SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
-----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-25418
CENTRAL COAST BANCORP
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0367061
- ------------------------------------------- --------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
301 Main Street, Salinas, California 93901
- ------------------------------------------- --------
(Address of principal executive offices) (Zip code)
(831) 422-6642
-----------------
(Registrant's telephone number,
including area code)
not applicable
---------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 9,014,174 shares outstanding at August 2, 2002 .
The Index to Exhibits is located at page 28 Page
1 of 72 Pages
PART 1-FINANCIAL INFORMATION
Item 1.FINANCIAL STATEMENTS:
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
June 30, December 31,
(In thousands, except per share data) 2002 2001
---- ----
Assets
Cash and due from banks $ 61,816 $ 55,245
Federal funds sold 15,442 -
--------- ---------
Total cash and equivalents 77,258 55,245
Available-for-sale securities (amortized
cost of $115 at June 30, 2002
and $138 at December 31, 2001) 117,163 137,153
Loans:
Commercial 185,560 199,761
Real estate-construction 86,118 85,314
Real estate-other 388,524 306,622
Consumer 16,030 15,653
Deferred loan fees, net (1,196) (1,050)
--------- ---------
Total loans 675,036 606,300
Allowance for loan losses (13,012) (11,753)
--------- ---------
Net Loans 662,024 594,547
--------- ---------
Premises and equipment, net 3,071 2,962
Accrued interest receivable and other assets 11,433 12,359
--------- ---------
Total assets $ 870,949 $ 802,266
========= =========
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $ 213,726 $ 231,501
Demand, interest bearing 138,073 105,949
Savings 188,734 122,861
Time 245,582 264,551
--------- ---------
Total Deposits 786,115 724,862
Accrued interest payable and other liabilities 12,482 12,068
--------- ---------
Total liabilities 798,597 736,930
--------- ---------
Commitments and contingencies (Note 2)
Shareholders' Equity:
Preferred stock-no par value; authorized
1,000,000 shares; no shares issued
Common stock - no par value; authorized
25,000,000 shares; issued and outstanding:
9,005,690 shares at June 30, 2002
and 8,963,780 shares at December 31, 2001 51,151 50,898
Shares held in deferred compensation trust
373,810 at June 30, 2002 and at December
31, 2001), net of deferred obligation - -
Retained earnings 20,138 14,855
Accumulated other comprehensive loss - net of
taxes of $755 at June 30, 2002 and $297 at
December 31, 2001 1,063 (417)
--------- ---------
Total shareholders' equity 72,352 65,336
--------- ---------
Total liabilities and shareholders' equity $ 870,949 $ 802,266
========= =========
See Notes to Consolidated Condensed Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, 2002 2001 2002 2001
except per share data) ---- ---- ---- ----
Interest Income
Loans (including fees) $ 10,952 $ 10,709 $ 21,044 $ 21,734
Investment securities 1,601 2,122 3,347 4,325
Other 78 113 147 305
-------- --------- ---------- ----------
Total interest income 12,631 12,944 24,538 26,364
-------- --------- ---------- ----------
Interest Expense
Interest on deposits 3,396 4,729 6,929 9,562
Other 122 94 214 187
-------- --------- ---------- ----------
Total interest expense 3,518 4,823 7,143 9,749
-------- --------- ---------- ----------
Net Interest Income 9,113 8,121 17,395 16,615
Provision for Loan Losses 900 75 1,123 195
-------- --------- ---------- ----------
Net Interest Income after
Provision for Loan Losses 8,213 8,046 16,272 16,420
-------- --------- ---------- ----------
Noninterest Income
Service Charges on Deposits 575 471 1,077 903
Other 387 304 652 522
-------- --------- ---------- ----------
Total noninterest revenue 962 775 1,729 1,425
-------- --------- ---------- ----------
Noninterest Expenses
Salaries and benefits 3,044 2,869 5,795 5,871
Occupancy 459 385 880 822
Furniture and equipment 437 456 861 911
Other 1,285 1,066 2,274 2,111
-------- --------- ---------- ----------
Total noninterest expenses 5,225 4,776 9,810 9,715
-------- --------- ---------- ----------
Income Before Income Taxes 3,950 4,045 8,191 8,130
Provision for Income Taxes 1,403 1,522 2,908 3,048
-------- --------- ---------- ----------
Net Income $ 2,547 $ 2,523 $ 5,283 $ 5,082
======== ========= ========== ==========
Basic Earnings per Share $ 0.28 $ 0.28 $ 0.59 $ 0.56
Diluted Earnings per Share $ 0.27 $ 0.26 $ 0.56 $ 0.52
See Notes to Consolidated Condensed Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six months ended June 30, 2002 2001
---- ----
Cash Flows from Operations:
Net income $ 5,283 $ 5,082
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 1,123 195
Net gain on sale of investments (102) (3)
Depreciation 637 690
Net loss on sale of fixed assets 17 1
Amortization and accretion 473 193
Decrease (increase) in accrued interest
receivable and other assets (252) (523)
Increase (decrease) in accrued interest
payable and other liabilities (152) (2,144)
Increase in deferred loan fees 146 214
---------- --------
Net cash provided by operations 7,173 3,705
---------- --------
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities 97,968 38,223
Purchases of investment securities (92,404) (88,520)
Proceeds from sale of investment securities 16,714 52,817
Net increase in loans (68,746) (34,974)
Purchases of premises and equipment (745) (175)
---------- --------
Net cash used in investing activities (47,213) (32,629)
---------- --------
Cash Flows from Financing Activities:
Net increase in deposit accounts 61,253 39,537
Net increase (decrease) in long-term borrowings 682 (148)
Cash received for stock options exercised 118 67
Cash paid for shares repurchased - (3,883)
---------- --------
Net cash provided by financing activities 62,053 35,573
---------- --------
Net increase in cash and equivalents 22,013 6,649
Cash and equivalents, beginning of period 55,245 74,492
---------- --------
Cash and equivalents, end of period $ 77,258 $ 81,141
========== ========
Other Cash Flow Information:
Interest paid $ 7,617 $ 9,642
Income taxes paid 2,612 4,737
See Notes to Consolidated Condensed Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated condensed financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly Central Coast Bancorp's (the
"Company's") consolidated financial position at June 30, 2002 and December 31,
2001, the results of operations for the three and six month periods ended
June 30, 2002 and 2001 and cash flows for the six month periods ended June
30, 2002 and 2001.
Certain disclosures normally presented in the notes to the annual financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. These interim
consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 2001 Annual Report to Shareholders. The results of operations for
the three and six month periods ended June 30, 2002 and 2001 may not
necessarily be indicative of the operating results for the full year.
In preparing such financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant changes
in the near term relate to the determination of the allowance for loan
losses.
Management has determined that since all of the commercial banking products
and services offered by the Company are available in each branch of the
Community Bank of Central California, its bank subsidiary (the "Bank"), all
branches are located within the same economic environment and management does
not allocate resources based on the performance of different lending or
transaction activities, it is appropriate to aggregate the Bank branches and
report them as a single operating segment.
Stock split - On January 28, 2002, the Board of Directors approved a
five-for-four stock split, which was distributed on February 28, 2002, to
shareholders of record as of February 14, 2002. All share and per share data
for the year 2001 have been retroactively adjusted to reflect the stock split.
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $201,662,000 and standby letters of credit
of approximately $6,148,000 at June 30, 2002. However, all such commitments
will not necessarily culminate in actual extensions of credit by the Company.
Approximately $42,802,000 of loan commitments outstanding at June 30, 2002
relate to real estate construction loans that are expected to fund within the
next twelve months. The remaining commitments primarily relate to revolving
lines of credit or other commercial loans, and many of these commitments are
expected to expire without being drawn upon. Therefore, the total
commitments do not necessarily represent future cash requirements. Each
potential borrower and the necessary collateral are evaluated on an
individual basis. Collateral varies, but may include real property, bank
deposits, debt or equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the
performance of a customer to a third party. These guarantees are issued
primarily relating to purchases of inventory by commercial customers and are
typically short-term in nature. Credit risk is similar to that involved in
extending loan commitments to customers and accordingly, evaluation and
collateral requirements similar to those for loan commitments are used.
Virtually all such commitments are collateralized.
3. 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.
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 three and six-month periods
ended June 30 is reconciled as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
In thousands (expect per share 2002 2001 2002 2001
data) ---- ---- ---- ----
Basic Earnings Per Share
- ------------------------
Net income $2,547 $2,523 $5,283 $5,082
Weighted average common shares
outstanding 9,003 9,025 8,989 9,110
------ ------ ------- ------
Basic earnings per share $ 0.28 $ 0.28 $ 0.59 $ 0.56
====== ====== ======= ======
Diluted Earnings Per Share
- --------------------------
Net Income $2,547 $2,523 $5,283 $5,082
Weighted average common shares
outstanding 9,003 9,025 8,989 9,110
Dilutive effect of outstanding
options 436 435 426 405
------ ------ ------- ------
Weighted average common shares
outstanding - Diluted 9,439 9,460 9,415 9,515
------ ------ ------- ------
Diluted earnings per share $ 0.27 $ 0.26 $ 0.56 $ 0.52
====== ====== ======= ======
4. COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2002 2001 2002 2001
---- ---- ---- ----
Net Earnings $2,547 $2,523 $5,283 $5,082
Other comprehensive income(loss)-
Net unrealized gain (loss) on
available-for-sale securities 1,445 (316) 1,541 934
Reclassification adjustment for gains
included in income, net of taxes
of $41 for the three and six
months ended June 30, 2002 and $2
and $1 for the three and six
months ended June 30, 2001 (61) (3) (61) (2)
-------- -------- -------- -------
Total comprehensive income $3,931 $2,204 $6,763 $6,014
======== ======== ======== =======
5. STOCK REPURCHASE PLAN
The Board of Directors has authorized a stock repurchase program under which
repurchases will be made from time to time by the Company in the open market,
or in block purchases, or in privately negotiated transactions, in compliance
with Securities and Exchange Commission rules. The Company has not
repurchased any shares in 2002. As of June 30, 2002, there were
approximately 279,900 shares remaining under the program for repurchase by
the Company.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board {"FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 rescinds and amends these statements to
eliminate any inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions including clarification
that gains or losses from normal extinguishments of debt need not be
classified as extraordinary items. The Company adopted SFAS No. 145 as of
April 1, 2002. The adoption did not have a significant impact on the
Company's financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force Issue No. 94-3. The Company will adopt the
provisions of SFAS 146 for restructuring activities initiated after December
31, 2002. SFAS 146 requires that the liability for costs associated with an
exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of
the Company's commitment to an exit plan. SFAS 146 also establishes that
the liability should initially be measured and recorded at fair value.
Accordingly, SFAS 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical information contained herein, this report on
Form 10-Q contains certain forward-looking statements 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 accounting principles and procedures; (7) changes in business
conditions and inflation; (8) changes in securities markets; (9) data
processing compliance problems; (10) the California energy problems; (11)
variances in the actual versus projected growth in assets; (12) return on
assets; (13) loan losses; (14) expenses; (15) rates charged on loans and
earned on securities investments; (16) rates paid on deposits; and (17) fee
and other noninterest income earned, as well as other factors. This entire
report should be read to put such forward-looking statements in context. To
gain a more complete understanding of the uncertainties and risks involved in
the Company's business this report should be read in conjunction with Central
Coast Bancorp's annual report on Form 10-K for the year ended December 31,
2001.
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 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 loan losses, see "Allowance for Loan Losses" discussion later
in this Item.
Stock Based Awards
The Company accounts for its stock based awards using the intrinsic value
method in accordance with Accounting Principles Board ("APB") Opinion No. 25
and related interpretations. Since the Company's stock option plans provide
for the issuance of options at a price of no less than the fair market value
at the date of the grant, no compensation expense has been recognized in the
financial statements.
Business Organization
- ---------------------
Central Coast Bancorp (the "Company") is a California corporation organized
in 1994, and is the parent company for Community Bank of Central California,
a state-chartered bank, headquartered in Salinas, California (the "Bank").
Its investment in the Bank comprises the major business activity of the
Company. 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 Company is engaged in certain
lending activities related to the purchase of certain tax advantaged loans
from the Bank.
The Bank offers a full range of commercial banking services, including a
diverse range of traditional banking products and services to individuals,
merchants, small and medium-sized businesses, professionals and agribusiness
enterprises. Its principal markets are located in the counties of Monterey,
San Benito, Santa Clara and Santa Cruz, which are in the central coastal area
of California.
Overview
- --------
For the second quarter 2002, Central Coast Bancorp reported diluted earnings
per share of $0.27 versus $0.26 reported in the year earlier period. Net
income for the quarter ended June 30, 2002 was $2,547,000 as compared to
$2,523,000 reported for the same period of 2001. The return on equity
("ROE") and the return on assets ("ROA") for the second quarter 2002 were
14.5% and 1.20% as compared to 16.6% and 1.44% for the same period in 2001.
Net income for the six months ended June 30, 2002 and 2001 was $5,283,000 and
$5,082,000 with diluted earnings per share of $.56 and $.52, respectively.
For the first six months of 2002, ROE was 15.4% and ROA was 1.28% as compared
to 16.8% and 1.48% for the same period in 2001. The earnings per share for
the 2001 periods have been adjusted for the 25% stock split distributed in
February 2002.
The Company continued to experience strong growth in assets, loans and
deposits during the second quarter of 2002. At June 30, 2002, the Company
had assets totaling $870,949,000, an increase of $34,881,000 (4.2%) from
March 31, 2002 and $68,683,000 from year-end 2001. During the quarter, loans
increased $55,456,000 (9.0%) to total $675,036,000 at June 30, 2002.
Deposits increased $31,757,000 (4.2%) to total $786,115,000 at quarter end.
The deposit growth was accomplished even with a reduction of $20,000,000 of
State of California certificates of deposit in April 2002. On a year over
year basis, internal growth has generated an increase in assets of
$124,813,000 (16.7%); an increase in loans of $166,938,000 (32.9%); and an
increase in deposits of $113,368,000 (16.9%), which was net of a decrease of
$10,000,000 of State of California certificates of deposit.
Central Coast Bancorp ended the second quarter of 2002 with a Tier 1 capital
ratio of 9.7% and a total risk-based capital ratio of 10.9% versus 10.6% and
11.9%, respectively, at the end of the second quarter of 2001.
In April 2002, the Bank opened its eleventh branch in Gilroy, California,
which is located in the southern portion of Santa Clara County. In July
2002, the Bank entered into a lease agreement for a branch office building in
downtown Monterey. Subject to regulatory approval, the Monterey branch
opening is planned for early fourth quarter of 2002. Both of these branch
expansions represent a continuation of our strategic plan to expand the
Bank's footprint within and on the fringes of our existing market area.
Within the Management's Discussion and Analysis, interest income, net
interest income, net interest margin and the efficiency ratio are presented
on a fully taxable equivalent basis ("FTE"). These items have been adjusted
to give effect to $279,000 and $281,000 in taxable equivalent interest income
on tax-free investments for the three- month periods ending June 30, 2002 and
2001 and $561,000 and $539,000 for the six-month periods ending June 30, 2002.
The following table provides a summary of the major elements of income and
expense for the periods indicated.
Condensed Comparative Income Statement
Percentage Percentage
Three Months Ended Change Six Months Ended Change
June 30, Increase June 30, Increase
(In thousands, except percentages) 2002 2001 (Decrease) 2002 2001 (Decrease)
---- ---- ---------- ---- ---- ----------
Interest Income (1) $ 12,910 $ 13,225 -2% $ 25,099 $ 26,903 -7%
Interest Expense 3,518 4,823 -27% 7,143 9,749 -27%
------ ----- ----- ------ ----- -----
Net interest income 9,392 8,402 12% 17,956 17,154 5%
Provision for Loan Losses 900 75 1100% 1,123 195 476%
------ ----- ----- ------ ----- -----
Net interest income after
provision for loan losses 8,492 8,327 2% 16,833 16,959 -1%
Noninterest Income 962 775 24% 1,729 1,425 21%
Noninterest Expense 5,225 4,776 9% 9,810 9,715 1%
------ ----- ----- ------ ----- -----
Income before income taxes 4,229 4,326 -2% 8,752 8,669 1%
Provision for Income Taxes 1,403 1,522 -8% 2,908 3,048 -5%
Tax Equivalent Adjustment 279 281 -1% 561 539 4%
------ ----- ----- ------ ----- -----
Net income $ 2,547 $ 2,523 1% $ 5,283 $5,082 4%
====== ===== ===== ====== ===== =====
1) Interest on tax-free securities is reported on a tax equivalent basis.
Net interest income / net interest margin
- -----------------------------------------
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits and other borrowings, is the
principal component of the Bank's earnings. Net interest margin is net
interest income expressed as a percentage of average earning assets. The
first two following tables provide a summary of the components of net
interest income and the changes within the components for the periods
indicated. The third table sets forth a summary of the changes in interest
income and interest expense from changes in average asset and liability
balances (volume) and changes in average interest rates for the periods
indicated.
Three months ended June 30,
(Taxable Equivalent Basis) 2002 2001
Avg. Avg. Avg. Avg.
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
Assets:
Earning Assets
Loans (1) (2) $ 639,398 $ 10,952 6.87% $ 484,536 $ 10,709 8.86%
Taxable investments 84,228 1,042 4.96% 102,866 1,558 6.08%
Tax-exempt investments (tax equiv. basis) 49,143 838 6.84% 49,706 845 6.81%
Federal funds sold 17,553 78 1.78% 10,978 113 4.13%
------- ------ ------- -------
Total Earning Assets 790,322 $ 12,910 6.55% 648,086 $ 13,225 8.18%
------ -------
Cash & due from banks 49,562 42,500
Other assets (4) 14,091 14,249
------- -------
$ 853,975 $ 704,835
======= =======
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $ 135,929 $ 362 1.07% $ 98,440 $ 332 1.35%
Savings 173,100 916 2.12% 123,679 984 3.19%
Time deposits 258,326 2,118 3.29% 245,628 3,413 5.57%
Other borrowings 6,863 122 7.13% 6,581 94 5.73%
------- ------ ------- -------
Total interest bearing liabilities 574,218 3,518 2.46% 474,328 4,823 4.08%
------ -------
Demand deposits 203,259 163,370
Other Liabilities 5,909 6,183
------- -------
Total Liabilities 783,386 643,881
Shareholders' Equity 70,589 60,954
------- -------
$ 853,975 $ 704,835
======= =======
Net interest income & margin (3) $ 9,392 4.77% $ 8,402 5.20%
====== ====== ======= =====
- --------------------------------------------------------------------------------------------------------------
(1) Loan interest income includes fee income of $415,000 and $347,000 for the three months
ended June 30, 2002 and 2001, respectively.
(2) Includes the average allowance for loan losses of $12,283,000 and $9,455,000 and average deferred
loan fees of $1,186,000 and $966,000 for the three months ended June 30, 2002 and 2001, respectively.
(3) Net interest margin is computed by dividing net interest income by the total average earning assets.
(4) Includes the unrealized loss on available-for-sale securities.
Six months ended June 30 ,
(Taxable Equivalent Basis) 2002 2001
Avg. Avg. Avg. Avg.
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
Assets:
Earning Assets
Loans (1) (2) $616,852 $21,044 6.88% $473,106 $21,734 9.26%
Taxable investments 87,118 2,225 5.15% 103,173 3,247 6.35%
Tax-exempt securities(tax equiv. basis) 49,378 1,683 6.87% 47,697 1,617 6.84%
Federal funds sold 17,764 147 1.67% 12,229 305 5.03%
------ ------ ------- ------
Total Earning Assets 771,112 $25,099 6.56% 636,205 $26,903 8.53%
------ ------
Cash & due from banks 47,377 42,089
Other assets (4) 14,498 14,552
------ -------
$832,987 $692,846
====== =======
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $123,840 $ 633 1.03% $ 93,543 $ 660 1.42%
Savings 156,115 1,675 2.16% 122,253 2,069 3.41%
Time deposits 273,529 4,621 3.41% 239,380 6,833 5.76%
Other borrowings 6,802 214 6.34% 6,147 187 6.13%
------ ------ ------- ------
Total interest bearing liabilities 560,286 7,143 2.57% 461,323 9,749 4.26%
------ ------
Demand deposits 197,674 163,521
Other Liabilities 5,968 6,952
------ -------
Total Liabilities 763,928 631,796
Shareholders' Equity 69,059 61,050
------ -------
$832,987 $692,846
====== =======
Net interest income & margin (3) $17,956 4.70% $17,154 5.44%
====== ==== ====== ======
- -----------------------------------------------------------------------------------------------------------
(1) Loan interest income includes fee income of $801,000 and $679,000 for the six months
ended June 30, 2002 and 2001, respectively
(2) Includes the average allowance for loan losses of $12,123,000 and $9,434,000 and average deferred
loan fees of $1,127,000 and $921,000 for the six months ended June 30, 2002 and 2001, respectively.
(3) Net interest margin is computed by dividing net interest income by the total average earning assets.
(4) Includes the unrealized loss on available-for-sale securities.
Volume/Rate Analysis
(in thousands) Three Months Ended June 30, 2002 over 2001
Increase (decrease) due to change in:
Net
Volume Rate (4) Change
------ -------- ------
Interest-earning assets:
Net Loans (1)(2) $ 3,421 $(3,178) $ 243
Taxable investment securities (283) (233) (516)
Tax exempt investment securities (3) (10) 3 (7)
Federal funds sold 68 (103) (35)
-------- -------- -------
Total 3,196 (3,511) (315)
-------- -------- -------
Interest-bearing liabilities:
Demand deposits 126 (96) 30
Savings deposits 393 (461) (68)
Time deposits 176 (1,471) (1,295)
Other borrowings 4 24 28
-------- -------- -------
Total 699 (2,004) (1,305)
-------- -------- -------
Interest differential $ 2,497 $(1,507) $ 990
======== ======== =======
(in thousands) Six Months Ended June 30, 2002 over 2001
Increase (decrease) due to change in:
Net
Volume Rate (4) Change
------ -------- ------
Interest-earning assets:
Net Loans (1)(2) $ 6,601 $(7,291) $ (690)
Taxable investment securities (506) (516) (1,022)
Tax exempt investment securities (3) 57 9 66
Federal funds sold 138 (296) (158)
-------- ------- --------
Total 6,290 (8,094) (1,804)
-------- ------- --------
Interest-bearing liabilities:
Demand deposits 213 (240) (27)
Savings deposits 573 (967) (394)
Time deposits 975 (3,187) (2,212)
Other borrowings 20 7 27
-------- ------- --------
Total 1,781 (4,387) (2,606)
-------- ------- --------
Interest differential $ 4,509 $(3,707) $ 802
======== ======= ========
(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 $415,000 and $347,000 for the quarters ended June 30, 2002 and 2001, and loan fees of
$801,000 and $679,000 for the six months ended June 30, 2002 and 2001, respectively have been
included in the interest income computation.
(3) Includes taxable-equivalent adjustments that relate to income on certain securities that are exempt from
federal income taxes. The effective federal statutory tax rate was 35% for 2002 and 2001.
(4) The rate / volume variance has been included in the rate variance.
Net interest income for the second quarter of 2002 was $9,392,000, which was
an increase of $990,000 (11.8%) over the second quarter of 2001. The net
interest income for the second quarter of 2002 was the highest quarterly net
interest income ever earned by the Company and was reflective of high growth
in loans and lower costs on interest-bearing liabilities. The interest
income component decreased $315,000 (2.4%) on a quarter over quarter basis as
the 475 basis points in rate decreases in 2001 continue to impact interest
income. Average loan balances were $154,862,000 (32.0%) higher in the second
quarter of 2002 versus the same quarter in the previous year. This volume
difference added $3,421,000 to interest income. However, the average yield
earned on loans in the second quarter of 2002 was 6.87%, a decrease of 199
basis points from the yield earned in the second quarter of 2001. The lower
loan yield decreased interest income by $3,178,000. The average balance of
taxable investment securities in the second quarter of 2002 was $18,638,000
(18.1%) lower than it was in the second quarter of 2001. Average balances
for Federal funds sold for these two periods increased $6,575,000 to
$17,553,000. Interest income for the investing activities decreased $558,000
on a period over period basis.
The negative effect on net interest income caused by the lower interest
income was more than offset by decreases in interest expense on deposit
liabilities. Interest expense decreased $1,305,000 (27.1%) as the average
rate paid on interest-bearing liabilities declined 162 basis points to 2.46%
for the second quarter of 2002 as compared to 4.08% in the year earlier
period. This decrease in rates reduced interest expense by $2,004,000.
Average balances of interest-bearing liabilities in the second quarter of
2002 increased by $99,890,000 (21.1%) over the prior year period. These
higher balances added $699,000 to interest expense.
The net interest margin for the second quarter of 2002 was 4.77% as compared
to 5.20% in the year earlier period. The net interest margin in the second
quarter of 2002 increased 15 basis points from the 4.62% achieved in the
first quarter of 2002. The favorable change in net interest margin from the
first quarter is attributable to lower costs on interest-bearing liabilities
as the result of longer-term certificates maturing and repricing. The
Federal Reserve board did not adjust short-term interest rates during the
first six months of 2002. If interest rates remain stable for the balance of
2002, the net interest margin is expected to show a slight improvement. In a
rising rate environment the net interest margin is expected to improve, as
the Bank's variable rate assets are expected to reprice more quickly than the
interest-bearing liabilities.
For the six-month period ending June 30, 2002, net interest income increased
$802,000 (4.7%) over the first six months of 2001. The interest income
component decreased $1,804,000 to $25,099,000. Average balances of earning
assets were $134,907,000 (21.2%) higher in the first six months of 2002 than
the same period in 2001. The average balance of loans was $143,746,000
higher, which contributed $6,601,000 to interest income. The average yield
received on loans in the first six months of 2002 was 238 basis points lower
than the 9.26% received in the year earlier period. The lower yield on loans
decreased interest income by $7,291,000. The average balance of taxable
investment securities was $16,055,000 (15.6%) lower in the first six-months
of 2002 than in the year earlier period. As securities matured the proceeds
were utilized to fund the continued loan growth. The lower balances in
taxable investments decreased interest income $506,000 and lower yields on
the investment securities decreased interest income an additional $516,000.
The changes in the tax-exempt investment securities and federal funds sold
decreased interest income by an additional $92,000.
Interest expense for the six-month period ending June 30, 2002 decreased
$2,606,000 (26.7%) from the first six months of 2001. Average interest
bearing deposit balances in the first six-months of 2002 were $98,308,000
(21.6%) higher than in the year earlier period. These volume increases added
$1,761,000 to interest expense. For the first six months of 2002, average
rates paid on interest bearing liabilities was 2.57% for a decline of 169
basis points from the rates paid in the first six-months of 2001. The lower
rates resulted in a $4,387,000 decrease in interest expense in the first six
months of 2002 from the prior year period.
Net interest margin for the first six months of 2002 decreased 74 basis
points to 4.70% from 5.44% in the year earlier period.
Provision for Loan Losses
- -------------------------
The Bank provided $900,000 for loan losses in the second quarter of 2002 as
compared to $75,000 in the second quarter of 2001. For the six-month period
ended June 30, 2002, the Bank provided $1,123,000 compared to $195,000 in the
year earlier period. The provision for loan losses that has been recorded is
based on factors which consider the loan growth, changes in the level of
nonperforming and classified assets, changing portfolio mix and prevailing
local and national economic conditions to establish the required level of
loan loss reserves. At June 30, 2002, the ratio of the allowance for loan
losses to total loans was 1.93% as compared to 1.96% at March 31, 2002, 1.94%
at December 31, 2001 and 1.87% at June 30, 2001. (See the "Credit Risk" and
"Allowance for Loan Losses" sections for additional discussion.).
Noninterest Income
- ------------------
Noninterest income consists primarily of service charges on deposit accounts
and fees for miscellaneous services. Noninterest income totaled $962,000 in
the second quarter of 2002, which was up $187,000 (24.1%) over the same
period in 2001. Service charges on deposit accounts were up $104,000 (22.2%)
due to volume and certain fee increases. Commissions on mortgage brokerage
services decreased $32,000 (27.0%) as mortgage originations and refinance
activity declined from the levels in the second quarter of 2001. The Company
realized net gains totaling $102,000 on the sale of investment securities in
the second quarter of 2002 as compared to $4,000 in the second quarter of
2001.
For the first six-months of 2002, noninterest income was $1,729,000 compared
to $1,425,000 in the same period last year. Service charges on deposits
were up $174,000 (19.3%) due to higher volumes and the effect of certain fee
increases. Other fees were $20,000 (4.7%) higher in the first half of 2002.
The higher fees on other services were offset in part by a $29,000 decline in
mortgage brokerage fees as the activity levels decreased. The Company
realized net gains totaling $102,000 on the sale of investment securities in
the first six-months of 2002 as compared to $3,000 in the same period of 2001.
Noninterest Expense
- -------------------
As compared to the second quarter of 2001, noninterest expenses increased
$449,000 (9.4%) to a total of $5,225,000 in the second quarter of 2002.
Salary and employee benefits increased $175,000 (6.1%) because of additional
staffing for the new Gilroy branch, opened in April 2002, internal growth,
higher benefit costs, and normal salary increases. On a quarter over quarter
basis, occupancy and fixed asset expenses were higher by $55,000 (6.5%).
Costs related to the new Gilroy branch, expansion of the Hollister branch and
higher business volume contributed to the increase. Other expenses for the
second quarter of 2002 totaled $1,285,000, which was an increase of $219,000
(20.5%) from the prior year quarter. Increased costs were due to higher
volumes and certain other operational losses. The efficiency ratio for the
second quarter of 2002 improved to 50.5% from 52.0%for the second quarter of
2001.
Noninterest expenses for the six-month period ending June 30, 2002 were
$9,810,000 versus $9,715,000 for the same period in 2001. Salary and benefit
expenses were $5,795,000 in 2002 versus $5,871,000 in the first six-months of
2001. The lower costs reflect a $260,000 one-time reduction to employee
health care, which was recorded in the first quarter of 2002. Even with the
opening of the Gilroy branch and the expansion of the Hollister branch,
occupancy and fixed asset expenses were relatively flat with total expenses
of $1,741,000 for the first six months of 2002 as compared to $1,733,000 in
the year earlier period. Lower depreciation expenses in the first quarter of
2002 contributed to the small year-to-date increase in these expenses. Other
expenses increased $163,000 (7.7%). Approximately half of the increase was
due to certain other operational losses with the balance due to higher
business volumes. The efficiency ratio for the first six months of 2002
improved to 49.8% as compared to 52.3% for the same period of 2001.
Provision for Income Taxes
- --------------------------
The effective tax rate, considering state and federal taxes, and tax exempt
income, for the second quarter and first six-months of 2002 was 35.5%
compared to 37.6% and 37.5 for the same periods in 2001. The estimated tax
rates in 2002 are lower as tax exempt loans and investment securities
represent a higher percentage of income.
Securities
- ----------
At June 30, 2002, available-for-sale securities had a market value of
$117,163,000 with an amortized cost basis of $115,345,000. On an amortized
cost basis, the investment portfolio decreased by $17,856,000 from the
balance at March 31, 2002 and $22,522,000 from the balance at December 31,
2001. Funds from the sale of securities and principal payments received on
mortgage backed securities have been used in support of the Company's loan
growth. The unrealized gain of $1,818,000 at June 30, 2002 represented an
increase of $2,367,000 from the unrealized loss of $549,000 at March 31, 2002
and an increase of $2,532,000 from the unrealized loss of $714,000 at
December 31, 2001. The unrealized gain was the result of the downward shift
in the mid to long term rates in the yield curve in the second quarter of
2002.
Loans
- -----
The ending loan balance at June 30, 2002 was $675,036,000, which was an
increase of $68,736,000 (11.3%) from the year-end 2001 balance and
$166,938,000 (32.9%) from the June 30, 2001 balance. All categories of loans
have increased compared to the June 30, 2001 balances. The most significant
loan growth has been in the real estate - other category. All sectors of
the commercial real estate market in Monterey County remain relatively
strong. Vacancy rates are low and economic projections expect the vacancy
rates to remain low as there is a lack of appropriately zoned land and
available water and the political pressures are for slow growth. Within its
primary market area, the Bank has diversified its risk both as to property
type and location. See "Credit Risk" below for a discussion regarding real
estate risk.
Credit Risk
- -----------
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 examine 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 additional market areas for the Bank. 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 $541 million
at June 30, 2002. Although management believes this real estate
concentration has no more than the normal risk of collectibility, a
substantial decline in the economy in general, or a decline in real estate
values in the 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. Notwithstanding
the foregoing, abnormally high rates of impairment due to general or 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 creditworthiness of the borrower. Collateral
held varies but may include accounts receivable, inventory, property, plant
and equipment, income-producing properties, residences and other real
property. The Bank secures its collateral by perfecting its interest in
business assets, obtaining deeds of trust, or outright possession among other
means. Loan losses from lending transactions related to real estate and
agriculture compare favorably with the Bank's loan losses on its loan
portfolio as a whole.
Management believes that its lending policies and underwriting standards will
tend to 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, Restructured Loans and Other Real Estate Owned (OREO)
- ---------------------------------------------------------------------------
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. When a loan is placed on nonaccrual status, the accrued and
unpaid interest receivable is reversed and the loan is accounted for on the
cash or cost recovery method thereafter, until qualifying for return to
accrual status. Generally, a loan may be returned to accrual status when all
delinquent interest and principal become current in accordance with the terms
of the loan agreement and remaining principal is considered collectible or
when the loan is both well secured and in the process of collection. Loans
are charged off when, in the opinion of management, collection appears
unlikely. The following table sets forth nonaccrual loans, loans past due 90
days or more, restructured loans performing in compliance with modified terms
and OREO at June 30, 2002 and December 31, 2001:
(In thousands, except percentages) June 30, December 31,
2002 2001
---- ----
Past due 90 days or more and still accruing :
Commercial $ 3 $ 68
Real estate 252 -
Consumer and other - 12
---------- ---------
255 80
---------- ---------
Nonaccrual:
Commercial 641 702
Real estate - 592
Consumer and other - -
---------- ---------
641 1,294
---------- ---------
Restructured (in compliance with modified
terms)- Commercial 945 955
---------- ---------
Total nonperforming and restructured loans 1,841 2,329
---------- ---------
Other real estate owned 592 -
---------- ---------
Total nonperforming assets $ 2,433 $ 2,329
========== =========
Allowance for loan losses as a percentage of
nonperforming and restructured loans 707% 505%
Nonperforming and restructured
loans to total loans 0.27% 0.38%
Allowance for loan losses to
nonperforming assets 535% 505%
Nonperforming assets to total assets 0.28% 0.29%
During the second quarter of 2002, the Company acquired one OREO property
with a value of $592,000. Including the OREO property, nonperforming loans
increased $165,000 from the March 31, 2002 balance and $104,000 from the
December 31, 2001 balance. At June 30, 2002, nonperforming and restructured
loans, excluding the OREO property, were 0.27% of total loans, which was down
from 0.37% at March 31, 2002 and 0.38% at December 31, 2001. The ratio of
nonperforming assets to total assets was 0.28% at June 30, 2002, 0.27% at
March 31, 2002 and 0.29% at December 31, 2001. Subsequent to June 30, 2002,
the Company accepted an offer for the purchase of the OREO property and no
loss on the property is expected.
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.
At June 30, 2002, the recorded investment in loans that are considered
impaired under SFAS No. 114 was $1,714,000. The total impaired loans include
$641,000 of nonaccrual loans and $945,000 of restructured loans. . Impaired
loans had valuation allowances totaling $747,000. At December 31, 2001, the
recorded investment in loans considered impaired was $2,418,000, of which
$1,294,000 was included in nonaccrual loans and $955,000 was included in
restructured loans. The impaired loans at December 31, 2001 had valuation
allowances totaling $536,000. Management is not aware of any potential
problem loans, other than the impaired loans disclosed above, which were
accruing and current at June 30, 2002, where serious doubt exists as to the
ability of the borrower to comply with the present repayment terms.
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 June 30,
2002, the formula allowance was $9,099,000 compared to $9,140,000 at March
31, 2002 and $9,043,000 at December 31, 2001. The slight decrease in the
formula allowance during the second quarter was primarily a result of
reclassifying certain loans into the specific allowance category.
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 significant classified and 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 or lower than the formula reserve will be calculated based on the
probability of loss and/or a collateral shortfall. At June 30, 2002, the
specific allowance was $2,102,000 on a loan base of $33,466,000 compared to a
specific allowance of $1,435,000 on a loan base of $17,473,000 at March 31,
2002 and a specific allowance of $1,678,000 on a loan base of $18,922,000 at
December 31, 2001. The $667,000 increase in the specific allowance in the
second quarter of 2002 was primarily attributable to establishing specific
reserves for loans from two borrowers.
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 June 30, 2002, the unallocated allowance was $1,811,000
compared to $1,569,000 at March 31, 2002 and $1,032,000 at December 31, 2001.
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 June 30, 2002 and set forth in the preceding paragraph.
The allowance for loan losses totaled $13,012,000 or 1.93% of total loans at
June 30, 2002 compared to $12,144,000 or 1.96% at March 31, 2002, $11,753,000
or 1.94% at December 31, 2001 and $9,509,000 or 1.87% of total loans at June
30, 2001. At these dates, the allowance represented 707%, 535%, 505% and 238%
of nonperforming loans.
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 periods can be made with any certainty.
The following table summarizes activity in the allowance for loan losses for
the periods indicated:
Three months ended Six months ended
June 30, June 30,
(In thousands, except 2002 2001 2002 2001
percentages) ---- ---- ---- ----
Beginning balance $12,144 $ 9,427 $11,753 9,371
Provision charged to
expense 900 75 1,123 195
Loans charged off (43) (17) (96) (104)
Recoveries 11 24 232 47
-------- -------- ------- -------
Ending balance $13,012 $ 9,509 $13,012 9,509
======== ======== ======= =======
Ending loan portfolio $675,036 $508,098
======= =======
Allowance for loan losses as
percentage of ending loan portfolio 1.93% 1.87%
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 June 30, 2002 were approximately $201,662,000 and $6,148,000,
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 June 30, 2002, consolidated liquid assets totaled $124.9 million or 14.3%
of total assets as compared to $110.0 million or 13.7% of total consolidated
assets on December 31, 2001. In addition to liquid assets, the Bank
maintains short-term lines of credit with correspondent banks. At June 30,
2002, the Bank had $80,000,000 available under these credit lines. Informal
agreements are also in place with various other banks to purchase
participations in loans, if necessary. The Company serves primarily a
business and professional customer base and, as such, its deposit base is
susceptible to economic fluctuations. Accordingly, management strives to
maintain a balanced position of liquid assets to volatile and cyclical
deposits.
Capital Resources
- -----------------
The Company's total shareholders' equity was $72,352,000 at June 30, 2002
compared to $65,336,000 at December 31, 2001.
The Company and the Bank are subject to regulations issued by the Board of
Governors and the FDIC which require maintenance of a certain level of
capital. Under the regulations, capital requirements are based upon the
composition of an institution's asset base and the risk factors assigned to
those assets. The guidelines characterize an institution's capital as being
"Tier 1" capital (defined to be principally shareholders' equity less
intangible assets) and "Tier 2" capital (defined to be principally the
allowance for loan losses, limited to one and one-fourth percent of gross
risk weighted assets). The guidelines require the Company and the Bank to
maintain a risk-based capital target ratio of 8%, one-half or more of which
should be in the form of Tier 1 capital.
The following table shows the Company's and the Bank's actual capital amounts
and ratios at June 30, 2002 and December 31, 2001 as well as the minimum
capital ratios for capital adequacy 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
------ ----- ------ ----- ------ -----
Company
- -------
As of June 30, 2002
- -------------------
Total Capital (to Risk Weighted Assets): $80,063,000 10.9% $58,585,000 8.0% N/A
Tier 1 Capital (to Risk Weighted Assets): 70,862,000 9.7% 29,292,000 4.0% N/A
Tier 1 Capital (to Average Assets): 70,862,000 8.3% 34,141,000 4.0% N/A
As of December 31, 2001:
- ------------------------
Total Capital (to Risk Weighted Assets): 73,518,000 11.1% 52,971,000 8.0% N/A
Tier 1 Capital (to Risk Weighted Assets): 65,198,000 9.9% 26,486,000 4.0% N/A
Tier 1 Capital (to Average Assets): 65,198,000 8.4% 30,896,000 4.0% N/A
Community Bank
- --------------
As of June 30, 2002:
- --------------------
Total Capital (to Risk Weighted Assets): $73,352,000 10.1% $58,030,000 8.0% $72,538,000 10.0%
Tier 1 Capital (to Risk Weighted Assets): 64,236,000 8.9% 29,015,000 4.0% 43,523,000 6.0%
Tier 1 Capital (to Average Assets): 64,236,000 7.6% 33,787,000 4.0% 42,234,000 5.0%
As of December 31, 2001:
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Total Capital (to Risk Weighted Assets): 65,318,000 10.0% 52,202,000 8.0% 65,252,000 10.0%
Tier 1 Capital (to Risk Weighted Assets): 57,117,000 8.8% 26,101,000 4.0% 39,151,000 6.0%
Tier 1 Capital (to Average Assets): 57,117,000 7.5% 30,470,000 4.0% 38,088,000 5.0%
The Bank meets the "well capitalized" ratio measures at both June 30, 2002
and December 31, 2001.
Item 3. MARKET RISK MANAGEMENT
Overview
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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
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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.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes.
Using computer modeling techniques, the Company is able to estimate the
potential impact of changing interest rates on earnings. A balance sheet
forecast is prepared using inputs of actual loan, securities and interest
bearing liabilities (i.e. deposits/borrowings) positions as the beginning
base. The forecast balance sheet is processed against three interest rate
scenarios. The scenarios include a 200 basis point rising rate forecast, a
flat rate forecast and a 200 basis point falling rate forecast which take
place within a one year time frame. The net interest income is measured
during the first year of the rate changes and in the year following the rate
changes. The latest simulation forecast using May 31, 2002 balances and
measuring against a flat rate environment, calculated that in a one-year
horizon an increase in interest rates of 200 basis points would result in an
increase of $3,393,000 in net interest income. Conversely, a 200 basis point
decrease would result in a decrease of $3,522,000 in net interest income.
The basic structure of the balance sheet has not changed significantly from
the last simulation run.
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk. The risk profile of the Bank
has not changed materially from that at year-end 2001.
Other Matters
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Terrorist Acts
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.
Off-Balance Sheet Items
The Company has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. As of June 30,
2002 and December 31, 2001, commitments to extend credit and letters of
credit were the only financial instruments with off-balance sheet risk (See
footnote 2 in the financial statements). The Company has not entered into
any contracts for financial derivative instruments such as futures, swaps,
options or similar instruments.
Certain financial institutions have elected to use special purpose vehicles
("SPV") to dispose of problem assets. A SPV is typically a subsidiary company
with an asset and liability structure and legal status that makes it
obligations secure even if the parent corporation goes bankrupt. Under the
circumstances, these financial institutions may exclude the problem assets
from their reported impaired and non-performing assets. The Company does not
use SPV or other structures to dispose of problem assets.
Subsequent Events
- -----------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the "Act") on
July 30, 2002, which responds to recent issues in corporate governance and
accountability. Among other matters, key provisions of the Act provide for:
o Expanded oversight of the Accounting Profession by creating a new
independent oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO, and makes it a crime for an issuer to interfere with an
audit.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes and
increases in the statute of limitations for securities fraud lawsuits.
The effect of the Act upon corporations is uncertain; however, it is likely
that compliance costs may increase as corporations modify procedures if
required to conform to the provisions of the Act. The Company does not
currently anticipate that compliance with the Act will have a material effect
upon its financial position or results of its operations or its cash flows.
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
None.
Item 2. Changes in securities.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
THE FOLLOWING ARE THE VOTING RESULTS OF THE REGISTRANTS'S ANNUAL
MEETING OF THE SHAREHOLDERS HELD ON MAY 23, 2002:
PROPOSAL NO. 1: ELECTION OF DIRECTORS
AFFIRMATIVE VOTES
-
NOMINEE VOTES WITHHELD
------- ----- --------
ALFRED P. GLOVER (Class 1) 6,482,593 25,791
LOUIS A. SOUZA 6,478,152 30,252
(Class 1)
MOSE E. THOMAS, JR. (Class 1) 6,477,269 31,115
PROPOSAL NO.2: APPROVAL OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP
AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE 2002 FISCAL YEAR
FOR 6,390,890 AGAINST 90,057 ABSTAIN 27,437
TOTAL NUMBER OF SHARES VOTED: 6,508,384.
IN ADDITION, THE FOLLOWING DIRECTORS CONTINUE IN OFFICE AS MEMBERS
OF THE CLASS DESIGNATED AND WERE NOT SUBJECT TO SHAREHOLDER
ELECTION AT THIS TIME:
MICHAEL T. LAPSYS (Class 2)
DUNCAN L. McCARTER (Class 2)
NICK VENTIMIGLIA (Class 2)
C. EDWARD BOUTONNET (Class 3)
BRADFORD G. CRANDALL (Class 3)
ROBERT M. MRAULE, D.D.S., M.D.(Class 3)
Item 5. Other information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
(2.1) Agreement and Plan of Reorganization and Merger by and between
Central Coast Bancorp, CCB Merger Company and Cypress Coast
Bank dated as of December 5, 1995, incorporated by reference
from Exhibit 99.1 to Form 8-K, filed with the Commission on
December 7, 1995.
(3.1) Articles of Incorporation, as amended, incorporated by reference from
Exhibit 10.18 to the Registrant's 2001 Annual Report on Form
10-K filed with the Commission on March 26, 2002.
(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.
*(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 Executive Employment Agreement incorporated by reference from Exhibit 10.13
to the Company's 1996 Annual Report on Form 10-K filed with
the Commission on March 31, 1997.
*(10.14) Form of Executive Salary Continuation Agreement incorporated by reference from Exhibit
10.14 to the Company's 1996 Annual Report on Form 10-K filed
with the Commission on March 31, 1997.
*(10.15) Form of Indemnification Agreement incorporated by reference from Exhibit D to the
Proxy Statement filed with the Commission on September 3,
1996, in connection with Registrant's 1996 Annual
Shareholders' Meeting held on September 23, 1996.
(10.16) Purchase and Assumption Agreement for the Acquisition of Wells Fargo Bank Branches
incorporated by reference from Exhibit 10.17 to 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 incorporated by reference
from Exhibit 10.17 to the Registrant's 2001 Annual Report on
Form 10-K filed with the Commission on March 26, 2002.
(10.18) Lease agreement dated February 11, 2002, related to 761
First Street, Gilroy, California incorporated by reference
from Exhibit 10.18 to the Registrant's 2001 Annual Report on
Form 10-K filed with the Commission on March 26, 2002.
(10.19) Lease agreement dated July 16, 2002, related to 439
Alvarado Street, Monterey, California.
(21.1) The Registrant's only subsidiary is its wholly-owned subsidiary,
Community Bank of Central California.
(99.1) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to the Sarbanes-Oxley Act of 2002
*Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K.
None
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 2, 2002 CENTRAL COAST BANCORP
By: /s/ ROBERT M. STANBERRY
----------------------------------
Robert M. Stanberry
(Chief Financial Officer, Principal
Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
10.19 Lease agreement dated July 16, 2002, related to 29
439 Alvarado Street, Monterey, California
99.1 Certification of Chief Executive Officer and Chief Financial 72
Officer pursuant to the Sarbanes-Oxley Act of 2002