at
December 31, 2000. The commitments represent 28.1% of total
loans at year-end 2001 versus 31.8% a year ago. The majority of
the commitments have a maturity of one year or less. Commitments
for home equity lines of credit totaling $14,700,000, which have
a ten-year maturity, are the single largest category of
commitments exceeding a one-year maturity.
Disclosure of Fair Value
The Financial Accounting Standards Board ("FASB"), adopted
Statement of Financial Accounting Standards Number 107,
"Disclosures About Fair Value of Financial Statements," requiring
the disclosure of fair value of most financial instruments,
whether recognized or not recognized in the financial statements.
The intent of presenting the fair values of financial instruments
is to depict the market's assessment of the present value of net
future cash flows discounted to reflect both current interest
rates and the market's assessment of the risk that the cash flows
will not occur.
In determining fair values, the Company used the carrying amount
for cash, short-term investments, accrued interest receivable,
short-term borrowings and accrued interest payable as all of
these instruments are short term in nature. Securities are
reflected at quoted market values. Loans and deposits have a
long term time horizon, which required more complex calculations
for fair value determination. Loans are grouped into homogeneous
categories and broken down between fixed and variable rate
instruments. Loans with a variable rate, which reprice quickly,
are valued at carrying value. The fair value of fixed rate
instruments is estimated by discounting the future cash flows
using current rates. Credit risk and repricing risk factors are
included in the current rates. Fair value for nonaccrual loans
is reported at carrying value and is included in the net loan
total. Since the allowance for loan losses exceeds any potential
adjustment for nonaccrual valuation, no further valuation
adjustment has been made.
Demand deposits, savings and certain money market accounts are
short term in nature so the carrying value equals the fair
value. For deposits that extend over a period in excess of four
months, the fair value is estimated by discounting the future
cash payments using the rates currently offered for deposits of
similar remaining maturities.
At year-end 2001 the fair values calculated on the Bank's assets
were 0.5% above the carrying values versus 0.4% under the
carrying values at year-end 2000.
43
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB")
issued 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 issued 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 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 was required to
adopt SFAS No. 142 beginning January 1, 2002. 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 December 31, 2001 and all of
the Company's intangible assets at 2001 have finite lives and
will continue to be amortized.
Other Matters
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.
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by Item 7A of Form 10-K is contained in
the Market Risk Management section of Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on page 37.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 46
Consolidated Balance Sheets, December 31, 2001 and 2000 47
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 48
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 49
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999 50
Notes to Consolidated Financial Statements 51-66
All schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the
schedule or because the information required is included in the
Consolidated Financial Statements or notes thereto.
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Central Coast Bancorp:
We have audited the accompanying consolidated balance sheets of
Central Coast Bancorp and subsidiary as of December 31, 2001 and
2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years
in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Central Coast Bancorp and subsidiary at December 31, 2001 and
2000, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2001
in conformity with accounting principles generally accepted in
the United States of America.
San Francisco, California
January 24, 2002
(February 28, 2002 as to the stock split information in Note 1)
46
Consolidated Balance Sheets
Central Coast Bancorp and Subsidiary
- -----------------------------------------------------------------------------------------------------------------
December 31, 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 55,245,000 $ 51,411,000
Federal funds sold - 23,081,000
- -----------------------------------------------------------------------------------------------------------------
Total cash and equivalents 55,245,000 74,492,000
Available-for-sale securities at fair value 137,153,000 152,276,000
Loans:
Commercial 199,761,000 171,631,000
Real estate-construction 85,314,000 57,780,000
Real estate-other 306,622,000 234,890,000
Consumer 15,653,000 9,840,000
Deferred loan fees, net (1,050,000) (746,000)
- -----------------------------------------------------------------------------------------------------------------
Total loans 606,300,000 473,395,000
Allowance for loan losses (11,753,000) (9,371,000)
- -----------------------------------------------------------------------------------------------------------------
Net Loans 594,547,000 464,024,000
- -----------------------------------------------------------------------------------------------------------------
Premises and equipment, net 2,962,000 3,735,000
Accrued interest receivable and other assets 12,359,000 12,166,000
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 802,266,000 $ 706,693,000
=================================================================================================================
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $ 231,501,000 $ 207,002,000
Demand, interest bearing 105,949,000 88,285,000
Savings 122,861,000 110,204,000
Time 264,551,000 227,719,000
- -----------------------------------------------------------------------------------------------------------------
Total deposits 724,862,000 633,210,000
Accrued interest payable and other liabilities 12,068,000 13,629,000
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 736,930,000 646,839,000
- -----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 11)
Shareholders' Equity:
Preferred stock-no par value; authorized
1,000,000 shares; none outstanding
Common stock - no par value; authorized 25,000,000 shares;
outstanding: 8,963,780 and 8,402,498 shares
at December 31, 2001 and 2000 50,898,000 44,472,000
Shares held in deferred compensation trust (299,048 shares in 2001
and 271,862 shares in 2000), net of deferred obligation - -
Retained earnings 14,855,000 16,444,000
Accumulated other comprehensive (loss), net of taxes of
$297,000 in 2001 and $738,000 in 2000 (417,000) (1,062,000)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 65,336,000 59,854,000
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 802,266,000 $ 706,693,000
=================================================================================================================
See notes to Consolidated Financial Statements
47
Consolidated Statements of Income
Central Coast Bancorp and Subsidiary
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Interest Income
Loans (including fees) $ 43,135,000 $ 41,405,000 $ 32,234,000
Investment securities 8,205,000 8,945,000 9,127,000
Fed funds sold 407,000 1,065,000 156,000
- -------------------------------------------------------------------------------------------------------------
Total interest income 51,747,000 51,415,000 41,517,000
- -------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 17,926,000 17,921,000 13,218,000
Other 434,000 369,000 430,000
- -------------------------------------------------------------------------------------------------------------
Total interest expense 18,360,000 18,290,000 13,648,000
- -------------------------------------------------------------------------------------------------------------
Net Interest Income 33,387,000 33,125,000 27,869,000
Provision for Loan Losses (2,635,000) (3,983,000) (1,484,000)
- -------------------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 30,752,000 29,142,000 26,385,000
- -------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposits 1,924,000 1,749,000 1,348,000
Other income 1,205,000 684,000 883,000
- -------------------------------------------------------------------------------------------------------------
Total noninterest income 3,129,000 2,433,000 2,231,000
- -------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and benefits 11,619,000 10,081,000 9,116,000
Occupancy 1,642,000 1,479,000 1,301,000
Furniture and equipment 1,833,000 1,702,000 1,338,000
Other 4,129,000 4,146,000 4,288,000
- -------------------------------------------------------------------------------------------------------------
Total noninterest expenses 19,223,000 17,408,000 16,043,000
- -------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 14,658,000 14,167,000 12,573,000
Provision for Income Taxes 5,149,000 5,241,000 4,522,000
- -------------------------------------------------------------------------------------------------------------
Net Income $ 9,509,000 $ 8,926,000 $ 8,051,000
=============================================================================================================
Basic Earnings per Share $ 1.05 $ 0.94 $ 0.82
Diluted Earnings per Share $ 1.01 $ 0.91 $ 0.80
=============================================================================================================
See Notes to Consolidated Financial Statements
48
Consolidated Statements of Cash Flow
Central Coast Bancorp and Subsidiary
- ----------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operations:
Net income $ 9,509,000 $ 8,926,000 $ 8,051,000
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 2,635,000 3,983,000 1,484,000
Depreciation 1,361,000 1,266,000 936,000
Amortization and accretion 665,000 8,000 136,000
Provision for deferred income taxes (1,260,000) (1,852,000) (871,000)
Loss (gain) on sale of securities (168,000) 194,000 (45,000)
Net loss on sale of equipment 23,000 19,000 126,000
Gain on other real estate owned (4,000) (67,000) -
Decrease (increase) in accrued interest receivable
and other assets 164,000 1,077,000 (2,241,000)
Increase (decrease) in accrued interest
payable and other liabilities (2,420,000) 3,492,000 2,110,000
Increase in deferred loan fees 304,000 25,000 47,000
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 10,809,000 17,071,000 9,733,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturities of available-for-sale securities 46,672,000 70,751,000 100,042,000
Proceeds from sale of available-for-sale securities 77,962,000 19,806,000 5,988,000
Purchase of available-for-sale securities (108,665,000) (91,174,000) (89,498,000)
Net change in loans held for sale - - 6,168,000
Net increase in loans (133,462,000) (78,031,000) (84,049,000)
Proceeds from sale of other real estate owned 199,000 - 387,000
Proceeds from sale of equipment - - 26,000
Purchases of equipment (611,000) (1,132,000) (2,087,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (117,905,000) (79,780,000) (63,023,000)
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts 91,652,000 115,021,000 28,997,000
Net increase (decrease) in other borrowings 935,000 (11,744,000) 16,950,000
Cash received for stock options exercised 119,000 76,000 1,098,000
Cahs paid for shares repurchased (4,857,000) (6,111,000) (2,682,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 87,849,000 97,242,000 44,363,000
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (19,247,000) 34,533,000 (8,927,000)
Cash and equivalents, beginning of year 74,492,000 39,959,000 48,886,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 55,245,000 $ 74,492,000 $ 39,959,000
============================================================================================================================
Noncash Investing and Financing Activities:
The Company obtained $335,000 of real estate (OREO) in 1999 in connection with forclosures of delinquent loans
(none in 2001 or 2000). In 2001, 2000 and 1999 stock option exercises and stock repurchases totaling $84,000,
$20,000 and $666,000, respectively were performed through a "stock for stock" exercise under the Company's
stock option and deferred compensation plans (see Note 9).
- ----------------------------------------------------------------------------------------------------------------------------
Other Cash Flow Information:
Interest paid $ 18,695,000 $ 17,121,000 $ 13,733,000
Income taxes paid 8,203,000 5,970,000 3,569,000
============================================================================================================================
See Notes to Consolidated Financial Statements
49
Consolidated Statements of Shareholders' Equity
Central Coast Bancorp and Subsidiary
- ---------------------------------------------------------------------------------------------------------------------
Accumulated Other
Years Ended December 31, Common Stock Retained Comprehensive
2001, 2000 and 1999 Shares Amount Earnings Income (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1999 7,640,056 $ 41,103,000 $ 9,733,000 $ 363,000 $ 51,199,000
Net income - - 8,051,000 - 8,051,000
Changes in unrealized losses
on securities available for sale,
net of taxes of $3,502,000 - - - (5,039,000) (5,039,000)
Reclassification adjustment for
gains included in income,
net of taxes of $19,000 - - - (26,000) (26,000)
----------------
Total comprehensive income 2,986,000
----------------
Stock options and warrants
exercised 667,790 1,764,000 - - 1,764,000
Shares repurchased (257,525) (3,348,000) - - (3,348,000)
Tax benefit of stock options
exercised - 704,000 - - 704,000
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 8,050,321 40,223,000 17,784,000 (4,702,000) 53,305,000
Net income - - 8,926,000 - 8,926,000
Changes in unrealized gains
on securities available for sale,
net of taxes of $2,449,000 - - - 3,526,000 3,526,000
Reclassification adjustment for
losses included in income,
net of taxes of $80,000 - - - 114,000 114,000
----------------
Total comprehensive income 12,566,000
----------------
10% stock dividend 805,033 10,266,000 (10,266,000) - -
Stock options exercised 16,248 96,000 - - 96,000
Shares repurchased (469,104) (6,131,000) - - (6,131,000)
Tax benefit of stock options
exercised - 18,000 - - 18,000
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 8,402,498 44,472,000 16,444,000 (1,062,000) 59,854,000
Net income - - 9,509,000 - 9,509,000
Changes in unrealized losses
on securities available for sale,
net of taxes of $511,000 - - - 744,000 744,000
Reclassification adjustment for
gains included in income,
net of taxes of $69,000 - - - (99,000) (99,000)
----------------
Total comprehensive income 10,154,000
----------------
10% stock dividend 836,410 11,098,000 (11,098,000) - -
Stock options exercised 38,291 203,000 - - 203,000
Shares repurchased (313,419) (4,940,000) - - (4,940,000)
Tax benefit of stock options
exercised - 65,000 - - 65,000
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2001 8,963,780 $ 50,898,000 $ 14,855,000 $ (417,000) $ 65,336,000
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Central Coast Bancorp and Subsidiary
Years ended December 31, 2001, 2000 and 1999
Note 1. Significant Accounting Policies and Operations. The
consolidated financial statements include Central Coast Bancorp
(the "Company") and its wholly-owned subsidiary, Community Bank
of Central California (the "Bank"). All material intercompany
accounts and transactions are eliminated in consolidation. The
accounting and reporting policies of the Company and the Bank
conform to accounting principles generally accepted in the
United States of America and prevailing practices within the
banking industry. In preparing such financial statements,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the
period. Actual results could differ significantly from those
estimates. The material estimate that is particularly
susceptible to significant changes in the near term relate to
the determination of the allowance for loan losses.
Community Bank of Central California operates ten full service
branch offices in Monterey, Santa Cruz and San Benito Counties,
serving small and medium sized business customers, as well as
individuals. The Bank focuses on business loans and deposit
services to customers throughout its service area.
Investment securities are classified at the time of purchase
into one of three categories: held-to-maturity, trading or
available-for-sale. Investment securities classified as
"held-to-maturity" are measured at amortized cost based on the
Company's positive intent and ability to hold such securities to
maturity. "Trading securities" are bought and held principally
for the purpose of selling them in the near term and are carried
at market value with a corresponding recognition of unrecognized
holding gain or loss in the results of operations. The
remaining investment securities are classified as
"available-for-sale" and are measured at market value with a
corresponding recognition of the unrealized holding gain or loss
(net of tax effect) as a separate component of shareholders'
equity until realized. Accretion of discounts and amortization
of premiums arising at acquisition are included in income using
methods approximating the effective interest method. Gains and
losses on sales of investments, if any, are determined on a
specific identification basis. At December 31, 2001 and 2000 all
of the Company's investments were classified as
available-for-sale.
Loans are stated at the principal amount outstanding, reduced by
any charge-offs. Loan origination fees and certain direct loan
origination costs are deferred and the net amount is recognized
using the effective yield method, generally over the contractual
life of the loan.
Interest income is accrued as earned. The accrual of interest
on loans is discontinued and any accrued and unpaid interest is
reversed when principal or interest is ninety days past due,
when payment in full of principal or interest is not expected or
when a portion of the principal balance has been charged off.
Income on such loans is then recognized only to the extent that
cash is received and where the future collection of principal is
probable. Senior management may grant a waiver from nonaccrual
status if a loan is well secured and in the process of
collection. When a loan is placed on nonaccrual status, the
51
accrued and unpaid interest receivable is reversed and the loan
is accounted for on the cash or cost recovery method thereafter,
until qualifying for return to accrual status. Generally, a
loan may be returned to accrual status when all delinquent
interest and principal become current in accordance with the
original terms of the loan agreement or when the loan is both
well secured and in process of collection.
The allowance for loan losses is an amount that management
believes will be adequate to absorb losses inherent in existing
loans and commitments to extend credit, based on evaluations of
collectibility, prior loss experience and other factors. The
allowance is established through a provision charged to
expense. Loans are charged against the allowance when
management believes that the collectibility of the principal is
unlikely. In evaluating the adequacy of the allowance,
management considers numerous factors such as changes in the
composition of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current and
anticipated local economic conditions that may affect the
borrowers' ability to pay.
A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement. Impaired loans are measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at
the loan's observable market price or the fair value of the
collateral if the loan is collateral-dependent.
Real estate and other assets acquired in satisfaction of
indebtedness are recorded at the lower of estimated fair market
value net of anticipated selling costs or the recorded loan
amount, and any difference between this and the loan amount is
charged to the allowance. Costs of maintaining other real
estate owned, subsequent write downs and gains or losses on
the subsequent sale are reflected in current earnings.
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the lesser of the
lease terms or estimated useful lives of the assets, which are
generally 3 to 30 years.
Intangible assets representing the excess of the purchase price
over the fair value of tangible net assets acquired, are being
amortized on a straight-line basis over seven years and are
included in other assets.
Other borrowed funds consist of $6,141,000 borrowed from the
Federal Home Loan Bank collaterallized by certain real estate
loans and investment securities.
Stock compensation. The Company accounts for its stock-based
awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees" and its related interpretations. No compensation
expense has been recognized in the financial statements for
employee stock arrangements. Note 9 to the Consolidated
Financial Statements contains a summary of the pro forma effects
to reported net income and earnings per share as if the Company
had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation."
52
Income taxes are provided using the asset and liability method.
Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities arise principally from differences in
reporting provisions for loan losses, interest on nonaccrual
loans, depreciation, state franchise taxes and accruals related
to the salary continuation plan. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Stock split. On January 28, 2002 the Board of Directors
declared a 5 for 4 stock split which was distributed on February
28, 2002, to shareholders of record as of February 14, 2002.
All share and per share data including stock option and warrant
information have been retroactively adjusted to reflect the
stock split.
Comprehensive income includes net income and other comprehensive
income, which represents the changes in its net assets during
the period from non-owner sources. The Company's only source of
other comprehensive income is derived from unrealized gain and
loss on securities available-for-sale and is presented net of
tax in the accompanying statements of shareholders' equity.
Segment reporting. The Company operates a single line of
business with no customer accounting for more than 10% of its
revenue. Management evaluates the Company's performance as a
whole and does not allocate resources based on the performance
of different lending or transaction activities. Accordingly, the
Company and its subsidiary operate as one business segment.
Recently issued accounting pronouncements. In June 2001, the
Financial Accounting Standards Board ("FASB") issued 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 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. 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
issued 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. 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 December 31,
2001 and all of the Company's intangible assets at December 31,
2001 have finite lives and will continue to be amortized.
53
Note 2. Cash and Due from Banks. The Company, through its bank
subsidiary, is required to maintain reserves with the Federal
Reserve Bank. Reserve requirements are based on a percentage of
deposits. At December 31, 2002 the Company maintained reserves
of approximately $975,000 in the form of vault cash and balances
at the Federal Reserve to satisfy regulatory requirements.
Note 3. Securities. The Company's investment securities
portfolio as of December 31, 2001 and 2000 consisted of the
following:
- ---------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
In thousands Cost Gain Loss Value
- ---------------------------------------------------------------------------------------------
December 31, 2001
Available for sale securities:
U.S. Treasury and Agency Securities $ 74,578 $ 961 $ 53 $ 75,486
State & Political Subdivision 50,523 186 868 49,841
Corporate Debt Securities 11,530 - 940 10,590
Other 1,236 - - 1,236
- ---------------------------------------------------------------------------------------------
Total investment securities $ 137,867 $ 1,147 $ 1,861 $ 137,153
=============================================================================================
December 31, 2000
Available for sale securities:
U.S. Treasury and Agency Securities $ 85,589 $ 169 $ 631 $ 85,127
State & Political Subdivision 45,851 93 1,107 44,837
Corporate Debt Securities 21,473 - 324 21,149
Other 1,163 - - 1,163
- ---------------------------------------------------------------------------------------------
Total investment securities $ 154,076 $ 262 $ 2,062 $ 152,276
=============================================================================================
The amortized cost and estimated fair value of debt securities
at December 31, 2001, based on projected average life, are
shown in the next table. Projected maturities will differ from
contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
- ------------------------------------------------------------------------------------------
Amortized Market
In thousands Cost Value
- ------------------------------------------------------------------------------------------
Available for sale securities:
Maturing within 1 year $ 103 $ 103
Maturing after 1 year but within 5 years 50,545 51,046
Maturing after 5 years but within 10 years 41,093 41,049
Maturing after 10 years 44,890 43,719
Other 1,236 1,236
- ------------------------------------------------------------------------------------------
Total investment securities $ 137,867 $ 137,153
==========================================================================================
At December 31, 2001 and 2000, securities with a market value
of $120,472,000 and $94,178,000 were pledged as collateral for
deposits of public funds and other purposes as required by law
or contract.
In 2001, security sales resulted in gross realized losses of
$26,000 and gross realized gains of $194,000. In 2000, such
sales resulted in gross realized losses of $194,000 and no
gross unrealized gains. In 1999, such sales resulted in gross
realized gains of $45,000 and no gross unrealized losses.
54
Note 4. Loans and allowance for loan losses. The Company's
business is concentrated in Monterey County, California whose
economy is highly dependent on the agricultural industry. As a
result, the Company lends money to individuals and companies
dependent upon the agricultural industry. In addition, the
Company has significant extensions of credit and commitments to
extend credit which are secured by real estate, the ultimate
recovery of which is generally dependent on the successful
operation, sale or refinancing of real estate, totaling
approximately $453,000,000. The Company monitors the effects
of current and expected market conditions and other factors on
the collectibility of real estate loans. When, in management's
judgment, these loans are impaired, appropriate provisions for
losses are recorded. The more significant assumptions
management considers involve estimates of the following: lease,
absorption and sale rates; real estate values and rates of
return; operating expenses; inflation; and sufficiency of
collateral independent of the real estate including, in limited
instances, personal guarantees.
In extending credit and commitments to borrowers, the Company
generally requires collateral and/or guarantees as security.
The repayment of such loans is expected to come from cash flow
or from proceeds from the sale of selected assets of the
borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection
with management's evaluation of the credit worthiness of the
borrower. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real
property. The Company secures its collateral by perfecting its
interest in business assets, obtaining deeds of trust, or
outright possession among other means. Loan losses from
lending transactions related to real estate and agriculture
compare favorably with the Company's loan losses on its loan
portfolio as a whole.
The activity in the allowance for loan losses is summarized as
follows:
- -------------------------------------------------------------------------------------------------------------
In thousands 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 9,371 $ 5,596 $ 4,352
Provision charged to expense 2,635 3,983 1,484
Loans charged off (430) (392) (400)
Recoveries 177 184 160
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 11,753 $ 9,371 $ 5,596
=============================================================================================================
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 level of allowances to be
maintained and the loan loss allowance ratio, management uses a
formula allowance calculated by applying loss factors to
outstanding loans and certain unused commitments and an
unallocated allowance for amounts that are based on management's
evaluation of conditions that are not directly measured in the
determination of the specific and formula allowances. In
determining these allowances, 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.
55
Management believes that the allowance for loan losses at
December 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.
Non-performing loans at December 31 are summarized below:
- -----------------------------------------------------------------------------------------------------------
In thousands 2001 2000
- -----------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Real estate $ 68 $ 10
Commercial - 215
Consumer and other 12 5
- -----------------------------------------------------------------------------------------------------------
80 230
- -----------------------------------------------------------------------------------------------------------
Nonaccrual:
Real estate 592 -
Commercial 702 329
Consumer and other - -
- -----------------------------------------------------------------------------------------------------------
1,294 329
- -----------------------------------------------------------------------------------------------------------
Restructured (in compliance with modified
terms) - Commercial 955 1,010
- -----------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 2,329 $ 1,569
===========================================================================================================
Interest due but excluded from interest income on nonaccrual
loans was approximately $45,000, $64,000 and $82,000 in 2001,
2000 and 1999 respectively. In 2001 and 1999, interest income
recognized from payments received on nonaccrual loans was
$69,000 and $21,000, respectively (none was recognized in 2000).
At December 31, 2001, the recorded investment in loans that are
considered impaired under SFAS No. 114 was $2,418,000 of which
$1,294,000 are included as nonaccrual loans above, and $955,000
are included as restructured loans above. At December 31, 2000,
the recorded investment in loans that are considered impaired
was $1,691,000 of which $215,000 are included as nonaccrual
loans above, and $1,010,000 are included as restructured loans
above. Such impaired loans had valuation allowances totalling
$536,000 and $809,000, in 2001 and 2000, respectively, based on
the estimated fair values of the collateral. The average
recorded investment in impaired loans during 2001 and 2000 was
$2,638,000 and $2,129,000, respectively. The Company recognized
interest income on impaired loans of $191,000, $161,000 and
$92,000 in 2001, 2000 and 1999, respectively (including interest
income of $98,000 on restructured loans in 2001 and in 2000).
At December 31, 2001, there were no commitments to lend
additional funds to borrowers whose loans were classified as
nonaccrual.
The Company held no real estate acquired by foreclosure at
December 31, 2001 or 2000.
Note 5. Premises and equipment. Premises and equipment owned by
the Company at December 31 are summarized as follows:
- -----------------------------------------------------------------------------------------------
In thousands 2001 2000
- -----------------------------------------------------------------------------------------------
Land $ 121 $ 121
Building 265 260
Furniture and equipment 6,606 6,390
Leasehold improvement 2,460 2,223
- -----------------------------------------------------------------------------------------------
9,452 8,994
Accumulated depreciation and amortization (6,490) (5,259)
- -----------------------------------------------------------------------------------------------
Premises and equipment, net $ 2,962 $ 3,735
===============================================================================================
56
The Company also leases facilities under agreements that expire
in March 2003 through October 2009 with options to extend for
five to fifteen years. These include two facilities leased from
shareholders at terms and conditions which management believes
are consistent with the market. Rental rates are adjusted
annually for changes in certain economic indices. Rental expense
was approximately $675,000, $634,000 and $565,000, including
lease expense to shareholders of $133,000, $122,000 and $121,000
in 2001, 2000 and 1999 respectively. The minimum annual rental
commitments under these leases, including the remaining rental
commitment under the leases to shareholders are as follows:
- ---------------------------------------------------------------------------------------------
Operating
In thousands Leases
- ---------------------------------------------------------------------------------------------
2002 $ 708
2003 642
2004 593
2005 480
2006 480
Thereafter 691
- ---------------------------------------------------------------------------------------------
Total $ 3,594
=============================================================================================
Note 6. Income Taxes. The provision for income taxes is as
follows:
- -----------------------------------------------------------------------------------
In thousands 2001 2000 1999
- -----------------------------------------------------------------------------------
Current:
Federal $ 4,577 $ 5,160 $ 3,863
State 1,832 1,933 1,530
- -----------------------------------------------------------------------------------
Total 6,409 7,093 5,393
- -----------------------------------------------------------------------------------
Deferred:
Federal (950) (1,432) (667)
State (310) (420) (204)
- -----------------------------------------------------------------------------------
Total (1,260) (1,852) (871)
- -----------------------------------------------------------------------------------
Total $ 5,149 $ 5,241 $ 4,522
- -----------------------------------------------------------------------------------
A reconciliation of the Federal income tax rate to the effective
tax rate is as follows:
- ---------------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income taxes (net of
Federal income tax benefit) 6.9% 7.1% 7.0%
Tax exempt interest income (6.4%) (5.0%) (5.4%)
Other (0.4%) (0.1%) (0.6%)
- ---------------------------------------------------------------------------------------
Effective tax rate 35.1% 37.0% 36.0%
- ---------------------------------------------------------------------------------------
57
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 2001 and 2000, are presented
below:
- ---------------------------------------------------------------------------------------
In thousands 2001 2000
- ---------------------------------------------------------------------------------------
Deferred tax assets:
Provision for loan losses $ 5,206 $ 4,053
Unrealized loss on available for sale securities 297 738
Salary continuation plan 755 618
Depreciation and amortization 209 258
State income taxes 127 251
Excess serving rights 12 15
Interest on nonaccrual loans 20 51
Accrual to cash adjustments - -
Other 202 26
- ---------------------------------------------------------------------------------------
Net deferred tax asset $ 6,828 $ 6,010
- ---------------------------------------------------------------------------------------
The Company believes that it is more likely than not that it will
realize the above deferred tax assets in future periods;
therefore, no valuation allowance has been provided against its
deferred tax assets.
Note 7. Other Noninterest Expense. Other expense for the
years ended December 31, 2001, 2000 and 1999 consists of the
following:
- ---------------------------------------------------------------------------------------------
In thousands 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Customer expenses $ 525 $ 413 $ 398
Marketing 473 644 475
Professional fees 457 430 452
Stationary and supplies 372 377 444
Data processing 272 314 306
Amortization of intangibles 257 257 257
Shareholder and director 229 253 250
Insurance 216 216 180
Dues and assessments 177 179 139
Other 1,151 1,063 1,387
- ---------------------------------------------------------------------------------------------
Total $ 4,129 $ 4,146 $ 4,288
- ---------------------------------------------------------------------------------------------
Note 8. Earnings Per Share. Basic earnings per share is
computed by dividing net income by the weighted average common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options or
other contracts to issue common stock were exercised and
converted into common stock.
58
There was no difference in the numerator used in the calculation
of basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share
and diluted earnings per share for each of the years ended
December 31 is reconciled as follows:
- -------------------------------------------------------------------------------------------
In thousands (expect per share data) 2001 2000 1999
- -------------------------------------------------------------------------------------------
Basic Earnings Per Share
Net income $ 9,509 $ 8,926 $ 8,051
Weighted average common shares outstanding 9,046 9,515 9,724
------------------------------
Basic earnings per share $ 1.05 $ 0.94 $ 0.82
===========================================================================================
Diluted Earnings Per Share
Net Income $ 9,509 $ 8,926 $ 8,051
Weighted average common shares outstanding 9,046 9,515 9,724
Dilutive effect of outstanding options 394 281 338
------------------------------
Weighted average common shares outstanding - Diluted 9,440 9,796 10,062
------------------------------
Diluted earnings per share $ 1.01 $ 0.91 $ 0.80
===========================================================================================
Note 9. Employee Benefit Plans. The Company has two stock option
plans under which incentive stock options or nonqualified stock
options may be granted to certain key employees or directors to
purchase shares of common stock. Options are granted at a price
not less than the fair market value of the common stock on the
date of grant. Options vest over various periods not in excess
of ten years from date of grant and expire not more than ten
years from date of grant. The weighted average value of options
granted in 2001, 2000 and 1999 was $4.95, $4.22 and $3.68 per
share, respectively. As of December 31, 2001, 1,433,399 shares
are available for future grants under the plans.
Activity under the stock option plans is as follows:
- -------------------------------------------------------------------------------------------------------
Weighted
Average
Exercise
Shares Price
- -------------------------------------------------------------------------------------------------------
Balances, January 1, 1999 1,443,341 $ 4.54
1,125,990 exercisable at a weighted average exercise price of $3.70
Granted 28,642 10.98
Expired (15,908) 6.50
Exercised (608,217) 1.99
- -------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 847,858 6.54
743,713 exercisable at a weighted average exercise price of $6.05
Granted 240,968 11.70
Expired (8,250) 11.64
Exercised (17,871) 5.33
- -------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 1,062,705 7.70
784,113 exercisable at a weighted average exercise price of $6.34
Granted 5,000 15.89
Exercised (43,786) 4.65
- -------------------------------------------------------------------------------------------------------
Balances, December 31, 2001 1,023,919 $ 5.80
852,027 exercisable at a weighted average exercise price of $7.09
- -------------------------------------------------------------------------------------------------------
59
Additional information regarding options outstanding as of
December 31, 2001 is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
$ 3.12 - 5.32 227,240 3.5 $ 4.34 227,240 $4.34
6.49 - 6.90 422,061 4.9 6.52 422,061 6.52
10.18 - 15.89 374,618 7.6 11.33 202,726 11.35
- ----------------------------------------------------------------------------------------------------------------------------------
$ 3.12 - 15.89 1,023,919 5.6 $ 7.79 852,027 $7.09
- ----------------------------------------------------------------------------------------------------------------------------------
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance
with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees" and its related interpretations. No
compensation expense has been recognized in the financial
statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," (SFAS 123) requires the disclosure
of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal
1995. Under SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value
of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions for
2001: expected life, four years following vesting; average stock
volatility of 15.6%; risk free interest rates ranging from 4.14%
to 6.57%; and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the
computed fair values of the 2001, 2000 and 1999 awards had been
amortized to expense over the vesting period of the awards, pro
forma net income would have been $9,334,000 ($1.03 basic and
$0.99 diluted earnings per share), $8,548,000 000 ($0.90 basic
and $0.87 diluted earnings per share) and $7,939,000 ($0.82 basic
and $0.79 diluted earnings per share) in 2001, 2000 and 1999,
respectively. The impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma
calculation; accordingly, the 2001, 2000 and 1999 pro forma
adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable
stock options.
401(k) Savings Plan
The Company has a 401(k) Savings Plan under which eligible
employees may elect to make tax deferred contributions from
their annual salary, to a maximum established annually by the
IRS. The Company matches 25% of the employees' contributions.
The Company may make additional contributions to the plan at
the discretion of the Board of Directors. All employees
meeting age and service requirements are eligible to
participate in the Plan. Company contributions vest after 3
years of service. Company contributions during 2001, 2000 and
1999 which are funded currently, totaled $129,000, $114,000 and
$94,000, respectively.
60
Salary Continuation Plan
The Company has a salary continuation plan for three officers
which provides for retirement benefits upon reaching age 63. The
Company accrues such post-retirement benefits over the vesting
periods (of five or ten years) based on a discount rate of 7.5%.
In the event of a change in control of the Company, the officers'
benefits will fully vest. The Company recorded compensation
expense of $94,000, $292,000 and $256,000 in 2001, 2000 and 1999
respectively. Accrued compensation payable under the salary
continuation plan totaled $1,233,000 and $1,140,000 at December
31, 2001 and 2000, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan for the benefit of
the Board of Directors and certain officers. In addition to the
deferral of compensation, the plan allows participants the
opportunity to defer taxable income derived from the exercise of
stock options. The participant's may, after making an election
to defer receipt of the option shares for a specified period of
time, use a "stock-for-stock" exercise to tender to the Company
mature shares with a fair value equal to the exercise price of
the stock options exercised. The Company simultaneously delivers
new shares to the participant equal to the value of shares
surrendered and the remaining shares under option are placed in a
trust administered by a third- party trust company, to be
distributed in accordance with the terms of each participant's
election to defer. During 2001 and 2000 no shares were tendered
under the plan. In 1999, 60,126 shares with a fair value of
approximately $666,000 were tendered to the Company using a
"stock-for-stock" exercise. At December 31, 2001, 299,048 shares
(with a fair value of approximately $6,579,000) were held in the
Deferred Compensation Trust.
Note 10. Disclosures About Fair Value of Financial Instruments.
The estimated fair value amounts have been determined by using
available market information and appropriate valuation
methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented are not necessarily
indicative of the amounts that could be realized in a current
market exchange. The use of different market assumptions and/or
estimation techniques may have a material effect on the estimated
fair value amounts.
- ----------------------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and equivalents $ 55,245 $ 55,245 $ 74,492 $ 74,492
Securities 137,153 137,153 152,276 152,276
Loans, net 594,547 598,475 464,024 461,060
Financial Liabilities
Demand deposits 337,450 337,450 295,287 295,287
Time Deposits 264,551 267,362 227,719 228,724
Savings 122,861 122,861 110,204 110,204
Other borrowings 6,141 6,141 5,206 5,206
- ----------------------------------------------------------------------------------------------------------------------
The following estimates and assumptions were used to estimate the
fair value of the financial instruments.
61
Cash and equivalents - The carrying amount is a reasonable
estimate of fair value.
Securities - Fair values of securities are based on quoted market
prices or dealer quotes. If a quoted market price was not
available, fair value was estimated using quoted market prices
for similar securities.
Loans, net - Fair values for certain commercial, construction,
revolving customer credit and other loans were estimated by
discounting the future cash flows using current rates at which
similar loans would be made to borrowers with similar credit
ratings and similar maturities, adjusted for the allowance for
loan losses.
Certain adjustable rate loans have been valued at their carrying
values, if no significant changes in credit standing have
occurred since origination and the interest rate adjustment
characteristics of the loan effectively adjust the interest rate
to maintain a market rate of return. For adjustable rate loans
which have had changes in credit quality, appropriate adjustments
to the fair value of the loans are made.
Demand, time and savings deposits - The fair value of
noninterest-bearing and adjustable rate deposits and savings is
the amount payable upon demand at the reporting date. The fair
value of fixed-rate interest-bearing deposits with fixed maturity
dates was estimated by discounting the cash flows using rates
currently offered for deposits of similar remaining maturities.
Other Borrowings - The carrying amount is a reasonable estimate
of fair value.
Off-balance sheet instruments - The fair value of commitments to
extend credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit-worthiness of the
counterparties. The fair values of standby and commercial
letters of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. The
fair values of such off-balance sheet instruments were not
significant at December 31, 2001 and 2000, therefore, have not
been included in the table above.
Note 11. Commitments and Contingencies. The Company is involved
in a number of legal actions arising from normal business
activities. Management, based upon the advise of legal counsel,
believes the ultimate resolution of all pending legal actions
will not have a material effect on the financial statements.
In the normal course of business there are various commitments
outstanding to extend credit which are not reflected in the
financial statements, including loan commitments of approximately
$166,386,000 and $149,839,000 at December 31, 2001 and 2000 and
standby letters of credit and financial guarantees of $3,690,000
and $4,634,000 at December 31, 2001 and 2000. The Bank does not
anticipate any losses as a result of these commitments.
Approximately $43,059,000 of loan commitments outstanding at
December 31, 2001 relate to construction loans and are expected
to fund within the next twelve months. The remainder relate
primarily to revolving lines of credit or other commercial
loans. Many of these loan commitments are expected to expire
without being drawn upon. Therefore the total commitments do not
necessarily represent future cash requirements.
62
Stand-by letters of credit are commitments written by the Bank
to guarantee the performance of a customer to a third party.
These guarantees are issued primarily relating to purchases of
inventory by the Bank's commercial customers, are typically
short-term in nature and virtually all such commitments are
collaterallized.
Most of the outstanding commitments to extend credit are at
variable rates tied to the Bank's reference rate of interest.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit issued
is the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The
Company controls the credit risk of the off-balance sheet
financial instruments through the normal credit approval and
monitoring process.
Note 12. Related Party Loans. The Company makes loans to
officers and directors and their associates subject to loan
committee approval and ratification by the Board of Directors.
These transactions are on substantially the same terms as those
prevailing at the time for comparable transactions with
unaffiliated parties and do not involve more than normal risk of
collectibility. An analysis of changes in related party loans
for the year ended December 31, 2001 is as follows:
- ------------------------------------------------------------------------------------------
Beginning Balance Additions Repayments Ending Balance
- ------------------------------------------------------------------------------------------
$ 4,882,000 $ 14,101,000 $ 14,968,000 $ 4,015,000
- ------------------------------------------------------------------------------------------
Committed lines of credit, undisbursed loans and standby letters
of credit to directors and officers were approximately $6,021,000
and $2,461,000 at December 31, 2001 and 2000.
Note 13. Regulatory Matters. The Company is subject to various
regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly, additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Capital
adequacy guidelines and the regulatory framework for prompt
corrective action require that the Company meet specific capital
adequacy guidelines that involve quantitative measures of the
Company's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The
Company's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weighting and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum ratios of total
and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and a minimum leverage ratio of
Tier 1 capital to average assets (as defined). Management
believes, as of December 31, 2001 that the Company meets all
capital adequacy requirements to which it is subject.
As of December 31, 2001 and 2000, the most recent notifications
from the Federal Deposit Insurance Corporation categorized the
Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the institution's category.
63
The following table shows the Company's and the Bank's actual
capital amounts and ratios at December 31, as well as the minimum
capital ratios to be categorized as "well capitalized" under the
regulatory framework:
- ----------------------------------------------------------------------------------------------------------------
To Be Categorized
Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
As of December 31, 2001:
Total Capital (to Risk Weighted Assets):
Company $ 73,518,000 11.1% $ 52,971,000 8.0% N/A
Community Bank 65,318,000 10.0% 52,202,000 8.0% $ 65,252,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 65,198,000 9.9% 26,486,000 4.0% N/A
Community Bank 57,117,000 8.8% 26,101,000 4.0% 39,151,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 65,198,000 8.4% 30,896,000 4.0% N/A
Community Bank 57,117,000 7.5% 30,470,000 4.0% 38,088,000 5.0%
-----------------------------------------------------------------------
As of December 31, 2000:
Total Capital (to Risk Weighted Assets):
Company $ 66,892,000 12.3% $ 43,490,000 8.0% N/A
Community Bank 63,866,000 11.8% 43,273,000 8.0% $ 54,092,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 60,098,000 11.1% 21,745,000 4.0% N/A
Community Bank 57,073,000 10.6% 21,637,000 4.0% 32,455,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 60,098,000 9.1% 26,344,000 4.0% N/A
Community Bank 57,073,000 8.7% 26,251,000 4.0% 32,814,000 5.0%
================================================================================================================
The ability of the Company to pay cash dividends in the future
will largely depend upon the cash dividends paid to it by its
subsidiary Bank. Under State and Federal law regulating banks,
cash dividends declared by a Bank in any calendar year generally
may not exceed its net income for the preceding three fiscal
years, less distributions to the Company, or its retained
earnings. Under these provisions, and considering minimum
regulatory capital requirements, the amount available for
distribution from the Bank to the Company was approximately
$9,003,000 as of December 31, 2001.
The Bank is subject to certain restrictions under the Federal
Reserve Act, including restrictions on the extension of credit to
affiliates. In particular, the Bank is prohibited from lending
to the Company unless the loans are secured by specified types of
collateral. Such secured loans and other advances from the Bank
is limited to 10% of Bank shareholders' equity, or a maximum of
$5,716,000 at December 31, 2001. No such advances were made
during 2001 or 2000.
64
Note 14. Central Coast Bancorp (Parent Company Only)
The condensed financial statements of Central Coast Bancorp
follow (in thousands):
Condensed Balance Sheets
- ---------------------------------------------------------------------------------------------------
December 31, 2001 2000
- ---------------------------------------------------------------------------------------------------
Assets:
Cash - interest bearing account with Bank $ 997 $ 1,944
Loans 7,063 -
Investment in Bank 57,672 56,823
Premises and equipment, net 1,174 1,730
Other Assets 1,149 1,142
- ---------------------------------------------------------------------------------------------------
Total assets $ 68,055 $ 61,639
===================================================================================================
Liabilities and Shareholders' Equity
Liabilities $ 2,719 $ 1,785
Shareholders' Equity 65,336 59,854
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 68,055 $ 61,639
===================================================================================================
Condensed Income Statements
- ------------------------------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Management fees $ 9,888 $ 8,700 $ 7,704
Interest income 109 - -
Other income 3 - 14
Cash dividends received from the Bank 10,500 7,000 500
- ------------------------------------------------------------------------------------------------------
Total income 20,500 15,700 8,218
Operating expenses 9,812 9,257 8,212
- ------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed net income of Bank 10,688 6,443 6
Provision (credit) for income taxes 66 (206) (206)
Equity in undistributed
net income of Bank (1,113) 2,277 7,839
- ------------------------------------------------------------------------------------------------------
Net income 9,509 8,926 8,051
Other comprehensive income (loss) 645 3,640 (5,065)
- ------------------------------------------------------------------------------------------------------
Total comprehensive income $ 10,154 $ 12,566 $ 2,986
======================================================================================================
65
Condensed Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------
Years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash:
Operations:
Net income $ 9,509 $ 8,926 $ 8,051
Adjustments to reconcile net
income to net cash provided
by operations:
Equity in undistributed
net income of Bank 1,113 (2,277) (7,839)
Depreciation 841 778 546
Gain on sale of equipment 17 - (10)
(Increase) decrease in other assets (8,387) (127) 31
Increase in liabilities 1,000 380 285
- ---------------------------------------------------------------------------------------------------
Net cash provided by operations 4,093 7,680 1,064
- ---------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sale of equipment - - 18
Purchases of equipment (302) (612) (944)
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (302) (612) (926)
- ---------------------------------------------------------------------------------------------------
Financing Activities:
Stock repurchases (4,857) (6,111) (2,682)
Stock options and warrants exercised 119 94 1,098
- ---------------------------------------------------------------------------------------------------
Net cash used by financing activities (4,738) (6,017) (1,584)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (947) 1,051 (1,446)
Cash balance, beginning of year 1,944 893 2,339
- ---------------------------------------------------------------------------------------------------
Cash balance, end of year $ 997 $ 1,944 $ 893
===================================================================================================
Note 15. Selected Quarterly Information (unaudited)
- ----------------------------------------------------------------------------------------------------------
In thousands (except per share data)
2001 2000
Three months ended Dec.31 Sep.30 June 30 Mar.31 Dec.31 Sep.30 June 30 Mar.31
- ----------------------------------------------------------------------------------------------------------
Interest revenue $ 12,331 $ 13,052 $ 12,944 $ 13,420 $ 13,656 $ 13,576 $ 12,618 $ 11,565
Interest expense 3,930 4,681 4,823 4,926 4,890 4,901 4,437 4,062
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Net interest revenue 8,401 8,371 8,121 8,494 8,766 8,675 8,181 7,503
Provision for loan losses 1,680 760 75 120 1,127 1,530 800 526
---------------------------------------------------------------------------
Net interest revenue after
provision for loan losses 6,721 7,611 8,046 8,374 7,639 7,145 7,381 6,977
Total noninterest revenues 777 927 775 650 584 672 631 546
Total noninterest expenses 4,759 4,749 4,776 4,939 4,654 4,298 4,336 4,120
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Income before taxes 2,739 3,789 4,045 4,085 3,569 3,519 3,676 3,403
Income taxes 680 1,421 1,522 1,526 1,215 1,266 1,433 1,327
---------------------------------------------------------------------------
Net income $ 2,059 $ 2,368 $ 2,523 $ 2,559 $ 2,354 $ 2,253 $ 2,243 $ 2,076
===========================================================================
Per common share:
Basic earnings per share $ 0.23 $ 0.26 $ 0.28 $ 0.28 $ 0.26 $ 0.24 $ 0.23 $ 0.21
Dilutive earnings per share 0.23 0.26 0.26 0.26 0.25 0.23 0.22 0.21
- ----------------------------------------------------------------------------------------------------------
The principal market on which the company's common stock is traded is Nasdaq.
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Form 10-K is
incorporated by reference to the information contained in the
Company's Proxy Statement for the 2002 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated
by reference to the information contained in the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders which will
be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated
by reference to the information contained in the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders which will
be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated
by reference to the information contained in the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders which will
be filed pursuant to Regulation 14A.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements. Listed and included in
Part II, Item 8.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits.
(2.1) Agreement and Plan of Reorganization and
Merger by and between Central Coast Bancorp,
CCB Merger Company and Cypress Coast Bank
dated as of 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, as amended.
(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.
*(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.
68
*(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 9.9 to Registration Statement on Form
S-8, No. 33-89948, 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.
69
(10.16) Purchase and Assumption Agreement for the
Acquisition of Wells Fargo Bank Branches
incorporated by reference from Exhibit 10.17
to the Registrant's 1996 Annual Report on
Form 10-K filed with the Commission on March
31, 1997.
(10.17) Lease agreement dated November 27, 2001,
related to 491 Tres Pinos Road , Hollister,
California.
(10.18) Lease agreement dated February 11, 2002,
related to 761 First Street, Gilroy,
California.
(21.1) The Registrant's only subsidiary is its
wholly-owned subsidiary, Community Bank of
Central California.
(23.1) Independent Auditors' Consent
*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 January 29, 2002,
reporting a press release dated January 24, 2001
regarding the Company's operating results for the
quarter and year ended December 31, 2001, and a second
report on Form 8-K was filed with the Commission on
February 6, 2002, reporting a press release dated
January 28, 2002 regarding the Company's five-for-four
stock split declared on January 28, 2002.
An Annual Report for the fiscal year ended December 31, 2001,
and Notice of Annual Meeting and Proxy Statement for the Company's
2002 Annual Meeting will be mailed to security holders subsequent
to the date of filing this Report. Copies of said materials will
be furnished to the Commission in accordance with the Commission's
Rules and Regulations.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 14(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CENTRAL COAST BANCORP
Date: March 25, 2002 By:/s/ NICK VENTIMIGLIA
-------------------------------
Nick Ventimiglia, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 25, 2002 By:/s/ ROBERT STANBERRY
--------------------------------
Robert Stanberry, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ C. EDWARD BOUTONNET Director 3/25/02
- ------------------------
(C. Edward Boutonnet)
/s/ BRADFORD G. CRANDALL Director 3/25/02
- ------------------------
(Bradford G. Crandall)
Director 3/25/02
- ------------------------
(Alfred P. Glover)
Director 3/25/02
- ------------------------
(Michael T. Lapsys)
/s/ ROBERT M. MRAULE Director 3/25/02
- ------------------------
(Robert M. Mraule)
Director 3/25/02
- ------------------------
(Duncan L. McCarter)
/s/ LOUIS A. SOUZA Director 3/25/02
- ------------------------
(Louis A. Souza)
Director 3/25/02
- ------------------------
(Mose E. Thomas)
/s/ NICK VENTIMIGLIA Chairman, President 3/25/02
- ------------------------ and CEO
(Nick Ventimiglia)
71
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
3.1 Articles of Incorporation, as amended 73
10.17 Lease agreement dated November 27, 2001, related to 81
491 Tres Pinos Road , Hollister, California
10.18 Lease agreement dated February 11, 2002, related to 158
761 First Street, Gilroy, California
23.1 Independent auditors' consent. 200
72