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, 2002
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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
Commission file number 0-25418
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CENTRAL COAST BANCORP
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0367061
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Main Street, Salinas, California 93901
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (831) 422-6642
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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 [ ]
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 [ X].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrant's
most recently completed second fiscal quarter was $166,515,208. As of
March 7, 2003, the registrant had 9,917,241 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 2003 annual meeting of shareholders.
The Index to Exhibits is located at page 78 Page 1 of 125 Pages
CENTRAL COAST BANCORP
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2002
Part I. Page
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 19
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About
Market Risks 47
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 69
Part III.
Item 10. Directors and Executive Officers of the Registrant 69
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 69
Item 13. Certain Relationships and Related Transactions 69
Item 14. Controls and Procedures 70
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports 72
on Form 8-K
Signatures and Certifications under Section 302 of the
Sarbanes-Oxley Act 75
Exhibits
10.19 Lease agreement dated July 16, 2002, related to
439 Alvarado Street, Monterey, California 79
23.1 Independent auditors' consent 124
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 125
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS.
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, the threat of
terrorism or the impact of potential military conflicts; (5) changes
in the regulatory environment; (6) changes in business conditions and
inflation; (7) changes in securities markets; (8) data processing
compliance problems; (9) variances in the actual versus projected
growth in assets; (10) return on assets; (11) loan losses; (12)
expenses; (13) rates charged on loans and earned on securities
investments; (14) rates paid on deposits; and (15) fee and other
noninterest income earned, as well as other factors. This entire
Annual Report should be read to put such forward-looking statements in
context and to gain a more complete understanding of the uncertainties
and risks involved in the Company's business. Therefore, the
information set forth therein should be carefully considered when
evaluating the business prospects of the Company and the Bank.
Central Coast Bancorp (the "Company") is a California corporation,
headquartered in Salinas, California and was organized in 1994 to act
as a bank holding company for Bank of Salinas. In 1996, the Company
acquired Cypress Bank, which was headquartered in Seaside,
California. Both banks were state-charted institutions. In July of
1999, the Company merged Cypress Bank into the Bank of Salinas and
then renamed Bank of Salinas as Community Bank of Central California
(the "Bank"). The Bank is headquartered in Salinas and serves
individuals, merchants, small and medium-sized businesses,
professionals, agribusiness enterprises and wage earners located in
the California Central Coast area.
On February 21, 1997, the former Bank of Salinas purchased certain
assets and assumed certain liabilities of the Gonzales and Castroville
branch offices of Wells Fargo Bank. As a result of the transaction
the Bank assumed deposit liabilities, received cash, and acquired
tangible assets. This transaction resulted in intangible assets,
representing the excess of the liabilities assumed over the fair value
of the tangible assets acquired.
In January 1997, the former Cypress Bank opened a new branch office in
Monterey, California, so that it might better serve business and
individual customers on the Monterey Peninsula. In December 1998, the
former Bank of Salinas opened an additional new branch office in
Salinas, California, to better provide services to the growing Salinas
community.
In June of 2000, the Bank opened a new branch office in Watsonville,
which is in Santa Cruz County. In October of 2000, another new branch
office was opened in Hollister, which is in San Benito County. The
opening of these two branch offices was a first step in expanding the
Bank's service area to include communities in contiguous counties
outside of Monterey County. On April 15, 2002 the Bank opened a new
branch in Gilroy, which 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.
As part of the Bank's continuing strategy to expand its franchise
through denovo branches, a new branch was opened in downtown Monterey
(Monterey Main) on January 21, 2003.
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
eleven branch offices located in Castroville, Gilroy, Gonzales,
Hollister, King City, Marina, Monterey (2), 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
equity, 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 Monterey Main 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 each
of its branch locations, 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, 2002, these four categories
accounted for approximately 30%, 2%, 10% and 58% 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. Approximately 50% of the deposits are from commercial
customers, 42% are from individuals and 8% are from governmental
entities and local agencies.
As of December 31, 2002, the Bank served a total of 29 state,
municipality and governmental agency depositors with $58,127,000 in
deposits. Of this amount $10,000,000 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, 2002, the Bank had total deposits of $826,502,000.
Of this total, $261,242,000 represented noninterest-bearing demand
deposits, $127,692,000 represented interest-bearing demand deposits,
and $437,568,000 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, 2002, these sources comprised 87.4%, 12.1%, and 0.5%,
respectively, of the Bank's total interest income.
SUPERVISION AND REGULATION
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 of the Federal
Reserve System ("Board of Governors") and provide such additional
information as the Commissioner, FDIC and the Board of Governors may
require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and is registered as such with, and subject to the supervision
of, the Board of Governors. The Company is required to obtain the
approval of the Board of Governors before it may acquire all or
substantially all of the assets of any bank, or ownership or control
of the voting shares of any bank if, after giving effect to such
acquisition of shares, the Company would own or control more than 5%
of the voting shares of such bank. The Bank Holding Company Act
prohibits the Company from acquiring any voting shares of, or interest
in, all or substantially all of the assets of, a bank located outside
the State of California unless such an acquisition is specifically
authorized by the laws of the state in which such bank is located.
Any such interstate acquisition is also subject to the provisions of
the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994.
The Company, and any subsidiaries, which it may acquire or organize,
are deemed to be "affiliates" of the Bank within the meaning of that
term as defined in the Federal Reserve Act. This means, for example,
that there are limitations (a) on loans by the Bank to affiliates, and
(b) on investments by the Bank in affiliates' stock as collateral for
loans to any borrower. The Company and its subsidiaries are also
subject to certain restrictions with respect to engaging in the
underwriting, public sale and distribution of securities.
In addition, regulations of the Board of Governors promulgated under
the Federal Reserve Act require that reserves be maintained by the
Bank in conjunction with any liability of the Company under any
obligation (demand deposits, promissory note, acknowledgement of
advance, banker's acceptance or similar obligation) with a weighted
average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying
funds to the Bank for use in its banking business, or to maintain the
availability of such funds.
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding
companies and banks. The guidelines are designed to make capital
requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to
aid in making the definition of bank capital uniform internationally.
Under the guidelines, the Company and the Bank are required to
maintain capital equal to at least 8.0% of its assets and commitments
to extend credit, weighted by risk, of which at least 4.0% must
consist primarily of common equity (including retained earnings) and
the remainder may consist of subordinated debt, cumulative preferred
stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present
less risk than others permit maintenance of capital at less than the
8% ratio. For example, most home mortgage loans are placed in a 50%
risk category and therefore require maintenance of capital equal to 4%
of such loans, while commercial loans are placed in a 100% risk
category and therefore require maintenance of capital equal to 8% of
such loans.
The Company and the Bank are subject to regulations issued by the
Board of Governors and the FDIC, which require maintenance of a
certain level of capital. These regulations impose two capital
standards: a risk-based capital standard and a leverage capital
standard.
Under the Board of Governors' risk-based capital guidelines, assets reported
on an institution's balance sheet and certain off-balance sheet items
are assigned to risk categories, each of which has an assigned risk
weight. Capital ratios are calculated by dividing the institution's
qualifying capital by its period-end risk-weighted assets. The
guidelines establish two categories of qualifying capital: Tier 1
capital (defined to include common shareholders' equity and
noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks,
cumulative) preferred stock, mandatory convertible securities,
subordinated debt and a limited amount of reserve for loan losses.
Tier 2 capital may also include up to 45% of the pretax net unrealized
gains on certain available-for-sale equity securities having readily
determinable fair values (i.e. the excess, if any, of fair market
value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to
exclude all or a portion of the unrealized gains upon a determination
that the equity securities are not prudently valued. Unrealized gains
and losses on other types of assets, such as bank premises and
available-for-sale debt securities, are not included in Tier 2
capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale
equity securities will continue to be deducted from Tier 1 capital as
a cushion against risk. Each institution is required to maintain a
risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%,
of which at least half must be Tier 1 capital.
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, 2002, the Bank and the Company are in compliance with
the risk-based capital and leverage ratios described above. See
Footnote 13 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,
2002 and 2001.
The Board of Governors and FDIC adopted regulations implementing a
system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The
regulations establish five capital categories with the following
characteristics: (1) "Well capitalized" - consisting of institutions
with a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater and a leverage ratio of 5%
or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive;
(2) "Adequately capitalized" - consisting of institutions with a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4% or greater, and the
institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions with
a total risk-based capital ratio less than 8%, a Tier 1 risk-based
capital ratio of less than 4%, or a leverage ratio of less than 4%;
(4) "Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based
capital ratio of less than 3%, or a leverage ratio of less than 3%;
(5) "Critically undercapitalized" - consisting of an institution with
a ratio of tangible equity to total assets that is equal to or less
than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing
capital restoration plans required under the regulations and
procedures for issuance of directives by the appropriate regulatory
agency, among other matters. The regulations impose restrictions upon
all institutions to refrain from certain actions which would cause an
institution to be classified within any one of the three
"undercapitalized" categories, such as declaration of dividends or
other capital distributions or payment of management fees, if
following the distribution or payment the institution would be
classified within one of the "undercapitalized" categories. In
addition, institutions which are classified in one of the three
"undercapitalized" categories are subject to certain mandatory and
discretionary supervisory actions. Mandatory supervisory actions
include (1) increased monitoring and review by the appropriate federal
banking agency; (2) implementation of a capital restoration plan; (3)
total asset growth restrictions; and (4) limitation upon acquisitions,
branch office expansion, and new business activities without prior
approval of the appropriate federal banking agency. Discretionary
supervisory actions may include (1) requirements to augment capital;
(2) restrictions upon affiliate transactions; (3) restrictions upon
deposit gathering activities and interest rates paid; (4) replacement
of senior executive officers and directors; (5) restrictions upon
activities of the institution and its affiliates; (6) requiring
divestiture or sale of the institution; and (7) any other supervisory
action that the appropriate federal banking agency determines is
necessary to further the purposes of the regulations. Further, the
federal banking agencies may not accept a capital restoration plan
without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent
holding company must guarantee that the institution will comply with
such capital restoration plan. The aggregate liability of the parent
holding company under the guaranty is limited to the lesser of (i) an
amount equal to 5 percent of the depository institution's total assets
at the time it became undercapitalized, and (ii) the amount that is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a
depository institution fails to submit an acceptable plan, it is
treated as if it were "significantly undercapitalized." FDICIA also
restricts the solicitation and acceptance of and interest rates
payable on brokered deposits by insured depository institutions that
are not "well capitalized." An "undercapitalized" institution is not
allowed to solicit deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the
market areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership
within 90 days of such determination unless it is also determined that
some other course of action would better serve the purposes of the
regulations. Critically undercapitalized institutions are also
prohibited from making (but not accruing) any payment of principal or
interest on subordinated debt without the prior approval of the FDIC
and the FDIC must prohibit a critically undercapitalized institution
from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than in the
usual course of business, including investment expansion, acquisition,
sale of assets or other similar actions; (2) extending credit for any
highly leveraged transaction; (3) amending articles or bylaws unless
required to do so to comply with any law, regulation or order; (4)
making any material change in accounting methods; (5) engaging in
certain affiliate transactions; (6) paying excessive compensation or
bonuses; and (7) paying interest on new or renewed liabilities at
rates which would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and
maintain comprehensive written real estate policies which address
certain lending considerations, including loan-to-value limits, loan
administrative policies, portfolio diversification standards, and
documentation, approval and reporting requirements. The FDICIA
further generally prohibits an insured state bank from engaging as a
principal in any activity that is impermissible for a national bank,
absent FDIC determination that the activity would not pose a
significant risk to the Bank Insurance Fund, and that the bank is, and
will continue to be, within applicable capital standards. Similar
restrictions apply to subsidiaries of insured state banks. The
Company does not currently intend to engage in any activities which
would be restricted or prohibited under the FDICIA.
The Federal Financial Institution Examination Counsel ("FFIEC")
utilizes the Uniform Financial Institutions Rating System ("UFIRS")
commonly referred to as "CAMELS" to classify and evaluate the
soundness of financial institutions. Bank examiners use the CAMELS
measurements to evaluate capital adequacy, asset quality, management,
earnings, liquidity and sensitivity to market risk.
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.
COMPETITION
At June 30, 2002, the competing commercial and savings banks had 63
branch offices in the cities of Castroville, Hollister, Gilroy,
Gonzales, King City, Marina, Monterey, Salinas, Seaside and
Watsonville where the Bank has its twelve 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, 2002, the Bank's aggregate
legal lending limits to a single borrower and such borrower's related
parties were $13,052,000 on an unsecured basis and $21,754,000 on a
fully secured basis based on regulatory capital and reserves of
$87,016,000
The Bank's business is concentrated in its service area, which
primarily encompasses Monterey County, including the Salinas Valley
area and also serves Hollister, in San Benito County, Watsonville, in
Santa Cruz County, and Gilroy, in Santa Clara County. The economy of
the Bank's service area is dependent upon agriculture, tourism, retail
sales, population growth and smaller service oriented businesses.
Based upon data as of the most recent practicable date (June 30,
20021), there were 70 operating commercial and savings bank branch
offices in Monterey County with total deposits of $4,830,773,000.
This was an increase of $355,860,000 over the June 30, 2001 balances.
The Bank held a total of $739,306,000 in deposits, representing
approximately 15.3% of total commercial and savings banks deposits in
Monterey County as of June 30, 2002. In the three new expansion areas
in the Cities of Gilroy, Hollister and Watsonville, at June 30, 2002,
there were 9, 8 and 11 branch offices with total deposits of
$490,438,000, $520,561,000 and $772,272,000, respectively. At that
date, the Bank had deposits of $4,487,000, $29,994,000 and $14,989,000
in those three 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.
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.
- --------
1 "FDIC Institution Office Deposits", June 30, 2002
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
significant rate changes were not anticipated and they adversely
impacted the Bank's net interest income for 2001 and 2002.
Additionally, in November of 2002, the Federal Funds rate was lowered
by another 50 basis points to 1.25%. Barring any further rate
reductions interest margins should remain relatively constant in 2003.
The FDIC's bank deposit insurance assessment rates currently 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 2003 from that in 2002.
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.
In 1999, the Gramm-Leach-Bliley Act was signed into law (the "GLB
Act"). The GLB Act 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 GLB
Act 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 GLB Act 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 GLB Act
Prior to the GLB Act, 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 GLB
Act 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 GLB Act, 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 respect the privacy of their customers and protect the
security and confidentiality of customers' non-public personal
information. These regulations require, in general, that financial
institutions (1) may not disclose non-public personal information of
customers to non-affiliated third parties without notice to their
customers, who must have 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 GLB Act, and the extent to which competition will change among
financial institutions affected by the GLB Act 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.
On July 30, 2002, President George W. Bush signed into law the
Sarbanes-Oxley Act of 2002 (the "Act"), which responds to recent
issues in corporate governance and accountability. Among other
matters, key provisions of the Act and rules promulgated by the
Securities and Exchange Commission pursuant to the Act include the
following:
o Expanded oversight of the accounting profession by creating a new
independent public company 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
all services provided by the independent auditor 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 making issuer
interference with an audit a crime.
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.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions, and
disclosure of any amendments or waivers to such code of
ethics. The disclosure obligation becomes effective for
fiscal years ending on or after July 15, 2003. The ethics
code must contain written standards that are reasonably
designed to deter wrongdoing and to promote:
- Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal
and professional relationships;
- Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a registrant files with, or
submits to, the Securities and Exchange Commission and in
other public communications made by the registrant;
- Compliance with applicable governmental laws, rules and
regulations;
- The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
- Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as
an "audit committee financial expert." The disclosure
obligation becomes effective for fiscal years ending on or
after July 15, 2003. To qualify as an "audit committe
financial expert," a person must have:
- An understanding of generally accepted accounting principles and
financial statements;
- The ability to assess the general application of such principles
in connection with the accounting for estimates, accruals
and reserves;
- Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the
breadth and complexity of issues that can reasonably be
expected to be raised by the registrant's financial
statements, or experience actively supervising one or more
persons engaged in such activities;
- An understanding of internal controls and procedures for
financial reporting; and
- An understanding of audit committee functions.
A person must have acquired the above listed attributes to be
deemed to qualify as an "audit committee financial expert"
through any one or more of the following:
- Education and experience as a principal financial officer,
principal accounting officer, controller, public accountant
or auditor or experience in one or more positions that
involve the performance of similar functions;
- Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant,
auditor or person performing similar functions;
- Experience overseeing or assessing the performance of companies
or public accountants with respect to the preparation,
auditing or evaluation of financial statements; or
- Other relevant experience.
The rule contains a specific safe harbor provision to clarify
that the designation of a person as an "audit committee financial
expert" does not cause that person to be deemed to be an "expert"
for any purpose under Section 11 of the Securities Act of 1933,
as amended, or impose on such person any duties, obligations or
liability greater that the duties, obligations and liability
imposed on such person as a member of the audit committee and the
board of directors, absent such designation. Such a designation
also does not affect the duties, obligations or liability of any
other member of the audit committee or board of directors.
o A prohibition on insider trading during pension plan blackout
periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on certain loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring
attorneys having an attorney-client relationship with a
company, among other matters, to report "up the ladder" to the
audit committee, another board committee or the entire board
of directors certain material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing
deadline to within 2 business days of the date a transaction
triggers an obligation to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be
phased-in over a four year period reducing the filing deadline
for Form 10-K reports from 90 days after the fiscal year end
to 60 days and Form 10-Q reports from 45 days after the fiscal
quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K,
10-Q and 8-K, and any amendments to those reports, by
"accelerated filers" as soon as reasonably practicable after
such reports and material are filed with or furnished to the
Securities and Exchange Commission.
o Proposed rules requiring national securities exchanges and
national securities associations to prohibit the listing of
any security whose issuer does not meet audit committee
standards established pursuant to the Act. These proposed
rules would establish audit committee:
- Independence standards for members;
- Responsibility for selecting and overseeing the issuer's
independent accountant;
- Responsibility for handling complaints regarding the issuer's
accounting practices;
- Authority to engage advisers; and
- Funding requirements for the independent auditor and outside
advisers engaged by the audit committee.
The proposed audit committee rules provide a one-year phase-in
period for compliance.
The Securities and Exchange Commission must adopt final rules by April
26, 2003.
The effect of the Act upon the Company is uncertain; however, it is
likely that the Company will incur increased costs to comply with the
Act and the rules and regulations promulgated pursuant to the Act by
the Securities and Exchange Commission and other regulatory agencies
having jurisdiction over the Company. The Company does not currently
anticipate, however, that compliance with the Act and such rules and
regulations will have a material adverse effect upon its financial
position or results of its operations or its cash flows.
On September 28, 2002, California Governor Gray Davis signed into law
the California Corporate Disclosure Act (the "CCD Act"), which became
effective January 1, 2003. The CCD Act requires publicly traded
corporations incorporated or qualified to do business in California to
disclose information about their past history, auditors, directors and
officers. The CCD Act requires the Company to disclose:
o The name of the company's independent auditor and a description
of services, if any, performed for the company during the
previous 24 months;
o The annual compensation paid to each director and executive
officer, including stock or stock options not otherwise
available to other company employees;
o A description of any loans made to a director at a "preferential"
loan rate during the previous 24 months, including the amount
and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its
directors or executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been
convicted of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any
securities or banking provisions of California law during the
previous 10 years for which the company was found liable or
fined more than $10,000.
The Company does not currently anticipate that compliance with the CCD
Act will have a material adverse effect upon its financial position or
results of its operations or its cash flows.
Certain legislative and regulatory proposals that could affect the
Bank and the banking business in general are periodically introduced
before the United States Congress, the California State Legislature
and Federal and state government agencies. It is not known to what
extent, if any, legislative proposals will be enacted and what effect
such legislation would have on the structure, regulation and
competitive relationships of financial institutions. It is likely,
however, that such legislation could subject the Company and the Bank
to 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, 2002, the Company employed 246 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 eleven banking offices. Owned and leased facilities are
listed below.
301 Main Street 1658 Fremont Boulevard
Salinas, California Seaside, California
23,662 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
$22,262 $5,273
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
$3,183
400 Alta Street 599 Lighthouse Avenue
Gonzales, California Monterey, California.
5,175 square feet 4,856 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 $6,435
532 Broadway 1915 Main Street
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
$5,445 $1,641
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 $4,060
761 First Street 439 Alvarado Street
Gilroy, California Monterey, California
2,670 square feet 5,731 square feet
Leased (term expires Leased (term expires 2008 with three
2007 with one five year five year renewal
renewal option) options) with a one year purchase option
Current monthly rent of Current monthly rent of
$5,207 $14,041
The above leases contain options to extend for five to twenty 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 to the Consolidated Financial
Statements in Item 8 "Financial Statements and Supplementary Data"
included in this report and incorporated here by reference. The
foregoing summary descriptions of certain of the above leased premises
are qualified in their entirety by reference to the lease agreements
listed as exhibits in Part IV, Item 15 of this Form 10-K.
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 2002.
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 in February 2001 and 2003 and the 5 for 4 stock split in
February 2002.
Calendar Year Low High
------------- --- ----
2002
First Quarter $15.10 $18.64
Second Quarter 15.25 22.04
Third Quarter 16.14 20.91
Fourth Quarter 15.55 18.46
2001
First Quarter $11.82 $14.36
Second Quarter 13.45 19.09
Third Quarter 14.00 18.25
Fourth Quarter 14.29 16.67
The closing price for the Company's common stock was $17.10 as of
March 7, 2003.
(b) Holders
As of March 7, 2003, 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
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 $11,480,000 as of December 31, 2002.
To date, the Company has not paid a cash dividend and presently does
not intend to pay cash dividends in the foreseeable future. The
Company distributed a ten percent stock dividend in February 2003, a
five-for-four stock split in February 2002, and a ten percent stock
dividend in 2001. 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.
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. The earnings per share
information has been adjusted retroactively to reflect the effect of
all stock dividends and stock splits.
- --------------------------------------------------------------------
In thousands (except As of and for the Year Ended December 31
per share data) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------
Operating Results
Total Interest Income $50,501 $51,747 $51,415 $41,517 $37,354
Total Interest Expense 13,955 18,360 18,290 13,648 13,319
-------------------------------------------
Net Interest Income 36,546 33,387 33,125 27,869 24,035
Provision for Loan Losses 3,584 2,635 3,983 1,484 159
-------------------------------------------
Net Interest Income
After Provision for
Loan Losses 32,962 30,752 29,142 26,385 23,876
Noninterest Income 3,665 3,129 2,433 2,231 2,084
Noninterest Expenses 20,496 19,223 17,408 16,043 13,859
-------------------------------------------
Income before Income
Taxes 16,131 14,658 14,167 12,573 12,101
Income Taxes 5,603 5,149 5,241 4,522 4,948
-------------------------------------------
Net Income $10,528 $9,509 $ 8,926 $8,051 $ 7,153
====================================================================
Basic Earnings Per $ 1.06 $ 0.95 $ 0.85 $ 0.75 $ 0.71
Diluted Earnings Per Share 1.02 0.92 0.83 0.73 0.65
====================================================================
Financial Condition and
Capital - Year-End Balances
Total Loans $745,353 $606,300 $473,395 $395,597 $312,170
Total Assets 919,132 802,266 706,693 593,445 543,933
Total Deposits 826,502 724,862 633,209 518,189 489,192
Shareholders' Equity 78,076 65,336 59,854 53,305 51,199
- --------------------------------------------------------------------
Financial Condition and
Capital - Average Balances
Total Loans $668,069 $522,884 $424,172 $352,936 $275,850
Total Assets 858,009 727,198 632,953 562,073 499,354
Total Deposits 772,111 648,664 565,487 494,266 447,598
Shareholders' Equity 72,519 62,918 55,762 52,069 47,587
- --------------------------------------------------------------------
Selected Financial Ratios
Return on Average Total
Assets 1.23% 1.31% 1.41% 1.43% 1.43%
Return on Average
Shareholders' Equity 14.52% 15.11% 16.01% 15.46% 15.03%
Average Shareholders'
Equity to Total
Average Assets 8.45% 8.65% 8.81% 9.26% 9.53%
- --------------------------------------------------------------------
(a) Average Balance Sheet and Net Interest Margin
(1) Distribution of Assets, Liabilities and Equity; Interest
Rates and Interest Differential is set forth in 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, 2002 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, 2002 and
2001 is set forth in Note 3 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, 2002 are set forth
in Table Thirteen in 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 set forth in Table
Three in 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, 2002 is set forth in Table Twelve in 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.
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 in 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, 2002 is summarized
in Table Five in 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 in 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 in 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, 2002, 2001 and 2000 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, 2002 and is
incorporated here by reference.
(f) Return on Equity and Assets
(1) The Selected Financial Data table at page 21 of this section sets
forth the ratios of net income to average assets and average
shareholders' equity, and average shareholders' equity to
average assets. As the Company has never paid a cash
dividend, the dividend payout ratio is not indicated.
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, the threat of
terrorism or the impact of potential military conflicts; (5) changes
in the regulatory environment; (6) changes in business conditions and
inflation; (7) changes in securities markets; (8) data processing
compliance problems; (9) variances in the actual versus projected
growth in assets; (10) return on assets; (11) loan losses; (12)
expenses; (13) rates charged on loans and earned on securities
investments; (14) rates paid on deposits; and (15) fee and other
noninterest income earned, as well as other factors. This entire
Annual Report should be read to put such forward-looking statements in
context and to gain a more complete understanding of the uncertainties
and risks involved in the Company's business. Therefore, the
information set forth therein should be carefully considered when
evaluating the business prospects of the Company and the Bank.
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. The
Company applies Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
to account for its stock based awards. 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 based on the probable estimated
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 credit losses, see page 36.
Stock Based Compensation
Under APB No. 25, compensation cost for stock options is measured as
the excess, if any, of the fair market value of the Company's stock at
the date of the grant over the amount required to be paid. Because 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 cost is required to be recognized for the stock option
plan. For further information regarding the proforma effect on
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 the date of grant as prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation" see Note 1 and 9 to the
Consolidated Financial Statements in Item 8 - Financial Statements and
Supplementary Data.
Business Organization
Central Coast Bancorp (the "Company") is a California corporation,
headquartered 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-chartered 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, 2002, the Bank operated eleven full-service branch
offices and one limited-service branch office and conducts online
banking through its web site www.community-bnk.com. The Bank is
headquartered in Salinas and serves individuals, merchants, small and
medium-sized businesses and professionals. The economy in the Bank's
service area is heavily weighted towards agribusiness enterprises and
the hospitality industry.
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. On April 15, 2002 the Bank opened a new
branch in Gilroy, which 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.
As part of the Bank's continuing strategy to expand its franchise
through denovo branches, a new branch was opened in downtown Monterey
(Monterey Main) on January 21, 2003.
Until August 16, 2001, the Company conducted no significant activities
other than holding the shares of the 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.
Within "Management's Discussion and Analysis" interest income and net
interest income are presented on a tax equivalent basis.
Overview
For the 19th consecutive year, Central Coast Bancorp earned record net
income on a year-over-year basis. Net income for 2002 increased 10.7%
to $10,528,000 from $9,509,000 in 2001. Diluted earnings per share
for 2002, after giving effect to the 10% stock dividend distributed
on February 28, 2003, was $1.02, up 10.9% from the $0.92 reported for
2001. For 2002, the Company realized a return on average equity of
14.5% and a return on average assets of 1.23%, as compared to 15.1%
and 1.31% for 2001.
At December 31, 2002, the Company had total assets of $919,132,000,
which was an increase of $116,866,000 (14.6%) from year-end 2001. At
December 31, 2002, loans totaled $745,353,000, up $139,053,000 (22.9%)
from the ending balances on December 31, 2001. Deposit growth in
2002, which is net of a $20,000,000 decrease in State of California
certificates of deposit, was $101,640,000 (14.0%). Deposits totaled
$826,502,000 at year-end 2002 compared to $724,862,000 at year-end
2001.
As discussed in last year's annual report, the 475 basis point
reduction in the prime interest rate during 2001 had a significant
impact on the Company's net interest income. As each rate cut
occurred, variable rate loans repriced immediately or, at the latest,
by quarter's end. However, rates paid on deposit products were
lowered as market conditions allowed and generally lagged the more
immediate reduction in loan rates. As a result, the average yield
earned on assets in 2001 decreased 116 basis points to 7.89% from
9.05% in 2000. Meanwhile, the average rate paid on liabilities only
decreased 49 basis points to 3.80% from 4.29%. This resulted in a
decrease in the net interest margin in 2001 compared to 2000 of 73
basis points to 5.15% from 5.88%.
The decrease in interest rates in 2001 continued to affect the net
interest income in 2002 as the lower rates were in place for the full
year. In addition, there was another 50 basis point decrease in the
prime interest rate in November 2002. Thus, the average yield on
earning assets for 2002 decreased 141 basis points to 6.48%. However,
the rates paid on the deposit liabilities adjusted more rapidly in
2002 especially in time deposits as the higher yielding instruments
matured and repriced at significantly lower rates. The average rate
paid on liabilities for 2002 decreased 138 basis points to 2.42%. The
overall effect on the net interest margin was a decrease of 42 basis
points to 4.73% in 2002 as compared to the 73 basis point decrease in
2001.
The cumulative effect of the two-year growth in average earning assets
of $219,237,000 (38.0%) from $577,287,000 in 2000 to $796,524,000 in
2002 very nearly offset the decrease in interest income due to the
lower rates. This growth coupled with the lower rates paid on the
deposit liabilities resulted in an increase in net interest income of
$3,176,000 (9.2%) to $37,665,000 for 2002 compared to an increase of
$562,000 in 2001 over 2000.
One key measure of the acceptance by our local communities of our
banking franchise is provided by the FDIC/OTS Summary of Deposits
annual "Market Share Report" issued in December of each year as of
June 30th. This year's report states that Community Bank was the
third largest bank serving Monterey County with a deposit market share
of 15.30% up from 14.37% in 2001. The Bank was just $6.1 million
under the second largest. The Bank also increased its market share in
each of the communities it serves outside of Monterey County. By
year-end 2002, the Bank's deposits had increased an additional $40.4
million from the June 30 totals. The Bank made another step forward in
January 2003 by opening a branch in downtown Monterey. We believe our
attention to customer service, close involvement with the communities
we serve and emphasis on relationship banking have been instrumental
to our continuing year-after-year growth in earnings, assets and
deposits.
For the second straight year, the economic data suggests that the
country will continue to have a slow recovery. If the short-term
interest rates remain stable, we expect the Bank's net interest margin
to hold around the fourth quarter 2002 level of approximately 4.75%.
With a relatively constant net interest margin, the year-over-year
effect of the 2002 growth in earning assets will support growth in the
level of interest income. Other factors that remain key for earnings
growth are the continuing development of solid banking relationships,
the continued emphasis on loan quality and continued cost control. As
we celebrated the Bank's twentieth anniversary in February 2003, we
looked forward with cautious optimism based on our evaluation of
economic and Bank performance data available to us to continuing our
record of continued earnings growth in 2003.
(A) Results of Operations
- ---------------------------
Net Interest Income/Net Interest Margin (fully taxable equivalent
basis)
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. These items have been adjusted to give effect to
$1,119,000, $1,102,000 and $802,000 in taxable equivalent interest
income on tax-free investments for the years ending December 31, 2002,
2001 and 2000.
Net interest income for 2002 was $37,665,000, which was a $3,176,000
(9.2%) increase over 2001. The increase was in spite of interest
income decreasing $1,229,000 to $51,620,000 in 2002. The
year-over-year effect of the 475 basis point decrease in prime rate in
2001 coupled with an additional 50 basis point decrease in November of
2002 caused the yield on average assets in 2002 to decrease 141 basis
points to 6.48%. The lower rates reduced interest income by
$12,151,000. The largest portion of the decrease ($10,935,000) was
related to the loan portfolio, as the average rate earned decreased
167 basis points to 6.74%. The rates earned on the taxable investment
portfolio decreased 100 basis points to 5.03%. This decrease reduced
interest income on those securities $771,000. Because of the
continuing loan demand, the proceeds from maturities of securities and
the growth in deposits were utilized to fund the growth in loans. The
average balance of taxable investment securities decreased $22,594,000
to $76,894,000. This change reduced interest income by $1,362,000.
The growth in the loan portfolio resulted in an increase in the
average loan balance of $141,984,000 for 2002. These higher balances
added $11,941,000 to interest income and helped to offset the
decreases detailed above.
The impact on net interest income caused by the lower interest income
during 2002 was more than offset by decreases in interest expenses on
deposit liabilities resulting in the overall increase in net interest
income of $3,176,000. While average balances of deposit bearing
liabilities increased $94,032,000 (19.5%), interest expense decreased
$4,405,000 (-24.0%) in 2002 from 2001 mainly due to repricing of the
time deposits as they matured throughout the year. The average
balance of time deposits increased $15,675,000 during 2002 and as a
result interest expense increased $807,000. However, the average rate
paid on time deposits decreased 192 basis points to 3.23%, which
decreased interest expense $5,048,000. Overall, in 2002 the average
rate paid on interest-bearing liabilities decreased 138 basis points
to 2.42% from 3.80% in 2001.
The effect of the above volume and rate changes resulted in a decrease
in the net interest margin for 2002 of 42 basis points to 4.73% from
5.15% in 2001. The net interest margin for the 4th quarter of 2002 was
4.75%, which was a decrease of 6 basis points from 4.81% in the 4th
quarter of 2001 and down just one basis point from the 3rd quarter of
2002. Assuming a stable rate environment in 2003, management expects
the net interest margin to be consistent with the level during the
second half of 2002.
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. The effect
of the above volume and rate changes resulted in a decrease in the net
interest margin for 2001 of 73 basis points to 5.15% from 5.88% in
2000.
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 Bank's 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.
Table One: Analysis of Net Interest Margin on Earning Assets
- ------------------------------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis) 2002 2001 2000
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) $ 655,061 $ 44,141 6.74% $ 513,077 $ 43,135 8.41% $ 417,075 $ 41,405 9.93%
Taxable investment
securities 76,894 3,867 5.03% 99,488 6,000 6.03% 106,754 7,340 6.88%
Tax-exempt investment
securities (3) 49,240 3,357 6.82% 48,691 3,307 6.79% 36,601 2,408 6.58%
Federal funds sold 15,329 255 1.66% 8,745 407 4.65% 16,857 1,064 6.31%
----------------------- ----------------------- ----------------------
Total Earning Assets 796,524 $ 51,620 6.48% 670,001 $ 52,849 7.89% 577,287 $ 52,217 9.05%
------------ ----------- -----------
Cash & due from banks 47,419 42,551 39,432
Other assets 14,066 14,646 16,234
----------- ------------ ------------
$ 858,009 $ 727,198 $ 632,953
=========== ============ ============
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $ 128,192 $ 1,308 1.02% $ 97,785 $ 1,254 1.28% $ 94,948 $ 1,551 1.63%
Savings 178,459 3,718 2.08% 129,358 3,940 3.05% 107,075 3,820 3.57%
Time deposits 263,063 8,491 3.23% 247,388 12,732 5.15% 218,330 12,549 5.75%
Other borrowings 7,345 438 5.96% 8,496 434 5.11% 5,769 370 6.41%
----------------------- ----------------------- -----------------------
Total interest bearing
liabilities 577,059 13,955 2.42% 483,027 18,360 3.80% 426,122 18,290 4.29%
------------ ----------- -----------
Demand deposits 202,397 174,133 145,134
Other Liabilities 6,034 7,120 5,935
----------- ------------ ------------
Total Liabilities 785,490 664,280 577,191
Shareholders' Equity 72,519 62,918 55,762
----------- ------------ ------------
$ 858,009 $ 727,198 $ 632,953
=========== ============ ============
Net interest income &
Margin (4) $ 37,665 4.73% $ 34,489 5.15% $ 33,927 5.88%
======================= ==================== ======================
- ------------------------------------------------------------------------------------------------------------------------------------
1. Loans interest includes loan fees of $1,632,000, $1,387,000 and $997,000 in 2001, 2001 and 2000.
2. Average balances of loans include average allowance for loan losses of $13,008,000, $9,807,000 and $7,097,000 and average
deferred loan fees of $1,125,000, $978,000 and $719,000 for the years ended December 31, 2002, 2001 and 2000, 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 2002, 2001 and 2000.
4. Net interest margin is computed by dividing net interest income by total average earning assets.
Table Two: Volume/Rate Analysis
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002 over 2001
(In thousands)
Increase (decrease) due to change in: Net
Volume Rate (4) Change
------ -------- ------
Interest-earning assets:
Net Loans (1)(2) $ 11,941 $ (10,935) $ 1,006
Taxable investment securities (1,362) (771) (2,133)
Tax exempt investment securities (3) 37 13 50
Federal funds sold 306 (458) (152)
------------- ------------- -------------
Total 10,922 (12,151) (1,229)
------------- ------------- -------------
Interest-bearing liabilities:
Demand deposits 389 (335) 54
Savings deposits 1,498 (1,720) (222)
Time deposits 807 (5,048) (4,241)
Other borrowings (59) 63 4
------------- ------------- -------------
Total 2,635 (7,040) (4,405)
------------- ------------- -------------
Interest differential $ 8,287 $ (5,111) $ 3,176
============= ============= =============
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001 over 2000
(In thousands)
Increase (decrease) due to change in:
Net
Volume Rate (4) Change
------ -------- ------
Interest-earning assets:
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
============= ============= =============
- ------------------------------------------------------------------------------------------------------
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 $1,632,000, $1,387,000 and $997,000 for the years ended December 31, 2002, 2001 and 2000 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 2002, 2001 and 2000.
4. The rate / volume variance has been included in the rate variance.
Provision for Loan Losses
The Bank provided $3,584,000 for loan losses in 2002 up from
$2,635,000 in 2001. The provision in 2002 reflects the change in the
mix and continuing growth in the loan portfolio and the continuing
uncertain economy. Net loan charge-offs were $102,000 in 2002 compared
to $253,000 in 2001. The ratio of net charge-offs to average loans
outstanding was 0.02% in 2002 compared to 0.05% in 2001.
Nonperforming and restructured loans were $1,820,000 at December 31,
2002, compared to $2,329,000 at December 31, 2001. The ratio of
nonperforming and restructured loans to total loans was 0.24% at
December 31, 2002 compared to 0.38% at December 31, 2001. The ratio of
the allowance for loan losses to total loans - net of deferred fees
was 2.04% at December 31, 2002 compared to 1.94% at December 31, 2001.
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 was due to the change of
the mix of loans in the loan portfolio and the individual analysis of
loan loss allowance required for each loan type. Net loans charged-off
in 2000 were $208,000 or 0.05% of average loans outstanding. The
ratio of the allowance for loan losses to total loans - net of
deferred fees was 1.98% at December 31, 2000.
Service Charges and Fees and Other Income
Noninterest income in 2002 increased $536,000 (17.1%) over 2001 to
$3,665,000. Service charges accounted for much of the increase rising
$418,000 (21.7%) due to increased business activity. Other noninterest
income increased $118,000 (9.7%) as mortgage origination fees and
other non-deposit related fees also reflected higher levels of
activity in 2002. Gains on the sale of available-for-sale securities
were $102,000 down $66,000 from the prior year. This decrease was
offset by a $79,000 gain on the sale of OREO in 2002 versus $4,000 in
2001.
Noninterest income in 2001 increased $696,000 (28.6%) over 2000 to
$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. Of the total
increase, $362,000 is related to securities transactions. In 2001,
the Bank realized gains of $168,000 on the sale of available-for-sale
securities versus a loss of $194,000 in 2000.
Salaries and Benefits
Salary and benefit expenses increased $510,000 (4.4%) to $12,129,000
in 2002 over 2001. Salary expense for the Gilroy branch opened in
April 2002 was $271,000 of the increase. Salaries and benefits from
all other operations increased $499,000 (4.3%) before a $260,000 one
time reduction in health care costs in the first quarter of 2002.
Base salaries increased $433,000 (5.0%) due to normal merit increases
and staffing additions during the year. At the end of 2002, the full
time equivalent (FTE) staff was 239 versus 221 at the end of 2001.
Salary and benefit expenses increased $1,538,000 (15.3%) in 2001 over
2000. Salary expense for the two new branches opened in mid to late
2000 was $567,000 of the increase on a year-over-year basis. Salaries
and benefits from all other operations were up $971,000 (9.9%). Base
salaries increased $653,000 (9.0%) due to normal merit increases and
staffing additions during the year. Benefit costs increases were
commensurate with the salary increases. At the end of 2000, the full
time equivalent (FTE) staff was 211.
Occupancy and Furniture and Equipment
Occupancy and furniture and equipment expense increased $324,000
(9.3%) to $3,799,000 in 2002 over 2001. Operations of the new Gilroy
branch resulted in $117,000 of the increase. Most of the remaining
$207,000 increase in this category was related to higher costs for
security services, rent on leased buildings and service contracts on
computers and equipment.
Occupancy and furniture and equipment expense increased $294,000
(9.2%) to $3,475,000 in 2001 over 2000. Operations of the two
branches opened in mid to late 2000 resulted in $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 adjusting for the new branches.
Other Expenses
Other expenses increased $439,000 (10.6%) to $4,568,000 in 2002 over
2001. The higher costs were mostly related to increased business
activity related to the Bank's continuing growth. Operating losses
for 2002 increased $101,000 from a total of $44,000 in 2001 as the
continuing slow economy contributed to an increase in such losses.
Other expenses decreased $17,000 to $4,129,000 in 2001 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.
The efficiency ratio (fully taxable equivalent) calculated by dividing
noninterest expense by the sum of net interest income and noninterest
income, for 2002 was 49.6% as compared to 51.1% in 2001. This
indicates that the growth in revenues during 2002 outpaced the growth
in expenses. The efficiency ratio (fully taxable equivalent) for 2000
was 47.9% .
Provision for Taxes
The effective tax rate on income was 34.7%, 35.1% and 37.0% in 2002,
2001 and 2000, respectively. In 2002, the interest earned on
tax-exempt investment securities and loans increased $412,000 from
2001. Since the overall interest income decreased $1,246,000 in 2002,
the tax-exempt income became a larger portion of total income
resulting in a favorable reduction in the tax rate. In the fourth
quarter of 2000 and in the first quarter of 2001, the Bank purchased
approximately $12,600,000 of fixed rate municipal bonds. As a result,
the 2001 tax-exempt interest income on a tax equivalent basis
increased to 6.26% of total interest income from 4.61% in 2000 and
the effective tax rate fell 1.9% in 2001. The effective tax rate was
greater than the federal statutory tax rate due to state tax expense
of $1,660,000 $1,522,000 and $1,513,000 in 2002, 2001 and 2000.
Tax-exempt income of $3,185,000 $2,754,000 and $2,082,000 from
investment securities and loans in 2002, 2001 and 2000 helped to
reduce the effective tax rate.
(B) Balance Sheet Analysis
- ---------------------------
Central Coast Bancorp's total assets at December 31, 2002 were
$919,132,000 compared to $802,266,000 at December 31, 2001,
representing an increase of $116,866,000 (14.6%). The average balance
of total assets was $858,009,000 in 2002, which represents an increase
of $130,811,000 (18.0%) over the average total asset balance of
$727,198,000 in 2001.
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, 2002, these four categories
accounted for approximately 30%, 10%, 58% and 2% of the Bank's loan
portfolio, respectively, as compared to 33%, 14%, 50% and 3% at
December 31, 2001. Since 1998, the annual percentage loan growth from
the prior year has been 22%, 27%, 20%, 28% and 23%, primarily as a
result of the success of the loan calling officer program. The
calling program not only has attracted many new loan customers, but
also serves as an effective way of ensuring continual contact with
existing customers. Real estate-other loans provided the largest
percentage (41.5) as well as absolute dollar ($127.3 million) growth
in 2002. Construction loans outstanding at the end of 2002 were down
$11.1 million as several large projects were completed in the year and
were moved into real estate-other. Demand for commercial construction
loans remained relatively stable during the year. However, large
project residential construction opportunities in Monterey County are
becoming limited as there are very few projects receiving governmental
approval. There was a decrease in consumer loans, as much of the
lending activity to individuals is in home equity lines of credit
which are reflected in the real estate-other category. Table Three
summarizes the composition of the loan portfolio for the past five
years as of December 31:
Table Three: Loan Portfolio Composite
- -------------------------------------------------------------------------------------------------------------------------------
In thousands 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Commercial $ 224,840 $ 199,761 $ 171,631 $ 159,385 $ 136,685
Real Estate:
Construction 74,214 85,314 57,780 35,330 19,929
Other 433,921 306,622 234,890 188,600 144,685
Consumer 13,414 15,653 9,840 13,003 11,545
Deferred Loans Fees (1,036) (1,050) (746) (721) (674)
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans 745,353 606,300 473,395 395,597 312,170
Allowance for
Loan Losses (15,235) (11,753) (9,371) (5,596) (4,352)
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 730,118 $ 594,547 $ 464,024 $ 390,001 $ 307,818
===============================================================================================================================
The majority of the Bank's loans are direct loans made to individuals,
local businesses and agri-businesses. The Bank relies substantially
on local promotional activity, personal contacts by Bank officers,
directors and employees to compete with other financial institutions.
The Bank makes loans to borrowers whose applications include a sound
purpose, a viable repayment source and a plan of repayment established
at inception and generally backed by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans
for equipment purchases, working capital, and various other business
loan products. Consumer loans include a range of traditional consumer
loan products offered by the Bank such as personal lines of credit and
loans to finance purchases of autos, boats, recreational vehicles,
mobile homes and various other consumer items. The construction loans
are generally composed of commitments to customers within the Bank's
service area for construction of both commercial properties and custom
and semi-custom single family residences. Other real estate loans
consist primarily of loans to the Bank's depositors secured by first
trust deeds on commercial and residential properties typically with
short-term maturities and original loan to value ratios not exceeding
75%. In general, except in the case of loans with SBA guarantees, the
Bank does not make long-term mortgage loans; however, the Bank has
informal arrangements in place with mortgage lenders to assist
customers in securing single-family mortgage financing.
Average net loans in 2002 were $655,061,000 representing an increase
of $141,984,000 or 27.7% over 2001. Average net loans in 2001 were
$513,077,000 representing an increase of $96,002,000 or 23.0% over
2000.
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 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 areas of
the Bank's recent branch expansion. 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
$568 million at December 31, 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 allowance for probable 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 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 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, as of December
31:
Table Four: Non-Performing Loans
- -------------------------------------------------------------------------------------------
In thousands 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------
Past due 90 days or more and
still accruing
Commercial $ - $ 68 $ 215 $ 51 $ 73
Real estate - - 10 303 1,174
Consumer and other 5 12 5 - -
- -------------------------------------------------------------------------------------------
5 80 230 354 1,247
- -------------------------------------------------------------------------------------------
Nonaccrual:
Commercial 272 702 329 11 333
Real estate 598 592 - 1,565 543
Consumer and other - - - - -
- -------------------------------------------------------------------------------------------
870 1,294 329 1,576 876
- -------------------------------------------------------------------------------------------
Restructured (in compliance with
modified terms)- Commercial 933 955 1,010 - -
- -------------------------------------------------------------------------------------------
Total $ 1,808 $ 2,329 $ 1,569 $ 1,930 $ 2,123
===========================================================================================
Interest due but excluded from interest income on nonaccrual loans was
approximately $24,000 in 2002, $45,000 in 2001 and $64,000 in 2000.
In 2002 and 2001, interest income recognized from payments received on
nonaccrual loans was $40,000 and $69,000, 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 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, 2002, the recorded investment in loans that are
considered impaired was $2,618,000 of which $870,000 is included in
nonaccrual loans, and $933,000 is included in restructured loans
above. At December 31, 2001 impaired loans were $2,418,000, of which
$1,294,000 are included as non accrual loans above, and $955,000 are
included as restructured loans above. Impaired loans had a valuation
allowance of $1,165,000 and $536,000, in 2002 and 2001, respectively.
The average recorded investments in impaired loans during 2002 and
2001 were $2,338,000 and $2,638,000, respectively. The Company
recognized interest income on impaired loans of $143,000, $191,000 and
$161,000 in 2002, 2001 and 2000, respectively (including interest
income of $66,000 in 2002 and $98,000 in both 2001 and 2000 on
restructured loans).
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, 2002. Management is not aware of any
potential problem loans, which were accruing and current at December
31, 2002, where serious doubt exists as to the ability of the borrower
to comply with the present repayment terms except for one loan which
was placed on nonaccrual in February of 2003. Management believes
that amounts due on this loan will be fully collected.
Other Real Estate Owned
The Company held no real estate acquired by foreclosure at December
31, 2002 or 2001.
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, 2002, the formula
allowance was $12,002,000 compared to $9,043,000 at December 31,
2001. The increase in the formula allowance was primarily a result of
the growth in loan and loan commitment balances subject to these
formula allowances of $148,845,000 in 2002.
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 either higher or lower than the formula
reserve will be calculated based on the higher/lower-than-normal
probability of loss and the adequacy of the collateral. At December
31, 2002, the specific allowance was $1,830,000 on a loan base of
$32,180,000 compared to a specific allowance of $1,678,000 on a loan
base of $18,922,000 at December 31, 2001. The increase in the
specific allowance in 2002 was due to the larger base of loans
requiring specific valuation allowances.
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, 2002, the unallocated allowance was $1,402,000 compared
to $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 December 31, 2002 and set
forth in the preceding paragraph.
The allowance for loan losses totaled $15,235,000 or 2.04% of total
loans at December 31, 2002 compared to $11,753,000 or 1.94% at
December 31, 2001. At those two dates, the allowance represented 837
percent and 505 percent 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 years can be made with any certainty.
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) 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding $ 669,104 $ 523,862 $ 424,891 $ 353,732 $ 276,437
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
at beginning of period $ 11,753 $ 9,371 $ 5,596 $ 4,352 $ 4,223
Loans charged off:
Commercial (53) (349) (273) (333) (130)
Real estate (219) (2) - (41) (16)
Consumer (81) (79) (119) (26) (31)
- ------------------------------------------------------------------------------------------------------------------------------------
(353) (430) (392) (400) (177)
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial 214 162 170 143 116
Real estate - - - 7 20
Consumer 37 15 14 10 11
- ------------------------------------------------------------------------------------------------------------------------------------
251 177 184 160 147
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans charged off (102) (253) (208) (240) (30)
Additions to allowance charged
to operating expenses 3,584 2,635 3,983 1,484 159
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan
losses at end of period $ 15,235 $ 11,753 $ 9,371 $ 5,596 $ 4,352
====================================================================================================================================
Ratio of net charge-offs to
average loans outstanding 0.02% 0.05% 0.05% 0.07% 0.01%
Provision of allowance for possible loan
losses to average loans outstanding 0.54% 0.50% 0.94% 0.42% 0.06%
Allowance for possible loan losses to loans
net of deferred fees at year end 2.04% 1.94% 1.98% 1.41% 1.39%
- ------------------------------------------------------------------------------------------------------------------------------------
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, 2002 and 2001.
Table Six: Allowance for Loan Losses by Loan Category
- -----------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
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 $ 6,750 30% $ 7,397 33%
Real estate 6,874 67% 3,019 64%
Consumer 209 2% 305 3%
- -----------------------------------------------------------------------------------
Total allocated 13,833 100% 10,721 100%
Total unallocated 1,402 1,032
- -----------------------------------------------------------------------------------
Total $ 15,235 $ 11,753
===================================================================================
Deposits
At December 31, 2002, deposits were $826,502,000 up from $724,862,000
at the end of 2001. The 2002 year-end balances included $10,000,000 in
certificates from the State of California as compared to $30,000,000
at the end of 2001. These deposits are placed in the Bank at its
request and are secured by pledged investment securities. The deposit
growth in 2002, exclusive of the State of California certificates, was
$121,640,000 (17.3%). Management believes the large growth in
deposits may have been due in part to customers moving money out of
the stock market. We do not anticipate that deposits will increase in
2003 at or near the 2002 growth levels and a recovery in the stock
market could potentially result in an outflow of deposits.
Capital Resources
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies are 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, 2002, 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 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 stock
dividends and splits through December 31, 2002. In 2002, the Company
did not acquire any shares of its common stock. 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, 2002, there were 307,894
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 $12,740,000 or 19.5% from the previous year-end. The ratio
of total risk-based capital to risk-adjusted assets was 10.9% at
December 31, 2002 compared to 11.1% at December 31, 2001. Tier 1
risk-based capital to risk-adjusted assets was 9.7% at December 31,
2002, compared to 9.9% at December 31, 2001. The capital ratios are
slightly lower in 2002 as compared to 2001 as the level of
risked-based assets grew at a slightly higher rate than the growth in
regulatory capital levels.
Table Seven: Capital Ratios
As of December 31,
-----------------
Central Coast Bancorp 2002 2001
- --------------------- ---- ----
Tier 1 Capital 9.7% 9.9%
Total Capital 10.9% 11.1%
Leverage 8.6% 8.4%
See the discussion of capital requirements in "Supervision and
Regulation" and in Footnote 13 - Regulatory Matters in the
Consolidated Financial Statements in Item 8 - Financial Statements and
Supplementary Data.
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 2002.
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.
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 2003 net interest income, as forecast below, was modeled
utilizing a forecast balance sheet projected from year-end 2002
balances.
The following assumptions were used in the modeling activity:
o Earning asset growth of 6.0% based on ending balances
o Loan growth of 4.0% based on ending balances
o Investment and funds sold growth of 22.6% based on ending balances
o Deposit growth of 8.8% based on ending balances
o 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, 2002:
Estimated Impact on
2003 Net Interest
Income
------
Variation from flat rate scenario (in thousands)
+200 $4,286
- 200 ($3,747)
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:
Table Nine: Interest Rate Risk Simulation of NII as of December 31, 2002
% Change $ Change
in NII in NII
from Current from Current
12 Mo. Horizon 12 Month Horizon
-------------- ----------------
(in thousands)
+ 200bp 24% $8,585
- 200bp (28%) ($9,851)
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, 2002, other than
immediately, the cumulative gap indicates an asset sensitive position
through all time horizons. 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.
Table Ten: Interest Rate Sensitivity
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
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 $ 1,306 $ 12,240 $ 8,896 $ 40,914 $ 43,967 $ 107,323
Loans, excluding
nonaccrual loans
and overdrafts 16,709 498,858 49,616 146,951 31,231 743,365
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 18,015 $ 511,098 $ 58,512 $ 187,865 $ 75,198 $ 850,688
====================================================================================================================================
Interest bearing
liabilities:
Interest bearing demand $ 127,692 $ - $ - $ - $ - $ 127,692
Savings 181,089 - - - - 181,089
Time certificates - 77,721 137,516 40,440 802 256,479
Other Borrowings - 62 280 2,811 3,507 6,660
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 308,781 $ 77,783 $ 137,796 $ 43,251 $ 4,309 $ 571,920
====================================================================================================================================
Interest rate
sensitivity gap $ (290,766) $ 433,315 $ (79,284) $ 144,614 $ 70,889
Cumulative interest
rate sensitivity gap $ (290,766) $ 142,549 $ 63,265 $ 207,879 $ 278,768
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001
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
- ------------------------------------------------------------------------------------------------------------------------------------
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, 2002,
were approximately $186,982,000 and $5,169,000, 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, 2002, consolidated liquid assets
totaled $74.4 million or 8.1% 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 and has several agreements in place
for obtaining brokered certificates of deposit. At December 31, 2002,
the Bank had $76,944,000 available under the credit lines and by
policy could have negotiated for up to $89,000,000 in brokered CD's.
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.
Liquidity is affected by portfolio maturities as well as the effect
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 and 2002, 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, 2002
- -----------------------------------------------------------
Three months or less $57,625
Over three months through six months 49,483
Over six months through twelve months 52,896
Over twelve months 33,687
- -----------------------------------------------------------
Total $193,691
===========================================================
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, 2002
- -------------------------------------------------------------------
One year
One year through Over
In thousands or less five years five years Total
- -------------------------------------------------------------------
Commercial $ 131,017 $ 69,366 $ 24,457 $ 224,840
Real estate -
construction 64,944 9,270 - 74,214
Real estate -
other 61,400 127,855 244,666 433,921
Consumer 7,089 5,573 752 13,414
- -------------------------------------------------------------------
Total $ 264,450 $ 212,064 $ 269,875 $ 746,389
- -------------------------------------------------------------------
Loans shown above with maturities greater than one year
include $281,107,000 of floating interest rate loans and
$200,832,000 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, 2002 December 31, 2001
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 $ 102 1.71% $ 103 2.27%
Maturing after 1 year but within 5 years 9 5.63% 47,223 6.21%
Maturing after 5 years but within 10 years 8,857 3.24% 17,898 4.62%
Maturing after 10 years 32,488 6.34% 10,262 6.87%
State & Political Subdivision
Maturing within 1 year - - - -
Maturing after 1 year but within 5 years 4,017 4.37% 3,823 7.05%
Maturing after 5 year but within 10 Years 25,277 4.37% 23,151 6.58%
Maturing after 10 years 24,698 4.84% 22,867 6.95%
Corporate Debt Securities
Maturing within 1 year - - - -
Maturing after 10 years 10,569 2.44% 10,590 3.01%
Other 1,306 - 1,236 -
- -------------------------------------------------------------------------------------
Total investment securities $ 107,323 4.74% $ 137,153 5.96%
=====================================================================================
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
Footnote 5 to the Consolidated Financial Statements in Item 8
"Financial Statements and Supplementary Data" for the terms.) These
commitments do not significantly impact operating results.
As of December 31, 2002, 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 $192,151,000 from $170,076,000 at December 31, 2001. The
commitments represent 25.8% of total loans at year-end 2002 versus
28.1% a year ago. The majority of the commitments have a maturity of
one year or less. Commitments for home equity lines of credit
totaling $20,180,000, which have a ten-year maturity, are the single
largest category of commitments exceeding a one-year maturity.
Disclosure of Fair Value
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Statements," requires the disclosure of
fair value of most financial instruments, whether recognized or not
recognized in the financial statements. The intent of presenting the
fair values of financial instruments is to depict the market's
assessment of the present value of net future cash flows discounted to
reflect both current interest rates and the market's assessment of the
risk that the cash flows will not occur.
In determining fair values, the Company used the carrying amount for
cash, short-term investments, accrued interest receivable, short-term
borrowings and accrued interest payable as all of these instruments
are short term in nature. Securities are reflected at quoted market
values. Loans and deposits have a long term time horizon, which
required more complex calculations for fair value determination.
Loans are grouped into homogeneous categories and broken down between
fixed and variable rate instruments. Loans with a variable rate,
which reprice 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 2002, the fair values calculated on the Bank's assets were
0.3% above the carrying values versus 0.5% under the carrying values
at year-end 2001.
Website Access
Information on the Company and its subsidiary Bank may be obtained
from the Company's website www.community-bnk.com. Copies of the
Company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments thereto are available
free of charge on the website as soon as they are published by the SEC
through a link to the Edgar reporting system maintained by the SEC.
Simply select the "Central Coast Bancorp" menu item, then click on the
"Central Coast Bancorp SEC Filings" link.
Other Matters
The terrorist actions on September 11, 2001 and the threat of terror
since, and the threat of war with Iraq 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.
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
40.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 48
Consolidated Balance Sheets, December 31, 2002 and 2001 49
Consolidated Statements of Income for the years
ended December 31, 2002, 2001 and 2000 50
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 51
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2002, 2001 and 2000 52
Notes to Consolidated Financial Statements 53-68
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.
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, 2002 and 2001,
and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 2002. 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE
San Francisco, California
January 22, 2003
(February 28, 2003 as to the effects of the stock dividend described in Note 1)
Consolidated Balance Sheets
Central Coast Bancorp and Subsidiary
- -------------------------------------------------------------------------------
December 31, 2002 2001
- -------------------------------------------------------------------------------
Assets
Cash and due from banks $ 63,915,000 $ 55,245,000
Federal funds sold 2,700,000 -
- -------------------------------------------------------------------------------
Total cash and equivalents 66,615,000 55,245,000
Available-for-sale securities at fair value 107,323,000 137,153,000
Loans:
Commercial 224,840,000 199,761,000
Real estate-construction 74,214,000 85,314,000
Real estate-other 433,921,000 306,622,000
Consumer 13,414,000 15,653,000
Deferred loan fees, net (1,036,000) (1,050,000)
- -------------------------------------------------------------------------------
Total loans 745,353,000 606,300,000
Allowance for loan losses (15,235,000) (11,753,000)
- -------------------------------------------------------------------------------
Net Loans 730,118,000 594,547,000
- -------------------------------------------------------------------------------
Premises and equipment, net 2,959,000 2,962,000
Accrued interest receivable and other assets 12,117,000 12,359,000
- -------------------------------------------------------------------------------
Total assets $ 919,132,000 $ 802,266,000
===============================================================================
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $ 261,242,000 $ 231,501,000
Demand, interest bearing 127,692,000 105,949,000
Savings 181,089,000 122,861,000
Time 256,479,000 264,551,000
- -------------------------------------------------------------------------------
Total deposits 826,502,000 724,862,000
Accrued interest payable and other liabilities 14,554,000 12,068,000
- -------------------------------------------------------------------------------
Total liabilities 841,056,000 736,930,000
- -------------------------------------------------------------------------------
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: 9,015,675 and
8,963,780 shares at December 31,2002 and 2001 51,289,000 50,898,000
Shares held in deferred compensation trust
(373,810 shares in 2002 and 2001), net of
deferred obligation - -
Retained earnings 25,383,000 14,855,000
Accumulated other comprehensive income (loss),
net of taxes of $994,000 in 2002 and $297,000
in 2001 1,404,000 (417,000)
- -------------------------------------------------------------------------------
Total shareholders' equity 78,076,000 65,336,000
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 919,132,000 $ 802,266,000
===============================================================================
See notes to Consolidated Financial Statements
Consolidated Statements of Income
Central Coast Bancorp and Subsidiary
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Interest Income
Loans (including fees) $ 44,141,000 $ 43,135,000 $ 41,405,000
Investment securities 6,105,000 8,205,000 8,945,000
Federal funds sold 255,000 407,000 1,065,000
- -------------------------------------------------------------------------------------------------------------------
Total interest income 50,501,000 51,747,000 51,415,000
- -------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 13,517,000 17,926,000 17,921,000
Other 438,000 434,000 369,000
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 13,955,000 18,360,000 18,290,000
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income 36,546,000 33,387,000 33,125,000
Provision for Loan Losses (3,584,000) (2,635,000) (3,983,000)
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 32,962,000 30,752,000 29,142,000
- -------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposits 2,342,000 1,924,000 1,749,000
Other income 1,323,000 1,205,000 684,000
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,665,000 3,129,000 2,433,000
- -------------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and benefits 12,129,000 11,619,000 10,081,000
Occupancy 1,997,000 1,642,000 1,479,000
Furniture and equipment 1,802,000 1,833,000 1,702,000
Other 4,568,000 4,129,000 4,146,000
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 20,496,000 19,223,000 17,408,000
- -------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 16,131,000 14,658,000 14,167,000
Provision for Income Taxes 5,603,000 5,149,000 5,241,000
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 10,528,000 $ 9,509,000 $ 8,926,000
===================================================================================================================
Basic Earnings per Share $ 1.06 $ 0.95 $ 0.85
Diluted Earnings per Share $ 1.02 $ 0.92 $ 0.83
===================================================================================================================
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Central Coast Bancorp and Subsidiary
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operations:
Net income $ 10,528,000 $ 9,509,000 $ 8,926,000
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 3,584,000 2,635,000 3,983,000
Depreciation 1,272,000 1,361,000 1,266,000
Amortization and accretion 782,000 665,000 8,000
Provision for deferred income taxes (1,589,000) (1,260,000) (1,852,000)
Loss (gain) on sale of securities (102,000) (168,000) 194,000
Net loss on sale of equipment 17,000 23,000 19,000
Gain on other real estate owned (79,000) (4,000) (67,000)
Decrease (increase) in accrued interest receivable
and other assets (308,000) 164,000 1,077,000
Increase (decrease) in accrued interest
payable and other liabilities (920,000) (2,420,000) 3,492,000
(Decrease) increase in deferred loan fees (14,000) 304,000 25,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 13,171,000 10,809,000 17,071,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturities of available-for-sale securities 119,594,000 46,672,000 70,751,000
Proceeds from sale of available-for-sale securities 16,714,000 77,962,000 19,806,000
Purchase of available-for-sale securities (103,788,000) (108,665,000) (91,174,000)
Net change in loans held for sale - - -
Net increase in loans (139,141,000) (133,462,000) (78,031,000)
Proceeds from sale of other real estate owned 670,000 199,000 -
Proceeds from sale of equipment - - -
Purchases of equipment (1,286,000) (611,000) (1,132,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (107,237,000) (117,905,000) (79,780,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts 101,640,000 91,652,000 115,021,000
Net increase (decrease) in other borrowings 3,575,000 935,000 (11,744,000)
Cash received for stock options exercised 221,000 119,000 76,000
Cash paid for shares repurchased - (4,857,000) (6,111,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 105,436,000 87,849,000 97,242,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 11,370,000 (19,247,000) 34,533,000
Cash and equivalents, beginning of year 55,245,000 74,492,000 39,959,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 66,615,000 $ 55,245,000 $ 74,492,000
==================================================================================================================================
Noncash Investing and Financing Activities:
The Company obtained $591,000 of real estate (OREO) in 2002 in connection with foreclosures of delinquent loans
(none in 2001 or 2000). In 2002, 2001 and 2000 stock option exercises and stock repurchases totaling $263,000,
$84,000 and $20,000, 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 $ 14,491,000 $ 18,695,000 $ 17,121,000
Income taxes paid 6,962,000 8,203,000 5,970,000
==================================================================================================================================
See Notes to Consolidated Financial Statements
Consolidated Statements of Shareholders' Equity
Central Coast Bancorp and Subsidiary
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Other
Years Ended December 31, Common Stock Retained Comprehensive
2002, 2001 and 2000 Shares Amount Earnings Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2000 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/losses
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 gains/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
Net income - - 10,528,000 - 10,528,000
Changes in unrealized gains/losses
on securities available for sale,
net of taxes of $1,334,000 - - - 1,881,000 1,881,000
Reclassification adjustment for
gains included in income,
net of taxes of $42,000 - - - (60,000) (60,000)
-----------------
Total comprehensive income 12,349,000
-----------------
Stock options exercised 51,895 221,000 - - 221,000
Tax benefit of stock options exercised - 170,000 - - 170,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2002 9,015,675 $ 51,289,000 $ 25,383,000 $ 1,404,000 $ 78,076,000
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Central Coast Bancorp and Subsidiary
Years ended December 31, 2002, 2001 and 2000
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 eleven full service
branch offices in Monterey, Santa Clara, 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.
Basis of presentation - Stock dividend. On January 27, 2003 the Board
of Directors declared a 10% stock dividend, which was distributed on
February 28, 2003, to shareholders of record as of February 14, 2003.
All earnings per share data and share data related to the stock option
information have been retroactively adjusted to reflect the stock
dividend.
Cash and Cash Equivalents consist of cash on hand, amounts due from
banks and Federal funds sold.
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, 2002
and 2001 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 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 $6,660,000 borrowed from the Federal
Home Loan Bank collateralized 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, as 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. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, 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
year 1995. Under SFAS No. 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 assumptions: expected life, four years following
vesting for 2002, 2001 and 2000; average stock volatility of 16.0% for
2002, 15.6% for 2001 and 15.3% for 2000; risk free interest rates
ranging from 2.92% to 6.57% for 2002, 4.14% to 6.57% for 2001, and
4.52% to 6.57% for 2000; and no dividends during the expected term for
2002, 2001 and 2000. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as
they occur.
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 SFAS No. 123 is as follows.
- --------------------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------
Net Income - As Reported $ 10,528,000 $ 9,509,000 $ 8,926,000
Compensation expense from amortization of fair
value of stock awards, net of taxes of $64,000,
$121,000 and $260,000 in 2002, 2001 and 2000 (86,000) (176,000) (377,000)
- --------------------------------------------------------------------------------------------
Pro Forma Net Income $ 10,442,000 $ 9,333,000 $ 8,549,000
============================================================================================
Basic Earnings per Share - As Reported $ 1.06 $ 0.95 $ 0.85
Pro Forma Basic Earnings per Share $ 1.06 $ 0.94 $ 0.82
Diluted Earnings per Share - As Reported $ 1.02 $ 0.92 $ 0.83
Pro Forma Diluted Earnings per Share $ 1.01 $ 0.90 $ 0.80
============================================================================================
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.
Derivative Instruments and hedging activities. The Company did not
enter into freestanding derivative contracts and was not involved in
any hedging activities and did not identify any embedded derivatives
requiring bifurcation and separate valuation during 2002, 2001 or
2000.
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. Effective January 1, 2002,
the Company adopted SFAS No. 141, "Business Combinations" which
addresses the elimination of pooling accounting treatment in business
combinations and the financial accounting and reporting for acquired
goodwill and other intangible assets at acquisition and SFAS No.142,
"Goodwill and Other Intangible Assets" which addresses 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 adoption of these statements did not
have a material effect on the Company's consolidated financial
position, results of operations, or cash flows.
Effective January 1, 2002, the Company adopted SFAS No. 144,
"Accounting For The Impairment Or Disposal Of Long-Lived Assets". SFAS
No. 144 supersedes SFAS No. 121, "Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of" and the
accounting and reporting provisions of Accounting Principles Board
("APB") Opinion No. 30, "Reporting The Results Of Operations -
Reporting The Effects Of Disposal Of A Segment Of A Business, And
Extraordinary, Unusual and Infrequently Occurring Events And
Transactions". SFAS No. 144 unifies the accounting treatment for
various types of long-lived assets to be disposed of, and resolves
implementation issues related to SFAS No. 121. The adoption of SFAS
No. 144 did not have a material effect on the Company's financial
position, results of operations, or cash flows.
Effective April 1, 2002, the Company adopted 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 adoption of SFAS No. 145 did
not have a material effect on the Company's financial position,
results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses
accounting for restructuring and similar costs. SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues
Task Force Issue No. 94-3. The Company will adopt the provisions of
SFAS No. 146 for restructuring activities initiated after December 31,
2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is
incurred. Under Issue No. 94-3, a liability for an exit cost was
recognized at the date of the Company's commitment to an exit plan.
SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. Accordingly, SFAS No. 146 may
affect the timing of recognizing future restructuring costs as well as
the amounts recognized.
Effective October 1, 2002, the Company adopted SFAS No. 147,
"Acquisitions of Certain Financial Institutions - an Amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No.9", which removes
acquisitions of financial institutions from the scope of both
Statement 72 and Interpretation 9 and requires those transactions be
accounted for in accordance with FASB Statements No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". This Statement is effective for acquisitions on or after
October 1, 2002 with earlier application permitted for the transition
provisions for previously recorded unidentifiable intangible assets.
The adoption of SFAS No. 147 did not have a material effect on the
Company's financial position, results of operations, or cash flows.
Effective December 31, 2002 the Company adopted SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure -
an Amendment of FASB Statement No, 123", which provides alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends
the disclosure requirements of No. 123 to require prominent
disclosures in both annual and interim financial statements within the
Significant Accounting Policies footnote about the method of
accounting for stock-based employee compensation and the effect of the
method used (intrinsic value or fair value) on reported results. The
Company continues to account for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and
presents the required disclosures in accordance with SFAS No. 123 as
amended by SFAS No. 148. The adoption of SFAS No. 148 did not have a
material effect on the Company's financial position, results of
operations, or cash flows.
Note 2. Cash and Due from Banks. The Company, through its bank
subsidiary, is required to maintain reserves with the Federal Reserve
Bank. Reserve requirements are based on a percentage of deposits. At
December 31, 2002 the Company maintained reserves of approximately
$1,609,000 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, 2002 and 2001 consisted of the following:
- -------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
In thousands Cost Gain Loss Value
- -------------------------------------------------------------------------------------
December 31, 2002
Available for sale securities:
U.S. Treasury and Agency Securities $ 40,027 $ 1,429 $ - $ 41,456
State & Political Subdivision 52,045 1,985 38 53,992
Corporate Debt Securities 11,547 - 978 10,569
Other 1,306 - - 1,306
- -------------------------------------------------------------------------------------
Total investment securities $ 104,925 $ 3,414 $ 1,016 $ 107,323
=====================================================================================
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
=====================================================================================
The amortized cost and estimated fair value of debt securities at
December 31, 2002, 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 $ 102 $ 102
Maturing after 1 year but within 5 years 3,907 4,026
Maturing after 5 years but within 10 years 33,280 34,134
Maturing after 10 years 66,330 67,755
Other 1,306 1,306
- ----------------------------------------------------------------------------
Total investment securities $ 104,925 $ 107,323
============================================================================
At December 31, 2002 and 2001, securities with a market value of
$90,952,000 and $120,472,000 were pledged as collateral for deposits
of public funds and other purposes as required by law or contract.
In 2002, security sales resulted in gross realized losses of $23,000
and gross realized gains of $125,000. 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 realized gains.
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 $571,000,000. 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 reserves for losses
are provided. 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 2002 2001 2000
- ----------------------------------------------------------------------
Balance, beginning of year $ 11,753 $ 9,371 $ 5,596
Provision charged to
expense 3,584 2,635 3,983
Loans charged off (353) (430) (392)
Recoveries 251 177 184
- ----------------------------------------------------------------------
Balance, end of year $ 15,235 $ 11,753 $ 9,371
======================================================================
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.
Management believes that the allowance for loan losses at December 31,
2002 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 2002 2001
- ----------------------------------------------------------------------
Past due 90 days or more and still accruing:
Real estate $ - $ 68
Commercial - -
Consumer and other 5 12
- ----------------------------------------------------------------------
5 80
- ----------------------------------------------------------------------
Nonaccrual:
Real estate 598 592
Commercial 272 702
Consumer and other - -
- ----------------------------------------------------------------------
870 1,294
- ----------------------------------------------------------------------
Restructured (in compliance with modified
terms) - Commercial 933 955
- ----------------------------------------------------------------------
Total nonperforming loans $ 1,808 $ 2,329
======================================================================
Interest due but excluded from interest income on nonaccrual loans was
approximately $24,000, $45,000 and $64,000 in 2002, 2001 and 2000
respectively. In 2002 and 2001, interest income recognized from
payments received on nonaccrual loans was $40,000 and $69,000,
respectively (none was recognized in 2000).
At December 31, 2002, the recorded investment in loans that are
considered impaired under SFAS No. 114 was $2,618,000 of which
$870,000 are included as nonaccrual loans above, and $933,000 are
included as restructured loans above. At December 31, 2001, the
recorded investment in loans that was 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.
Such impaired loans had valuation allowances totaling $1,165,000 and
$536,000, in 2002 and 2001, respectively, based on the estimated fair
values of the collateral. The average recorded investment in impaired
loans during 2002 and 2001 was $2,338,000 and $2,638,000,
respectively. The Company recognized interest income on impaired
loans of $143,000, $191,000 and $161,000 in 2002, 2001 and 2000,
respectively (including interest income of $66,000 in 2002 and $98,000
in both 2001 and 2000 on restructured loans). At December 31, 2002,
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, 2002 or 2001.
Note 5. Premises and equipment. Premises and equipment owned by the
Company at December 31 are summarized as follows:
- ---------------------------------------------------------------------
In thousands 2002 2001
- ---------------------------------------------------------------------
Land $ 121 $ 121
Building 265 265
Furniture and equipment 7,175 6,606
Leasehold improvement 2,685 2,460
- ---------------------------------------------------------------------
10,246 9,452
Accumulated depreciation and amortization (7,287) (6,490)
- ---------------------------------------------------------------------
Premises and equipment, net $ 2,959 $ 2,962
=====================================================================
The Company also leases facilities under agreements that expire in
March 2003 through October 2009 with options to extend for five to
twenty 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 $793,000, $675,000
and $634,000, including rent expense to shareholders of $130,000,
$133,000 and $122,000 in 2002, 2001 and 2000 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
- ---------------------------------------------------------------------
2003 $ 969
2004 923
2005 808
2006 675
2007 446
Thereafter 326
- ---------------------------------------------------------------------
Total $ 4,147
=====================================================================
Note 6. Income Taxes. The provision for income taxes is as follows:
- ---------------------------------------------------------------------
In thousands 2002 2001 2000
- ---------------------------------------------------------------------
Current:
Federal $ 5,063 $ 4,577 $ 5,160
State 2,129 1,832 1,933
- ---------------------------------------------------------------------
Total 7,192 6,409 7,093
- ---------------------------------------------------------------------
Deferred:
Federal (1,120) (950) (1,432)
State (469) (310) (420)
- ---------------------------------------------------------------------
Total (1,589) (1,260) (1,852)
- ---------------------------------------------------------------------
Total $ 5,603 $ 5,149 $ 5,241
=====================================================================
A reconciliation of the Federal income tax rate to the effective tax
rate is as follows:
- ---------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income taxes (net of
Federal income tax benefit) 6.8% 6.9% 7.1%
Tax exempt interest income (6.7%) (6.4%) (5.0%)
Other (0.4%) (0.4%) (0.1%)
- ---------------------------------------------------------------------
Effective tax rate 34.7% 35.1% 37.0%
=====================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001, are presented below:
- ---------------------------------------------------------------------
In thousands 2002 2001
- ---------------------------------------------------------------------
Deferred tax assets:
Provision for loan losses $ 6,831 $ 5,206
Unrealized (gain) loss on available
for sale securities (994) 297
Salary continuation plan 862 755
Depreciation and amortization 108 209
State income taxes 52 127
Excess serving rights 10 12
Interest on nonaccrual loans 18 20
Other 240 203
- ---------------------------------------------------------------------
Net deferred tax asset $ 7,127 $ 6,829
=====================================================================
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, 2002, 2001 and 2000 consists of the following:
- ---------------------------------------------------------------------
In thousands 2002 2001 2000
- ---------------------------------------------------------------------
Marketing $ 565 $ 473 $ 644
Professional fees 540 457 430
Customer expenses 526 525 413
Stationary and supplies 370 372 377
Data processing 268 272 314
Amortization of intangibles 257 257 257
Shareholder and director 245 229 253
Dues and assessments 245 177 179
Insurance 226 216 216
Other 1,326 1,151 1,063
- ---------------------------------------------------------------------
Total $ 4,568 $ 4,129 $ 4,146
=====================================================================
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, as adjusted to give effect to all stock splits and
dividends. 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 each of the years ended December 31 is reconciled as follows:
- -----------------------------------------------------------------------------------------
In thousands (expect per share data) 2002 2001 2000
- -----------------------------------------------------------------------------------------
Basic Earnings Per Share
Net income $ 10,528 $ 9,509 $ 8,926
Weighted average common shares outstanding 9,898 9,951 10,467
------------------------------------------
Basic earnings per share $ 1.06 $ 0.95 $ 0.85
=========================================================================================
Diluted Earnings Per Share
Net Income $ 10,528 $ 9,509 $ 8,926
Weighted average common shares outstanding 9,898 9,951 10,467
Dilutive effect of outstanding options 460 433 309
------------------------------------------
Weighted average common shares
outstanding - Diluted 10,358 10,384 10,776
------------------------------------------
Diluted earnings per share $ 1.02 $ 0.92 $ 0.83
=========================================================================================
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. All stock option information has been
adjusted to give effect to all stock splits and dividends. 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 2002, 2001 and 2000 was $4.77, $4.50 and $3.84 per share,
respectively. As of December 31, 2002, 1,922,075 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, 2000
818,084 exercisable at a weighted average
exercise price of $5.50 932,643 $5.94
Granted (weighted average fair value $3.84
per share) 265,064 10.64
Expired (9,075) 10.58
Exercised (19,658) 4.85
- --------------------------------------------------------------------
Balances, December 31, 2000
862,524 exercisable at a weighted average
exercise price of $5.76 1,168,974 7.00
Granted (weighted average fair value $4.50
per share) 5,500 14.44
Exercised (48,164) 4.23
- --------------------------------------------------------------------
Balances, December 31, 2001
937,230 exercisable at a weighted average
exercise price of $6.44 1,126,310 5.27
Granted (weighted average fair value $4.77
per share) 11,000 18.05
Expired (2,521) 14.55
Exercised (71,785) 5.28
- --------------------------------------------------------------------
Balances, December 31, 2002
963,764 exercisable at a weighted average
exercise price of $6.85 1,063,004 $6.72
- --------------------------------------------------------------------
Additional information regarding options outstanding as of December
31, 2002 is as follows:
- ---------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (years) Price Exercisable Price
- ---------------------------------------------------------------------
$3.71 - 4.84 230,253 2.4 $3.89 230,253 $3.89
5.90 - 5.97 433,454 3.9 5.92 433,454 5.92
9.25 - 11.90 382,797 6.6 10.47 298,223 10.42
14.45 - 16.08 16,500 9.4 16.33 1,834 14.45
- ---------------------------------------------------------------------
3.71 - 16.08 1,063,004 4.6 $7.34 963,764 $6.85
=====================================================================
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 2002, 2001 and 2000
which are funded currently, totaled $134,000, $129,000 and $114,000,
respectively.
Salary Continuation Plan
The Company has a salary continuation plan for three officers, which
provides for a stated retirement benefit for each participant 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 $101,000, $94,000 and $292,000 in 2002, 2001 and 2000.
Accrued compensation payable under the salary continuation plan
totaled $1,335,000 and $1,233,000 at December 31, 2002 and 2001.
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 2002, 2001 and 2000 no shares were tendered
under the plan. At December 31, 2002, 373,810 shares (with a fair
value of approximately $7,386,000) 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, 2002 December 31, 2001
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------
Financial Assets
Cash and equivalents $ 66,615 $ 66,615 $ 55,245 $ 55,245
Securities 107,323 107,323 137,153 137,153
Loans, net 730,118 733,124 594,547 598,475
Financial Liabilities
Demand deposits 388,934 388,934 337,450 337,450
Time Deposits 256,479 259,233 264,551 267,362
Savings 181,089 181,089 122,861 122,861
Other borrowings 9,716 9,716 6,141 6,141
- ---------------------------------------------------------------------
The following estimates and assumptions were used to estimate the fair
value of the financial instruments.
Cash and equivalents - The carrying amount is a reasonable estimate of
fair value.
Securities - Fair values of securities are based on quoted market
prices or dealer quotes. If a quoted market price was not available,
fair value was estimated using quoted market prices for similar
securities.
Loans, net - Fair values for certain commercial, construction,
revolving customer credit and other loans were estimated by
discounting the future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and
similar maturities, adjusted for the allowance for loan losses.
Certain adjustable rate loans have been valued at their carrying
values, if no significant changes in credit standing have occurred
since origination and the interest rate adjustment characteristics of
the loan effectively adjust the interest rate to maintain a market
rate of return. For adjustable rate loans, which have had changes in
credit quality, appropriate adjustments to the fair value of the loans
are made.
Demand, time and savings deposits - The fair value of
noninterest-bearing and adjustable rate deposits and savings is the
amount payable upon demand at the reporting date. The fair value of
fixed-rate interest-bearing deposits with fixed maturity dates was
estimated by discounting the cash flows using rates currently offered
for deposits of similar remaining maturities.
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,
2002 and 2001, therefore, have not been included in the table above.
Note 11. Commitments and Contingencies. The Company is involved in
certain 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 $186,982,000
and $166,386,000 at December 31, 2002 and 2001 and standby letters of
credit and financial guarantees of $5,169,000 and $3,690,000 at
December 31, 2002 and 2001. The Bank does not anticipate any losses
as a result of these commitments.
Approximately $30,858,000 of loan commitments outstanding at December
31, 2002 relate to construction loans and are expected to fund within
the next twelve months. The remainder relate primarily to revolving
lines of credit or other commercial loans. Many of these loan
commitments are expected to expire without being drawn upon.
Therefore the total commitments do not necessarily represent future
cash requirements.
Stand-by letters of credit are commitments written by the Bank to
guarantee the performance of a customer to a third party. These
guarantees are issued primarily relating to purchases of inventory by
the Bank's commercial customers, are typically short-term in nature
and virtually all such commitments are collateralized.
Most of the outstanding commitments to extend credit are at variable
rates tied to the Bank's reference rate of interest. The Company's
exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit issued is the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments. The Company controls the credit risk of
the off-balance sheet financial instruments through the normal credit
approval and monitoring process.
Note 12. Related Party Loans. The Company makes loans to officers and
directors and their associates subject to loan committee approval and
ratification by the Board of Directors. These transactions are on
substantially the same terms as those prevailing at the time for
comparable transactions with unaffiliated parties and do not involve
more than normal risk of collectibility. An analysis of changes in
related party loans for the year ended December 31, 2002 is as
follows:
- ---------------------------------------------------------------------
Beginning Balance Additions Repayments Ending Balance
- ---------------------------------------------------------------------
$4,015,000 $10,172,000 $10,585,000 $3,602,000
=====================================================================
Committed lines of credit, undisbursed loans and standby letters of
credit to directors and officers were approximately $3,226,000 and
$6,021,000 at December 31, 2002 and 2001.
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, 2002
that the Company meets all capital adequacy requirements to which it
is subject.
As of December 31, 2002 and 2001, the most recent notifications from
the Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the institution's category.
The following table shows the Company's and the Bank's actual capital
amounts and ratios at December 31, as well as the minimum capital
ratios to be categorized as "well capitalized" under the regulatory
framework:
- ------------------------------------------------------------------------------------------------
To Be Categorized
Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Company $ 86,334,000 10.9% $ 63,321,000 8.0% N/A
Community Bank 79,470,000 10.2% 62,607,000 8.0% $ 78,259,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 76,374,000 9.7% 31,660,000 4.0% N/A
Community Bank 69,621,000 8.9% 31,304,000 4.0% 46,955,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 76,374,000 8.6% 35,576,000 4.0% N/A
Community Bank 69,621,000 7.9% 35,324,000 4.0% 44,155,000 5.0%
-----------------------------------------------------------------
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%
- ------------------------------------------------------------------------------------------------
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 $11,480,000 as of December 31, 2002.
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 $7,139,000 at December 31,
2002. No such advances were made during 2002 or 2001.
Note 14. Central Coast Bancorp (Parent Company Only)
The condensed financial statements of Central Coast Bancorp follow (in
thousands):
Condensed Balance Sheets
- ------------------------------------------------------------------------
December 31, 2002 2001
- ------------------------------------------------------------------------
Assets:
Cash - interest bearing account with Bank $ 2,585 $ 997
Loans 3,936 7,063
Investment in Bank 71,322 57,672
Premises and equipment, net 1,142 1,174
Other Assets 1,747 1,149
- ------------------------------------------------------------------------
Total assets $ 80,732 $ 68,055
========================================================================
Liabilities and Shareholders' Equity
Liabilities $ 2,656 $ 2,719
Shareholders' Equity 78,076 65,336
- ------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 80,732 $ 68,055
========================================================================
Condensed Income Statements
- -------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------
Management fees $ 10,164 $ 9,888 $ 8,700
Interest income 322 109 -
Other income - 3 -
Cash dividends received from the Bank - 10,500 7,000
- -------------------------------------------------------------------------
Total income 10,486 20,500 15,700
Operating expenses 10,162 9,812 9,257
- -------------------------------------------------------------------------
Income before income taxes and equity
in undistributed net income of Bank 324 10,688 6,443
Provision (credit) for income taxes 42 66 (206)
Equity in undistributed
net income of Bank 10,246 (1,113) 2,277
- -------------------------------------------------------------------------
Net income 10,528 9,509 8,926
Other comprehensive income (loss) 1,821 645 3,640
- -------------------------------------------------------------------------
Total comprehensive income $ 12,349 $ 10,154 $ 12,566
=========================================================================
Condensed Statements of Cash Flows
- ---------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------
Increase (decrease) in cash:
Operations:
Net income $ 10,528 $ 9,509 $ 8,926
Adjustments to reconcile net
income to net cash provided
by operations:
Equity in undistributed
net income of Bank (10,246) 1,113 (2,277)
Depreciation 710 841 778
Gain on sale of equipment 8 17 -
(Increase) decrease in other assets (181) (1,324) (127)
Increase in liabilities 107 1,000 380
- ---------------------------------------------------------------------
Net cash provided by operations 926 11,156 7,680
- ---------------------------------------------------------------------
Investing Activities:
Contribution to subsidiary (2,000) - -
Net (increase) decrease in loans 3,127 (7,063) -
Purchases of equipment (686) (302) (612)
- ---------------------------------------------------------------------
Net cash provided by (used in)
investing activities 441 (7,365) (612)
- ---------------------------------------------------------------------
Financing Activities:
Stock repurchases - (4,857) (6,111)
Stock options exercised 221 119 94
- ---------------------------------------------------------------------
Net cash used in financing activities 221 (4,738) (6,017)
- ---------------------------------------------------------------------
Net increase (decrease) in cash 1,588 (947) 1,051
Cash balance, beginning of year 997 1,944 893
- ---------------------------------------------------------------------
Cash balance, end of year $ 2,585 $ 997 $1,944
=====================================================================
Note 15. Selected Quarterly Information (unaudited)
- ----------------------------------------------------------------------------------------------------------------
In thousands (except per share data)
2002 2001
Three months ended Dec.31 Sep.30 June 30 Mar.31 Dec.31 Sep.30 June 30 Mar.31
- ----------------------------------------------------------------------------------------------------------------
Interest income $12,951 $ 13,012 $ 12,631 $ 11,907 $ 12,331 $ 13,052 $ 12,944 $ 13,420
Interest expense 3,276 3,536 3,518 3,625 3,930 4,681 4,823 4,926
- ----------------------------------------------------------------------------------------------------------------
Net interest income 9,675 9,476 9,113 8,282 8,401 8,371 8,121 8,494
Provision for loan losses 1,536 925 900 223 1,680 760 75 120
- ----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 8,139 8,551 8,213 8,059 6,721 7,611 8,046 8,374
Total noninterest income 944 992 962 767 777 927 775 650
Total noninterest expenses 5,429 5,257 5,225 4,585 4,759 4,749 4,776 4,939
- ----------------------------------------------------------------------------------------------------------------
Income before taxes 3,654 4,286 3,950 4,241 2,739 3,789 4,045 4,085
Provision for income taxes 1,257 1,438 1,403 1,505 680 1,421 1,522 1,526
- ----------------------------------------------------------------------------------------------------------------
Net income $ 2,397 $ 2,848 $ 2,547 $ 2,736 $ 2,059 $ 2,368 $ 2,523 $ 2,559
================================================================================================================
Per common share:
Basic earnings per share $ 0.25 $ 0.29 $ 0.25 $ 0.27 $ 0.21 $ 0.24 $ 0.25 $ 0.25
Diluted earnings per share 0.24 0.27 0.25 0.26 0.20 0.24 0.24 0.24
- ----------------------------------------------------------------------------------------------------------------
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 2003 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 2003 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 2003 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 2003 Annual Meeting of Shareholders which will be
filed pursuant to Regulation 14A.
ITEM 14. CONTROLS AND PROCEDURES
Quarterly Evaluation of the Company's Disclosure Controls and Internal
Controls. Within the 90 days prior to the date of this annual report
on Form 10-K, the Company evaluated the effectiveness of the design
and operation of its "disclosure controls and procedures" (Disclosure
Controls), and its "internal controls and procedures for financial
reporting" (Internal Controls). This evaluation (the Controls
Evaluation) was done under the supervision and with the participation
of management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO). Rules adopted by the SEC require that in this
section of the annual report on Form 10-K we present the conclusions
of the CEO and the CFO about the effectiveness of our Disclosure
Controls and Internal Controls based on and as of the date of the
Controls Evaluation.
CEO and CFO Certifications. Appearing immediately following the
Signatures section of this annual report on Form 10-K there are two
separate forms of "Certifications" of the CEO and the CFO. The first
form of Certification is required in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 (the Section 302 Certification). This
section of the annual report on Form 10-K which you are currently
reading is the information concerning the Controls Evaluation referred
to in the Section 302 Certifications and this information should be
read in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are
procedures that are designed with the objective of ensuring that
information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 (Exchange Act), such as this annual
report on Form 10-K, is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is
accumulated and communicated to our management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required
disclosure. Internal Controls are procedures which are designed with
the objective of providing reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded
against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our
financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP").
Limitations on the Effectiveness of Controls. The Company's
management, including the CEO and CFO, does not expect that our
Disclosure Controls or our Internal Controls will prevent all error
and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
Scope of the Controls Evaluation. The CEO/CFO evaluation of our
Disclosure Controls and our Internal Controls included a review of the
controls' objectives and design, the controls' implementation by the
Company and the effect of the controls on the information generated
for use in this annual report on Form 10-K. In the course of the
Controls Evaluation, we sought to identify risks related to data
errors, controls problems or acts of fraud and to confirm that
appropriate controls were in place to mitigate these risks. This type
of evaluation will be done on a quarterly basis so that the
conclusions concerning controls effectiveness can be reported in our
quarterly reports on Form 10-Q and annual report on Form 10-K.
Our Internal Controls are also evaluated on an ongoing basis by our
Internal Audit Service Providers, by other personnel in our Finance
organization and by our independent auditors in connection with their
audit and review activities. The overall goals of these various
evaluation activities are to monitor our Internal Controls and to make
modifications as necessary; our intent in this regard is that the
Internal Controls will be maintained as dynamic systems that change
(including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in
the Company's Internal Controls, or whether the Company had identified
any acts of fraud involving personnel who have a significant role in
the company's Internal Controls. This information was important both
for the Controls Evaluation generally and because items 5 and 6 in the
Section 302 Certifications of the CEO and CFO require that the CEO and
CFO disclose that information to our Board's Audit Committee and to
our independent auditors and to report on related matters in this
section of the annual report on Form 10-K. In the professional
auditing literature, "significant deficiencies" are referred to as
"reportable conditions"; these are control issues that could have a
significant adverse effect on the ability to record, process,
summarize and report financial data in the financial statements. A
"material weakness" is defined in the auditing literature as a
particularly serious reportable condition where the internal control
does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material
in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other controls matters
in the Controls Evaluation, and in each case if a problem was
identified, we considered what revision, improvement and/or correction
to make in accord with our on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this annual report on
Form 10-K, there have been no significant changes in Internal Controls
or in other factors that could significantly affect Internal Controls,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Conclusions. Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, the Company's
Disclosure Controls and Internal Controls (as defined in Exchange Act
Rule13a-14(c)) are adequate and effective in timely alerting them to
material information relating to the Company required to be included
in the Company's filings with the SEC under the Securities Exchange
Act of 1934.
PART IV
ITEM 15. 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, 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) 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.
*(10.5) 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 November 15, 1996.
*(10.6) 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 November 15, 1996.
*(10.7) 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 November 15, 1996.
*(10.8) 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.
*(10.9) 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.
*(10.10) 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.
*(10.11) 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.
*(10.12) 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.
(10.13) 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.
(10.14) 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.
(10.15) 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.
(10.16) Lease agreement dated November 18, 2002,
related to 439 Alvarado Street, Monterey.
(21.1) The Registrant's only subsidiary is its wholly
owned subsidiary, Community Bank of Central California.
(23.1) Independent Auditors' Consent
(99.1) Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 the
Sarbanes-Oxley Act of 2002
*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 22, 2003, reporting a
press release dated January 22, 2003 regarding the Company's
operating results for the quarter and year ended December
31, 2002, and a second report on Form 8-K was filed with the
Commission on January 28, 2003, reporting a press release
dated January 28, 2003 regarding the Company's 10% stock
dividend declared on January 27, 2003.
An Annual Report for the fiscal year ended December 31, 2002, and
Notice of Annual Meeting and Proxy Statement for the Company's 2003
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.
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 20, 2003 By: /s/ NICK VENTIMIGLIA
--------------------------------------
Nick Ventimiglia, Chief Executive
Officer (Principal Executive Officer)
Date: March 20, 2003 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 3/20/03
- -----------------------
(C. Edward Boutonnet)
Director 3/20/03
- -----------------------
(Bradford G. Crandall)
/s/ ALFRED P. GLOVER Director 3/20/03
- -----------------------
(Alfred P. Glover)
/s/ MICHAEL T. LAPSYS Director 3/20/03
- -----------------------
(Michael T. Lapsys)
/s/ ROBERT M. MRAULE Director 3/20/03
- -----------------------
(Robert M. Mraule)
/s/ DUNCAN L. MCCARTER Director 3/20/03
- -----------------------
(Duncan L. McCarter)
/s/ LOUIS A. SOUZA Director 3/20/03
- -----------------------
(Louis A. Souza)
/s/ MOSE E. THOMAS Director 3/20/03
- -----------------------
(Mose E. Thomas)
/s/ NICK VENTIMIGLIA Chairman and CEO 3/20/03
- -----------------------
(Nick Ventimiglia)
CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Nick Ventimiglia, certify that:
1. I have reviewed this annual report on Form 10-K of Central Coast
Bancorp.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 20, 2003 /s/NICK VENTIMIGLIA
-----------------------
Nick Ventimiglia, Chief Executive Officer
I, Robert M. Stanberry, certify that:
1. I have reviewed this annual report on Form 10-K of Central Coast
Bancorp.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 20, 2003 /s/ ROBERT STANBERRY
-----------------------
Robert M Stanberry, Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
10.16 Lease agreement dated November 18,
2002, related to 439 Alvarado Street,
Monterey, California 79
23.1 Independent auditors'consent 124
99.1 Certification of Chief Executive Officer
and Chief Financial Officer pursuant to
Section 906 the Sarbanes-Oxley Act of
2002 125