<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT IT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996 .
-----------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
--------------------- ---------------------
Commission File No. 0-25418 .
--------
CENTRAL COAST BANCORP
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0367061 .
- - ---------------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
301 Main Street, Salinas, California . 93901 .
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(408) 422-6642 .
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X . No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 2,226,967 shares outstanding at March 31, 1996 .
-----------------
Page 1 of 23
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,066,000 $ 25,849,000
Federal Funds Sold 34,448,000 41,764,000
------------ ------------
Total cash and cash equivalents 53,514,000 67,613,000
------------ ------------
Interest-bearing deposits in
other financial institutions 99,000 3,563,000
Investment securities
(market value $82,331,000 at March 31, 1996
and $75,397,000 at December 31, 1995) 82,354,000 74,912,000
Loans, net 164,063,000 161,780,000
Premises and equipment, net 671,000 728,000
Other assets 5,360,000 4,937,000
------------ ------------
TOTAL ASSETS $306,061,000 $313,533,000
============ ============
LIABILITIES
Deposits:
Noninterest bearing $ 57,738,000 $ 62,970,000
Interest bearing 218,512,000 223,518,000
------------ ------------
Total deposits 276,250,000 286,488,000
Other liabilities 2,201,000 1,059,000
------------ ------------
TOTAL LIABILITIES 278,451,000 287,547,000
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY
Preferred stock - no par value
authorized 1,000,000 shares, no shares issued
Common stock - no par value
authorized 20,000,000 shares
issued & outstanding: 2,226,967 shares
at March 31, 1996 and 2,214,630 shares
at December 31, 1995 20,892,000 20,852,000
Retained earnings 6,718,000 5,134,000
SHAREHOLDERS' EQUITY 27,610,000 25,986,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $306,061,000 $313,533,000
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
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<PAGE> 3
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans (including fees) $4,798,000 $4,289,000
Investment securities 1,136,000 865,000
Other 642,000 355,000
---------- ----------
Total interest income 6,576,000 5,509,000
---------- ----------
INTEREST EXPENSE
Deposits 2,124,000 1,902,000
Other -- 1,000
---------- ----------
Total interest expense 2,124,000 1,903,000
NET INTEREST INCOME 4,452,000 3,606,000
Provision for credit losses -- 380,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSS 4,452,000 3,226,000
OTHER INCOME 193,000 192,000
---------- ----------
OTHER OPERATING EXPENSE
Salaries and employee benefits 1,217,000 1,153,000
Occupancy 141,000 132,000
Furniture and equipment 107,000 111,000
Other expenses 411,000 556,000
---------- ----------
Total other operating expenses 1,876,000 1,952,000
========== ==========
INCOME BEFORE INCOME TAXES 2,769,000 1,466,000
Provision for income taxes 1,185,000 610,000
---------- ----------
NET INCOME $1,584,000 $ 856,000
========== ==========
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.65 $ 0.36
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
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<PAGE> 4
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
------------ ------------
<S> <C> <C>
Increase (decrease) in cash and equivalents:
OPERATIONS
Net income $ 1,584,000 $ 856,000
Reconciliation to net cash provided by operations
Provision for credit losses -- 380,000
Depreciation 57,000 75,000
Amortization 6,000 21,000
Increase and accretion in other assets (423,000) (245,000)
Increase (decrease) in other liabilities 1,142,000 530,000
Net change in deferred loan fees (2,000) (50,000)
------------ ------------
Net cash provided by operations 2,368,000 1,567,000
------------ ------------
INVESTMENT ACTIVITIES
Net (increase) decrease in interest-bearing deposits
in other financial institutions 3,464,000 (1,979,000)
Proceeds from maturities of securities 20,975,000 6,054,000
Purchase of securities (28,423,000) (8,000,000)
Net (increase) decrease in loans (2,285,000) 8,960,000
Capital expenditures -- (68,000)
------------ ------------
Net cash used for investment activities (6,269,000) 4,967,000
FINANCING ACTIVITIES ------------ ------------
Net decrease in deposit accounts (10,238,000) (16,978,000)
Proceeds from sale of common stock 40,000 17,000
------------ ------------
Net cash used by financing activities (10,198,000) (16,961,000)
------------ ------------
Net decrease in cash and equivalents (14,099,000) (10,427,000)
Cash and cash equivalents, beginning of period 67,613,000 45,443,000
------------ ------------
Cash and cash equivalents, end of period $ 53,514,000 $ 35,016,000
============ ============
OTHER CASH FLOW INFORMATION
Interest paid $ 2,024,000 $ 1,904,000
Income taxes| paid -- 770,000
</TABLE>
See Notes to Consolidated Condensed Financial Statements
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<PAGE> 5
CENTRAL COAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1996 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated condensed financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position at March 31, 1996 and December 31, 1995, and the results of operations
and cash flows for the three month periods ended March 31, 1996 and 1995.
Certain information and footnote disclosures normally presented in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These interim consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1995 Annual Report to Shareholders. The
results of operations for the three month period ended March 31, 1996 may not
necessarily be indicative of the operating results for the full year.
2. INVESTMENT SECURITIES
The Company is required under Financial Accounting Standards Board (FASB)
Statement No. 115, "Accounting for Investments in Certain Debt and Equity
Securities", to classify debt and equity securities 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. Any gains and losses
on sales of investments are computed on a specific identification basis.
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<PAGE> 6
The carrying value and approximate market value of securities at March 31, 1996
and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
Book Unrealized Unrealized Market
In thousands Value Gain Losses Value
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
March 31, 1996
U.S. Treasury and
agency securities $79,292 $204 $201 $79,295
State and municipal
obligations -- -- -- --
Other 3,062 -- 26 3,036
- - -------------------------------------------------------------------------------------------
Total $82,354 $204 # $227 $82,331
===========================================================================================
INVESTMENTS HELD TO MATURITY:
December 31, 1995
U.S. Treasury and
agency securities $74,912 $491 $ 6 $75,397
State and municipal
obligations -- -- -- --
- - -------------------------------------------------------------------------------------------
Total $74,912 $491 $ 6 $75,397
===========================================================================================
</TABLE>
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<PAGE> 7
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Three months ended
March 31,
In thousands 1996 1995
- - -------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 3,984 $ 3,699
Provision charged to expense -- 380
Loans charged off (67) (75)
Recoveries 11 14
- - -------------------------------------------------------------------------------
Ending balance $ 3,928 $ 4,018
===============================================================================
</TABLE>
The allowance for credit losses reflects management's judgement as to the level
which is considered adequate to absorb potential losses inherent in the loan
portfolio. This allowance is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based upon information currently available to analyze
credit loss potential, including (1) the loan portfolio balance in the period;
(2) a comprehensive grading and review of new and existing loans outstanding;
(3) actual previous charge-offs; and, (4) changes in economic conditions.
Beginning in 1995, the Company adopted FASB Statements No. 114, "Accounting by
Creditors for Impairment of a Loan" and No. 118, "Accounting by Creditors for
Impairment of a Loan --Income Recognition and Disclosure." Under the new
standard, the 1995 allowance for credit losses related to loans that are
identified for evaluation in accordance with Statements 114 and 118 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans.
Management believes that the allowance for credit losses at March 31, 1996 is
adequate, based on information currently available. However, no prediction of
the ultimate level of loan charge-offs in future years can be made with any
certainty.
Nonperforming assets are comprised of loans delinquent 90 days or more with
respect to interest or principal, loans for which the accrual of interest has
been discontinued, and other real estate which has been acquired through
foreclosure and is awaiting disposition.
Unless well secured and in the process of collection, loans are placed on
nonaccrual status when a loan becomes 90 days past due as to interest or
principal, when the payment of interest or principal in accordance with the
contractual terms of the loan becomes uncertain or when a portion of the
principal balance has been
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<PAGE> 8
charged off. When a loan is placed on nonaccrual status, the accrued and unpaid
interest receivable is reversed and the loan is accounted for on the cash or
cost recovery method thereafter, until qualifying for return to accrual status.
Generally, a loan may be returned to accrual status when all delinquent interest
and principal become current in accordance with the terms of the loan agreement
and remaining principal is considered collectible or when the loan is both well
secured and in process of collection.
Real estate and other assets acquired in satisfaction of indebtedness are
recorded at the lower of estimated fair market value net of anticipated selling
costs or the recorded loan amount, and any difference between this and the
amount is treated as a loan loss. Costs of maintaining other real estate owned
and gains or losses on the subsequent sale are reflected in current earnings.
Nonperforming loans and other real estate owned (foreclosed properties) are
summarized below:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------
March 31, December 31,
In thousands 1996 1995
- - ------------------------------------------------------------------------------------
<S> <C> <C>
Past due 90 days or more and still accruing:
Real estate $ 577 $ 71
Commercial 117 35
Installment and other -- --
- - ------------------------------------------------------------------------------------
$ 694 $106
- - ------------------------------------------------------------------------------------
Nonaccrual:
Real estate $ 305 $633
Commercial 57 64
Installment and other -- 22
- - ------------------------------------------------------------------------------------
$ 362 $719
- - ------------------------------------------------------------------------------------
Total nonperforming loans $1,056 $825
====================================================================================
Other real estate owned $ 506 $506
====================================================================================
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $76,153,000 and standby letters of credit of
$1,882,000 at March 31, 1996. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 1996.
Approximately $23,942,000 of loan commitments outstanding at March 31, 1996
relate to real estate construction loans and are expected to fund within the
next twelve months. The remainder relate primarily to revolving lines of credit
or other commercial loans, and many of these commitments are expected to expire
without
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<PAGE> 9
being drawn upon. Therefore, the total commitments do not necessarily represent
future cash requirements. The Bank evaluates each potential borrower and the
necessary collateral on an individual basis. Collateral varies, but may include
real property, bank deposits, debt or equity securities or business assets.
Stand-by letters of credit are commitments written 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
and are typically short-term in nature. Credit risk is similar to that involved
in extending loan commitments to customers and the Bank accordingly uses
evaluation and collateral requirements similar to those for loan commitments.
Virtually all such commitments are collateralized.
5. NET INCOME PER SHARE COMPUTATION
Net income per common and equivalent share is calculated using weighted average
shares and dilutive effect of stock options outstanding during the period
totaling 2,430,916 and 2,396,495 for the three month periods ended March 31,
1996 and 1995, respectively.
6. PENDING ACQUISITION
On December 5, 1995, the Company signed a definitive agreement to acquire
Cypress Coast Bank ("Cypress") whereby Cypress would become a subsidiary of the
Company and continue to operate from its offices in Seaside and Marina. Under
the terms of the agreement the shareholders of Cypress will receive common stock
of the Company in a tax-free exchange, based upon a conversion ratio equal to
1.5 times Cypress' fully diluted tangible book value per share (as defined)
divided by the average of the bid and asked quotations for a share of Company
common stock (the "Average Price") for the twenty consecutive trading days
immediately prior to the merger. If the Average Price is below $14.00 or above
$18.00 at that time, the parties have the right to renegotiate the conversion
ratio. At March 31, 1996, Cypress had unaudited total assets of $44.6 million,
including $28.4 million in net loans and total unaudited liabilities of $40.7
million, including $40.4 million in deposits. The transaction is expected to be
accounted for as a pooling-of-interests and the Company anticipates consumation
during the second quarter of 1996.
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<PAGE> 10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Organization
Central Coast Bancorp (the "Company") is a California corporation organized in
1994 to act as the holding company for Bank of Salinas (the "Bank"), a
state-chartered bank, headquartered in Salinas with a branch office in King
City. Other than its investment in the Bank, the Company currently conducts no
other significant business activities, although it is authorized to engage in a
variety of activities which are deemed closely related to the business of
banking upon prior approval of the Board of Governors of the Federal Reserve
System (the "FRB"), the Company's principal regulator.
The Bank offers a full range of commercial banking services, offering a diverse
range of traditional banking products and services to individuals, merchants,
small and medium-sized businesses, professionals and agribusiness enterprises
located in an are adjacent to Salinas, California.
Summary of Financial Results
At March 31, 1996, total assets of Central Coast Bancorp were
$306,061,000, a decrease of $7,472,000 or 2.4% from December 31, 1995 total
assets of $313,533,000. Average total assets for the quarters ended March 31,
1996 and 1995 were $307,490,000 and $268,366,000, respectively. Net loans at
March 31, 1996 were $164,063,000 compared to $161,780,000 at December 31, 1995,
an increase of $2,283,000 or 1.4%. The increase in loan balances is primarily
the result of increases in construction and commercial loans. Real estate
construction and land development loans of $20,162,000 at March 31, 1996
represented an increase of $774,000 or 4.0% over $19,388,000 at December 31,
1995. Commercial loans increased $6,490,000 or 9.8% to $72,838,000 at March 31,
1996 from $66,348,000 at December 31, 1995. Partially offsetting these
increases was a decrease in real estate mortgage loan balances of $70,178,000
at March 31, 1996 compared to $75,945,000 at December 31, 1995 representing a
decrease of $5,767,000 or 7.6%.
Securities designated as held-to-maturity at March 31, 1996 were carried at an
amortized cost of $82,354,000. The estimated market value of the
held-to-maturity portfolio at quarter end was $82,331,000. The held-to-maturity
portfolio at March 31, 1996 consists primarily of U.S. Treasury bills and notes
and securities issued by U.S. government-sponsored agencies (FNMA, FHLMC and
FHLB) with maturities within five years. Investment securities classified as
held-to-maturity are measured at amortized cost based on the Company's intent
and ability to hold such securities
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<PAGE> 11
to maturity. During the three months ended March 31, 1996, the Bank made
securities purchases of $28,423,000 to replace $20,975,000 of maturities and to
more fully employ excess liquidity.
Other earning assets are comprised of Federal funds sold and time deposits at
other financial institutions. Federal funds sold balances of $34,448,000 at
March 31, 1996 represent a decrease of $7,316,000 from $41,764,000 at December
31, 1995. The decrease in federal funds sold is primarily the result of seasonal
runoff in deposit balances and a increase in loan balances. The Bank has
invested a portion of its excess liquidity in time deposits at other financial
institutions. Time deposits in other financial institutions were $99,000 at
March 31, 1996 compared to $3,563,000 at December 31, 1995, representing a
decrease of $3,464,000 or 97.2%. The decrease in time deposits at other
institutions is a result of management's decision to redeploy these funds into
other short-term investment securities.
Total deposits of $276,250,000 at March 31, 1996 represent a decrease of
$10,238,000 or 3.6% from balances of $286,488,000 at December 31, 1995. The
decrease is comprised of decreases in noninterest-bearing demand and savings
deposits and is attributed to seasonal fluctuation in these deposit categories.
nonInterest-bearing demand deposits were $57,751,000 at March 31, 1996 compared
to $62,970,000 at December 31, 1995, a decrease of $5,219,000 or 8.3%. Savings
balances of $107,851,000 represent a decrease of $6,708,000 or 5.9% from
$114,559,000 at December 31, 1995. Additionally, interest bearing demand
balances decreased $211,000 or .3% to $71,080,000 at March 31, 1996 from
$71,291,000 at December 31, 1995. . Partially offsetting these decreases was an
increase in time deposits of $1,900,000 or 5.0% to $39,568,000 at March 31, 1996
from $37,668,000 at December 31, 1995.
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<PAGE> 12
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net income for the three months ended March 31, 1996 was $1,584,000 or $.65 per
share compared to $856,000 or $.36 per share for the comparable period in 1995.
The following discussion highlights changes in certain items in the consolidated
condensed statements of income.
Net interest income
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits, is the principal component of the
Bank's earnings. The components of net interest income are as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three months ended March 31,
In thousands (except percentages) 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
Avg Avg Avg Avg
Balance Interest Yield Balance Interest Yield
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning Assets:
Loans $164,231 $4,798 11.7% $156,350 $4,289 11.1%
Investment Securities 75,598 1,136 6.0% 66,452 865 5.3%
Other 48,727 642 5.3% 24,900 355 5.8%
-------- ------ -------- ------
Total interest earning assets 288,556 $6,576 9.1% 247,702 $5,509 9.0%
------ ------
Cash and due from banks 17,618 19,162
Other assets net of deferred
loan fees and allowance
from loan losses 1,316 1,502
-------- --------
$307,490 $268,366
======== ========
Liabilities & Shareholders'
Equity:
Interest bearing liabilities:
Demand deposits $ 66,188 $ 374 2.3% $ 72,019 $ 429 2.4%
Savings 118,598 1,237 4.2% 90,229 1,055 4.7%
Time deposits 38,628 513 5.3% 36,834 418 4.6%
Other borrowings -- -- 40 1 10.1%
-------- ------ -------- ------
Total interest bearing
liabilities 223,414 $2,124 3.8% 199,122 $1,903 3.9%
------ ------
Demand deposits 55,410 45,334
Other Liabilities 1,618 1,267
-------- --------
Total liabilities 280,442 245,723
Shareholders' Equity 27,048 22,643
-------- --------
$307,490 $268,366
======== ========
Net interest income & margin $4,452 6.2% $3,606 5.8%
====== === ====== ===
</TABLE>
- - ------------------------
(1) Annualized
(2) Loan interest income includes fee income of $154,000 and $189,000 for the
three month periods ended March 31, 1996 and 1995, respectively.
(3) Includes the average allowance for loan losses of $3,965,000 and $3,822,000,
and average deferred loan fees of $478,000 and $474,000 for the three months
ended March 31, 1996 and 1995.
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<PAGE> 13
Net tax equivalent interest income for the three months ended March 31, 1996 was
$4,452,000 representing an improvement of $846,000 or 23.5% over $3,606,000 for
the comparable period in 1995. As a percentage of average earning assets, net
taxable equivalent interest margin for the first three months of 1996 improved
to 6.2% from 5.8% in the same period one year earlier. The increase in net
taxable equivalent interest margin is primarily due to an increase in taxable
equivalent interest income. Taxable interest income for the first quarter of
1996 includes approximately $498,000 recognized as a result of collection of
substantial principal and foregone interest on one nonaccruing loan. The loan
was returned to accrual status based upon the substantial performance by the
borrower and, subsequent to March 31, 1996, all remaining amounts due were
collected by the bank. Excluding this nonrecurring event, the increase in net
taxable equivalent interest income would have been $348,000 or 9.7% with a
resulting net interest margin of 5.5%.
Taxable equivalent interest income recognized in the three months ended March
31, 1996 was $6,576,000 representing an increase of $1,067,000 or 19.4% over
$5,509,000 for the same period of 1995. The increase in taxable equivalent
interest income was primarily due to increases in the volume of average earning
assets. Earning assets averaged $288,556,000 in the three months ended March 31,
1996 compared to $247,702,000 in the same period in 1995, representing an
increase of $40,854,000 or 16.5%. The increase in average earning assets
included increases in average net loans, investment securities and fed funds
sold of $7,881,000, $9,146,000 and $23,827,000 or 5.0, 13.8 and 95.7%,
respectively. In addition, as noted above, taxable interest income for the first
quarter of 1996 includes approximately $498,000, recognized as a result of
collection of substantial principal and foregone interest on one nonaccruing
loan. Excluding this nonrecurring event, the increase in taxable equivalent
interest income would have been $569,000 or 10.3%. The average yield on
interest earning assets increased to 9.1% in the first three months of 1996
compared to 9.0% for the first three months of 1995. Loan fees recognized
during the first three months of 1996 were $154,000 compared to $189,000 one
year earlier.
Partially offsetting the increase in taxable equivalent interest income was an
increase in the cost of liabilities funding the growth in average earning
assets. Interest expense for the three months ended March 31, 1996 was
$2,124,000 and represented and increase of $221,000 or 11.6% over $1,903,000 for
the three months ended March 31, 1995. During the three months ended March 31,
1996, the average rate paid by the Bank on interest-bearing liabilities of 3.8%
compared to 3.9% for the same period in 1995. The increase in interest expense
for the first quarter of 1996 reflects the impact of an increase in the volume
of average interest bearing liabilities. Average interest bearing liabilities
were $223,417,000 in the three months ended March 31, 1996 compared to
$199,122,000 for the same period in 1995, an increase of $24,295,000 or 12.2%.
Provision for credit losses
The provision for credit losses is based upon management's evaluation of the
adequacy of the existing allowance for loan losses in relation to total loans
and the inherent risk in the loan portfolio. Management's evaluation takes into
consideration such factors as
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<PAGE> 14
changes in the composition of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current and anticipated economic
conditions that may affect borrowers' ability to repay.
Real estate construction loans represented 12% of total loans at March
31, 1996, the majority of which are for the construction of single family
residential properties. In addition, 46% of the Bank's loans were other real
estate-secured loans. These loans were primarily loans made to Bank depositors
secured by first deeds of trust on commercial and residential properties and
with original loan to value ratios not exceeding 75%. Commercial loans
comprised 39% of total loans at March 31, 1996. The Bank's loans are not
concentrated in any particular industry. The Bank's service area is somewhat
dependent on the economy of the greater Salinas Valley which has a
concentration of agri-business companies, and accordingly, the ability of the
Bank's borrower's to repay loans may be affected by the performance of this
sector of the economy. At March 31, 1996, virtually all loans were
collateralized, and the majority have adjustable rates. Generally, real estate
loans were secured by real property, and commercial and other loans were
secured by bank deposits and business or personal assets. Repayment is
generally expected from the sale of the related property for real estate
construction loans, and from the cash flow of the borrower for commercial and
other loans.
In the first quarter of 1996, the Bank did not increase its provision for loan
losses though a charge to earnings as a response to a strengthening economy and
improved credit performance. The provision compares to $380,000 charged against
earnings for the same period in 1995. Loan balances of $67,000, which previously
identified and were fully reserved for, were charged-off in the first quarter of
1996 compared to $75,000 charged-off in the same period one year earlier.
Recoveries of loan balances previously charged-off were $11,000 for the quarter
ended March 31, 1996 compared to $14,000 for the same period in 1995. See Note 3
of the consolidated condensed financial statements for further discussion of
nonperforming loans and the allowance for credit losses.
At March 31, 1996 the allowance for credit losses was $3,928,000 or 2.34% of
total loans, compared to $3,984,000 or 2.40% at December 31, 1995.
Management believes that the allowance for loan losses is maintained at an
adequate level for known and anticipated furture risks inherent in the loan
portfolio. However, the Company's loan portfolio particularly the real estate
related segments, may be adversely affected if California's economic conditions
and Monterey County real estate market were to weaken. As a result, the level of
nonperforming loans, the provision for loan losses and the level of the
allowance for loan losses may increase.
Other income and expense
Other income consists primarily of service charges on deposit accounts and fees
for miscellaneous services. Total other income was $193,000 for the three months
ended March 31, 1996 as compared to $192,000 for the same period of 1995.
-14-
<PAGE> 15
Noninterest expense decreased $76,000 or 3.9% to $1,876,000 in the quarter ended
March 31, 1996 from $1,952,000 in the same period one year earlier. The decrease
in noninterest expenses is primarily due to a decrease in the cost of deposit
insurance of $145,000 to $10,000 in the first quarter of 1996 from $155,000 for
the same period in 1995. The decrease in deposit insurance expense was partially
offset by moderate increases in salary and benefits expense, professional fees
and marketing costs. As a percentage of average earning assets, other expenses,
on an annualized basis, decreased to 2.6% in the first three months of 1996 from
3.2% in the first three months of 1995.
Salary and benefits expense was $1,217,000 in the three months ended March 31,
1996 compared to 1,153,000 in the same period one year earlier. The increase in
salary and benefits expense is primarily due to increased headcount at the Bank.
-15-
<PAGE> 16
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity
Liquidity management refers to the Bank's ability to provide funds on an ongoing
basis to meet fluctuations in deposits levels as well as the credit needs and
withdrawal requirements of its customers. Both assets and liabilities contribute
to the Bank's liquidity position. Assets such as cash and due from Banks,
Federal funds sold and investment securities as well as loan repayments,
contribute to liquidity. Of greater significance are the diverse sources
comprising the Bank's funding base. These include demand deposits, interest
bearing transaction accounts and time deposits.
Liquidity is measured by various ratios, the most common being the ratio of
cash, deposits with other banks, Federal funds sold and unpledged securities to
total deposits. At March 31, 1996 this ratio was 41.4% (37.7% at December 31,
1995). Another key liquidity ratio is gross loans to total deposits. This ratio
was 61.0% at March 31, 1996 and 58.0% at December 31, 1995.
Interest rate sensitivity
Interest rate sensitivity is a measure of the exposure to fluctuations in the
Bank's future earnings caused by fluctuations in interest rates. If assets and
liabilities do not reprice simultaneously and in equal amounts, the potential
for such exposure exists. It is management's objective to maintain stability in
net interest margin through the maintenance of an appropriate mix of interest
rate sensitive assets and liabilities. Management regularly reviews general
economic and financial conditions, both external and internal, and determines
whether the position taken with respect to liquidity and interest rate
sensitivity continue to be appropriate. The Bank also utilizes a monthly "GAP"
report which identifies rate sensitivity over the short- and long-term.
The following table sets forth the distribution of repricing opportunities,
based on contractual term, of the Bank's earning assets and interest-bearing
liabilities at March 31, 1996, the interest rate sensitivity gap (i.e. interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive liabilities)
and the cumulative interest rate sensitivity gap ratio.
-16-
<PAGE> 17
<TABLE>
<CAPTION>
In thousands
- - ----------------------------------------------------------------------------------------------------------------------
Over three
Assets and Liabilities Next day months and Over one
which Mature or and within within and within Over
Reprice Immediately three months one year five years five years Total
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 34,448 $ -- $ -- $ -- $ -- $ 34,448
Purchased CD's -- -- 99 -- -- 99
Investment securities -- 6,001 19,956 56,393 4 82,354
Loans, excluding
nonaccrual loans
and overdrafts 149,501 371 6,596 6,573 4,053 167,094
- - ----------------------------------------------------------------------------------------------------------------------
Total $183,949 $ 6,372 $26,651 $62,966 $ 4,057 $283,995
- - ----------------------------------------------------------------------------------------------------------------------
Interest bearing
liabilities:
Interest bearing demand $ 70,690 $ -- $ -- $ -- $ -- $ 70,690
Savings 107,535 -- -- -- -- 107,535
Time certificates -- 14,064 22,944 2,460 100 39,568
- - ----------------------------------------------------------------------------------------------------------------------
Total $178,225 $ 14,064 $22,944 $ 2,460 $ 100 $217,793
- - ----------------------------------------------------------------------------------------------------------------------
Interest rate
sensitivity gap $ 5,724 $ (7,692) $ 3,707 $60,506 $ 3,957
Cumulative interest
rate sensitivity gap $ 5,724 $ (1,968) $ 1,739 $62,245 $66,202
Ratios:
Interest rate
sensitibity gap 1.03 0.45 1.16 25.60 40.57
Cumulative interest
rate sensitivity gap 1.03 0.99 1.01 1.29 1.30
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
It is management's objective to maintain stability in the net interest margin in
times of fluctuating interest rates by maintaining an appropriate mix of
interest sensitive assets and liabilities. Toward that end, the Bank prices the
majority of its interest-bearing liabilities at variable rates to reprice at
approximately the same time as interest-earning assets tied to the Bank's "Peg"
or base rate. At March 31, 1996 the Bank is slightly asset-sensitive over a one
year time horizon. That is, within the next twelve months a greater volume of
assets than liabilities will reprice. Volatile interest rate fluctuations are
detrimental to the net interest margin in the instance of rapidly declining
interest rates.
CAPITAL RESOURCES
The Company and Bank are subject to capital adequacy guidelines issued by the
FRB and the FDIC. For 1996, the Company and the Bank are required to maintain
capital equal to a least 8% of assets and commitments to extend credit, weighted
by risk ("risk-adjusted" assets). Further, capital equal to at least 4% of
risk-adjusted assets 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. Certain assets and
commitments to extend credit present less risk than others and will be assigned
to lower risk weighted categories requiring less capital allocation
-17-
<PAGE> 18
than the 8% total ratio. For example, cash and government securities are
assigned to a 0% risk weighted category; most home mortgage loans are assigned
to a 50% risk weighted category requiring a 4% capital allocation; and
commercial loans are assigned to a 100% risk weighted category requiring an 8%
capital allocation.
In addition, the Company and the Bank are required to maintain a 3-5% minimum
leverage ratio as a supplement to the risk weighted capital guidelines. The
minimum leverage ratio is intended to limit the ability of banking organizations
to leverage their equity capital base by increasing assets and liabilities
without increasing capital proportionately. The 3% ratio constitutes a minimum
ratio for well-run banking organizations. Organizations experiencing or
anticipating significant growth or failing to meet such standards will be
required to maintain a minimum leverage ratio ranging from 100 to 200 basis
points in excess of the 3% ratio.
At March 31, 1996, the Bank and the Company were in compliance with the
risk-based capital and leverage ratios noted above. The following table sets
forth the risk-based capital and leverage ratios of the Company.
<TABLE>
<CAPTION>
Dollars March 31, 1996 December 31,1995
in thousands Amount Ratio Amount Ratio
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RISK BASED CAPITAL RATIOS
Tier 1 Capital $ 27,610 14.9% $ 25,986 13.9%
Total Capital $ 29,924 16.2% $ 28,328 15.1%
Total risk adjusted capital $185,148 $187,372
- - ------------------------------------------------------------------------------------
LEVERAGE RATIOS
Tier 1 Capital to
average total assets $ 27,610 9.0% $ 25,986 8.9%
Quarterly average
total assets $306,568 $291,602
- - ------------------------------------------------------------------------------------
</TABLE>
On December 19, 1991, the president signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). The FDICIA, among other matters,
substantially revises banking regulations and establishes a framework for
determination of capital adequacy of financial institutions. Under FDICIA,
financial institutions are placed into one of five capital adequacy categories
as follows: (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 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 less than 3%; (5) Critically undercapitalized, consisting of an
institution with a ratio tangible equity to or less than 2%.
-18-
<PAGE> 19
Financial institutions classified as undercapitalized or below are subject to
various limitations including among other matters, certain supervisory action by
bank regulatory authorities and restrictions related to (1) growth of assets,
(2) payment of interest on subordinated indebtedness, (3) payment of dividends
or other capital distributions, and (4) payment of management fees to a parent
holding company. The FDICIA requires the bank regulatory authorities to initiate
corrective action regarding financial institutions which fail to meet minimum
capital requirements. Such action may include orders to, among other matters,
augment capital and reduce total assets. Critically undercapitalized financial
institutions may also be subject to appointment of a receiver or conservator
unless the financial institutions submits an adequate capitalization plan.
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 rate 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 adequacy because loan growth in
inflationary periods can increase at rates higher than the rate that capital
grows through retention of earnings which the Company may generate in the
future. In addition to its effects on interest rates, inflation directly affects
the Company by increasing the Company's operating expenses.
The effect of inflation was not material to the Company's results of operations
during the periods covered by this report.
-19-
<PAGE> 20
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
None.
Item 2. Changes in securities.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits - None.
(27.1) Financial Data Schedules.
(b) Reports on Form 8-K - None.
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 14, 1996 CENTRAL COAST BANCORP
By /s/ THOMAS A. SA
-----------------------------------
Thomas A. Sa, Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
-21-
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
Exhibit Sequential
Number Description Page Number
- - -------- ----------- -----------
27.1 Financial Data Schedule 23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 19,066
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 34,448
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 82,354
<INVESTMENTS-MARKET> 82,331
<LOANS> 167,991
<ALLOWANCE> 3,928
<TOTAL-ASSETS> 306,061
<DEPOSITS> 276,250
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,201
<LONG-TERM> 0
0
0
<COMMON> 20,892
<OTHER-SE> 6,718
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 4,798
<INTEREST-INVEST> 1,136
<INTEREST-OTHER> 642
<INTEREST-TOTAL> 6,676
<INTEREST-DEPOSIT> 2,124
<INTEREST-EXPENSE> 2,124
<INTEREST-INCOME-NET> 4,452
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,876
<INCOME-PRETAX> 2,769
<INCOME-PRE-EXTRAORDINARY> 2,769
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,584
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 6.20
<LOANS-NON> 362
<LOANS-PAST> 694
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,964
<CHARGE-OFFS> 67
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 3,928
<ALLOWANCE-DOMESTIC> 3,928
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
