SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999 .
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25418 .
---------
CENTRAL COAST BANCORP
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0367061
- ------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
301 Main Street, Salinas, California. 93901 .
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(831) 422-6642 .
-------------------------------
(Registrant's telephone number,
including area code)
not applicable
---------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
No par value Common Stock - 6,504,812 shares outstanding at April 29,1999.
Page 1 of 22
The Index to the Exhibits is located at Page 20
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
CENTRAL COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In thousands) March 31, 1999 December 31,1998
-------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks $ 36,938 $ 44,684
Federal funds sold - 4,202
--------- ---------
Total cash and equivalents 36,938 48,886
Available-for-sale securities 165,961 170,387
Loans held for sale 5,291 6,168
Loans:
Commercial 129,350 136,685
Real estate-construction 21,854 19,929
Real estate-other 157,984 144,685
Installment 11,659 11,545
Deferred loan fees, net (728) (674)
--------- ---------
Total loans 320,119 312,170
Allowance for loan losses (4,398) (4,352)
--------- ---------
Net Loans 315,721 307,818
--------- ---------
Premises and equipment, net 3,239 3,069
Accrued interest receivable and other assets 8,854 7,605
--------- --------
Total assets $536,004 $543,933
========= ========
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $122,272 $149,757
Demand, interest bearing 93,176 98,226
Savings 101,558 104,447
Time 158,462 136,762
--------- --------
Total Deposits 475,468 489,192
Accrued interest payable and other liabilities 8,389 3,542
--------- --------
Total liabilities 483,857 492,734
--------- --------
Commitments and contingencies (Note 2)
Shareholders' Equity:
Preferred stock - no par value; authorized
1,000,000 shares; no shares issued
Common stock - no par value; authorized
25,000,000 shares;
issued and outstanding: 6,490,327 shares at
March 31, 1999
and 6,112,045 shares at December 31, 1998 41,106 41,103
Shares held in deferred compensation trust
(247,148 at March 31, 1999 and 71,949 at
December 31, 1998), net of deferred obligation - -
Retained earnings 11,457 9,733
Accumulated other comprehensive income - net of
deferred obligation
taxes of $289,000 at March 31, 1999 and
$254,000 at December 31,1998 (416) 363
-------- ---------
Shareholders' equity 52,147 51,199
-------- ---------
Total liabilities and shareholders' equity $536,004 $543,933
======== =========
See notes to Consolidated Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CENTRAL COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
(In thousands)
Three Months Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Interest Income
Loans (including fees) $7,140 $6,267
Investment securities 2,249 1,780
Other 73 945
----------- ------------
Total interest income 9,462 8,992
----------- ------------
Interest Expense
Interest on deposits 3,086 3,334
Other 27 1
----------- ------------
Total interest expense 3,113 3,335
----------- ------------
Net Interest Income 6,349 5,657
Provision for Loan Losses 127 17
----------- ------------
Net Interest Income after
Provision for Loan Losses 6,222 5,640
----------- ------------
Noninterest Income 542 394
----------- ------------
Noninterest Expenses
Salaries and benefits 2,331 2,155
Occupancy 280 219
Furniture and equipment 291 195
Other 921 883
----------- ------------
Total other expenses 3,823 3,452
----------- ------------
Income Before Income Taxes 2,941 2,582
Provision for Income Taxes 1,216 1,068
----------- ------------
Net Income $1,725 $1,514
=========== ============
Basic Earnings per Share $0.27 $0.25
Diluted Earnings per Share $0.26 $0.23
See Notes to Consolidated Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CENTRAL COAST BANCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended March 31, 1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operations:
Net income $1,725 $1,514
Reconciliation of net income to net
cash provided by operating activities:
Provision for credit losses 127 17
Net gain on sale of fixed assets - (1)
Depreciation 212 139
Amortization and accretion 77 (100)
(Increase) decrease in accrued interest
receivable and other assets (919) 53
Increase in accrued interest
payable and other liabilities 1,107 367
(Increase) decrease in deferred
loan fees 54 (50)
---------- ----------
Net cash provided by operations 2,383 1,939
---------- ----------
Cash Flows from Investing Activities:
Purchases of investment securities (87,498) (62,166)
Proceeds from maturities
of investment securities 90,738 61,780
Net change in loans held for sale 877 (877)
Net (increase) decrease in loans (8,084) 5,056
Proceeds from sale of fixed assets - 1
Capital expenditures (382) (267)
---------- ----------
Net cash provided (used) in
investing activities (4,349) 3,527
---------- ----------
Cash Flows from Financing Activities:
Net decrease in deposit accounts (13,724) (13,984)
Net increase (decrease) in short-term
borrowings 3,740 (288)
Proceeds from sale of stock 810 39
Shares repurchased (808) (13)
---------- ----------
Net cash used by financing activities (9,982) (14,246)
---------- ----------
Net decrease in cash and equivalents (11,948) (8,780)
Cash and equivalents, beginning of period 48,886 104,597
---------- ----------
Cash and equivalents, end of period $36,938 $95,817
========== ==========
Other Cash Flow Information:
Interest paid $ 3,092 $ 2,612
Income taxes paid 224 -
</TABLE>
See Notes to Consolidated Condensed Financial Statements
<PAGE>
CENTRAL COAST BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1999 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated condensed
financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
Company's consolidated financial position at March 31, 1999 and
December 31, 1998, the results of operations for the three month
periods ended March 31, 1999 and 1998, and cash flows for the three
month periods ended March 31, 1999 and 1998.
Certain disclosures normally presented in the notes to the annual
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These interim
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's 1998 Annual Report to
Shareholders. The results of operations for the three month
periods ended March 31, 1999 and 1998 may not necessarily be
indicative of the operating results for the full year.
In preparing such financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant changes in the near term
relate to the determination of the allowance for loan losses 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.
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various
commitments to extend credit which are not reflected in the
financial statements, including loan commitments of approximately
$125,601,000 and standby letters of credit of $1,135,000 at March
31, 1999. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 1999.
Approximately $18,783,000 of loan commitments outstanding at March
31, 1999 relate to real estate construction loans and are expected
to fund within the next twelve months. The remainder relate
primarily to revolving lines of credit or other commercial loans,
and many of these commitments are expected to expire without being
drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements. Each potential borrower and
the necessary collateral are evaluated on an individual basis.
Collateral varies, but may include real property, bank deposits,
debt or equity securities or business assets.
Stand-by letters of credit are commitments written to guarantee the
performance of a customer to a third party. These guarantees are
issued primarily relating to purchases of inventory by commercial
customers and are typically short-term in nature. Credit risk is
similar to that involved in extending loan commitments to customers
and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such
commitments are collateralized.
3. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period
(6,360,000 for the three month period ended March 31, 1999, and
6,008,000 for the three month period ended March 31, 1998).
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 (329,000 for the three month period ended March 31, 1999
and 534,000 for the three month period ended March 31, 1998).
4. COMPREHENSIVE EARNINGS
In 1998, Central Coast Bancorp adopted Statement of Financial
Accounting Standards 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 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Net Earnings $ 1,725 $ 1,514
Other comprehensive loss - net unrealized
loss on available-for-sale securities. (779) (115)
--------- ----------
Total comprehensive earnings $ 946 $ 1,399
========= ==========
</TABLE>
5. STOCK DIVIDEND
On January 25, 1999 the Board of Directors declared a five-for-four
stock split, which was distributed on February 26, 1999, to
shareholders of record as of February 8, 1999. All share and per
share data have been retroactively adjusted to reflect the stock
dividend.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical information contained herein, this
report on Form 10-Q contains certain forward-looking statements.
The reader of this 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. 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
possible Year 2000 problems. This entire report should be read to
put such forward-looking statements in context. To gain a more
complete understanding of the uncertainties and risks involved in
the Company's business this report should be read in conjunction
with Central Coast Bancorp's annual report on Form 10-K for the
year ended December 31, 1998.
Interest income and net interest income are presented on a fully
taxable equivalent basis (FTE) within the Management's Discussion
and Analysis.
Business Organization
Central Coast Bancorp (the "Company") is a California corporation
organized in 1994, and is the parent company for Bank of Salinas
and Cypress Bank, state-chartered banks, headquartered in Salinas
and Seaside, California, respectively (the "Banks"). 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 of the Federal Reserve System (the "FRB"), the Company's
principal regulator.
The Banks offer a full range of commercial banking services,
including a diverse range of traditional banking products and
services to individuals, merchants, small and medium-sized
businesses, professionals and agribusiness enterprises located in
the Salinas Valley and Monterey Peninsula.
Overview
Central Coast Bancorp, holding company for Bank of Salinas and
Cypress Bank, reported record first quarter earnings of $1,725,000
for the three months ended March 31,1999. The earnings reflect a
13.9% increase over the $1,514,000 reported for the first quarter
of 1998. Diluted earnings per share for the first quarters of 1999
and 1998 were $0.26 and $0.23, respectively.
Assets of the Company totaled $536,004,000 at March 31, 1999 for an
increase of $50,810,000 (10.5%) from March 31, 1998 ending balances
and a decrease of $7,929,000 (1.5%) from December 31, 1998
balances. Due to seasonal variations of the Company's agribusiness
customers, it is normal for the Company to experience a decline in
assets in the first quarter of each year from year-end balances.
March 31, 1998 total assets reflected a decrease of $12,480,000
(2.5%) from the December 31, 1997 ending assets of $497,674,000.
For the first quarter of 1999, the Company had annualized return on
assets of 1.32% and return on equity of 13.57% versus 1.27% and
13.70%, respectively, for the first quarter of 1998. Central Coast
Bancorp ended the first quarter of 1999 with a Tier 1 capital ratio
of 14.4% and a total risk-based capital ratio of 15.7%.
<PAGE>
The following table provides a summary of the major elements of
income and expense for the periods indicated.
<TABLE>
<CAPTION>
Percentage
Change
Three months ended Increase
March 31, (Decrease)
(In thousands) 1999 1998
---- ---- --------
<S> <C> <C> <C>
Interest income (1) $ 9,638 $ 9,007 7%
Interest expense 3,113 3,335 (7%)
--------- -------- --------
Net interest income 6,525 5,672 15%
Provision for loan losses 127 17 647%
--------- -------- --------
Net interest income after
provision for loan losses 6,398 5,655 13%
Noninterest income 542 394 38%
Noninterest expense 3,823 3,452 11%
--------- -------- --------
Net income before income taxes 3,117 2,597 20%
Tax equivalent adjustment 176 15 1073%
Income taxes 1,216 1,068 14%
--------- -------- --------
Net income $ 1,725 $1,514 14%
========= ======== ========
1) Interest on tax-free securities is
reported on tax equivalent basis.
</TABLE>
<PAGE>
Net interest income
Net interest income, the difference between interest earned on
loans and investments and interest paid on deposits and other
borrowings, is the principal component of the Banks' earnings. The
following table provides a summary of the components of net
interest income and the changes within the components for the
periods indicated. The second table sets forth a summary of the
changes in interest income and interest expense from changes in
average asset and liability balances (volume) and changes in
average interest rates.
<TABLE>
<CAPTION>
(Unaudited)
Three months ended March 31,
(Taxable Equivalent Basis) 1999 1998
Avg. Avg. Avg. Avg.
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning Assets
Loans (1) (2) $ 309,892 $ 7,140 9.3% $ 245,425 $ 6,267 10.4%
Taxable investments 127,466 1,894 6.0% 119,377 1,750 6.0%
Tax-exempt securities (tax equiv.basis) 32,314 531 6.7% 2,127 45 8.6%
Federal funds sold 6,230 73 4.8% 70,211 945 5.5%
------- ------- ------- -----
Total Earning Assets 475,902 $ 9,638 8.2% 437,140 $ 9,007 8.4%
Cash & due from banks 42,400 ------- 37,718 -----
Other assets 10,578 10,100
------- -------
$ 528,880 $ 484,958
======= =======
Liabilites & Shareholders'
Equity:
Interest bearing liabilities:
Demand deposits $ 93,030 $ 354 1.5% $ 86,596 $ 422 2.0%
Savings 108,843 891 3.3% 99,572 942 3.8%
Time deposits 147,048 1,841 5.1% 142,025 1,970 5.6%
Other borrowings 2,252 27 4.9% 61 1 6.6%
------- ------- ------- -----
Total interest bearing liabilities 351,173 3,113 3.6% 328,254 3,335 4.1%
Demand deposits 122,259 ------- 108,580 -----
Other Liabilities 3,882 3,308
------- -------
Total Liabilities 477,314 440,142
Shareholders' Equity 51,566 44,816
------- -------
$ 528,880 $ 484,958
Net interest income & margin (3) ======= $ 6,525 5.6% ======= $ 5,672 5.3%
======= ==== ===== ====
</TABLE>
1 Loan interest income includes fee income of $241,000 and $244,000
for the three month periods ended March 31, 1999
and 1998, respectively.
2 Includes the average allowance for loan losses of $4,364,000 and
$4,207,000 and average deferred loan fees of
$719,000 and $548,000 for the three months ended March 31,
1999 and 1998, respectively.
3 Net interest margin is computed by dividing net interest income
by the total average earning assets.
<PAGE>
<TABLE>
<CAPTION>
Volume/Rate Analysis
(in thousands) Three Months Ended March 31, 1999 over 1998
Increase (decrease) due to change
in:
Interest-earning assets: Rate Net
Volume (4) Change
------ ----- -----
<S> <C> <C> <C>
Net Loans (1)(2) $1,653 $(780) $ 873
Taxable investment securities 118 26 144
Tax exempt investment
securities(3) 640 (154) 486
Federal funds sold (868) (4) (872)
------ ----- -----
Total 1,543 (912) 631
------ ----- -----
Interest-bearing liabilities:
Demand deposits 32 (100) (68)
Savings deposits 87 (138) (51)
Time deposits 69 (198) (129)
Other borrowings 36 (10) 26
------ ---- -----
Total 224 (446) (222)
------ ----- -----
Interest differential $1,319 $ (466) $ 853
====== ===== =====
</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 $241,000 and $244,000 for the quarters ended March 31, 1999 and
1998, respectively have been included in the interest income computation.
3. Includes taxable-equivalent adjustments that relate to income on certain
securities that is exempt from
federal income taxes. The effective federal statutory tax rate was 34%
for 1999 and 1998.
4. The rate / volume variance has been included in the rate
variance.
First quarter 1999 net interest income of $6,525,000 was a 15.0%
increase of $853,000 over the same period in 1998. Interest income
increased $631,000 (7.0%) as a result of an 8.9% increase in
average earning assets. The growth in earning assets was due to
increases of $64,467,000 (26.3%) in average loans outstanding and
$38,276,000 (31.5%) in average investment securities offset in part
by a decrease of $63,981,000 (91.1%) in average balances of Federal
Funds sold. The average rate received on Federal Funds sold
decreased from 5.5% in the first quarter of 1998 to 4.8% for the
same period in 1999.The change in mix from Federal Funds sold in
1998 to longer term securities including tax-exempt municipal bonds
in the later part of 1998 and the first quarter of 1999 helped to
stabilize interest income. The increase in tax exempt municipal investments
results in an increased tax benfit, as reflected in the increase in the tax
equivalent adjustment of 1073% from $15,000 in 1998 to 176,000 in 1999.
The positive effect on earnings of the higher balances in earning assets was
also offset in part by a 110 basis point decrease in the average yield received
on loans from 10.4% in the first quarter of 1998 to 9.3% in the first quarter
of 1999. The 75 basis point decrease in the prime interest rate in the
last half of 1998 as well as competitive pricing pressures caused this change.
Due to a 50 basis point decrease in average rates paid offset in part by a
$22,919,000 (7.0%) increase in balances of interest bearing liabilities,
interest expense was down $222,000 (6.7%) in the first quarter of 1999 versus
the same period in 1998. The net interest margin increased to 5.6% for the first
quarter of 1999 from 5.3% in the year earlier period.
Provision for Loan Losses
The Banks provided $127,000 for loan losses in the first quarter of
1999 versus $17,000 in 1998. Net charge-offs for all loans in the
first quarter of 1999 totaled $81,000 versus $39,000 in the year
earlier period. The additional provision in 1999 was made as a result of
increases in loan balances.
Noninterest Income
Noninterest income consists primarily of service charges on deposit
accounts and fees for miscellaneous services. Noninterest income
totaled $542,000 in the first quarter of 1999, which was up
$148,000 (37.6%) over the same period in 1998. Service charges on
deposits were up $58,000 (21.5%) due to higher volumes and some
selective fee increases implemented in the second and fourth
quarters in 1998. Also, fees from mortgage originations increased
$55,000 (271%) on quarter over quarter basis as the Company added another
commissioned mortgage lending officer.
Noninterest Expense
First quarter 1999 noninterest expense increased $371,000 to
$3,823,000 from the first quarter 1998 results. Salary and
employee benefits increased $176,000 (8.2%) due to increased staff
for the Westridge branch which opened in December 1998, additional
staff due to growth, higher commissions on mortgage originations,
higher benefit costs and normal salary increases. On a quarter
over quarter basis, premise and fixed asset expenses were higher by
$157,000 (37.9%). Costs associated with the Westridge branch, the
new computer system and network upgrades installed in the second
half of 1998 were the major factors contributing to the increased
premise and fixed asset expenses. The overhead efficiency ratio
for the first quarter of 1999 was 55.5% as compared to 57.0% in the
same quarter of 1998.
Provision for Income Taxes
The Company recorded income tax expense of $1,216,000 in the first
quarter of 1999 versus $1,068,000 in the first quarter of 1998.
The effective tax rate for the three months ended March 31, 1999 is
41.3%, which is essentially unchanged from the year earlier
results.
Loans
Ending loan balances at March 31, 1999 were $320,119,000, which was
an increase of $7,949,000 from year-end 1998 balances. The March
31, 1999 loan balances were $69,670,000 (28%) higher than the year
earlier totals. All categories of loans were higher on year over
year basis. Loan demand remains strong heading into the second
quarter of 1999.
Nonperforming Assets
Nonperforming assets are comprised of loans delinquent 90 days or
more with respect to interest or principal, loans for which the
accrual of interest has been discontinued, and other real estate
which has been acquired through foreclosure and is awaiting
disposition.
Unless well secured and in the process of collection, loans are
placed on nonaccrual status when a loan becomes 90 days past due as
to interest or principal, when the payment of interest or principal
in accordance with the contractual terms of the loan becomes
uncertain or when a portion of the principal balance has been
charged off. When a loan is placed on nonaccrual status, the
accrued and unpaid interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until
qualifying for return to accrual status. Generally, a loan may be
returned to accrual status when all delinquent interest and
principal become current in accordance with the terms of the loan
agreement and remaining principal is considered collectible or when
the loan is both well secured and in process of collection.
<PAGE>
Real estate and other assets acquired in satisfaction of
indebtedness are recorded at the lower of estimated fair market
value net of anticipated selling costs or the recorded loan amount,
and any difference between this and the amount is treated as a loan
loss. Costs of maintaining other real estate owned and gains or
losses on the subsequent sale are reflected in current earnings.
The following is a summary of nonperforming assets:
<TABLE>
<CAPTION>
(In thousands) March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Past due 90 days or more and still accruing
Real estate $ 71 $ 1,174
Commercial 1,104 73
Installment and other - -
----- -------
1,175 1,247
----- -------
Nonaccrual:
Real estate 622 543
Commercial 70 333
Installment and other - -
----- -------
692 876
----- -------
Total nonperforming loans 1,867 2,123
----- -------
Other real estate owned 61 -
----- -------
Total nonperforming assets $ 1,928 $ 2,123
===== =======
Allowance for loan losses as a percentage of 236% 205%
nonperforming loans
Nonperforming loans to total loans 0.58% 0.68%
</TABLE>
Nonperforming loans decreased $256,000 during the first quarter of
1999. This decrease coupled with a small increase in the allowance
for loan losses resulted in the improvement in the coverage ratio
of the allowance for loan losses to nonperforming loans from 205%
at year-end to 236%. Overall loan quality remains high.
Allowance for Loan Losses
The allowance for loan losses reflects management's judgement as to
the level considered adequate to absorb probable losses inherent in
the loan portfolio. The allowance is increased by provisions
charged to expense and reduced by loan charge-offs net of
recoveries. Management determines an appropriate provision based
upon information currently available to analyze loan loss
potential, including (1) the loan portfolio balance in the period;
(2) a comprehensive grading and review of new and existing loans
outstanding; (3) actual previous charge-offs; and, (4) changes in
economic conditions.
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 loan losses at March
31,1999 is adequate, based on information currently available.
However, no prediction of the ultimate level of loans charged off
in future years can be made with any certainty.
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes activity in the allowance for loan
losses for the periods indicated:
(In thousands) Three months
ended March 31,
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 4,352 $ 4,223
Provision charged to expense 127 17
Loans charged off (90) (69)
Recoveries 9 30
------- -------
Ending balance $ 4,398 $ 4,201
======= =======
Ending loan portfolio $ 320,119 $ 250,449
======= =======
Allowance for loan losses as percentage 1.37% 1.68%
of ending loan portfolio
</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 March 31,1999 were approximately $125,601,000
and $1,135,000, 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 its deposits with
other banks, overnight funds sold to correspondent banks, unpledged
short-term, marketable investments and loans available for sale.
On March 31, 1999 consolidated liquid assets totaled $163.6 million
or 30.6% of total assets as compared to $153.5 million or 28.2% of
total consolidated assets on December 31, 1998. In addition to
liquid assets, the Banks maintain lines of credit with
correspondent banks for up to $60,000,000 available on a short-term
basis. Informal agreements are also in place with various other
banks to purchase participations in loans, if necessary. The
Company serves primarily a business and professional customer base
and, as such, its deposit base is susceptible to economic
fluctuations. Accordingly, management strives to maintain a
balanced position of liquid assets to volatile and cyclical
deposits.
Capital Resources
The Company's total shareholders' equity was $52,147,000 at March
31, 1999 compared to $51,199,000 at December 31, 1998.
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.
A bankinig organization's total qualifying capital includes two components,
core capital(Tier 1 capital) and supplementary capital (Tier 2 capital).
Core capital, which must comprise at least half of total capital, includes
common shareholders' equity, qualifying perpetual preferred stock,
trust preferred securities and minority interests, less goodwill. Supplementary
capital includes the allowance for loan losses (subject to certain limitations),
other perpetual preferred stock, trust preferred securities, certain other
capital instruments and term subordinated debt. The Company's major capital
components are shareholders' equity and TPS in core capital, and the allowance
for loan losses and subordinated debt in supplementary capital.
<PAGE>
The following table shows the Company's actual capital amounts and ratios
at March 31, 1999 and December 31, 1998 as well as the minimum capital ratios
for capital adequacy under the regulatory framework:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
----------------- --------------------
<S> <C> <C> <C> <C>
As of March 31, 1999
Total Capital (to Risk Weighted Assets): 55,414,000 15.7% 28,321,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 51,118,000 14.4% 14,160,000 4.0%
Tier 1 Capital (to Average Assets): 51,118,000 9.7% 21,155,000 4.0%
As of December 31, 1998:
Total Capital (to Risk Weighted Assets): 53,588,000 14.8% 29,004,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 49,326,000 13.6% 14,502,000 4.0%
Tier 1 Capital (to Average Assets): 49,326,000 9.9% 19,935,000 4.0%
</TABLE>
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. Testing on the Company's mission critical
systems is substantially complete and monitoring of vendor and
customer relationships is ongoing.
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 $171,000.
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 to remedy 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 3. MARKET RISK MANAGEMENT
The reader is referred to Item 7A of the Company's 1998 Annual
Report on Form 10-K for information on market risk. There have
been no significant changes since December 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
None.
Item 2. Changes in securities.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
(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, incorporated by reference
from the Company's 1998 Annual Report on Form
10K filed with the Commission on March 29,1999.
(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.
(27.1) Financial Data Schedule
*Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K None
<PAGE>
SIGNATURES
- ---------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
April 29, 1999 CENTRAL COAST BANCORP
By: /S/ ROBERT M. STANBERRY
----------------------------
(Chief Financial Officer,
Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
27.1 Financial Data Schedule 21
<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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 36,938
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 165,961
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 325,410
<ALLOWANCE> 4,398
<TOTAL-ASSETS> 536,004
<DEPOSITS> 475,468
<SHORT-TERM> 3,740
<LIABILITIES-OTHER> 4,649
<LONG-TERM> 0
0
0
<COMMON> 41,106
<OTHER-SE> 11,041
<TOTAL-LIABILITIES-AND-EQUITY> 536,004
<INTEREST-LOAN> 7,140
<INTEREST-INVEST> 2,249
<INTEREST-OTHER> 73
<INTEREST-TOTAL> 9,462
<INTEREST-DEPOSIT> 3,086
<INTEREST-EXPENSE> 3,113
<INTEREST-INCOME-NET> 6,349
<LOAN-LOSSES> 127
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,823
<INCOME-PRETAX> 2,941
<INCOME-PRE-EXTRAORDINARY> 2,941
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,725
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 5.6
<LOANS-NON> 692
<LOANS-PAST> 1,175
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,352
<CHARGE-OFFS> 90
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 4,398
<ALLOWANCE-DOMESTIC> 4,398
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
