UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-25418
CENTRAL COAST BANCORP
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0367061
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(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
301 Main Street, Salinas, California 93901
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (408) 422-6642
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock
(no par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 8, 1999 was $92,459,969.22.
As of March 8, 1999, the registrant had 6,215,796 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 1998 annual meeting of shareholders.
The Index to Exhibits is located at page 73 Page 1 of 92 Pages
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 the operating market areas of the Company and the Banks; (4) changes
in the regulatory environment; (5) changes in business conditions and
inflation; (6) changes in securities markets; and (7) effects of Year 2000
problems discussed herein. Therefore, the information set forth therein
should be carefully considered when evaluating the business prospects of
the Company and the Banks.
Central Coast Bancorp (the "Company") is a California corporation
organized in 1994 to act as the bank holding company of Bank of Salinas and
Cypress Bank, state-chartered banks (the "Banks"). The Banks, headquartered
in Salinas and Seaside, respectively, serve individuals, merchants, small
and medium-sized businesses, professionals, agribusiness enterprises and
wage earners located in the Salinas Valley and the Monterey Peninsula.
On February 21, 1997, the 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, 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
Bank of Salinas opened an additional new branch office in Salinas,
California, in order to better provide services to the growing Salinas
community.
Other than holding the shares of the subsidiary Banks, the Company
conducts no significant activities. Although, it is authorized, with the
prior approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"), the Company's principal regulator, to engage in a
variety of activities which are deemed closely related to the business of
banking.
The Banks operate through their headquarters offices located in
Salinas and Seaside, California and through their branch offices located in
Castroville, Gonzales, King City, Marina, Monterey and Salinas,
California. The Banks offer a full range of commercial banking services,
including the acceptance of demand, savings and time deposits, and the
making of commercial, real estate (including residential mortgage), Small
Business Administration, personal, home improvement, automobile and other
installment and term loans. They also offer travelers' checks, safe
deposit boxes, notary public, customer courier and other customary bank
services. The Bank of Salinas and Cypress Bank 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 Bank of Salinas 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 Banks have
automated teller machines (ATMs) located at the Castroville, Gonzales, King
City, Marina, Monterey, Salinas and Seaside offices, the Monterey County
Fairgrounds, the Soledad Correctional Training Facility Credit Union,
Salinas Valley Memorial Hospital and Fort Hunter Liggett which is located
in Jolon, California. The Banks are insured under the Federal Deposit
Insurance Act and each depositor's account is insured up to the legal
limits thereon. The Banks are chartered (licensed) by the California
Commissioner of Financial Institutions ("Commissioner") and have chosen not
to become a member of the Federal Reserve System. The Banks have no
subsidiaries.
The Banks also currently offer personal and business Visa credit
cards. The Banks have arranged with a correspondent institution to offer
trust services to the Banks' customers on request. The Banks operate an
on-site computer system which provides independent processing of the Banks'
deposits, loans and financial accounting.
The three areas in which the Banks have directed virtually all of
their lending activities are: (i) commercial loans; (ii) consumer loans;
and (iii) real estate loans (including residential construction and
mortgage loans). As of December 31, 1998, these three categories accounted
for approximately 44 percent, 4 percent and 52 percent, respectively, of
the Banks' loan portfolio.
The Banks' deposits are attracted primarily from individuals,
merchants, small and medium-sized businesses, professionals and
agribusiness enterprises. The Banks' 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 Banks,
nor is a material portion of the Banks' deposits concentrated within a
single industry or group of related industries.
As of December 31, 1998, the Banks served a total of 24 municipality
and governmental agency depositors totaling $30,929,000 in deposits. In
connection with the deposits of municipalities or other governmental
agencies or entities, the Banks are 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, 1998, the Banks had total deposits of
$489,192,000. Of this total, $149,757,000 represented noninterest-bearing
demand deposits, $98,226,000 represented interest-bearing demand deposits,
and $241,209,000 represented interest-bearing savings and time deposits.
The principal sources of the Banks' revenues are: (i) interest and
fees on loans; (ii) interest on Federal Funds sold (funds loaned on a
short-term basis to other banks) ; and (iii) interest on investments
(principally government securities). For the fiscal year ended December
31, 1998 these sources comprised 72 percent, 8 percent, and 20 percent,
respectively, of the Banks' 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 Banks' 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 Banks are licensed by the Commissioner, their deposits are
insured by the FDIC, and they have chosen not to become members of the
Federal Reserve System. The Banks have no subsidiaries. Consequently, the
Banks are subject to the supervision of, and are regularly examined by, the
Commissioner and the FDIC. Such supervision and regulation include
comprehensive reviews of all major aspects of the Banks' business and
condition, including their capital ratios, allowance for possible loan
losses and other factors. However, no inference should be drawn that such
authorities have approved any such factors. The Company and the Banks are
required to file reports with the Commissioner, the FDIC and the Board of
Governors and provide such additional information as the Commissioner, FDIC
and the Board of Governors may require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"),
and is registered as such with, and subject to the supervision of, the
Board of Governors. The Company is required to obtain the approval of the
Board of Governors before it may acquire all or substantially all of the
assets of any bank, or ownership or control of the voting shares of any
bank if, after giving effect to such acquisition of shares, the Company
would own or control more than 5% of the voting shares of such bank. The
Bank Holding Company Act prohibits the Company from acquiring any voting
shares of, or interest in, all or substantially all of the assets of, a
bank located outside the State of California unless such an acquisition is
specifically authorized by the laws of the state in which such bank is
located. Any such interstate acquisition is also subject to the provisions
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
discussed below.
The Company, and any subsidiaries which it may acquire or organize,
are deemed to be "affiliates" of the Banks 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 Banks to affiliates, and (b) on
investments by the Banks 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 Banks in
conjunction with any liability of the Company under any obligation
(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 Banks 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 Banks 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 Banks 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 credit
losses. Effective October 1,1998, the Board of Governors and other federal
bank regulatory agencies approved including in Tier 2 capital 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 adopted a
revised minimum leveraged ratio for bank holding companies as a supplement
to the risk-weighted capital guidelines. The old rule established a 3%
minimum leverage standard for well-run banking organizations (bank holding
companies and banks)with diversified risk profiles. Banking organizations
which did not exhibit such characteristics or had greater risk due to
significant growth, among other factors, were required to maintain a
minimum leverage ratio 1% to 2% higher. The old rule did not take into
account the implementation of the market risk capital measure set forth in
the federal regulatory agency capital adequacy guidelines. The revised
leverage ratio establishes a minimum Tier1 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. The old rule
remains in effect for banks, however, the federal regulatory agencies are
currently continuing work on revised leverage rule for banks.
At December 31, 1998, the Banks and the Company are in compliance
with the risk-based capital and leverage ratios described above. See Item
8 below for a listing of the Company's risk-based capital ratios at
December 31, 1998 and 1997.
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Board of
Governors and FDIC adopted regulations effective December 19, 1992,
implementing a system of prompt corrective action pursuant to Section 38 of
the Federal Deposit Insurance Act and Section 131 of the 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
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. 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 banking agencies during 1996 issued a joint agency policy
statement regarding the management of interest-rate risk exposure (interest
rate risk is the risk that changes in market interest rates might adversely
affect a bank's financial condition) with the goal of ensuring that
institutions with high levels of interest-rate risk have sufficient capital
to cover their exposures. This policy statement reflected the agencies
decision at that time not to promulgate a standardized measure and explicit
capital charge for interest rate risk, in the expectation that industry
techniques for measurement of such risk will evolve.
However, the Federal Financial Institution Examination Counsel
(OFFIEC) on December 13, 1996, approved an updated Uniform Financial
Institutions Rating System ("UFIRS"). In addition to the five components
traditionally included in the so-called CAMEL rating system which has
been used by bank examiners for a number of years to classify and evaluate
the soundness of financial institutions (including capital adequacy, asset
quality, management, earnings and liquidity), UFIRS includes for all bank
regulatory examinations conducted on or after January 1, 1997, a new rating
for a sixth category identified as sensitivity to market risk. Ratings in
this category are intended to reflect the degree to which changes in
interest rates, foreign exchange rates, commodity prices or equity prices
may adversely affect an institution's earnings and capital. The rating
system henceforth will be identified as the "CAMELS" system.
The federal financial institution agencies have established safety
and soundness standards for insured financial institutions covering (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. Under the final rule, an
institution must file a compliance plan within 30 days of a request to do
so from the institution's primary federal regulatory agency. 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.
The Board of Governors issued final amendments to its risk-based
capital guidelines to be effective December 31, 1994, requiring that net
unrealized holding gains and losses on securities available for sale
determined in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," are not to be included in the
Tier 1 capital component consisting of common stockholders' equity. Net
unrealized losses on marketable equity securities (equity securities with a
readily determinable fair value), however, will continue to be deducted
from Tier 1 capital. This rule has the general effect of valuing available
for sale securities at amortized cost (based on historical cost) rather
than at fair value (generally at market value) for purposes of calculating
the risk-based and leverage capital ratios.
On December 13, 1994, the Board of Governors issued amendments to its
risk-based capital guidelines regarding concentration of credit risk and
risks of non-traditional activities, which were effective January 17,
1996. As amended, the risk-based capital guidelines identify
concentrations of credit risk and evaluate an institution's ability to
manage such risks and the risk posed by non-traditional activities as
important factors in assessing an institution's overall capital adequacy.
Community Reinvestment Act ("CRA") regulations effective as of
July 1, 1996 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 branches or form bank holding companies. In addition,
any bank rated in "substantial noncompliance" with the CRA regulations may
be subject to enforcement proceedings.
The Banks have a current rating of "satisfactory" or better 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 Banks.
The payment of cash dividends and/or management fees by the Banks 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
Banks.
COMPETITION
At December 31, 1998, there were 56 branches of commercial and
savings banks in the cities of Castroville, Gonzales, King City, Marina,
Salinas, Seaside and the Monterey Peninsula. Additionally, the Banks
compete with savings and loan associations 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 Banks are not authorized or
prepared to offer currently. The Banks have made arrangements with their
correspondent banks and with others to provide such services for its
customers. For borrowers requiring loans in excess of the Banks' legal
lending limits, the Banks have offered, and intend 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 their lending limits. As of December 31, 1998, the Banks' aggregate
legal lending limits to a single borrower and such borrower's related
parties were $7,947,000 on an unsecured basis and $13,245,000 on a fully
secured basis based on regulatory capital of $52,981,000.
Each Bank's business is concentrated in its service area, which
primarily encompasses Monterey County, including the Salinas Valley area
and to a lesser extent, the contiguous areas of San Benito County, Southern
Santa Cruz County, and Santa Clara County. The economy of the Bank of
Salinas's service area is primarily dependent upon the agricultural
industry. Consequently, Bank of Salinas competes with other financial
institutions for deposits from and loans to individuals and companies who
are also dependent upon the agricultural industry. The economy of Cypress
Bank's service area is primarily dependent on the tourist supported small
business industry. Cypress Bank competes with other financial institutions
located in their own communities and in surrounding communities.
Based upon data as of the most recent practicable date (June 30,1998)(1)
there were 73 operating commercial and savings bank branches in Monterey
County with total deposits of $3,656,276,000. The Banks held a total
of $489,192,000 in deposits, representing approximately 13.4% of total
commercial and savings banks deposits in Monterey County as of June 30, 1998.
Of the Banks'competitors, two are independent banksheadquartered in Monterey
County. The Banks also compete with savings and loans associations in
Monterey County.
In order to compete with the major financial institutions in their
primary service areas, the Banks use to the fullest extent possible the
flexibility which is accorded by their independent status. This includes
an emphasis on specialized services, local promotional activity, and
personal contacts by the Banks' officers, directors and employees. The
Banks also seek 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 Banks' lending limits, the Banks
seek to arrange for such loans on a participation basis with other
financial institutions. The Banks also assist those customers requiring
services not offered by the Banks to obtain such services from
correspondent banks.
Banking is a business which depends on interest rate differentials.
In general, the difference between the interest rate paid by the Banks to
obtain their deposits and other borrowings and the interest rate received
by the Banks on loans extended to customers and on securities held in the
Banks' portfolio comprise the major portion of the Banks' earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for loans with savings and loan
associations, credit unions, consumer finance companies, mortgage companies
and other lending institutions.
The interest rate differentials of the Banks, and therefore their
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 Banks are not predictable.
In 1996 the FDIC, pursuant to Congressional mandate, reduced bank
deposit insurance assessment rates to a range from $0 to $0.27 per $100 of
deposits, dependent upon a bank's risk. Based upon the above risk-based
assessment rate schedule, the Banks' current capital ratios and the Banks'
current levels of deposits, the Banks anticipate no change in the
assessment rate applicable to the Banks during 1999 from that in 1998.
Since 1986, California has permitted California banks and bank
holding companies to be acquired by banking organizations based in other
states on a "reciprocal" basis (i.e., provided the other state's laws
permit California banking organizations to acquire banking organizations in
that state on substantially the same terms and conditions applicable to
local banking organizations). Some increase in merger and acquisition
activity among California and out-of-state banking organizations has
occurred as a result of this law, as well as increased competition for
loans and deposits.
Since October 2, 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
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.
Recently, the Federal banking agencies, especially the 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. On November 20, 1996, the OCC
issued final 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
after going through a new expedited application process. In addition, the
new regulations include a provision whereby a national bank may apply to
the OCC to engage in an activity through a subsidiary in which the bank
itself may not engage. This OCC regulation could be advantageous to
national banks depending on the extent to which the OCC permits national
banks to engage in new lines of business.
Certain legislative and regulatory proposals that could affect the
Bank and the banking business in general are pending or may be introduced
before the United States Congress, the California State Legislature and
Federal and state government agencies. The United States Congress is
considering numerous bills that could reform banking laws substantially.
For example, proposed bank modernization legislation under consideration
would, among other matters include a repeal of the Glass-Steagall Act
restrictions on banks that now prohibit the combination of commercial and
investment banks.
It is not known to what extent, if any, the 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 many of these proposals would
subject the Company and the Banks to increased regulation, disclosure and
reporting requirements and would increase competition and the Banks' cost
of doing business.
In additional to pending legislative changes, the various banking
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 Banks.
- --------
(1) "FDIC Institution Office Deposits", June 30, 1998
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 which house administrative and data processing functions
and eight banking offices. Major owned and leased facilities are listed
below.
BANK OF SALINAS CYPRESS BANK
301 main street 1658 fremont boulevard
salinas, california seaside, california
leased - term expires 1999 leased - term expires 1999
10601 merritt street 228 reservation road
castroville, california marina, california
owned leased - term expires 2004
400 alta street 484 lighthouse avenue
gonzales, california monterey, california.
leased - term expires 2003 leased - term expires 2000
532 broadway
king city, california
leased - term expires 2002
1285 north davis road
salinas, california.
leased - term expires 2008
The above leases contain options to extend for three to fifteen
years. Included in the above are two facilities leased from shareholders at
terms and conditions which management believes are consistent with the
commercial lease market. Rental rates are adjusted annually for changes in
certain economic indices. The annual minimum lease commitments are set
forth in Footnote 7 of Item 8 Financial Statements and Supplementary Data
included in this report and incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the Banks
to which any director, officer, affiliate of the Company or 5% shareholder
of the Company or the Banks, or any associate of any such director,
officer, affiliate or 5% shareholder of the Company or Banks are a party,
and none of the above persons has a material interest adverse to the
Company or the Banks.
Neither the Company nor the Banks are a party to any pending legal or
administrative proceedings (other than ordinary routine litigation
incidental to the Company's or the Banks' 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 1998.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
Prior to the second quarter of 1998, there was limited trading in and
no established public trading market for the Company's common stock. As of
the second quarter of 1998, the Company's common stock is listed on the
Nasdaq National Market exchange (trading symbol CCBN)
Sandler O'Neill & Partners, L.P. and Hoefer & Arnett, Incorporated are
registered as market makers in the Company's stock. Based on information
provided to the Company from Nasdaq and Heofer & Arnett(for those quarters
prior to the Company's Nasdaq listing), the range of high and low bids for
the common stock for the twomost recent fiscal years, restated to reflect
all stock dividends and stock splits distributed by the Company and the
5-for-4 stock split declared in January 1999, are presented below.
<TABLE>
<CAPTION>
Calendar Year Low High
<S> <C> <C>
1998
First Quarter ....................... $ 14.55 $ 19.20
Second Quarter ...................... 16.50 20.41
Third Quarter ....................... 13.20 18.50
Fourth Quarter ...................... 14.40 16.10
1997
First Quarter ........................ $ 11.45 $ 17.82
Second Quarter ...................... 12.36 17.00
Third Quarter ....................... 16.18 18.18
Fourth Quarter ...................... 14.00 16.45
</TABLE>
The closing price for the Company's common stock was $14.875 as of
March 8, 1999.
(b) Holders
As of March 8, 1999, there were approximately 1,150 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 Banks.
The payment of cash dividends by the subsidiary Banks 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 Banks to the
Company was approximately $17,747,000 as of December 31, 1998.
To date, the Company has not paid a cash dividend and presently does
not intend to pay cash dividends in the foreseeable future. The Company
distributed a five-for-four stock split in February 1999, a ten percent
stock dividend in 1998, a three-for-two stock split in 1997 and a ten
percent stock dividend in 1996. 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
Banks.
The following table presents certain consolidated financial
information concerning the business of the Company and its subsidiary
Banks. 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.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
(Dollar amounts in 1998 1997 1996 1995 1994
thousands)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total Interest Income $37,354 $33,916 $29,301 $26,964 $21,646
Total Interest Expense 13,319 12,041 9,859 10,008 7,071
-------------------------------------------------
Net Interest Income 24,035 21,875 19,442 16,956 14,575
Provision for Credit Losses 159 64 352 695 1,745
-------------------------------------------------
Net Interest Income After Provision
for Credit Losses 23,876 21,811 19,090 16,261 12,830
Other Income 2,084 1,765 1,456 1,302 1,315
Other Expenses 13,859 12,573 11,115 10,263 9,170
-------------------------------------------------
Income before Income Taxes 12,101 11,003 9,431 7,300 4,975
Income Taxes 4,948 4,500 3,571 2,975 2,046
-------------------------------------------------
NET INCOME $ 7,153 $ 6,503 $ 5,860 $ 4,325 $ 2,929
- ---------------------------------------------------------------------------
Basic Earnings Per Share $ 1.18 $ 1.09 $ 1.01 $ 0.75 $ 0.53
Diluted Earnings Per Share 1.09 1.01 0.94 0.70 0.50
- ---------------------------------------------------------------------------
FINANCIAL CONDITION AND CAPITAL - YEAR-END BALANCES
Net Loans $307,818 $251,271 $235,992 $191,000 $179,266
Total Assets 543,933 497,674 376,832 357,236 310,362
Deposits 489,192 450,301 338,663 326,089 283,823
Shareholders' Equity 51,199 43,724 36,332 29,916 25,547
- ---------------------------------------------------------------------------
FINANCIAL CONDITION AND CAPITAL - AVERAGE BALANCES
Net Loans $271,590 $238,793 $203,117 $173,065 $179,514
Total Assets 499,354 441,013 355,386 329,502 290,166
Deposits 447,598 396,457 319,110 300,291 265,512
Shareholders' Equity 47,587 39,969 33,228 27,684 23,691
- ---------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Rate of Return on:
Average Total Assets 1.43% 1.47% 1.65% 1.31% 1.01%
Average Shareholders'
Equity 15.03% 16.27% 17.64% 15.62% 12.36%
Rate of Average Shareholders'Equity
to Total Average Assets 9.53% 9.06% 9.35% 8.40% 8.16%
- ---------------------------------------------------------------------------
</TABLE>
(a)
(1) Distribution of Assets, Liabilities and Equity; Interest Rates and
Interest Differential
Table One in 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,
1998 and is hereby incorporated 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 Management's Discussion and
Analysis.
(b) Investment Portfolio
(1) The book value of investment securities at December 31, 1998 and
1997 is set forth in Note 5 of Item 8 - "Financial Statements and
Supplementary Data" and are included in this report and incorporated
herein by reference.
(2) The book value, maturities and weighted average yields of
investment securities as of December 31, 1998 are set forth in
Table Twelve of Management's Discussion and Analysis included
in this report and incorporated herein by reference.
(3) There were no issuers of securities for which the book value
was greater than 10% of shareholders' equity other than U.S.
Government and U.S. Government Agencies and Corporations.
(c) Loan Portfolio
(1) The composition of the loan portfolio is summarized in Table
Three of Management's Discussion and Analysis included in this
report and is incorporated herein by reference.
(2) The maturity distribution of the loan portfolio at December 31,
1998 is summarized in Table Eleven of Management's Discussion
and Analysis included in this report and is incorporated herein
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.
For further discussion of nonperforming loans, refer to Risk
Elements section of Management Discussion Analysis in this
report.
(d) Summary of Loan Loss Experience
(1) An analysis of the allowance for loan loss showing charged off and
recovery activity as of December 31, 1998 is summarized in Table
Five of Management's Discussion and Analysis included in this
report and is incorporated herein 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 herein by reference.
(2) In evaluating the adequacy of the allowance for loan losses, the
Company attempts to allocate the allowance for loan losses to
specific categories of loans. Management believes that any
breakdown or allocation of the allowance for possible loan
losses into loan categories lends an appearance of exactness
which does not exist in that the allowance is utilized as a
single unallocated allowance available for all loans. Further,
management believes that the breakdown of historical losses in
the preceding table is a reasonable representation of
management's expectation of potential losses in the next full
year of operation. 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.
(e) Deposits
(1) Table One in Management's Discussion and Analysis included in this
report sets forth the distribution of average deposits for the years
ended December 31, 1998, 1997 and 1996 and is incorporated herein by
reference.
(2) Table Ten in 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, 1998 and is incorporated herein by
reference.
3(f) Return on Equity and Assets
(1) The table at page 16 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
In addition to the historical information contained herein, this Annual
Report contains certain forward-looking statements. The reader of this
Annual Report should understand that all such forward-looking statements
are subject to various uncertainties and risks that could affect their
outcome. The Company's actual results could differ materially from those
suggested by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, variances
in the actual versus projected growth in assets, return on assets, loan
losses, expenses, rates charged on loans and earned on securities
investments, rates paid on deposits, competition effects, fee and other
noninterest income earned, general economic conditions, nationally,
regionally and in the operating market areas of the Company and the Banks,
changes in the regulatory environment, changes in business conditions and
inflation, changes in securities markets, effects of Year 2000 problems
discussed herein, 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.
Business Organization
Central Coast Bancorp (the "Company"), a California corporation organized
in 1994, acts as the holding company for Bank of Salinas and Cypress Bank
(the "Banks"), state-chartered banks, headquartered in Salinas and Seaside,
California, respectively. As of December 31, 1998, the Banks operated
eight full-service branches and one limited-service branch in Monterey
County, California. Other than its investment in the Banks, 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, the Company's principal regulator.
The Banks offer 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 the Salinas Valley and the Monterey
Peninsula.
The Company has expanded its banking operations through internal growth and
the acquisition of other banking units. Bank of Salinas' newest branch was
opened deNovo in December 1998. It is located in Salinas' newest shopping
area, Westridge Center. On February 21, 1997, the 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 that
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, Cypress Bank opened a new branch office in Monterey,
California, so that it might better serve business and individual customers
on the Monterey Peninsula.
The following analysis is designed to enhance the reader's understanding of
the Company's financial condition and the results of its operations as
reported in the Consolidated Financial Statements included in this Annual
Report. Reference should be made to those statements and the Selected
Financial Data presented elsewhere in this report for additional detailed
information. Average balances, including such balances used in calculating
certain financial ratios, are generally comprised of average daily balances
for the Company. Except within the "overview" section, interest income and
net interest income are presented on a tax equivalent basis.
Overview
Central Coast Bancorp continued its record of increased earnings in
each successive year since the founding of Bank of Salinas in 1983.
Earnings for the year ended December 31, 1998 were $7,153,000 versus
$6,503,000 for 1997. Diluted earnings per share for the years were $1.09
and $1.01. The earnings per share for the two years have been adjusted for
the 5 for 4 stock split paid on February 26, 1999.
For the year 1998, net interest income increased $2,160,000 (9.9%) to
$24,035,000 from the prior year. The interest income component was up
$3,438,000 to $37,354,000 due to a 13.0% growth in average earning assets
of $51,738,000. Loan volume made up $32,797,000 of this increase and
represented a 13.7% growth in loans. The higher loan volume added
$3,410,000 in interest income on a year over year basis. This increase was
offset in part by decrease of $1,201,000 due to a 44 basis point decline in
the average yield received on loans during 1998. Interest income on
investment securities grew $1,650,000 (28.3%) as average balances were
$25,727,000 (25.8%) higher and the average yield improved by 12 basis
points. During the year, the Company began a program to reduce Federal
Funds sold and move those funds into higher yielding securities. Interest
income from Federal Funds sold declined $421,000 (12.9%) in 1998 versus
1997. Interest expense increased $1,278,000 (10.6%) in 1998 due mostly to
growth of $33,175,000 (11.0%) in average interest bearing deposits. The
average rate paid on interest-bearing liabilities was 4.0% for both 1998
and 1997. Net interest margin for 1998 was 5.34% versus 5.49% in 1997.
This change reflects the effect of the 50 basis point decrease in the prime
rate during the fourth quarter.
Noninterest income increased $319,000 to $2,084,000 in 1998 versus
1997. Service charges on deposits provided $159,000 of the increase mostly
due to higher volumes. The increased volume of mortgage originations
contributed an additional $136,000 on a year over year basis.
Noninterest expenses increased $1,286,000 (10.2%) to $13,859,000.
Salary and benefits expenses increased 10.5% to $8,385,000. Part of the
higher expense was attributable to the full year effect in 1998 of the two
branches purchased from Wells Fargo Bank in late February 1997 and the
December 1998 opening of the new Westridge branch in Salinas. Additional
staff has been added Company wide due to growth. During the year, the
Company installed a wide area network, a Year 2000 compliant central
computer and software system and upgraded many of its workstations. These
enhancements provide the platform for growth, but contributed significantly
to the $128,000 (30.5%) increase in depreciation for 1998 versus 1997. For
1998, the Company had an overhead efficiency ratio of 53.1% as compared to
53.2% for 1997.
Assets of the Company totaled $543,933,000 at December 31, 1998 which
was an increase of $46,259,000 (9.3%) from the 1997 ending balances. Loan
ending balances totaled $312,844,000 on December 31, 1998 versus
$256,062,000 on December 31,1997. Nonperforming loans were $2,123,000 at
the end of 1998 versus $895,000 at the end of 1997. One real estate
secured loan for $1,174,000, which was in the process of collection,
accounted for most of the $1,228,000 increase. This loan was refinanced
outside the Bank in March 1999. Deposits grew 8.6% to total $489,192,000
at December 31, 1998.
For 1998, the Company realized a return on assets of 1.43% and a
return on equity of 15.0% versus 1.47% and 16.3%, respectively, in 1997.
Central Coast Bancorp ended 1998 with a Tier 1 capital ratio of 13.6% and a
total risk-based capital ratio of 14.8%.
Management's continuing goals for the Banks are to deliver a full array of
competitive products to their customers while maintaining the personalized
customer service of a community bank. We believe this strategy will
provide continued growth and the ability to achieve above average returns
for our shareholders.
Accounting Pronouncements
See Note One in the Consolidated Financial Statements at Item 8.
(A) Results of Operations
Net Interest Income/Net Interest Margin
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for 1998 totaled $24,130,000 and was up 10.1%
($2,223,000) over the prior year. The interest income component was up
$3,501,000 to $37,449,000. Most of the increase was attributable to growth
in the earning assets. Average outstanding loan balances of $271,590,000
for 1998 reflected a 13.7% increase over 1997 balances. This increase
contributed an additional $3,410,000 to interest income. This increase was
offset in part by an average 44 basis point decrease in loan yields that
caused a reduction of $1,201,000 in interest income. Competitive pressures
and three 25 basis point decreases in the prime rate late in the year
contributed to the lower yields. The securities portfolio average balances
grew $25,727,000 (25.8%) which added $1,511,000 to interest income. The
average yield received on securities was up 16 basis points and added
$202,000 to interest income. Federal Funds sold interest income decreased
$421,000 as the average balances were $6,786,000 (11.3%) lower.
Interest expense increased $1,278,000 (10.6%) in 1998 over 1997. The
average balances of interest bearing liabilities increased $31,307,000
(10.4%). The higher balances were due in part to the full year effect in
1998 of the deposits acquired in the February 1997 purchase of two branches
from Wells Fargo Bank. Interest expense attributable to the higher volume
was $1,787,000. Lower rates paid on all interest bearing liabilities
helped offset the higher expense by $509,000. Net interest margin for 1998
was 5.36% versus 5.50% in 1997.
Net interest income for 1997 totaled $21,907,000 and was up 12.7%
($2,465,000) over 1996. Average earning assets were $398,416,000 in 1997
for an increase of $73,213,000 over 1996. The purchase of the two
branches from Wells Fargo Bank accounted for approximately $25,000,000 of
this increase. In 1997, interest income increased by $4,647,000 to
$33,948,000. The higher volume of earning assets added $6,003,000 to
interest income in 1997. The average yield received on all interest
earning assets fell 49 basis points to 8.52%. The yield differential
reduced interest income by $1,356,000.
Interest expense increased $2,182,000 (22.1%) in 1997 over 1996. Average
balances of interest bearing liabilities increased $52,933,000 in 1997.
Approximately $28,000,000 of that increase was attributable to the branch
purchase from Wells Fargo Bank. Interest expense was up $2,409,000 due to
the higher average balances. Changes due to rate variations helped offset
the increase by $227,000. Net interest margin for 1997 was 5.50% versus
5.98% in 1996.
Table One, Analysis of Net Interest Margin on Earning Assets, and Table
Two, Analysis of Volume and Rate Changes on Net Interest Income and
Expenses, are provided to enable the reader to understand the components
and past trends of the Banks' interest income and expenses. Table One
provides an analysis of net interest margin on earning assets setting forth
average assets, liabilities and shareholders' equity; interest income
earned and interest expense paid and average rates earned and paid; and the
net interest margin on earning assets. Table Two presents an analysis of
volume and rate change on net interest income and expense.
Table One: Analysis of Net Interest Margin on Earning Assets
<TABLE>
<CAPTION>
(Taxable Equivalent Basis) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
In thousands Avg Avg Avg Avg Avg Avg
(except percentages) Balance Interest Yield Balance Interest Yield Balance Interest Yield
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Earning Assets
Loans (1) (2) $ 271,590 $27,037 9.96% $ 238,793 $24,828 10.40% $ 203,117 $22,330 10.99%
Investment Securities (3) 125,380 7,568 6.04% 99,653 5,855 5.88% 82,883 4,936 5.96%
Other 53,184 2,844 5.35% 59,970 3,265 5.44% 39,203 2,035 5.19%
------ ----- ---- ------ ----- ---- ------ ----- ----
Total Earning Assets 450,154 $37,449 8.32% 398,416 $33,948 8.52% 325,203 $29,301 9.01%
------- ---- ------- ---- ------- ----
Cash & due from banks 38,889 33,144 22,867
Other assets 10,311 9,453 7,316
------ ----- -----
$ 499,354 $ 441,013 $ 355,386
========= ========= =========
Liabilites & Shareholders'
Equity:
Interest bearing liabilities:
Demand deposits $ 89,637 $ 1,720 1.92% $ 93,161 $ 1,881 2.02% $ 75,295 $ 1,629 2.16%
Savings 101,256 3,774 3.73% 95,767 3,875 4.05% 102,819 4,303 4.19%
Time deposits 142,580 7,825 5.49% 111,370 6,187 5.56% 71,119 3,927 5.52%
Other borrowings - - n/a 1,868 98 5.25% - - n/a
------- ------ ---- ------ ------ ---- ------- ----- ----
Total interest bearing
liabilities 333,473 13,319 3.99% 302,166 12,041 3.98% 249,233 9,859 3.96%
------ ---- ------ ---- ----- ----
Demand deposits 114,125 96,159 69,877
Other Liabilities 4,169 2,719 3,048
----- ----- -----
Total Liabilities 451,767 401,044 322,158
Shareholders' Equity 47,587 39,969 33,228
------ ------ ------
$ 499,354 $ 441,013 $ 355,386
========= ========= =========
Net interest income & margin (4) $24,130 5.36% $21,907 5.50% $19,442 5.98%
======= ==== ======= ==== ======= ====
</TABLE>
- -----------------------------
1. Loans interest includes loan fees of $951,000, $1,037,000 and $901,000 in
1998, 1997 and 1996, and interest recognized from
payments collected on nonaccrual loans of
$619,000 in 1996.
2. Average balances of loans include average allowance for loan losses of
$4,260,000, $4,229,000 and $4,439,000, and average deferred
loan fees of $587,000, $571,000 and $613,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
3. Includes taxable-equivalent adjustments that primarily relate to income
on certain securities that is exempt from
federal income taxes. The effective federal statutory tax rate was
34% for 1998, 1997 and 1996.
4. Net interest margin is computed by dividing net interest
income by total average earning assets.
Table Two: Volume/Rate Analysis
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1998 over 1997
Increase (decrease) due to change in:
Net
Volume Rate (5) Change
------ -------- ------
<S> <C> <C> <C>
Interest-earning assets:
Net Loans (1)(2)(3) ......................$ 3,410 $(1,201) $ 2,209
Investment securities(4) ................. 1,511 202 1,713
Federal funds sold & other ............... (370) (51) (421)
----- ------ -----
Total .................................. 4,551 (1,050) 3,501
----- ------- -----
Interest-bearing liabilities:
Demand deposits .......................... (71) (90) (161)
Savings deposits ......................... 222 (323) (101)
Time deposits ............................ 1,734 (96) 1,638
Other borrowings ......................... (98) 0 (98)
--- --- ---
Total .................................. 1,787 (509) 1,278
----- ---- -----
Interest differential .......................$ 2,764 $ (541) $ 2,223
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1997 over 1996
Increase (decrease) due to change in:
Net
Volume Rate(5) Change
------ ------- ------
<S> <C> <C> <C>
Interest-earning assets:
Net loans (1)(2)(3) ......................$ 3,924 $(1,426) $ 2,498
Investment securities(4) ................. 999 (80) 919
Federal funds sold & other ............... 1,080 150 1,230
----- ---- -----
Total .................................. 6,003 (1,356) 4,647
----- ------ -----
Interest-bearing liabilities:
Demand deposits .......................... 393 (141) 252
Savings deposits ......................... (296) (132) (428)
Time deposits ............................ 2,214 46 2,260
Other borrowings ......................... 98 - 98
--- --- ---
Total .................................. 2,409 (227) 2,182
----- ---- -----
Interest differential ....................... $ 3,594 $(1,129) $ 2,465
- --------------------------------------------------------------------------------
</TABLE>
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 $951,000, $1,037,000 and $901,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, have
been included in the interest income
computation.
3. Rate variance includes impact of interest income recognized from
payments received on nonaccrual loans of $619,000 in 1996.
4. Includes taxable-equivalent adjustments that primarily relate to income
on certain securities that is exempt from
federal income taxes. The effective federal statutory tax rate was 34% for
1998, 1997 and 1996.
5. The rate / volume variance has been included in the rate variance.
Provision for Loan Losses
Credit quality remained strong in 1998. Consequently, the Company made
provisions for loan losses of only $159,000. This amounted to 0.06% of
average loans outstanding. In 1997, the Company provided $64,000. That
was a decrease of $288,000 from 1996.
Service Charges and Fees and Other Income
For 1998, noninterest income was up $319,000 (18.1%) from 1997 results to
$2,084,000. Service charges and fees related to deposit accounts accounted
for $159,000 of the increase. The growth came from both higher volumes and
some selective fee increases. Other income was up $160,000 to $849,000
over 1997 results. Mortgage origination fees accounted for $136,000 of
that increase as mortgage activity was significantly higher in 1998.
Should interest rates increase, activity in mortgage originations would
most likely decrease resulting in a decrease in those fees.
In 1997, income realized from service charges on deposit accounts increased
$341,000 or 46.4% to $1,076,000 over $735,000 in 1996. The increase in
income from fees and service charges was largely the result of the increase
in deposit accounts due to the two former Wells Fargo branches as well as
growth in the total number of interest bearing and noninterest bearing
demand deposit accounts at all branches. Other income decreased $32,000
(4.4%) in 1997 versus 1996. Income from the sale and servicing of SBA
loans was $119,000 in 1997 representing a decrease of $42,000 or 26.1% over
$161,000 recognized in 1996. The Company is retaining the SBA loans in its
portfolio rather than selling them.
Salaries and Benefits
Salary and benefits expenses increased $799,000 (10.5%) to $8,385,000 in
1998 from the level in 1997. Part of the higher expense was attributable
to the full year effect in 1998 of the two branches purchased from Wells
Fargo Bank in late February 1997 and the December 1998 opening of the new
Westridge branch in Salinas. Additional staff has been added Company wide
due to growth. At the end of 1998, the full time equivalent (FTE) staff
was 197 versus 181 at the end of 1997. Components of salaries and benefits
that increased significantly included; base salary and wages, $533,000 and
benefits including employer taxes $224,000.
Salaries and employee benefits expense for 1997 was $7,586,000, an increase
of 17.9% over the $6,437,000 incurred in 1996. The increase in 1997
primarily reflected the impact of increased headcount because of the
purchase of the Wells Fargo branches and to accommodate growth in the
Banks. In 1997, the FTE staff increased 36 positions from the end of 1996.
Salaries and employee benefits in 1997 included approximately $175,000 of
nonrecurring charges for restructuring related to the acquisition of
Cypress Bank and $250,000 for a salary continuation plan.
Occupancy and Furniture and equipment
Premise and fixed asset related expenses were $1,975,000 in 1998. This was
an increase of $286,000 over 1997. During 1998, the Company installed a
wide area network, a Year 2000 compliant central computer and software
system and upgraded many of its computer workstations. These enhancements
provide the platform for growth, but contributed significantly to the
increase in premise and fixed asset expenses. Other significant increases
occurred in repairs and maintenance of equipment, janitorial and gardening
and rent on leased quarters.
For 1997, premise and fixed asset related expenses increased $124,000 or
7.92% to $1,689,000. Most of the increase was related to the branch
acquisition.
Other Expenses
Other expenses increased $201,000 (6.1%) to $3,499,000 in 1998. ATM
expense was up $77,000 (51.3%) as the Banks added more locations and
changed the service provider. Promotional expenses were up $51,000 (46.3%)
as the Banks increased their advertising campaigns. Those two categories
saw the largest changes from the prior year.
Other expenses were $3,298,000 in 1997 representing an increase of $185,000
or 5.9% from 1996 expenses of $3,113,000. The increase in 1997 was
primarily related to increased supplies expense and amortization of
intangibles related to the purchase of two branches in that year.
Provision for Taxes
The effective tax rate on income was 40.9%, 40.9%, and 37.9% in 1998, 1997
and 1996, respectively. The primary factor reducing the effective tax rate
of the Company in 1996 was a change in the valuation allowance for the
deferred tax assets of Cypress Bank. The effective tax rate was greater
than the federal statutory tax rate due to state tax expense of $1,292,000,
$1,213,000, and $1,030,000 in these years. Tax-exempt income of $190,000,
$63,000, and none ($0) from investment securities in these years helped to
reduce the effective tax rate.
(B) Balance Sheet Analysis
Central Coast Bancorp's total assets at December 31, 1998 were $543,933,000
compared to $497,674,000 at December 31, 1997, representing an increase of
9.3%. The average balances of total assets of $499,354,000 in 1998
represent an increase of $58,341,000 or 13.2% over $441,013,000 in 1997.
Loans
The Banks concentrate their lending activities in four principal areas:
commercial loans (including agricultural loans); installment loans; real
estate-other loans and real estate construction loans (both commercial and
personal). At December 31, 1998, these four categories accounted for
approximately 44%, 4%, 46% and 6% of the Banks' loan portfolio,
respectively, as compared to 49%, 3%, 42%, and 6% at December 31, 1997.
Strong economic activity in the Banks' market area coupled with lower
interest rates resulted in some shifting loan demands during 1998. While
all loan categories reflect year over year growth from 1997 to 1998, the
largest growth took place 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
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
In thousands
- -----------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial $136,685 124,714 $111,545 $85,823 $78,627
Installment 11,545 9,349 8,230 5,677 6,445
Real Estate:
Construction 19,929 14,645 27,997 24,852 24,076
Other 144,685 107,354 93,241 79,644 74,769
- -----------------------------------------------------------------------------
Total Loans 312,844 256,062 241,013 195,996 183,917
Allowance for
Credit Losses (4,352) (4,223) (4,372) (4,446) (4,068)
Deferred Loans Fees (674) (568) (649) (550) (583)
- -----------------------------------------------------------------------------
Total $307,818 $251,271 $235,992 $191,000 $179,266
- -----------------------------------------------------------------------------
</TABLE>
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. Installment loans include a range of traditional consumer loan
products offered by the Company 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 Company'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 Banks' 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 Company does not make long-term
mortgage loans; however, the Company has informal arrangements in place
with mortgage lenders to assist customers in securing single-family
mortgage financing.
Average net loans in 1998 were $271,590,000 representing an increase of
$32,797,000 or 13.7% over 1997. The favorable economic conditions and
lower interest rates provided the impetus for continuing loan growth.
Average net loans of $238,793,000 in 1997 represented an increase of
$35,676,000 or 17.6% from $203,117,000 in 1996.
Risk Elements - The Company assesses and manages credit risk on an ongoing
basis through stringent credit review and approval policies, extensive
internal monitoring and established formal lending policies. Additionally,
the Company contracts with an outside loan review consultant to
periodically grade new loans and to review the existing loan portfolio.
Management believes its ability to identify and assess risk and return
characteristics of the Company's loan portfolio is critical for
profitability and growth. Management strives to continue the historically
low level of credit losses by continuing its emphasis on credit quality in
the loan approval process, active credit administration and regular
monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio.
Ultimately, credit quality may be influenced by underlying trends in the
economic and business cycles. 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, totalling approximately $212.1
million at December 31, 1998. The ultimate recovery of these loans is
generally dependent on the successful operation, sale or refinancing of the
real estate. 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 judgement, these loans are impaired, an
appropriate provision for losses is recorded. The more significant
assumptions management considers involve estimates of the following: lease,
absorption and sale rates; real estate values and rates of return;
operating expenses; inflation; and sufficiency of collateral independent of
the real estate including, in limited instances, personal guarantees.
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. Credit losses from lending transactions
related to real estate and agriculture compare favorably with the Company's
credit losses on its loan portfolio as a whole.
Management believes that its lending policies and underwriting standards
will tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances. The Banks'
loan policies and underwriting standards include, but are not limited to,
the following: 1) maintaining a thorough understanding of the Banks'
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 Banks' construction
lending officers. In addition, the Banks strive 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 and
loans past due 90 days or more for December 31:
Table Four: Non-Performing Loans
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Past due 90 days or more and still accruing:
Real estate $ 1,174 $ 6 $ 59 $ 71 $ -
Commercial 73 73 60 35 -
Installment and other - - 90 - 6
- --------------------------------------------------------------------------------
1,247 79 209 106 6
- --------------------------------------------------------------------------------
Nonaccrual:
Real estate 543 628 419 633 2,697
Commercial 333 188 184 194 99
Installment and other - - 1 24 33
- --------------------------------------------------------------------------------
876 816 604 851 2,829
- --------------------------------------------------------------------------------
Total nonperforming loans $ 2,123 $ 895 $ 813 $ 957 $ 2,835
================================================================================
</TABLE>
Interest due but excluded from interest income on nonaccrual loans was
approximately $45,000 in 1998, $7,000 in 1997 and $50,000 in 1996. In
1998, 1997 and 1996 interest income recognized from payments received on
nonaccrual loans was $17,000, $7,000 and $619,000, respectively.
At December 31, 1998, the recorded investment in loans that are
considered impaired was $727,000 of which $335,000 are included as
nonaccrual loans above. Such impaired loans had a valuation allowance of
$164,000. The average recorded investment in impaired loans during 1998
was $776,000. The Company recognized interest income on impaired loans of
$64,000.
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, 1998. Management is not aware of any potential problem loans,
which were accruing and current at December 31, 1998, where serious doubt
exists as to the ability of the borrower to comply with the present
repayment terms.
Other real estate owned was $105,000 and $348,000 at December 31, 1997 and
1996, respectively (none at December 31, 1998).
Allowance for Loan Losses Activity
The provision for credit losses is based upon management's evaluation of
the adequacy of the existing allowance for loans outstanding. 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 the interaction of three primary factors: (1) the loan
portfolio growth in the period, (2) a comprehensive grading and review
formula for total loans outstanding, and (3) actual previous charge-offs.
The allowance for credit losses totaled $4,352,000 or 1.39% of total loans
at December 31, 1998 compared to $4,223,000 or 1.65% at December 31, 1997
and $4,372,000 or 1.81% at December 31, 1996. The decrease in the
allowance as a percentage of total loans is primarily due to the increase
in loan balances in a generally strong economic environment. It is the
policy of management to maintain the allowance for credit losses at a level
adequate for known and future risks inherent in the loan portfolio. Based
on information currently available to analyze credit loss potential,
including economic factors, overall credit quality, historical delinquency
and a history of actual charge-offs, management believes that the credit
loss provision and allowance is prudent and 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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
For the year ended December 31 1998 1997 1996 1995 1994
(dollars in thousands)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $276,437 $243,593 $208,169 $178,012 $183,434
- ----------------------------------------------------------------------------------
Allowance for possible credit losses
at beginning of period $ 4,223 $4,372 $4,446 $ 4,068 $ 2,840
Loans charged off:
Real estate (16) (100) (207) (52) (45)
Installment (31) (61) (22) (80) (125)
Commercial (130) (279) (391) (302) (413)
- ----------------------------------------------------------------------------------
(177) (440) (620) (434) (583)
- ----------------------------------------------------------------------------------
Recoveries of loans previously
Charged off:
Real estate 20 28 11 - -
Installment 11 37 27 29 35
Commercial 116 162 156 88 31
- ----------------------------------------------------------------------------------
147 227 194 117 66
- ----------------------------------------------------------------------------------
Net loans charged off (30) (213) (426) (317) (517)
Additions to allowance charged
to operating expenses 159 64 352 695 1,745
- ----------------------------------------------------------------------------------
Allowance for possible loans
Losses at end of period $ 4,352 $ 4,223 $ 4,372 $ 4,446 $ 4,068
==================================================================================
Ratio of net charge-offs to
Average loans outstanding 0.01% 0.09% 0.20% 0.18% 0.28%
Provision of allowance for possible
credit losses to average
loans outstanding 0.06% 0.03% 0.17% 0.39% 0.95%
Allowance for possible credit losses to loans
net of deferred fees at year end 1.39% 1.65% 1.82% 2.27% 2.22%
- ----------------------------------------------------------------------------------
</TABLE>
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, 1998 and 1997.
Table Six: Allowance for Loan Losses by Loan Category
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
December 31, 1998 December 31, 1997
Percent Percent
of of
loans in each loans in each
category category
to to
(Dollars in thousands) Amount total loans Amount total loans
loans loans
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 3,416 43% $ 2,704 48%
Real estate 678 52% 695 47%
Consumer 139 3% 108 4%
Loans held for sale - 2% - 1%
- ---------------------------------------------------------------------------
Total allocated 4,233 100% 3,507 100%
Total unallocated 119 716
- ---------------------------------------------------------------------------
Total $ 4,352 $ 4,223
- ---------------------------------------------------------------------------
</TABLE>
Other Real Estate Owned
The Company did not have any properties in OREO at December 31, 1998. At
the end of 1997, the Company had properties with a total value of $105,000
in OREO.
Deposits
Deposits at December 31, 1998 totaled $489,192,000 and were up $38,891,000
(8.6%) over the 1997 year-end balances. The increase in year-end total
deposits is attributable to internal growth in noninterest-bearing demand,
interest-bearing demand, savings and time deposit categories. At the end
of 1997, total deposits were $450,301,000. That represented a $111,638,000
or 32.9% increase over the balances at December 31, 1996. Deposits in
the two branches purchased from Wells Fargo Bank in February 1997 accounted
for $55,025,000 of the increase. Those two branches realized growth of
approximately $21,000,000 from the date of acquisition.
Equity
See Note 15 in the financial statements for a discussion of regulatory
capital requirements. Management believes that the Company's capital is
adequate to support anticipated growth, meet the cash dividend requirements
of the Banks and meet the future risk-based capital requirements of the
Banks and the Company.
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 Banks use simulation models to forecast earnings, net
interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity
of earnings to interest rate changes. Using computer modeling techniques,
the Company is able to estimate the potential impact of changing interest
rates on earnings. A balance sheet forecast is prepared using inputs of
actual loan, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance
sheet is processed against three interest rate scenarios. The scenarios
include a 100 basis point rising rate forecast, a flat rate forecast and a
100 basis point falling rate forecast within a one year time frame. The
Company's 1999 net interest income forecast is determined by utilizing a
forecast balance sheet projected from year end 1998 balances.
The following assumptions were used in the modeling activity:
Earning asset growth of 14.5% based on ending balances
Loan growth of 11.4% based on ending balances
Investment and funds sold growth of 16.7% based on ending balances
Deposit growth of 12.8% based on ending balances
Balance sheet target balances were the same for all rate scenarios
The following table summarizes the effect on net interest income of a +/- 100
basis point change in interest rates as measured against a flat rate (no
change) scenario.
Table 7: Interest Rate Risk Simulation of Net Interest Income as of
December 31, 1998
Estimated Impact on
1999 Net Interest
Income
------
(in thousands)
Variation from flat rate scenario
+100 $ 826
-100 (1,007)
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 +/-100
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, 1998 balance sheet as the base for the simulation, the following table
summarizes the effect on net interest income of a +/-100 basis point change in
interest rates:
Table 8: Interest Rate Risk Simulation of NII as of December 31, 1998
% Change Change
in NII in NII
from Current from Current
12 Mo. Horizon 12 Month Horizon
-------------- ----------------
(in thousands)
+100bp 7.6% $2,504
-100bp ( 8.5%) ($2,802)
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 Nine, at December 31, 1998, the Company is asset
sensitive in all time frames except for the immediately repricing items.
This gap position would indicate that as interest rates rise, the Bank's
earnings should be favorably impacted and conversely, as interest rates
fall, earnings should be adversely impacted. Because the deposit
liabilities do not reprice immediately with changes in interest rates the
Company is very asset sensitive. In 1998, Management began a program to
diversify some of the Banks assets into longer term investment instruments
that will help reduce earnings volatility in falling interest rate
environments. As a result of this program, the interest rate sensitivity
gap ratios in Table Nine as of December 31, 1998 show decreased asset
sensitivity when compared to those as of December 31, 1997.
Table Nine: INTEREST RATE SENSITIVITY DECEMBER 31,1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 4,202 $ - $ - $ - $ - $ 4,202
Investment securities 1,525 32,610 11,092 27,487 97,673 170,387
Loans, excluding
nonaccrual loans
and overdrafts 10,104 204,938 8,919 78,346 13,062 315,369
- ---------------------------------------------------------------------------------------------------------------------
Total $ 15,831 $ 237,548 $ 20,011 $105,833 $ 110,735 $ 489,958
=====================================================================================================================
Interest bearing
liabilities:
Interest bearing demand $ 98,226 $ - $ - $ - $ - $ 98,226
Savings 104,447 - - - - 104,447
Time certificates 14 43,703 81,983 10,950 112 136,762
Other Borrowings - - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total $ 202,687 $ 43,703 $ 81,983 $ 10,950 $ 112 $ 339,435
=====================================================================================================================
Interest rate
sensitivity gap $ (186,856) $ 193,845 $ (61,972) $ 94,883 $ 110,623
Cumulative interest
rate sensitivity gap $ (186,856) $ 6,989 $ (54,983) $ 39,900 $ 150,523
Ratios:
Interest rate
sensitivity gap 0.08 5.44 0.24 9.67 988.71
Cumulative interest
rate sensitivity gap 0.08 1.03 0.83 1.12 1.44
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Ratios:
Interest rate
sensitivity gap 0.37 6.06 0.41 4.08 222.17
Cumulative interest
rate sensitivity gap 0.37 1.35 1.13 1.35 1.39
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Banks assess 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, 1998, were approximately $122,423,000 and $1,556,000,
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 and loans held for
sale. On December 31, 1998, consolidated liquid assets totaled $153.5
million or 28.2% of total assets as compared to $164.2 million or 33.0% of
total consolidated assets on December 31, 1997. In addition to liquid
assets, the subsidiary Banks maintain short term lines of credit with
correspondent banks. At December 31, 1998, the Banks had $23,500,000
available under these credit lines. Additionally, the Banks are members of
the Federal Home Loan Bank. At December 31, 1998, the Banks could have
arranged for up to $17,114,000 in secured borrowings from the FHLB.
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 also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and
liabilities. In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities". In conjunction with the adoption of SFAS 133 the
Banks reclassified all securities into the available-for-sale category.
This enables the Banks to sell any of their unpledged securities to meet
liquidity needs.
The maturity distribution of certificates of deposit in denominations of
$100,000 or more is set forth in Table Ten. 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 Ten: Certificates of Deposit in Denominations of $100,000 or More
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Year Ended
12/31/98
- ------------------------------------------------------------------
<S> <C>
Three months or less $27,967,000
Over three months through six months 22,280,000
Over six months through twelve months 29,637,000
Over twelve months 8,293,000
- ------------------------------------------------------------------
Total $88,177,000
- ------------------------------------------------------------------
</TABLE>
Loan demand also affects the Bank's liquidity position. Table Eleven
presents the maturities of loans at December 31, 1998.
Table Eleven: Loan Maturities - December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
One year
One year through Over
(in thousands) or less five years five years Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial,
financial and
agricultural $115,509,000 $ 20,334,000 $ 3,409,000 $139,252,000
Real estate -
construction 18,957,000 472,000 500,000 19,929,000
Real estate -
other 78,889,000 57,864,000 11,533,000 148,286,000
Installment 9,912,000 1,621,000 12,000 11,545,000
- ---------------------------------------------------------------------------------------------------------
Total $223,267,000 $ 80,291,000 $ 15,454,000 $319,012,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Loans shown above with maturities greater than one year include
$36,604,000 of floating interest rate loans and $59,141,000 of fixed
rate loans.
The maturity distribution and yields of the investment portfolios are
presented in Table Twelve which follows:
<TABLE>
<CAPTION>
Table Twelve: Securities Maturities and Weighted Average Yields - December 31, 1998
- ---------------------------------------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market Average
In thousands Cost Gain Losses Value Yield
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Available for sale Securities:
U.S. Treasury and agency securities
Maturing within 1 year $13,976 $ 119 $ - $ 14,095 6.16%
Maturing after 1 year but within 5 years 27,248 239 - 27,487 6.16%
Maturing after 5 years but within 10 years 20,037 15 - 20,052 6.27%
Maturing after 10 years but within 15 years 19,486 118 - 19,604 6.08%
Maturing after 15 years 29,169 293 - 29,462 6.19%
State & Political Subdivision
Maturing after 5 year but within 10 Years 3,159 9 10 3,154 4.06%
Maturing after 10 year but within 15 Years 22,144 44 199 21,993 4.18%
Maturing after 15 Years 3,418 15 24 3,409 4.74%
Corporate Debt Securities
Maturing within 1 year 29,608 - - 29,608 5.92%
Other 1,525 - - 1,525 -
- ---------------------------------------------------------------------------------------------------
Total investment securities $ 169,770 $ 852 $ 235 $170,387 5.73%
===================================================================================================
</TABLE>
The principal cash requirements of the Company are for expenses incurred in
the support of administration and operations of the Banks. These cash
requirements are funded through direct reimbursement billings to the
Banks. For nonbanking functions, the Company is dependent upon the payment
of cash dividends by the Banks to service its commitments. The Company
expects that the cash dividends paid by the Bank to the Company will be
sufficient to meet this payment schedule.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating leases. (See Note
7 of the financial statements for the terms.) These commitments do not
significantly impact operating results.
As of December 31, 1998, commitments to extend credit were the only
financial instruments with off-balance sheet risk. The Bank has not
entered into any contracts for financial derivative instruments such as
futures, swaps, options etc. Loan commitments increased to $122,423,000
from $90,649,000 at December 31, 1997. The commitments represent 39.1% of
total loans at year-end 1998 versus 35.4% a year ago.
Disclosure of Fair Value
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 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 immediately, 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 1998 year end, the fair values calculated on the Bank's assets are .09%
above the carrying values versus 1.08% above the carrying values at year
end 1997.The change in the calculated fair value percentage relates to
the securities and loan categories and is the result of changes in interest
rates in 1998 (see Note 12 of the financial statements).
Year 2000
As the year 2000 approaches, a critical issue has emerged regarding how
existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit
date position which represents the year (e.g., "95" is stored on the
system and represents the year 1995). As a result, the year 1999 (i.e.,
"99") could be the maximum date value these systems will be able to
accurately process. This is not just a banking problem, as corporations
around the world and in all industries are similarly impacted.
The Company is uncertain regarding the consequences of the Year 2000 (Y2K)
issue on the future results of operations, liquidity and financial
condition; but believes that failure to ensure that its systems are in
compliance with Y2K requirements could have a material adverse effect on
its business. As a result, the Company has made addressing Y2K issues a
priority of management and the Board. Based upon actions implemented to
date, the Company currently anticipates that it will be successful in
addressing Y2K issues and anticipates no materially adverse processing
problems. The Company is subject to examination by the Federal Deposit
Insurance Corporation and the Federal Reserve Bank under their Y2K Phase I
and Phase II programs. Management is not currently aware of any conditions
cited as unsatisfactory by such federal bank regulatory agencies.
All mission critical systems have been identified by the Company, and
the Company is currently testing, or developing contingency plans, for
each. The term "mission critical" refers to an application or system that
is vital to the successful continuance of core business activity.
Significantly all mission critical hardware and software utilized by the
Company are provided by third parties. This requires that the Company is
in close contact with relevant vendors and contractors as it conducts
testing and contingency planning. The Company anticipates that all of its
mission critical systems will be tested and implemented, or that
contingency plans will be written and in place, by March 31, 1999.
The Company has made disclosures to all existing and new customers
regarding the importance of the Y2K issue and its relevance to the Company
and the customer. The Company is conducting an ongoing effort to identify
customers that represent material risk exposure to the institution, to
evaluate their Y2K preparedness and risk to the Company and to implement
appropriate risk controls.
The Company also continues to evaluate the cost to address Y2K issues.
Most costs incurred to date are in conjunction with the planned replacement
of systems. The cost of system replacements accelerated to meet Y2K
requirements and Y2K project specific costs have not been significant to
the operations of Company as a whole. Management estimates that the
incremental cost of mitigating Year 2000 risk exclusive of management time
that has been redirected to focus on this matter will be approximately $171
thousand.
Despite efforts undertaken to date and as projected, there can be no
assurance that problems will not arise which could have an adverse impact
upon the Company due, among other matters, to the complexities involved in
computer programming related to resolution of Year 2000 problems and the
fact that the systems of other companies on which Central Coast Bancorp and
its subsidiaries, Bank of Salinas and Cypress Bank, may rely must also be
corrected on a timely basis. Many phases of the Company's Y2K preparedness
plan have been completed: the Company has identified, assessed and
prioritized mission critical systems; developed Year 2000 testing
strategies and plans; implemented a customer due diligence program; and
tested most mission critical systems. But, delays, mistakes or failures
in correcting Y2K system problems by other companies on which Central Coast
Bancorp and its subsidiaries may rely, could have a significant adverse
impact upon Central Coast Bancorp and its subsidiaries, Bank of Salinas and
Cypress Bank, and their ability to mitigate the risk of adverse impact of
Y2K problems for their customers.
The disclosure set forth above contains forward-looking statements.
Specifically, such statements are contained in sentences including the
words "expect" or "anticipate" or "could" or "should". Such
forward-looking statements are subject to inherent risks and uncertainties
that may cause actual results to differ materially from those contemplated
by such forward-looking statements. The factors that may cause actual
results to differ materially from those contemplated by the forward-looking
statements include the failure by third parties adequately to remediate Y2K
issues or the inability of the Company to complete testing software changes
on the time schedules currently expected. Nevertheless, the Company
currently expects that its Y2K compliance efforts will be successful
without material adverse effects on its business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A of Form 10-K is contained in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 44
Consolidated Balance Sheets, December 31, 1998 and 1997 45
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 46
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 47
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 48
Notes to Consolidated Financial Statements 49-66
All schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in the Consolidated Financial
Statements or notes thereto.
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 subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998.
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 generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Coast Bancorp and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Salinas, California
January 25, 1999
(February 26, 1999 as to the stock split information in Note 1)
CONSOLIDATED BALANCE SHEETS
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 44,684,000 $ 39,891,000
Federal funds sold 4,202,000 64,706,000
- -------------------------------------------------------------------------------------------------------------------------
Total cash and equivalents 48,886,000 104,597,000
Securities:
Available-for-sale 170,387,000 91,481,000
Held-to-maturity (Market value: 1997, $39,105,000) - 39,048,000
Loans held for sale 6,168,000 1,331,000
Loans:
Commercial 136,685,000 124,714,000
Real estate-construction 19,929,000 14,645,000
Real estate-other 144,685,000 107,354,000
Installment 11,545,000 9,349,000
- -------------------------------------------------------------------------------------------------------------------------
Total loans 312,844,000 256,062,000
Allowance for credit losses (4,352,000) (4,223,000)
Deferred loan fees, net (674,000) (568,000)
- -------------------------------------------------------------------------------------------------------------------------
Net Loans 307,818,000 251,271,000
- -------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,069,000 2,001,000
Accrued interest receivable and other assets 7,605,000 7,945,000
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 543,933,000 $ 497,674,000
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 149,757,000 $ 126,818,000
Demand, interest bearing 98,226,000 89,107,000
Savings 104,447,000 99,748,000
Time 136,762,000 134,628,000
- -------------------------------------------------------------------------------------------------------------------------
Total Deposits 489,192,000 450,301,000
Accrued interest payable and other liabilities 3,542,000 3,649,000
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 492,734,000 453,950,000
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 13)
Shareholders' Equity:
Preferred stock-no par value; authorized
1,000,000 shares; no shares issued
Common stock - no par value; authorized 25,000,000 shares;
issued and outstanding: 6,112,045 shares in 1998
and 5,460,586 shares in 1997 41,104,000 31,644,000
Shares held in deferred compenstion trust ( 71,949 shares in 1998
and none in 1997), net of deferred obligation - -
Retained earnings 9,733,000 11,979,000
Accumulated other comprehensive income, net of taxes of $254,000
in 1998 and $71,000 in 1997 363,000 101,000
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 51,199,000 43,724,000
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 543,933,000 $ 497,674,000
=========================================================================================================================
</TABLE>
See notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 27,037,000 $ 24,828,000 $22,330,000
Investment securities 7,473,000 5,823,000 4,936,000
Other 2,844,000 3,265,000 2,035,000
- -------------------------------------------------------------------------------------------------------------------
Total interest income 37,354,000 33,916,000 29,301,000
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 13,319,000 11,943,000 9,859,000
Other - 98,000 -
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 13,319,000 12,041,000 9,859,000
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income 24,035,000 21,875,000 19,442,000
Provision for Credit Losses (159,000) (64,000) (352,000)
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Credit Losses 23,876,000 21,811,000 19,090,000
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposits 1,235,000 1,076,000 735,000
Other income 849,000 689,000 721,000
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,084,000 1,765,000 1,456,000
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and benefits 8,385,000 7,586,000 6,437,000
Occupancy 970,000 889,000 728,000
Furniture and equipment 1,005,000 800,000 837,000
Other 3,499,000 3,298,000 3,113,000
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 13,859,000 12,573,000 11,115,000
- ------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 12,101,000 11,003,000 9,431,000
Provision for Income Taxes 4,948,000 4,500,000 3,571,000
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 7,153,000 $ 6,503,000 $5,860,000
==================================================================================================================
Basic Net Income per Share $ 1.18 $ 1.09 $ 1.01
Diluted Net Income per Share $ 1.09 $ 1.01 $ 0.94
==================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 7,153,000 $ 6,503,000 $5,860,000
Reconciliation of net income to net cash provided
by operating activities:
Provision for credit losses 159,000 64,000 352,000
Depreciation 656,000 513,000 557,000
Amortization and accretion (6,000) (369,000) (42,000)
Deferred income taxes (333,000) 31,000 (300,000)
Gain on sale of securities (58,000) - -
Net (gain) loss on sale of equipment - (19,000) 52,000
Gain on sale of other real estate owned (20,000) (21,000) (87,000)
Increase in accrued interest receivable and other assets 129,000 (1,779,000) (787,000)
Increase in accrued interest payable and other liabilities 364,000 1,939,000 606,000
Increase (decrease) in deferred loan fees 106,000 (81,000) 99,000
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 8,150,000 6,781,000 6,310,000
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing
deposits in financial institutions - 999,000 3,493,000
Proceeds from maturities of investment securities
Available-for-sale 107,423,000 63,750,000 -
Held-to-Maturity 20,959,000 41,882,000 56,969,000
Proceeds from sale of available-for-sale securities 9,119,000 - -
Purchase of investment securities
Available-for-sale (176,593,000) (154,353,000) -
Held-to-Maturity - (10,181,000) (48,161,000)
Net change in loans held for sale (4,837,000) (884,000) 93,000
Net increase in loans (56,812,000) (15,723,000) (45,485,000)
Proceeds from sale of other real estate owned 125,000 725,000 287,000
Proceeds from sale of equipment - 31,000 1,000
Capital expenditures (1,724,000) (1,386,000) (417,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (102,340,000) (75,140,000) (33,220,000)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 38,891,000 111,638,000 12,574,000
Net increase (decrease) in short-term borrowings (289,000) 289,000 -
Proceeds from sale of stock 264,000 380,000 319,000
Shares repurchased under stock repurchase plan (374,000) - -
Fractional shares repurchased (13,000) (8,000) (5,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 38,479,000 112,299,000 12,888,000
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (55,711,000) 43,940,000 (14,022,000)
Cash and equivalents, beginning of year 104,597,000 60,657,000 74,679,000
- -----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 48,886,000 $104,597,000 $ 60,657,000
=============================================================================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1997 and 1996 the Company obtained $461,000 and $42,000, respectively of real estate (OREO) in connection with
foreclosures of delinquent loans (none in 1998). In 1998 stock option exercises and stock repurchases totalling $384,000
were performed through a "stock for stock" exercise under the Company's deferred compensation plan (see Note 11).
- -----------------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION:
Interest paid $ 13,100,000 $11,367,000 $9,852,000
Income taxes paid 4,619,000 3,497,000 4,063,000
=============================================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income -
Net Unrealized
Gain on Available-
Years Ended December 31, Common Stock Retained For-Sale
1998, 1997 and 1996 Shares Amount Earnings Securities Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 4,759,601 $ 25,860,000 $ 4,056,000 $ - $ 29,916,000
Net income and comprehensive income - - 5,860,000 - 5,860,000
10% stock dividend 475,960 4,440,000 (4,440,000) - -
Shares repurchased (816) (5,000) - - (5,000)
Stock options and warrants
exercised 106,789 319,000 - - 319,000
Tax benefit of stock options
exercised - 242,000 - - 242,000
- ----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 5,341,534 30,856,000 5,476,000 - 36,332,000
Net income - - 6,503,000 - 6,503,000
Changes in unrealized gains
on securities available for sale,
net of taxes of $71,000 - - - 101,000 101,000
----------------
Comprehensive income 6,604,000
----------------
Shares repurchased (434) (8,000) - - (8,000)
Stock options and warrants
exercised 119,486 380,000 - - 380,000
Tax benefit of stock options
exercised - 416,000 - - 416,000
- ----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 5,460,586 31,644,000 11,979,000 101,000 43,724,000
Net income - - 7,153,000 - 7,153,000
Changes in unrealized gains
on securities available for sale,
net of taxes of $223,000 - - - 320,000 320,000
Reclassification adjustment for
gains included in income,
net of taxes of $40,000 - - - (58,000) (58,000)
----------------
Comprehensive income - - - 7,415,000
----------------
10% stock dividend 546,059 9,399,000 (9,399,000) -
Stock options and warrants
exercised 153,019 647,000 - - 647,000
Shares repurchased (47,619) (770,000) (770,000)
Tax benefit of stock options -
exercised - 183,000 - - 183,000
- ----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 6,112,045 $ 41,103,000 $ 9,733,000 $ 363,000 $ 51,199,000
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CENTRAL COAST BANCORP AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND OPERATIONS. The consolidated
financial statements include Central Coast Bancorp (the "Company") and its
wholly-owned subsidiaries, Bank of Salinas and Cypress Bank (the "Banks").
All material intercompany accounts and transactions are eliminated in
consolidation. The accounting and reporting policies of the Company and
the Banks conform to generally accepted accounting principles 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. Material
estimates that are particularly susceptible to significant changes in the
near term relate to the determination of the allowance for credit losses
and the carrying value of other real estate owned. Management uses
information provided by an independent loan review service in connection
with the determination of the allowance for loan losses.
Bank of Salinas operates five full service branches in the Salinas Valley
and Cypress Bank operates three full service branches on the Monterey
Peninsula, serving small and medium sized business customers, as well as
individuals. The Banks focus on business loans and deposit services to
customers throughout Monterey.
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.
Loans are stated at the principal amount outstanding, reduced by any
charge-offs or specific valuation allowance. 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.
Loans held for sale are stated at the lower of cost or aggregate market
value.
The allowance for credit 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 and prior loss
experience. 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 reserve, 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 treated as a loan loss. 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.
Stock Compensation. The Company accounts for its stock-based awards using
the intrinsic value method in accordance with Accounting Principles Board
No. 25, Accounting for Stock Issued to Employees and its related
interpretations. No compensation expense has been recognized in the
financial statements for employee stock arrangements. Note 11 to the
Consolidated Financial Statements contains a summary of the pro forma
effects to reported net income and earnings per share as if the Company had
elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
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 credit losses, net operating loss carryforwards,
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.
Earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average of common shares outstanding for the period
(6,037,000, 5,966,000 and 5,814,000 in 1998, 1997 and 1996, respectively).
Diluted earnings per share reflects the potential dilution that could occur
if outstanding stock options and stock purchase warrants were exercised.
Diluted earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period plus the dilutive
effect of options and warrants (546,000, 485,000 and 401,000 in 1998, 1997
and 1996, respectively). All earnings per share information has been
adjusted retroactively for stock dividends of 10% in July 1996 and January
1998, a 3-for-2 stock split in March 1997 and a 5-for-4 stock split in
January 1999.
Stock split. On January 25, 1999 the Board of Directors declared a 5-for-4
stock split, which was distributed on February 26,1999, to shareholders of
record as of February 8, 1999. All share and per share data including
stock option and warrant information have been retroactively adjusted to
reflect the stock split.
Comprehensive income. In 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which
requires that an enterprise report, by major components and as a single
total, the change in net assets during the period from nonowner sources.
Such amounts have been reported in the accompanying statements of
shareholders' equity.
Segment reporting. In 1998 the Company adopted Financial Accounting
Standards Statement (FAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major
customers. Management has determined that since all of the commercial
banking products and services offered by the Company are available in each
of the Company's wholly-owned bank subsidiaries, their operations are
located within the same economic environment and management does not
allocate resources based on the performance of different lending or
transaction activities, it is appropriate to aggregate the Banks and report
them as a single operating segment.
Reclassification of investment securities. Effective July1, 1998 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments
and hedging activities. In connection with the adoption of SFAS 133 the
Company reclassified certain securities with an amortized cost of
$18,085,000 and a fair value of $18,202,000 from held-to-maturity to
available-for-sale. Adoption of this statement did not have any other
impact on the Company's consolidated financial position and had no impact
on the Company's results of operations or cash flows.
NOTE 2. ACQUISITION OF CYPRESS COAST BANK. On May 31, 1996, the Company
completed its acquisition of Cypress Coast Bank ("Cypress") whereby Cypress
became a subsidiary of the Company and continues to operate from its
offices in Seaside and Marina. Cypress shareholders received shares of
common stock of the Company in a tax-free exchange. At May 31, 1996,
Cypress had unaudited total assets of $46.9 million, including $29.8
million in net loans and total unaudited liabilities of $42.7 million,
including $42.5 million in deposits. The transaction has been accounted
for as a pooling-of-interests.
NOTE 3. BRANCH ACQUISITION. On February 21, 1997, the 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 ($34 million), received
cash ($31 million), and acquired tangible assets ($1 million). This
transaction resulted in intangible assets, representing the excess of the
liabilities assumed over the fair value of the tangible assets acquired.
NOTE 4. CASH AND DUE FROM BANKS. The Company, through its bank
subsidiaries, is required to maintain reserves with the Federal Reserve
Bank. Reserve requirements are based on a percentage of deposits. At
December 31, 1998 the Company maintained reserves of approximately
$7,584,000 in the form of vault cash and balances at the Federal
Reserve to satisfy regulatory requirements.
NOTE 5. SECURITIES. THE SCHEDULED MATURITIES AND WEIGHTED AVERAGE YIELDS OF
THE COMPANY'S INVESTMENT SECURITIES PORTFOLIO AS OF DECEMBER 31, 1998 AND 1997
ARE AS FOLLOWS:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market Average
In thousands Cost Gain Losses Value Yield
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Available for sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $13,976 $ 119 $ - $ 14,095 6.16%
Maturing after 1 year but within 5 years 27,248 239 - 27,487 6.16%
Maturing after 5 years but within 10 years 20,037 15 - 20,052 6.27%
Maturing after 10 years but within 15 years 19,486 118 - 19,604 6.08%
Maturing after 15 years 29,169 293 - 29,462 6.19%
State & Political Subdivision
Maturing after 5 year but within 10 Years 3,159 9 10 3,154 4.06%
Maturing after 10 year but within 15 Years 22,144 44 199 21,993 4.18%
Maturing after 15 Years 3,418 15 24 3,409 4.74%
Corporate Debt Securities
Maturing within 1 year 29,608 - - 29,608 5.92%
Other 1,525 - - 1,525 -
- ---------------------------------------------------------------------------------------------------
Total investment securities $ 169,770 $ 852 $ 235 $170,387 5.73%
===================================================================================================
DECEMBER 31, 1997
Available for sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $32,861 $ - $ 5 $ 32,856 5.68%
Maturing after 1 year but within 5 years 48,410 184 7 48,587 6.16%
Corporate Debt Securities
Maturing within 1 year 10,034 - - 10,034 5.05%
Other 4 4 -
- ---------------------------------------------------------------------------------------------------
Total available for sale $91,309 $ 184 $ 12 $ 91,481 5.87%
- ---------------------------------------------------------------------------------------------------
Held to maturity securities:
U.S. Treasury and
agency securities
Maturing within 1 year $27,484 $ 7 $ 11 $ 27,480 5.60%
Maturing after 1 year but within 5 years 8,495 66 2 8,559 6.34%
Maturing after 5 years but within 10 years 20 - - 20 9.05%
Maturing after 10 years 857 6 9 854 7.00%
State & Political Subdivision
Maturing after 5 years but within 10 years 2,192 - - 2,192 5.60%
- ---------------------------------------------------------------------------------------------------
Total held to maturity $39,048 $ 79 $ 22 $ 39,105 5.79%
- ---------------------------------------------------------------------------------------------------
Total investment securities $ 130,357 $ 263 $ 34 $130,586 5.85%
===================================================================================================
</TABLE>
At December 31, 1998 and 1997, securities with a book value of $56,936,000
and $57,289,000 were pledged as collateral for deposits of public funds and
other purposes as required by law or contract.
U.S. Treasury Securities with a market value of $9,119,000 and an amortized
cost of $9,061,000 were sold during the fiscal year ended December 31,
1998. There were no sales of securities in 1997 or 1996.
NOTE 6. LOANS AND ALLOWANCE FOR CREDIT 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 $212
million. The Company monitors the effects of current and expected market
conditions and other factors on the collectibility of real estate loans.
When, in management's judgment, these loans are impaired, appropriate
provisions for losses are recorded. The more significant assumptions
management considers involve estimates of the following: lease, absorption
and sale rates; real estate values and rates of return; operating expenses;
inflation; and sufficiency of collateral independent of the real estate
including, in limited instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such
loans is expected to come from cash flow or from proceeds from the sale of
selected assets of the borrowers. The Company's requirement for collateral
and/or guarantees is determined on a case-by-case basis in connection with
management's evaluation of the credit worthiness of the borrower.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, income-producing properties, residences and
other real property. The Company secures its collateral by perfecting its
interest in business assets, obtaining deeds of trust, or outright
possession among other means. Credit losses from lending transactions
related to real estate and agriculture compare favorably with the Company's
credit losses on its loan portfolio as a whole.
The activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, beginning of year $ 4,223 $ 4,372 $ 4,446
Provision charged to expense 159 64 352
Loans charged off (177) (440) (620)
Recoveries 147 227 194
- ---------------------------------------------------------------------------
Balance, end of year $ 4,352 $ 4,223 $ 4,372
===========================================================================
</TABLE>
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 general valuation allowances to be maintained and the
loan loss allowance ratio, management evaluates many factors including
prevailing and forecasted economic conditions, regular reviews of the
quality of loans, industry experience, historical loss experience,
composition and geographic concentrations of the loan portfolio, the
borrowers' ability to repay and repayment performance and estimated
collateral values.
Management believes that the allowance for credit losses at December 31,
1998 is prudent and warranted, 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.
Nonperforming loans at December 31 are summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
In thousands 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Past due 90 days or more and still accruing:
Real estate $ 1,174 $ 6
Commercial 73 73
Installment and other - -
- ----------------------------------------------------------------------------------------------------------------------
1,247 79
- ----------------------------------------------------------------------------------------------------------------------
Nonaccrual:
Real estate 543 628
Commercial 333 188
Installment and other - -
- ----------------------------------------------------------------------------------------------------------------------
876 816
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 2,123 $ 895
======================================================================================================================
</TABLE>
Interest due but excluded from interest income on nonaccrual loans was
approximately $45,000, $7,000 and $50,000 in 1998, 1997 and 1996 respectively.
In 1998, 1997 and 1996, interest income recognized from payments received on
nonaccrual loans was $17,000, $7,000 and $619,000, respectively.
At December 31, 1998 and 1997, the recorded investment in loans that are
considered impaired under SFAS No. 114 was $727,000 and $996,000 of which
$335,000 and $816,000 are included as nonaccrual loans above. Such impaired
loans had valuation allowances totalling $164,000 and $200,000 based on the
estimated fair values of the collateral The average recorded investment in
impaired loans during 1998 and 1997 was $776,000 and $829,000. The Company
recognized interest income on impaired loans of $64,000 and $33,000 in 1998 and
1997, respectively.
Other real estate owned included in other assets was $105,000 at
December 31, 1997 (none at December 31, 1998).
NOTE 7. PREMISES AND EQUIPMENT. premises and equipment at december 31 are
summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
In thousands 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 145 $ 145
Building 460 478
Furniture and equipment 5,641 4,073
Leasehold improvement 1,310 1,161
- ---------------------------------------------------------------------------------
7,556 5,857
Accumulated depreciation and amortization (4,487) (3,856)
- ---------------------------------------------------------------------------------
Premises and equipment, net $ 3,069 $ 2,001
- ---------------------------------------------------------------------------------
</TABLE>
The Company's facilities leases expire in October 1999 through November
2008 with options to extend for three to fifteen years. These include
three 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 $456,000, $422,000 and $406,000, including lease expense
to shareholders of $134,000, $152,000 and $174,000 in 1998, 1997 and 1996,
respectively. The minimum annual rental commitments under these leases,
including the remaining rental commitment under the leases to shareholders,
are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Operating
In thousands Leases
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 519
2000 240
2001 236
2002 231
2003 141
Thereafter 492
- --------------------------------------------------------------------------------
Total $ 1,859
- --------------------------------------------------------------------------------
</TABLE>
NOTE 8. INCOME TAXES. The provision for income taxes is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
In thousands 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 3,946 $ 3,255 $ 2,830
State 1,335 1,214 1,041
- ------------------------------------------------------------------------------
Total 5,281 4,469 3,871
- ------------------------------------------------------------------------------
Deferred:
Federal (290) 32 (289)
State (43) (1) (11)
- ------------------------------------------------------------------------------
Total (333) 31 (300)
- ------------------------------------------------------------------------------
Total $ 4,948 $ 4,500 $ 3,571
- ------------------------------------------------------------------------------
</TABLE>
A reconciliation of the Federal income tax rate to the effective tax rate
is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income taxes (net of
Federal income tax benefit) 7.1% 7.2% 7.6%
Change in the valuation allowance
for deferred tax assets - - (4.0%)
Tax exempt interest income (0.8%) (0.8%) -
Other (0.4%) (0.5%) (0.7%)
- -----------------------------------------------------------------------------------
Effective tax rate 40.9% 40.9% 37.9%
- -----------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997, respectively, are presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax assets (liabilities):
Provision for credit losses $ 1,680 $ 1,609
State income taxes 263 185
Salary continuation plan 265 165
Excess serving rights 86 110
Unrealized gain on
available-for-sale securities (253) (71)
Accrual to cash adjustments 30 45
Interest on nonaccrual loans 35 22
Depreciation and amortization 254 161
Other 1 3
- --------------------------------------------------------------------------------
Net deferred tax asset $ 2,361 $ 2,229
- --------------------------------------------------------------------------------
</TABLE>
NOTE 9. DETAIL OF OTHER EXPENSE. Other expense for the years ended
December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Professional fees $ 461 $ 358 $ 454
Customer expenses 431 340 379
Data processing 386 334 330
Marketing 335 302 345
Stationary and supplies 326 466 319
Shareholder and director 262 249 284
Amortization of intangibles 257 209 -
Insurance 196 180 176
Dues and assessments 109 123 65
Other 736 737 761
- --------------------------------------------------------------------------------
Total $ 3,499 $ 3,298 $ 3,113
- --------------------------------------------------------------------------------
</TABLE>
NOTE 10. STOCK PURCHASE WARRANTS. During 1995 and 1994, warrants were
issued in connection with the sale of the Company's common stock at a rate
of one warrant for every share of stock purchased. The warrants are
exercisable at $4.18 and expire on June 30, 1999. During 1998, 1997 and
1996, respectively 15,868 , 5,875 and 30,157 warrants were exercised and at
December 31, 1998, 137,995 warrants were outstanding.
NOTE 11. 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 authorized, but
unissued, common stock. Shares may be purchased at a price not less than
the fair market value of such 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.
Activity under the stock option plans adjusted for stock dividends and
stock splits is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Weighted
Average
Shares Price per share Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, January 1, 1996 899,573 $ 1.42 - 7.05 $ 3.30
Granted (wt. avg. fair value $2.91 per share) 441,375 8.04 - 10.42 10.33
Canceled (24,853) 1.42 - 6.18 3.32
Exercised (87,311) 1.42 - 4.72 2.23
- --------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 1,228,784 1.42 - 10.42 5.65
Granted (wt. avg. fair value $3.46 per share) 37,812 9.94 - 16.50 11.14
Expired (95,738) 2.32 - 9.82 8.37
Exercised (125,558) 1.42 - 6.18 2.85
- --------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 1,045,300 2.32 - 16.50 5.94
Granted (wt. avg. fair value $5.60 per share) 68,125 15.40 - 18.80 16.71
Expired (22,000) 9.82 - 9.82 9.82
Exercised (137,150) 2.32 - 9.82 4.24
- --------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 954,275 $ 2.32 - 18.80 $ 6.86
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Additional information regarding options outstanding as of December 31,
1998 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------------------
Weighted Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> (C) <C> <C> <C> <C> <C>
$2.32 - 2.32 343,235 0.1 $ 2.32 343,235 $ 2.32
4.72 - 6.17 178,321 5.5 5.84 156,361 5.91
8.04 - 9.94 359,594 7.9 9.67 242,591 9.67
15.40 18.80 73,125 9.4 16.87 2,269 16.50
- -----------------------------------------------------------------------------------------------------------------------
$2.32 - 18.80 954,275 4.1 $ 6.86 744,456 $ 5.51
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, 797,360 shares were available for additional grants.
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 20% 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 1998, 1997 and 1996 which are funded currently,
totaled $68,000, $56,000 and $46,000, respectively.
Salary Continuation Plan
In 1996 the Company established a salary continuation plan for five
officers which provides for retirement benefits upon reaching age 63.
During 1997 two of such officers terminated their employment with the
Company without vesting in the plan. 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 $225,000, $117,000 and $250,000 in 1998, 1997 and
1996, respectively. Accrued compensation payable under the salary
continuation plan totaled $592,000 and $367,000 at December 31, 1998 and
1997, respectively.
Deferred Compensation Plan
In 1998 the Company established 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 the
Company, to be distributed in accordance with the terms of each
participant's election to defer. During 1998, 22,430 shares with a fair
value of approximately $384,000 were tendered to the Company using a
"stock-for-stock" exercise and, at December 31, 1998, 71,949 shares (with a
fair value of approximately $1,158,000 at December 31, 1998) were held in
the Deferred Compensation Trust.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees and its related interpretations. No compensation expense has
been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma
net income and earnings per share had the Company adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect
the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, four years following vesting; average stock
volatility of 16.5%; risk free interest rates ranging from 4.52% to 5.77%;
and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the 1998, 1997
and 1996 awards had been amortized to expense over the vesting period of
the awards, pro forma net income would have been $6,957,000 ($1.15 basic
and $1.06 diluted earnings per share, $6,345,000 ($1.06 basic and $0.98
diluted earnings per share) and $5,348,000 ($0.92 basic and $0.86 diluted
per share) in 1998, 1997 and 1996, respectively. However, the impact of
outstanding non-vested stock options granted prior to 1995 has been
excluded from the pro forma calculation; accordingly, the 1998, 1997 and
1996 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock
options.
NOTE 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.The
following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31,1998 December 31,1997
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 48,886 $48,886 $104,597 $104,597
Securities 170,387 170,387 130,529 130,586
Loans held for sale 6,168 6,208 1,331 1,453
Loans, net 307,818 308,253 251,271 256,361
FINANCIAL LIABILITIES
Demand deposits 247,983 247,983 215,925 215,925
Time deposits 136,762 137,559 134,628 135,542
Savings deposits 104,447 104,447 99,748 99,748
Other borrowings - - 289 289
- -------------------------------------------------------------------------------
</TABLE>
The following estimates and assumptions were used to estimate the fair
value of the financial instruments.
Cash and cash 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 credit 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.
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, 1998 and 1997 and, therefore, have not been included in the
table above.
NOTE 13. COMMITMENTS AND CONTINGENCIES. 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 $122,423,000 and standby letters of credit and financial
guarantees of $1,556,000 at December 31, 1998. The Bank does not
anticipate any losses as a result of these transactions.
Approximately $23,177,000 of loan commitments outstanding at December 31,
1998 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 Banks'
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 Banks' 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 14. 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, 1998 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Beginning Balance Additions Repayments Ending Balance
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$9,119,000 $11,817,000 $14,728,000 $6,208,000
- --------------------------------------------------------------------------------
</TABLE>
Committed lines of credit, undisbursed loans and standby letters of credit
to directors and officers at December 31, 1998 were approximately
$4,820,000.
NOTE 15. 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, 1998 that the Company meets all
capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, the most recent notifications from the
Federal Deposit Insurance Corporation categorized the Banks as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Banks 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 Banks' 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:
<TABLE>
<CAPTION>
To Be Categorized
Well Capitalized Under
For Capital Promt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted Assets):
Company 53,588,000 14.8% 29,004,000 8.0% N/A
Bank of Salinas 45,996,000 14.3% 25,796,000 8.0% 32,245,000 10.0%
Cypress Bank 5,203,000 14.1% 2,950,000 8.0% 3,687,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 49,326,000 13.6% 14,502,000 4.0% N/A
Bank of Salinas 42,196,000 13.1% 12,898,000 4.0% 19,347,000 6.0%
Cypress Bank 4,743,000 12.9% 1,475,000 4.0% 2,212,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 49,326,000 9.9% 19,935,000 4.0% N/A
Bank of Salinas 42,196,000 9.4% 18,014,000 4.0% 22,518,000 5.0%
Cypress Bank 4,743,000 8.2% 2,300,000 4.0% 2,874,000 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted Assets):
Company 45,782,000 15.2% 24,046,000 8.0% N/A
Bank of Salinas 38,887,000 14.5% 21,514,000 8.0% 26,892,000 10.0%
Cypress Bank 5,012,000 14.6% 2,739,000 8.0% 3,423,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 41,968,000 14.0% 12,023,000 4.0% N/A
Bank of Salinas 35,501,000 13.2% 10,757,000 4.0% 16,135,000 6.0%
Cypress Bank 4,584,000 13.4% 1,369,000 4.0% 2,054,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 41,968,000 9.6% 17,570,000 4.0% N/A
Bank of Salinas 35,501,000 8.9% 15,869,000 4.0% 19,837,000 5.0%
Cypress Bank 4,584,000 8.8% 2,084,000 4.0% 2,605,000 5.0%
</TABLE>
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 Banks. 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 Banks to the Company was approximately $17,747,000 as of December 31,
1998.
The Banks are subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates. In
particular, the Banks are prohibited from lending to the Company unless the
loans are secured by specified types of collateral. Such secured loans and
other advances from the Banks are limited to 10% of Bank shareholders'
equity, or a combined maximum of $4,863000 at December 31, 1998. No such
advances were made during 1998 or 1997.
NOTE 16. CENTRAL COAST BANCORP (PARENT COMPANY ONLY)
THE CONDENSED FINANCIAL STATEMENTS OF CENTRAL COAST BANCORP FOLLOW (IN
THOUSANDS):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash - interest bearing account with Bank $ 2,339 $ 191
Investment in Banks 48,629 41,841
Premises and equipment, net 1,506 491
Other Assets 549 1,916
- -------------------------------------------------------------------------------
Total assets $ 53,023 $ 44,439
- -------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Liabilities $ 1,824 $ 715
Shareholders Equity 51,199 43,724
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 53,023 $ 44,439
- -------------------------------------------------------------------------------
</TABLE>
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees $ 5,957 $ 3,624 $ 840
Other income 2 11 -
Cash dividends received
from the Banks 1,500 2,000 500
- -------------------------------------------------------------------------------
Total income 7,459 5,635 1,340
Operating expenses 7,435 6,386 1,737
- -------------------------------------------------------------------------------
Income(loss) before income taxes and equity in
undistributed net income of Banks 23 (751) (397)
Provision (credit) for income (604) (1,125) (352)
Equity in undistributed
net income of Banks 6,526 6,129 5,905
- -------------------------------------------------------------------------------
Net income (loss) 7,153 6,503 5,860
Other comprehensive income 262 101 -
- -------------------------------------------------------------------------------
Comprehensive income $ 7,415 $ 6,604 $ 5,860
- -------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash:
Operations:
Net income $ 7,153 $ 6,503 $ 5,860
Adjustments to reconcile net
income to net cash provided (used)
by operations:
Equity in undistributed
net income of Banks (6,526) (6,129) (5,905)
Depreciation 213 71 1
(Increase) decrease in other assets 1,367 (656) (522)
Increase (decrease) in liabilities 1,292 450 80
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operations 3,499 239 (486)
- -------------------------------------------------------------------------------------------------------------------
Investing Activities -
Capital expenditures (1,228) (494) (69)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities:
Short-term borrowings - - -
Fractional shares repurchased (13) (8) (5)
Stock repurchases (374)
Stock options and warrants exercised 264 380 319
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (123) 372 314
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,148 117 (241)
Cash balance, beginning of year 191 74 315
- -------------------------------------------------------------------------------------------------------------------
Cash balance, end of year $ 2,339 $ 191 $ 74
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 17. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
In thousands (except per share data)
- --------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------- ---------------------------------
Three months ended Dec.31 Sep.30 June.30 Mar.31 Dec.31 Sep.30 June.30 Mar.31
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest revenue $9,498 $9,583 $9,281 $8,992 $8,993 $8,737 $8,554 $7,632
Interest expense 3,211 3,358 3,415 3,335 3,305 3,125 2,999 2,612
- --------------------------------------------------------------------------------------------------------
Net interest revenue 6,287 6,225 5,866 5,657 5,688 5,612 5,555 5,020
Provision for credit losses 78 40 24 17 64 - - -
- --------------------------------------------------------------------------------------------------------
Net interest revenue after
credit losses provision 6,209 6,185 5,842 5,640 5,624 5,612 5,555 5,020
Total noninterest revenues 670 490 530 394 531 428 420 386
Total operating expenses 3,635 3,314 3,458 3,452 3,180 3,200 3,244 2,949
- --------------------------------------------------------------------------------------------------------
Income before taxes 3,244 3,361 2,914 2,582 2,975 2,840 2,731 2,457
Income taxes 1,284 1,391 1,205 1,068 1,216 1,155 1,123 1,006
- --------------------------------------------------------------------------------------------------------
Net income 1,960 1,970 1,709 1,514 1,759 1,685 1,608 1,451
- --------------------------------------------------------------------------------------------------------
Per common share:
Basic earnings per share $0.32 $0.33 $0.28 $0.25 $0.29 $0.28 $0.27 $0.25
Diluted earnings per share 0.30 0.30 0.26 0.23 0.27 0.26 0.25 0.23
- --------------------------------------------------------------------------------------------------------
Price range per common share:
High $16.10 $18.50 $20.41 $19.20 $16.45 $18.18 $17.00 $17.82
Low 14.40 13.20 16.50 14.55 14.00 16.18 12.36 11.45
- --------------------------------------------------------------------------------------------------------
</TABLE>
The principal market on which the Company's common stock is traded is the
Nasdaq National Market. The earnings per share and high and low common
share prices in the preceding table have been adjusted retroactively for
stock dividends of 10% in July 1996 and January 1998, a 3-for-2 stock split
in March 1997 and a 5-for-4 stock split in January 1999.
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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits.
<TABLE>
<C> <S>
(2.1) Agreement and Plan of Reorganization and Merger by
and between Central Coast Bancorp, CCB Merger
Company and Cypress Coast Bank dated as of
December 5, 1995, incorporated by reference from
Exhibit 99.1 to Form 8-K filed with the Commission
on December 7, 1995.
(3.1) Articles of Incorporation, incorporated by
reference from Exhibit 4.8 to Registration
Statement on Form S-8 No. 33-89948, filed with the
Commission on March 3, 1995.
(3.2) Bylaws, as amended.
(4.1) Specimen form of Central Coast Bancorp stock
certificate incorporated by reference from the
Company's 1994 Annual Report on Form 10K 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 Company's 1994 Annual Report
on Form 10K filed with the Commission on March 31,
1995.
(10.2) King City Branch Lease incorporated by reference
from Exhibit 10.3 to Registration Statement on Form
S-4 No. 33-76972, filed with the Commission on
March 28, 1994.
(10.3) Amendment to King City Branch Lease
incorporated by reference from Exhibit 10.4 to
Registration Statement on Form S-4 No. 33-76972,
filed with the Commission on March 28, 1994.
*(10.4) 1982 Stock Option Plan, as amended, incorporated by
reference from Exhibit 4.2 to Registration
Statement on Form S-8 No. 33-89948, filed with the
Commission on March 3, 1995.
*(10.5) Form of Nonstatutory Stock Option Agreement under
the 1982 Stock Option Plan incorporated by
reference from Exhibit 4.6 to Registration
Statement on Form S-8 No. 33-89948, filed with the
Commission on March 3, 1995.
*(10.6) Form of Incentive Stock Option Agreement under the
1982 Stock Option Plan incorporated by reference
from Exhibit 4.7 to Registration Statement on Form
S-8 No. 33-89948, filed with the Commission on
March 3, 1995.
*(10.7) 1994 Stock Option Plan incorporated by reference
from Exhibit 4.1 to Registration Statement on Form
S-8 No. 33-89948, filed with the Commission on
March 3, 1995.
*(10.8) Form of Nonstatutory Stock Option Agreement under
the 1994 Stock Option Plan incorporated by
reference from Exhibit 4.3 to Registration
Statement on Form S-8 No. 33-89948, filed with
Commission on March 3, 1995.
*(10.9) Form of Incentive Stock Option Agreement under the
1994 Stock Option Plan incorporated by reference
from Exhibit 4.4 to Registration Statement on Form
S-8 No. 33-89948, filed with the commission on
March 3, 1995.
*(10.10) Form of Director Nonstatutory Stock Option
Agreement under the 1994 Stock Option Plan
incorporated by reference from Exhibit 4.5 to
Registration Statement on Form S-8 No. 33-89948,
filed with the commission on March 3, 1995.
*(10.11) Form of Bank of Salinas Indemnification Agreement
for directors and executive officers incorporated
by reference from Exhibit 10.9 to Amendment No. 1
to Registration Statement on Form S-4 No. 33-76972,
filed with the Commission on April 15, 1994.
*(10.12) 401(k) Pension and Profit Sharing Plan Summary Plan
Description incorporated by reference from Exhibit
10.8 to Registration Statement on Form S-4 No.
33-76972, filed with the Commission on March 28,
1994.
*(10.13) Specimen form of Employment Agreement incorporated
by reference from Exhibit 10.13 to the Company's
1996 Annual Report on Form 10K filed with the
Commission on March 31, 1997.
*(10.14) Specimen form of Executive Salary Continuation
Agreement incorporated by reference from Exhibit
10.14 to the Company's 1996 Annual Report on Form
10K filed with the Commission on March 31, 1997.
*(10.15) 1994 Stock Option Plan, as amended, incorporated by
reference from Exhibit A to the Proxy Statement
filed with the Commission on September 3, 1996 in
connection with Central Coast Bancorp's 1996 Annual
Shareholders' Meeting held on September 23, 1996.
(10.16) Specimen of Indemnification Agreement, incorporated
by reference from Exhibit D to the Proxy Statement
filed with the Commission on September 3, 1996 in
connection with Central Coast Bancorp's 1996 Annual
Shareholders' Meeting held on September 23, 1996.
(10.17) Purchase and Assumption Agreement for the
Acquisition of Wells Fargo Bank Branches
incorporated by reference from Exhibit 10.17 to the
Company's 1996 Annual Report on Form 10K filed with
the Commission on March 31, 1997.
*(10.18) Employee Stock Ownership Plan and Trust Agreement
incorporated by reference from Exhibit 10.18 to the
Company's 1996 Annual Report on Form 10K filed with
the Commission on March 31, 1997.
(10.19) Lease agreement dated March 7, 1997, related to
484 Lighthouse Avenue, Monterey, California
incorporated by reference from Exhibit 10.19
to the Company's 1997 Annual Report on Form 10K
filed with the Commission on march 27, 1998.
(21.1) The Registrant's only subsidiaries are
its wholly-owned subsidiaries, Bank of Salinas and
Cypress Bank.
(23.1) Independent auditor's consent
(27.1) Financial Data Schedule
</TABLE>
*Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K. - none
An Annual Report for the fiscal year ended December 31, 1998, and Notice of
Annual Meeting and Proxy Statement for the Company's 1999 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 15(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, 1999 By: /S/ NICK VENTIMIGLIA
----------------------------
Nick Ventimiglia, President and Chief
Executive Officer (Principal Executive Officer)
Date: March 20, 1999 By: /S/ ROBERT STANBERRY
----------------------------
Robert Stanberry, Chief Financial Officer
(Principal Accounting and Financial 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ C. EDWARD BOUTONNET Director 3/20/99
- -----------------------
(C. Edward Boutonnet)
Director 3/20/99
- -----------------------
(Bradford G. Crandall)
/S/ ALFRED P. GLOVER Director 3/20/99
- -----------------------
(Alfred P. Glover)
Director 3/20/99
- -----------------------
(Michael T. Lapsys)
/S/ ROBERT M. MRAULE Director 3/20/99
- -----------------------
(Robert M. Mraule)
/S/ DUNCAN L. MCCARTER Director 3/20/99
- -----------------------
(Duncan L. McCarter)
/S/ LOUIS A. SOUZA Director 3/20/99
- -----------------------
(Louis A. Souza)
/S/ MOSE E. THOMAS Director 3/20/99
- -----------------------
(Mose E. Thomas)
/S/ NICK VENTIMIGLIA Chairman,Presidentand CEO 3/20/99
- -----------------------
(Nick Ventimiglia)
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
<C> <S> <C>
3.2 Bylaws, as amended. 74
23.1 Independent auditors' consent. 90
27.1 Financial Data Schedule. 91
</TABLE>
Exhibit 3.2
BY-LAWS
OF
CENTRAL COAST BANCORP
(A California Corporation)
ARTICLE I
Offices
Section 1. Principal Office. The principal executive
office in the State of California for the transaction of the business
of the corporation (called the principal office) shall be 301 Main
Street, Salinas, California in the County of Monterey. Subject to
applicable regulatory authorization therefor, the Board of Directors
shall have the authority from time to time to change the principal
office from one location to another within the State by amending this
Section 1 of the By-Laws.
Section 2. Other Offices. Upon applicable regulatory
authorization therefor, one or more branches or other subordinate
offices may at any time be fixed and located by the Board of Directors
at such place or places within the State of California as it deems
appropriate.
ARTICLE II
Meeting of Shareholders
Section 3. Place of Meetings. Meetings of the shareholders
shall be held at any place within the State of California that may be
designated either by the Board of Directors in accordance with these
By-Laws, or by the written consent of all persons entitled to vote at
the meeting, given either before or after the meeting and filed with
the Secretary of the corporation. If no such designation is made, the
meetings shall be held at the principal office of the corporation.
Section 4. Annual Meetings. The annual meeting of the
shareholders shall be held on the third Thursday in April in each year,
if not a legal holiday, and if a legal holiday, then on the next
succeeding business day, at the hour of 5:30 P.M., at which time the
shareholders shall elect a Board of Directors, consider reports of the
affairs of the corporation, and transact such other business as may
properly be brought before the meeting.
If the annual meeting of shareholders shall not be held on
the date above specified, the Board of Directors shall cause such a
meeting to be held as soon thereafter as convenient and
any business transacted or election held at such meeting shall be as
valid as if transacted or held at an annual meeting on the date above
specified. Notice of proposals which shareholders intend to present at
any annual meeting of shareholders and wish to be included in the proxy
statement of management of the corporation distributed in connection
with such annual meeting must be received at the principal executive
offices of the corporation not less than 120 days prior to the date on
which, during the previous year, management's proxy statement for the
previous year's annual meeting was first distributed to shareholders.
Any such proposal, and the proponent shareholder, must comply with the
eligibility requirements set forth in Rule 14a-8 of the Securities and
Exchange Commission.
Section 5. Special Meetinqs. Special meetings of the
shareholders, for any purpose or purposes whatsoever, may be called at
any time by a majority of the Board of Directors, Chairman of the Board
of Directors, the President, or by holders of shares entitled to cast
not less than 10 percent (10%)of the votes at the meeting.
Section 6. Notice of Shareholders' Meetings. Whenever
shareholders are required or permitted to take any action at a meeting,
a written notice of the meeting shall be given not less than 10 (or, if
sent by third class mail, 30) nor more than 60 days before the date of
the meeting to each shareholder entitled to vote thereat. Such notice
shall state the place, date and hour of the meeting and (1) in the case
of a special meeting, the general nature of the business to be
transacted, and no other business may be transacted, or (2) in the case
of the annual meeting, those matters which the Board of Directors, at
the time of the mailing of the notice, intends to present for action by
the shareholders, but subject to the provisions of Section 601(f) of
the California Corporations Code, any proper matter may be presented at
the meeting for such action. The notice of any meeting at which
directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by management for
election.
Notice of a shareholders' meeting shall be given either
personally or by first-class mail, or, if the corporation has
outstanding shares held of record by 500 or more persons (determined as
provided in Section 605 of the California Corporations Code) on the
record date for the shareholders' meeting, notice may be sent by
third-class mail, or other means of written communication, addressed to
the shareholder at the address of such shareholder appearing on the
books of the corporation or given by the shareholder to the corporation
for the purpose of notice; or if no such address appears or is given,
at the place where the principal office of the corporation is located.
The notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other means of
written communication.
If any notice addressed to the shareholder at the address of
such shareholder appearing on the books of the corporation is returned
to the corporation by the United States Postal Service marked to
indicate that the United States Postal Service is unable to deliver the
notice to the shareholder at such address, all future notices shall be
deemed to have been duly given without further mailing if the same
shall be available for the shareholder upon written demand of the
shareholder at the
principal office of the corporation for a period of one year from the
date of the giving of the notice to all other shareholders.
Upon request in writing to the Chairman of the Board of
Directors, the President, a Vice President or the Secretary by any
person entitled to call a special meeting of shareholders, the officer
forthwith shall cause notice to be given to the shareholders entitled
to vote that a meeting will be held at a time requested by the person
or persons calling the meeting, not less than 35 nor more than 60 days
after the receipt of the request.
Section 7. Ouorum. The presence at any meeting, in person
or by proxy, of the persons entitled to vote a majority of the voting
shares of the corporation shall constitute a quorum for the transaction
of business. Shareholders present at a valid meeting at which a quorum
is initially present may continue to do business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved
by persons voting more than 25 percent of the voting shares.
Section 8. Adjourned Meeting. Any annual or special
shareholders' meeting may be adjourned from time to time, even though a
quorum is not present, by vote of the holders of a majority of the
voting shares present at the meeting either in person or by proxy,
provided that in the absence of a quorum, no other business may be
transacted at the meeting except as provided in Section 7 of these
by-laws.
Notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, any business may be
transacted which might have been transacted at the original meeting.
If the adjournment is for more than 45 days or if after the adjournment
a new record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each shareholder of record entitled
to vote at the meeting.
Section 9. Waiver or Consent by Shareholders. The
transactions of any meeting of shareholders, however called and
noticed, and wherever held, are as valid as though had at a meeting
duly held after regular call and notice, if a quorum is present either
in person or by proxy, and if, either before or after the meeting, each
of the persons entitled to vote, not present in person or by proxy,
signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. All such waivers,
consents and approvals shall be filed with the corporate records or
made a part of the minutes of the meeting. Attendance of a person at a
meeting shall constitute a waiver of notice of and presence at such
meeting, except when the person objects, at the beginning of the
meeting,
to the transaction of any business because the meeting is not
lawfully called or convened and except that attendance at a
meeting is not a waiver of any right to object to the
consideration of matters required by Section 6 of these By-Laws
or Section 601(f) of the California Corporations Code to be
included in the notice but not so included, if such objection
is expressly made at the meeting. Neither the business to be
transacted at nor the purpose of any regular or special meeting
of shareholders need be specified in any written waiver of
notice, consent to the holding of the meeting or approval of
the minutes thereof, except as provided in Section 601(f) of
the California Corporations Code.
Section 10. Action Without Meeting . Any action
which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior
notice, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and
voted, except that unanimous written consent shall be required
for election of directors to non-vacant positions.
Unless the consents of all shareholders entitled to
vote have been solicited or received in writing, notice shall
be given to non-consenting shareholders to the extent required
by Section 603(b) of the California Corporations Code.
Any shareholder giving written consent, or the
shareholder's proxyholders, or a transferee of the shares or a
personal representative of the shareholder or their respective
proxyholders, may revoke the consent by a writing received by
the corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have
been filed with the Secretary of the corporation, but may not
do so thereafter. Such revocation is effective upon its
receipt by the Secretary of the corporation.
Section 11. Voting Rights; Cumulative Voting. Only
persons in whose names shares entitled to vote stand on the
stock records of the corporation at the close of business on
the record date fixed by the Board of Directors as provided in
Section 41 of these By-Laws for the determination of
shareholders of record shall be entitled to notice of and to
vote at such meeting of shareholders. If no record date is
fixed, the record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at
the close of business or the business day next preceding the
day on which notice is given or, if notice is waived, at the
close of business on the business day next preceding the day on
which the meeting is held; the record date for determining
shareholders entitled to give consent to
corporate action in writing without a meeting, when no prior action by
the Board has been taken, shall be the day on which the first written
consent is given; and the record date for determining shareholders for
any other purpose shall be at the close of business on the day on which
the Board adopts the resolution relating thereto, or the 60th day prior
to the date of such other action, whichever is later.
Except as provided in the next following sentence and except
as may be otherwise provided in the Articles of Incorporation, each
shareholder entitled to vote shall be entitled to one vote for each
share held on each matter submitted to a vote of shareholders. In the
election of directors, each such shareholder complying with the
following paragraph may cumulate such shareholder's votes and give one
candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which the shareholder's
shares are normally entitled, or distribute the shareholder's votes on
the same principle among as many candidates as the shareholder thinks
fit.
No shareholder shall be entitled to cumulate votes in favor
of any candidate or candidates unless such candidate's or candidates'
names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any
one shareholder has given such notice, such fact shall be announced to
all shareholders and proxies present, who may then cumulate their votes
for candidates in nomination.
In any election of directors, the candidates receiving the
highest number of votes of the shares entitled to be voted for them, up
to the number of directors to be elected by such shares, are elected.
Voting may be by voice or ballot, provided that any election
of directors must be by ballot upon the demand of any shareholder made
at the meeting and before the voting begins.
Section 12. Proxies. Every person entitled to vote shares
may authorize another person or persons to act by proxy with respect to
such shares. All proxies must be in writing and must be signed by the
shareholder confirming the proxy or his attorney-in-fact. No proxy
shall be valid after the expiration of 11 months from the date thereof
unless otherwise provided in the proxy. Every proxy continues in full
force and effect until revoked by the person executing it prior to the
vote pursuant thereto, except as otherwise provided in Section 705 of
the California Corporations Code. Such revocation may be effected by a
writing delivered to the corporation stating that the proxy is revoked
or by a subsequent proxy executed by the person executing the prior
proxy and presented to the meeting, or as to any
proxy presumptively determine the order of execution, regardless
of the postmark dates on the envelopes in which they are mailed.
The proxy solicited by management for any annual meeting of
shareholders shall confer discretionary authority upon
management's proxy holders to vote with respect to any shareholder
proposal offered at such meeting, the proponent of which has not
notified the corporation, within the time period specified by
Section 4 of these Bylaws, of his or her intention to present such
proposal at the annual meeting. Specific reference to such voting
authority shall be made in management's proxy statement for each
annual meeting.
Section 13. Voting by Joint Holders or
Proxies.
Shares or proxies standing in the names of two or more persons
shall be voted or represented in accordance with the vote or
consent of the majority of such persons. If only one of such
persons is present in person or by proxy, that person shall have
the right to vote all such shares, and all of the shares standing
in the names of such persons shall be deemed to be represented for
the purpose of determining a quorum. This section shall apply to
the voting of shares by two or more administrators, executors,
trustees or other fiduciaries, or joint proxy holders, unless the
instrument or order of court appointing them shall otherwise
direct.
Section 14. Inspectors of Election. In advance of any
meeting of shareholders the Board may appoint inspectors of
election to act at the meeting and any adjournment thereof. If
inspectors of election are not so appointed, or if any persons so
appointed fail to appear or refuse to act, the chairman of any
meeting of shareholders may, and on the request of any shareholder
or a shareholder's proxy shall, appoint inspectors of election (or
persons to replace those who so fail or refuse) at the meeting.
The number of inspectors shall be either one or three. If
appointed at a meeting on the request of one or more shareholders
or proxies, the majority of shares represented in person or by
proxy shall determine whether one or three inspectors are to be
appointed. If there are three inspectors of election, the
decision, act or certificate of a majority is effective in all
respects as the decision, act or certificate of all.
The inspectors of election shall determine the number
of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum and the
authenticity, validity and effect of proxies, receive votes,
ballots or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote,
count and tabulate all votes or consents, determine when the polls
shall close, determine the result and do such acts as may be
proper to conduct the election or vote with fairness to all
shareholders.
ARTICLE III
Directors Management
Section 15. Powers. Subject to any provisions of the
Articles of Incorporation, of the By-Laws and of law limiting the
powers of the Board of Directors or reserving powers to the
shareholders, the Board of Directors shall, directly or by delegation,
manage the business and affairs of the corporation and exercise all
corporate powers permitted by law.
Section 16. Number and qualification of Directors. The
authorized number of directors shall be not less than Seven (7) nor
more than Thirteen (13), until changed by amendment of the Articles of
Incorporation or, if not prohibited by the Articles, by an amendment of
this By-Law adopted by the shareholders. The exact number of directors
within said range shall be fixed by a resolution adopted by the Board
of Directors; and unless and until so amended, the exact number of
directors is hereby fixed at nine (9). Directors need not be
shareholders of the corporation.
Nomination for election of members of the Board of Directors
may be made by the Board of Directors or by any stockholder of any
outstanding class of capital stock of the corporation entitled to vote
for the election of directors. Notice of intention to make any
nominations shall be made in writing and shall be delivered or mailed
to the President of the corporation not less than 21 days nor more than
60 days prior to any meeting of stockholders called for the election of
directors; provided however, that if less than 21 days notice of the
meeting is given to shareholders, such notice of intention to nominate
shall be mailed or delivered to the President of the corporation not
later than the close of business on the tenth day following the day on
which the notice of meeting was mailed; provided further that if notice
of such meeting is sent by third-class mail as permitted by Section 6
of these By-Laws, no notice of intention to make nominations shall be
required. Such notification shall contain the following information to
the extent known to the notifying shareholder: (a) the name and address
of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the number of shares of capital stock of the corporation
owned by each proposed nominee; (d) the name and residence address of
the notifying shareholder; and (e) the number of shares of capital
stock of the corporation owned by the notifying shareholder.
Nominations not made in accordance herewith may, in the discretion of
the Chairman of the meeting, be disregarded and upon the Chairman's
instructions, the inspectors of election can disregard all votes cast
for each such nominee. A copy of this paragraph shall be set forth in
a notice to shareholders of any meeting at which Directors are to be
elected.
Section 17. Election and Term of Office. The directors
shall be elected annually by the shareholders at the annual meeting of
the shareholders; provided that if, for any reason, said annual meeting
or an adjournment thereof is not held or the directors are not elected
thereat, then the directors may be elected at any special meeting of
the shareholders called and held for that purpose. The term of office
of the directors shall, except as provided in Section 18 of these
By-Laws, begin immediately after their election and shall continue
until their respective successors are elected and qualified.
Section 18. Removal of Directors. A director may be
removed from office by the Board of Directors if he is declared of
unsound mind by the order of court or convicted of a felony. Any or all
of the directors may be removed from office without cause by a vote of
shareholders holding a majority of the outstanding shares entitled to
vote at an election of directors; however, unless the entire Board of
Directors is removed, an individual director shall not be removed if
the votes cast against removal, or not consenting in writing to such
removal, would be sufficient to elect such director if voted
cumulatively at an e1ection at which the same total number of votes
were cast, or, if such action is taken by written consent, all shares
entitled to vote were voted, and the entire number of directors
authorized at the time of the director's most recent election were then
being elected. A director may also be removed from office by the
superior court of the county in which the principal office is located,
at the suit of shareholders holding at least ten percent (10%) of the
number of outstanding shares of any class, in case of fraudulent or
dishonest acts or gross abuse of authority or discretion with reference
to the corporation, in the manner provided by law.
No reduction of the authorized number of directors shall
have the effect of removing any director before his term of office
expires.
Section 19. Vacancies. A vacancy or vacancies on the Board
of Directors shall exist on the death, resignation, or removal of any
director, or if the authorized number of directors is increased or the
shareholders fail to elect the full authorized number of directors.
Except for a vacancy created by the removal of a director,
vacancies on the Board of Directors may be filled by a majority of the
remaining directors although less than a quorum, or by a sole remaining
director, and each director elected in this manner shall hold office
until his successor is elected at an annual or special shareholders'
meeting.
The shareholders may elect a director at any time to fill
any vacancy not filled by the directors. Any such election
by written consent other than to fill a vacancy created by
removal requires the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign effective upon giving
written notice to the Chairman of the Board of Directors, the
President, the Secretary or the Board of Directors of the
corporation, unless the notice specifies a later time for the
effectiveness of such resignation. If the resignation is
effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
Section 20. Place of Meetings. Regular and special
meetings of the Board of Directors shall be held at any place
within the State of California that is designated by resolution
of the Board or, either before or after the meeting, consented
to in writing by all the Board members. If the place of a
regular or special meeting is not fixed by resolution or
written consents of the Board, it shall be held at the
corporation's principal office.
Section 21. Organizational Meetings. Immediately
following each annual shareholders' meeting, the Board of
Directors shall hold an organizational meeting at a date and
time adopted by the Board of Directors by Resolution to
organize, elect officers, and transact other business. Notice
of this meeting shall not be required.
Section 22. Other Regular Meetings. Other regular
meetings of the Board of Directors shall be held at such time
and place as the Board of Directors by resolution shall
determine. Notice of these regular meetings shall not be
required.
Section 23. Special Meetings. Special meetings of
the Board of Directors for any purpose may be called at any
time by the Chairman of the Board of Directors, or the
President, or any Vice President, or the Secretary, or any two
directors.
Special meetings of the Board shall be held upon
four days' notice by mail or 24 hours notice delivered
personally or by telephone or telegraph. If notice is by
telephone, it shall be complete when the person calling the
meeting believes in good faith that the notified person has
heard and acknowledged the notice. If the notice is by mail or
telegraph, it shall be complete when deposited in the United
States mail or delivered to the telegraph office at the place
where the corporation's principal office is located, charges
prepaid and addressed to the notified person at such person's
address appearing on the corporate records or, if it is not on
these records or is not readily ascertainable, at the place
where the regular Board meeting is held.
Section 24. Quorum. A majority of the authorized number of
directors shall constitute a quorum for the transaction of business,
except to adjourn a meeting under Section 26 of these By-Laws. Every
act done or decision made by a majority of the directors present at a
meeting at which a quorum is present shall be regarded as the act of
the Board of Directors, unless the vote of a greater number is required
by law, the Articles of Incorporation, or these By-Laws. A meeting at
which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is
approved by a majority of the required quorum for such meeting.
Section 25. Contents of Notice and Waiver of Notice.
Neither the business to be transacted at, nor the purpose of, any
regular or special Board meeting need be specified in the notice or
waiver of notice of the meeting. Notice of a meeting need not be given
to any director who signs a waiver of notice or a consent to holding
the meeting or an approval of the minutes thereof, either before or
after the meeting, or who attends the meeting without protesting, prior
thereto or at its commencement, the lack of notice to said director.
All such waivers, consents, and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 26. Adjournment. A majority of the directors
present, whether or not a quorum is present, may adjourn any meeting to
another time and place.
Section 27. Notice of Adjournment. Notice of the time and
place of holding an adjourned meeting need not be given to absent
directors if the time and place are fixed at the meeting being
adjourned, except that if the meeting is adjourned for more than 24
hours such notice shall be given prior to the adjourned meeting to the
directors who were not present at the time of the adjournment.
Section 28. Telephone Participation. Members of the Board
may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating
in such meetings can hear one another. Such participation constitutes
presence in person at such meeting.
Section 29. Action Without Meeting. The Board of Directors
may take any action without a meeting that may be required or permitted
to be taken by the Board at a meeting, if all members of the Board
individually or collectively consent in waiting to the action. The
written consent or consents shall be filed in the minutes of the
proceedings of the Board of Directors. Such action by written consent
shall have the same effect as a unanimous vote of directors.
Section 30. Fees and Compensation. Directors and
members of committees shall receive neither compensation for their
services nor reimbursement for their expenses unless these
payments are fixed by resolution of the Board.
ARTICLE IV
Officers
section 31. Officers. The officers of the corporation
shall be a President, a Secretary, and a Chief Financial Officer.
The corporation may also have, at the discretion of the Board of
Directors, a Chairman of the Board (who shall be chosen from the
Board of Directors), one or more Vice Presidents, one or more
Assistant Secretaries, one or more Assistant Chief Financial
Officers, and any other officers who may be appointed under
Section 33 of these By-Laws. Any two or more officers, except
those of President and Secretary, may be held by the same person.
Any officer of the corporation may be excluded by
resolution of the Board of Directors or by a provision of these
By-Laws from participation, other than in the capacity of a
director, in major policymaking functions of the corporation.
If requested by the Board of Directors, each officer
and employee of the corporation shall give bond of suitable amount
with security to be approved by the Board of Directors,
conditioned on the honest and faithful discharge of his duties as
such officer or employee. At the discretion of the Board, such
bonds may be schedule or blanket form and the premiums shall be
paid by the corporation. The amount of such bonds, the form of
coverage, and the name of the company providing the surety
therefor shall be reviewed annually by the Board of Directors.
Action shall be taken by the Board at that time approving the
amount of the bond to be provided by each officer and employee of
the corporation for the ensuing year.
Section 32. Election. The officers of the
corporation, except those appointed under Section 33 of these
By-Laws, shall be chosen annually by the Board of Directors, and
each shall hold his office until he resigns or is removed or
otherwise disqualified to serve, or his successor is elected and
qualified.
Section 33. Subordinate Officers. The Board of
Directors may appoint, and may authorize the President to appoint,
any other officers that the business of the corporation may
require, each of whom shall hold office for the period, have the
authority, and perform the duties specified in the By-Laws or by
the Board of Directors.
Section 34. Removal and Resignation. Any officer may be
removed with or without cause either by the Board of Directors at any
regular or special directors' meeting or, except for an officer chosen
by the Board, by any officer on whom the power of removal may be
conferred by the Board.
Any officer may resign at any time by giving written notice
to the Board of directors, the President or the Secretary of the
corporation. An officer's resignation shall take effect when it is
received or at any later time specified in the resignation. Unless the
resignation specifies otherwise, its acceptance by the corporation
shall not be necessary to make it effective.
Section 35. Vacancies. A vacancy in any office because of
death, resignation, removal, disqualification, or any other cause shall
be filled in the manner prescribed in the By-Laws for regular
appointments to the office.
Section 36. Chairman of the Board. The Board of Directors
may in its discretion elect a Chairman of the Board, who shall preside
at all meetings of the Board of Directors at which the Chairman is
present and shall exercise and perform other powers and duties assigned
to the Chairman by the Board or prescribed by the By-Laws.
Section 37. President. Subject to any supervisory powers
that may be given by the Board of Directors or the By-Laws to the
Chairman of the Board, the President shall be the corporation's chief
executive officer and shall, subject to the control of the Board of
Directors, have general supervision, direction, and control over the
corporation's business and affairs. The President shall preside as
Chairman at all shareholders' meetings and at all directors' meetings
not presided over by the Chairman of the Board. He shall be ex officio
a member of all the standing committees except the Audit Committee,
shall have the general powers and duties of management usually vested
in a corporation's president; shall have any other powers and duties
that are prescribed by the Board of Directors or these By-Laws; and
shall be primarily responsible for carrying out all orders and
resolutions of the Board of Directors.
Section 38. Vice Presidents. If the President is absent or
is unable or refuses to act, the Vice Presidents in order of their rank
as fixed by the Board of Directors or, if not ranked, the Vice
President designated by the Board of Directors, shall perform all the
duties of the President, and when so acting shall have all the powers
of, and be subject to all the restrictions on, the President. Each
Vice President shall have any
other duties that are prescribed for said Vice President by the Board
of Directors or the By-Laws.
Section 39. Secretary. The Secretary shall keep or cause
to be kept, and be available at the principal office and any other
place that the Board of Directors specifies, a book of minutes of all
directors' and shareholders' meetings. The minutes of each meeting
shall state the time and place that it was held; whether it was regular
or special; if a special meeting, how it was authorized; the notice
given; the names of those present or represented at shareholders'
meetings; and the proceedings of the meetings. A similar minute book
shall be kept for each committee of the Board.
The Secretary shall keep, or cause to be kept, at the
principal office or at the office of the corporation's transfer agent,
a share register, or duplicate share register, showing the
shareholders' names and addresses, the number and classes of shares
held by each, the number and date of each certificate issued for these
shares, and the number and date of cancellation of each certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of
all directors' and shareholders' meeting, required to be given under
these By-Laws or by law, shall keep the corporate seal in safe custody,
and shall have any other powers and perform any other duties that are
prescribed by the Board of Directors or these By-Laws.
The Secretary shall be deemed not to be an executive officer
of the corporation and the Secretary shall be excluded from
participation, other than in the capacity of director if the Secretary
is also a director, in major policymaking functions of the corporation.
Section 40. Chief Financial Officer. The Chief Financial
Officer shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the corporation's properties and
business transactions, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings, and
shares. The books of account shall at all reasonable times be open to
inspection by any director.
The Chief Financial Officer shall deposit all money and
other valuables in the name and to the credit of the corporation with
the depositories designated by the Board of Directors. The Chief
Financial Officer shall disburse the corporation's funds as ordered by
the Board of Directors; shall render to the President and directors,
whenever they request it, an account of all his transactions as Chief
Financial Officer and of the corporation's financial condition; and
shall have any other powers and perform
any other duties that are prescribed by the Board of Directors or
By-Laws.
If required by the Board of Directors, the Chief Financial
Officer shall give the corporation a bond in the amount and with the
surety or sureties specified by the Board for faithful performance of
the duties of that person's office and for restoration to the
corporation of all its books, papers, vouchers, money, and other
property of every kind in that person's possession or under that
person's control on that person's death, resignation, retirement, or
removal from office.
ARTICLE V
General Corporate Matters
Section 41. Record Date and Closing of Stockbooks. The
Board of Directors may fix a time in the future as a record date for
determining shareholders entitled to notice of and to vote at any
shareholders' meeting; to receive any dividend, distribution, or
allotment of rights; or to exercise rights in respect of any other
lawful action, including change, conversion, or exchange of shares.
The record date shall not, however, be more than 60 nor less than 10
days prior to the date of such meeting nor more than 60 days prior to
any other action. If a record date is fixed for a particular meeting
or event, only shareholders of record on that date are entitled to
notice and to vote and to receive the dividend, distribution, or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the
corporation after the record date.
A determination of shareholders of record entitled to notice
of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board fixes a new record date for
the adjourned meeting, but the Board shall fix a new record date if the
meeting is adjourned for more than 45 days.
Section 42. Corporate Records and Inspection by
Shareholders and Directors. Books and records of account and minutes
of the proceedings of the shareholders, Board, and committees of the
Board shall be kept available at the principal office for inspection by
the shareholders to the extent required by Section 1601 of the
California Corporations Code. A record of the shareholders, giving the
names and addresses of all shareholders and the number and class of
shares held by each, shall be kept available for inspection at the
principal office or at the office of the corporation's transfer agent
or registrar.
A shareholder or shareholders holding at least five percent
(5%) in the aggregate of the outstanding voting shares of
the corporation shall have an absolute right to do either or both
of the following: (1) inspect and copy the record of shareholders'
names and addresses and shareholdings during usual business hours
upon five business days' prior written demand upon the
corporation, or (2) obtain from the transfer agent for the
corporation, upon five business days prior written demand and upon
the tender of its usual charges for such a list (the amount of
which charges shall be stated to the shareholder by the transfer
agent upon request), a list of the shareholders' names and
addresses, who are entitled to vote for the election of directors,
and their shareholdings, as of the most recent record date for
which it has been compiled or as of a date specified by the
shareholder subsequent to the date of demand. The record of
shareholders shall also be open to inspection and copying by any
shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the
corporation, for a purpose reasonably related to such holder's
interests as a shareholder or holder of a voting trust
certificate. Inspection and copying may be made in person or by
agent or attorney.
Every director shall have the absolute right at any
reasonable time to inspect and copy all books, records and
documents of every kind and to inspect the physical properties of
the corporation and its subsidiary corporations, domestic or
foreign. Such inspection by a director may be made in person or
by agent or attorney and includes the right to copy and make
extracts.
Section 43. Checks, Drafts, Evidences of Indebtedness.
All checks, drafts, or other orders for payment of money, notes
and all mortgages, or other evidences of indebtedness, issued in
the name of or payable to the corporation, and all assignments and
endorsements of the foregoing, shall be signed or endorsed by the
person or persons and in the manner specified by the Board of
Directors.
Section 44. Corporate Contracts and Instruments: How
Executed. Except as otherwise provided in the By-Laws, officers,
agents, or employees must be authorized by the Board of Directors
to enter into any contract or execute any instrument in the
corporation's name and on its behalf. This authority may be
general or confined to specific instances.
Section 45. Stock Certificates. One or more
certificates for shares of the corporation's capital stock shall
be issued to each shareholder for any of such shareholder's shares
that are fully paid. The corporate seal or its facsimile may be
fixed on certificates. All certificates shall be signed by the
Chairman of the Board, President, or a Vice President and the
Secretary, Treasurer, or an Assistant Secretary. Any or all of
the signatures on the certificate may be facsimile signatures.
Section 46. Lost Certificates. Ho new share certificate
that replaces an old one shall be issued unless the old one is
surrendered and canceled at the same time; provided, however, that if
any share certificate is lost, stolen, mutilated, or destroyed, the
Board of Directors may authorize issuance of a new certificate
replacing the old one on any terms and conditions, including a
reasonable arrangement for indemnification of the corporation, that the
Board may specify.
Section 47. Reports to Shareholders. The requirement for
the annual report to shareholders referred to in Section 1501(a) of the
California Corporations Code is hereby expressly waived so long as
there are less than 100 holders of record of the corporation's shares.
The Board of Directors shall cause to be sent to the shareholders such
annual or other periodic reports as they consider appropriate or as
otherwise required by law. In the event the corporation has 100 or
more holders of its shares, an annual report complying with Section
1501(a) and, when applicable, Section 1501(b) of the California
Corporations Code, shall be sent to the shareholders not later than 120
days after the close of the fiscal year and at least 15 days prior to
the annual meeting of shareholders to be held during the next fiscal
year.
If no annual report for the last fiscal year has been sent
to shareholders, the corporation shall, upon the written request of any
shareholder made more than 120 days after the close of such fiscal
year, deliver or mail to the person making the request within 30 days
thereafter the financial statements referred to in Section 1501(a) for
such year.
A shareholder or shareholders holding at least five percent
(54) of the outstanding shares of any class of a corporation may make a
written request to the corporation for an income statement of the
corporation for the three-month, six-month, or nine-month period of the
current fiscal year ended more than 30 days prior to the date of the
request and a balance sheet of the corporation as of the end of such
period and, in addition, if no annual report for the last fiscal year
has been sent to shareholders, the statements referred to in Section
1501(a) of the California Corporations Code for the last fiscal year.
The statement shall be delivered or mailed to the person making the
request within 30 days thereafter. A copy of the statements shall be
kept on file in the principal office of the corporation for 12 months
and they shall be exhibited at all reasonable times to any shareholder
demanding an examination of them or a copy shall be mailed to such
shareholder. The income statements and balance sheets referred to
shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that such financial statements
were prepared without audit from the books and records of the
corporation.
Section 48. Indemnification of Corporate Agents. The
corporation shall have power to indemnify each of its agents to the
fullest extent permissible by the California General Corporation Law.
Without limiting the generality of the foregoing sentence, the
corporation:
(a) is authorized to provide indemnification of agents in
excess of that expressly permitted by section 317 of
the California General Corporation Law for those agents
of the corporation for breach of duty to the
corporation and its shareholders, provided, however,
that the corporation is not authorized to provide
indemnification of any agent for any acts or omissions
or transactions from which a director may not be
relieved of liability as set forth in the exception to
section 204(a)(10) of the California General
Corporation Law or as to circumstances in which
indemnity is expressly prohibited by section 317 of the
California General Corporation law; and
(b) shall have power to purchase and maintain insurance on
behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in
such capacity or arising out of the agent's status as
such, whether or not the corporation would have the
power to indemnify the agent against such liability
under the provisions of section 317 of the California
General Corporation Law, and shall have power to
advance the expenses reasonably expected to be incurred
by such agent in defending any such proceeding upon
receipt of the undertaking required by subdivision (f)
of such section. The term "agent" used in this
section 48 shall have the same meaning as such term in
section 317 of the California General Corporation Law.
ARTICLE VI
Amendments
Section 49. Amendments by Shareholders. New By-Laws may be
adopted or these By-Laws may be amended or repealed by the affirmative
vote or written consent of a majority of the outstanding shares
entitled to vote.
Section 50. Amendments By Directors. Subject to the right
of shareholders under the preceding Section 49 of these By-Laws,
By-Laws other than a By-Law fixing or changing the authorized number of
directors may be adopted, amended, or repealed by the Board of
Directors. However, if the Articles of Incorporation, or a By-Law
adopted by the shareholders, provide for an indefinite number of
directors within specified limits,
the directors may adopt or amend a By-Law or resolution
fixing the exact number of directors within those limits.
ARTICLE VII
Committees of the Board of Directors
Section 51. Committees of the Board of Directors. The
Board of Directors shall, by resolution adopted by a majority of
the authorized number of directors, designate the following
standing committees:
(1) An Audit Committee which shall consist of at
least three members of the Board of Directors, none of
whom shall be active officers of the corporation. The
duties of this committee shall be to make suitable
examination every 12 months of the affairs of the
corporation. The result of such examination shall be
reported, in writing, to the Board of Directors stating
whether the corporation is in a sound and solvent
condition, whether adequate internal audit controls and
procedures are being maintained, and recommending to
the Board such changes in the manner of doing business,
etc. as shall be deemed advisable. The Audit
Committee, upon its own recommendation and with the
approval of the Board of Directors, may employ a
qualified firm of Certified Public Accountants to make
a suitable examination and audit of the corporation.
If such a procedure is followed, the one annual
examination and audit of such firm of accountants and
the presentation of its report to the Board of
Directors will be deemed sufficient to comply with the
requirements of this section of these By-Laws.
The Board of Directors may, by resolution adopted by a
majority of the authorized number of directors, also designate
one or more additional standing committees including, but not
limited to, a Loan Committee, an Investment Committee and/or an
Executive Committee consisting of two or more directors who shall
be appointed by, and hold office at, the pleasure of the Board of
Directors. The Board of Directors may, except as hereinafter
limited, and to extent permissible under applicable law, delegate
to such committees any of the powers and authorities of the Board
of Directors.
The appointment of members or alternate members
of a committee requires the vote of a majority of the
authorized number of directors.
The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace
any absent member at any meeting of the committee. Any such
committee shall have all the authority of the Board, except with respect to:
(1) The approval of any action for which shareholder
approval is also required.
(2) The filling of vacancies on the Board or in any
committee.
(3) The fixing of compensation of the directors for
serving on the Board or on any committee.
(4) The amendment or repeal of By-Laws or the adoption
of new By-Laws.
(5) The amendment or repeal of any resolution of the
Board which by its express terms is not so amendable or
repealable.
(6) A distribution to the shareholders of the
corporation as defined in Section 166 of the California
Corporations Code, except at a rate or in a periodic amount
or within a price range determined by the Board.
(7) The appointment of other committees of the Board
or the members thereof.
The Board of Directors shall designate a chairman for each
committee who shall have the sole power to call any committee meeting
other than a meeting set by the Board. Except as otherwise established
by the Board of Directors, Article III of these By-Laws shall apply to
committees of the Board and action by such committees, mutatis mutandis.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No.33-89948 of Central Coast Bancorp on Form S-8 of our report dated
January 25, 1999 (February 26, 1999 as to the stock split information in
Note 1),appearing in the Annual Report on Form 10-K of Central Coast Bancorp
for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Salinas, California
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule Contains Summary Financial Information Extracted >From (a)
Item 7 - 'Financial Statements And Supplementary Data" And Is Qualified In
Its Entirety By Reference To Such (b) Financial Statements Included In This
Report And Incorporated Herein By Reference.
</LEGEND>
<CIK> 0000921085
<NAME> CENTRAL COAST BANCORP
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