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, 2000 .
[ ] 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 - 6,972,430 shares outstanding
at May 9, 2000.
Page 1 of 21
The Index to the Exhibits is located at Page 19
1
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
March 31, December 31,
(In thousands) 2000 1999
---------- ----------
<S> <C> <C>
Assets
Cash and due from banks $ 37,532 $ 39,959
Federal funds sold 26,803 -
------------ -----------
Total cash and equivalents 64,335 39,959
Available-for-sale securities 139,738 145,435
Loans:
Commercial 155,229 159,385
Real estate-construction 30,310 35,330
Real estate-other 200,137 188,600
Consumer 10,950 13,003
Deferred loan fees, net (697) (721)
------------ -----------
Total loans 395,929 395,597
Allowance for loan losses (6,136) (5,596)
------------ -----------
Net Loans 389,793 390,001
------------ -----------
Premises and equipment, net 3,767 3,888
Accrued interest receivable and other assets 12,269 14,162
------------ -----------
Total assets $ 609,902 $593,445
============ ===========
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest bearing $ 132,105 $141,389
Demand, interest bearing 98,384 100,871
Savings 99,292 97,833
Time 216,761 178,096
------------ -----------
Total Deposits 546,542 518,189
Accrued interest payable and other liabilities 9,153 21,951
------------ -----------
Total liabilities 555,695 540,140
------------ -----------
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: 7,014,930 shares at March 31, 2000
and 6,440,257 shares at December 31, 1999 49,371 40,223
Shares held in deferred compensation trust (271,862 at March 31, 2000
and 247,148 at December 31, 1999), net of deferred obligation - -
Retained earnings 9,594 17,784
Accumulated other comprehensive loss - net of taxes
of $3,307,000 at March 31, 2000 and $3,267,000 at December 31, 1999 (4,758) (4,702)
------------ -----------
Shareholders' equity 54,207 53,305
------------ -----------
Total liabilities and shareholders' equity $ 609,902 $593,445
============ ===========
See notes to Consolidated Condensed Financial Statements
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
(In thousands)
Three Months Ended March 31, 2000 1999
---- ----
<S> <C> <C>
Interest Income
Loans (including fees) $ 9,213 $ 7,140
Investment securities 2,236 2,249
Other 116 73
--------------- --------------
Total interest income 11,565 9,462
--------------- --------------
Interest Expense
Interest on deposits 3,914 3,086
Other 148 27
--------------- --------------
Total interest expense 4,062 3,113
--------------- --------------
Net Interest Income 7,503 6,349
Provision for Loan Losses 526 127
--------------- --------------
Net Interest Income after
Provision for Loan Losses 6,977 6,222
--------------- --------------
Noninterest Income 546 542
--------------- --------------
Noninterest Expenses
Salaries and benefits 2,380 2,331
Occupancy 333 280
Furniture and equipment 388 291
Other 1,019 921
--------------- --------------
Total other expenses 4,120 3,823
--------------- --------------
Income Before Income Taxes 3,403 2,941
Provision for Income Taxes 1,327 1,216
--------------- --------------
Net Income $ 2,076 $ 1,725
=============== ==============
Basic Earnings per Share $ 0.29 $ 0.25
Diluted Earnings per Share $ 0.29 $ 0.24
See notes to Consolidated Condensed Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CENTRAL COAST BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended March 31, 2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operations:
Net income $ 2,076 $ 1,725
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 526 127
Depreciation 296 212
Amortization and accretion 61 77
(Increase) decrease in accrued interest receivable and other assets 1,869 (919)
Increase (decrease) in accrued interest payable and other liabilities (136) 1,107
Increase (decrease) in deferred loan fees (24) 54
--------------- --------------
Net cash provided by operations 4,668 2,383
--------------- --------------
Cash Flows from Investing Activities:
Purchases of investment securities (20) (87,498)
Proceeds from maturities
of investment securities 5,624 90,738
Net change in loans held for sale - 877
Net increase in loans (295) (8,084)
Capital expenditures (175) (382)
--------------- --------------
Net cash provided (used) in investing activities 5,134 (4,349)
--------------- --------------
Cash Flows from Financing Activities:
Net increase (decrease) in deposit accounts 28,353 (13,724)
Net increase (decrease) in short-term borrowings (12,662) 3,740
Proceeds from sale of stock - 810
Shares repurchased (1,117) (808)
--------------- --------------
Net cash provided (used) by financing activities 14,574 (9,982)
--------------- --------------
Net increase (decrease) in cash and equivalents 24,376 (11,948)
Cash and equivalents, beginning of period 39,959 48,886
--------------- --------------
Cash and equivalents, end of period $ 64,335 $ 36,938
=============== ==============
Other Cash Flow Information:
Interest paid $ 4,005 $ 3,092
Income taxes paid 2,640 224
See Notes to Consolidated Condensed Financial Statements
</TABLE>
4
<PAGE>
CENTRAL COAST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2000 (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, 2000 and
December 31, 1999, the results of operations for the three month
periods ended March 31, 2000 and 1999, and cash flows for the three
month periods ended March 31, 2000 and 1999.
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 1999 Annual Report to
Shareholders. The results of operations for the three-month
periods ended March 31, 2000 and 1999 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.
Management has determined that since all of the commercial banking
products and services offered by the Company are available in each
branch of the Bank, all branches are located within the same
economic environment and management does not allocate resources
based on the performance of different lending or transaction
activities, it is appropriate to aggregate the Bank branches and
report them as a single operating segment.
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
$123,780,000 and standby letters of credit of $2,433,000 at March
31, 2000. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2000.
Approximately $16,712,000 of loan commitments outstanding at March
31, 2000 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.
5
<PAGE>
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
(7,069,000 for the three month period ended March 31, 2000, and
6,996,000 for the three month period ended March 31, 1999).
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 (198,000 for the three month period ended March 31, 2000
and 362,000 for the three month period ended March 31, 1999).
4. COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In thousands) 2000 1999
---- ----
<S> <C> <C>
Net Earnings $ 2,076 $ 1,725
Other comprehensive loss - net unrealized
loss on available-for-sale securities (56) (779)
--------------- ---------------
Total comprehensive earnings $ 2,020 $ 946
=============== ===============
</TABLE>
5. STOCK DIVIDEND
On January 31, 2000, the Board of Directors declared a ten percent
stock dividend, which was distributed on February 28, 2000, to
shareholders of record as of February 14, 2000. All share and per
share data have been retroactively adjusted to reflect the stock
dividend.
6
<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. 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 Bank, changes in the regulatory
environment, changes in business conditions and inflation, changes
in securities markets, as well as other factors. This entire
report should be read to put such forward-looking statements in
context. To gain a more complete understanding of the
uncertainties and risks involved in the Company's business this
report should be read in conjunction with Central Coast Bancorp's
annual report on Form 10-K for the year ended December 31, 1999.
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 Community Bank of
Central California, a state-chartered bank, headquartered in
Salinas, California (the "Bank"). Other than its investment in the
Bank, the Company currently conducts no other significant business
activities, although it is authorized to engage in a variety of
activities which are deemed closely related to the business of
banking upon prior approval of the Board of Governors of the
Federal Reserve System (the "FRB"), the Company's principal
regulator.
The Bank offers a full range of commercial banking services,
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 reported a 21% increase in diluted earnings
per share of $0.29 for the three months ended March 31, 2000 versus
$0.24 in the first quarter last year. Net income for the first
quarters of 2000 and 1999 were $2,076,000 and $1,725,000,
respectively. The first quarter 2000 net income was a record for a
first quarter and was 20% higher than year ago net income. The
earnings per share for the 1999 first quarter have been adjusted
for the 10% stock dividend distributed in February 2000.
Total assets of the Company at March 31, 2000 were $609,902,000 up
$73,898,000 (13.8%) over the ending balance at March 31, 1999 and
up $16,457,000 (2.8%) from December 31, 1999 balances. At quarter
end, loans totaled $395,929,000, up $70,519,000 (21.7%) from the
ending balances on March 31, 1999 and up slightly from $395,597,000
at December 31, 1999. Deposit balances at quarter end totaled
$546,542,000 up $71,074,000 (14.9%) from the year earlier balances
and up $28,353,000 (5.5%) from year-end 1999. The deposit growth
included $20,000,000 of State of California certificates of deposit
placed in the Bank in February 2000.
7
<PAGE>
For the first quarter 2000, the Company realized a return on
average equity of 15.4% and a return on average assets of 1.40%, as
compared to 13.6% and 1.32% in the first quarter of 1999. Central
Coast Bancorp ended the first quarter of 2000 with a Tier 1 capital
ratio of 12.2% and a total risk-based capital ratio of 13.4% versus
14.4% and 15.7%, respectively at the end of the first quarter of
1999.
The following table provides a summary of the major elements of
income and expense on a tax equivalent basis for the periods
indicated.
<TABLE>
<CAPTION>
Condensed Comparative Income Statement Percentage
Change
Three months ended March 31, Increase
(In thousands, except percentages) 2000 1999 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Interest income (1) $ 11,760 $ 9,638 22%
Interest expense 4,062 3,113 30%
-------------- ------------ -------------
Net interest income 7,698 6,525 18%
Provision for loan losses 526 127 314%
-------------- ------------ -------------
Net interest income after
provision for loan losses 7,172 6,398 12%
Noninterest income 546 542 1%
Noninterest expense 4,120 3,823 8%
-------------- ------------ -------------
Income before income taxes 3,598 3,117 15%
Income taxes 1,327 1,216 9%
Tax equivalent adjustment 195 176 11%
-------------- ------------ -------------
Net income $ 2,076 $ 1,725 20%
============== ============ =============
1) Interest on tax-free securities is reported on tax equivalent basis.
</TABLE>
8
<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 Bank's 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) 2000 1999
Average Average Average Average
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning Assets
Loans (1) (2) $ 389,616 $ 9,213 9.48% $ 309,892 $ 7,140 9.34%
Taxable investments 107,673 1,844 6.87% 127,466 1,894 6.03%
Tax-exempt securities (tax equiv. basis) 35,825 587 6.57% 32,314 531 6.66%
Federal funds sold 8,335 116 5.58% 6,230 73 4.75%
--------- -------- --------- -------
Total Earning Assets 541,449 $ 11,760 8.71% 475,902 $ 9,638 8.21%
-------- -------
Cash & due from banks 37,206 42,400
Other assets 16,665 10,578
--------- ---------
$ 595,320 $ 528,880
========= =========
Liabilites & Shareholders'
Equity:
Interest bearing liabilities:
Demand deposits $ 96,688 $ 405 1.68% $ 93,030 $ 354 1.54%
Savings 102,204 875 3.43% 108,843 891 3.32%
Time deposits 197,194 2,634 5.36% 147,048 1,841 5.08%
Other borrowings 9,474 148 6.27% 2,252 27 4.86%
--------- -------- --------- -------
Total interest bearing
liabilities 405,560 4,062 4.02% 351,173 3,113 3.60%
-------- -------
Demand deposits 130,637 122,259
Other Liabilities 5,221 3,882
--------- ---------
Total Liabilities 541,418 477,314
Shareholders' Equity 53,902 51,566
--------- ---------
$ 595,320 $ 528,880
========= =========
Net interest income & margin (3) $ 7,698 5.70% $ 6,525 5.56%
======== =======
- ----------------------------------------------------------------------------------------------------------------
1 Loan interest income includes fee income of $236,000 and $241,000 for the three month periods ended March 31, 2000
and 1999, respectively.
2 Includes the average allowance for loan losses of $5,795,000 and $4,364,000 and average deferred loan fees of
$686,000 and $719,000 for the three months ended March 31, 2000 and 1999, respectively.
3 Net interest margin is computed by dividing net interest income by the total average earning assets.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Volume/Rate Analysis
(in thousands) Three Months Ended March 31, 2000 over 1999
Increase (decrease) due to change in:
Net
Volume Rate (4) Change
------ -------- ------
<S> <C> <C> <C>
Interest-earning assets:
Net Loans (1)(2) $ 1,856 $ 217 $2,073
Taxable investment securities (298) 248 (50)
Tax exempt investment securities (3) 58 (2) 56
Federal funds sold 25 18 43
------- ------- -------
Total 1,641 481 2,122
------- ------- -------
Interest-bearing liabilities:
Demand deposits 14 37 51
Savings deposits (55) 39 (16)
Time deposits 635 158 793
Other borrowings 88 3 121
------- ------ -------
Total 682 267 949
------- ------- -------
Interest differential $ 959 $ 214 $1,173
======= ======= =======
</TABLE>
(1.) Loan interest income includes fee income of $236,000 and $241,000
for the three month periods ended March 31, 2000 and 1999,
respectively.
(2.) The average balance of non-accruing loans is immaterial as a
percentage of total loans and, as such, has been included in net
loans.
(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 2000 and 1999.
(4.) The rate / volume variance has been included in the rate variance.
Net interest income (fully taxable equivalent, FTE) for the first
quarter of 2000 was $7,698,000, a $1,173,000 (18.0%) increase over
the first quarter of 1999. Interest income was up $2,122,000
(22.0%) over those same periods. The average balances of earning
assets were $65,547,000 (13.8%) higher in the first quarter of 2000
versus the prior year first quarter. Included in this increase,
the average balances of loans, tax-exempt investments and Federal
funds sold increased $79,724,000 (25.7%), $3,511,000 (10.9%) and
$2,105,000 (33.8%), respectively, for the first quarter of 2000
compared to that of 1999. Average balances of taxable investments
decreased $19,793,000 (15.5%) in the first three months of 2000
compared to that period in 1999, as these assets were deployed into
loans throughout the previous twelve months. These higher balances
accounted for $1,641,000 of the increase in interest income on a
quarter over quarter basis. Average yields on the earning assets
increased 50 basis points in the first three months of 2000
compared to that period in 1999 due to the higher rates initiated
by the Federal Reserve Board, adding $481,000 to interest income.
Interest expense was $949,000 (30.5%) higher in the first quarter
of 2000 versus the same quarter in 1999. Average balances of
interest-bearing liabilities were higher by $54,387,000 (15.5%) in
the first three moths of 2000 compared to that period in 1999,
adding $682,000 to interest expense. Average rates paid on
interest-bearing liabilities were up 42 basis points on a quarter
over quarter basis. The higher rates added $267,000 to interest
expense in the first quarter of 2000 compared to the first quarter
of 1999. The net interest margin for the first quarter of 2000 was
5.70% as compared to 5.56% in the year earlier period.
Provision for Loan Losses
The Bank provided $526,000 for loan losses in the first quarter of
2000 as compared to $127,000 in the first quarter of 1999 and
$529,000 in the fourth quarter of 1999. While there has been no
specific identification of deterioration in the Bank's loan
portfolio at this time, management is aware of some weakness
appearing in the local agricultural economy. For that reason the
loss provision was maintained at the level recorded in the fourth
quarter of 1999.
10
<PAGE>
Noninterest Income
Noninterest income consists primarily of service charges on deposit
accounts and fees for miscellaneous services. Noninterest income
totaled $546,000 in the first quarter of 2000, which was up only
$4,000 (0.7%) over the same period in 1999. Service charges on
deposits were up $40,000 (12.2%) due to higher volumes and some
selective fee increases implemented in the fourth quarter in 1999.
This increase was largely offset by a reduction of $39,000 (51.4%)
in fees from mortgage originations as higher interest rates for
home mortgages resulted in a significant reduction in demand for
those loans.
Noninterest Expense
Noninterest expenses increased $297,000 (7.8%) to a total of
$4,120,000 in the first quarter of 2000 versus first quarter 1999.
Salary and employee benefits increased $49,000 (2.1%) due to higher
benefit costs and normal salary increases, offset in part by lower
commissions paid on mortgage originations. Premises and fixed
asset expense increased $150,000 (26.3%) due in great part to
higher operating costs for the three branches and the operations
center that were moved or remodeled in 1999. Other expenses
increased $98,000 (10.6%) generally due to higher business volumes
and price increases. The overhead efficiency ratio (FTE) for the
two quarters was 51.2% and 55.5%, respectively.
Provision for Income Taxes
The Company recorded income tax expense of $1,327,000 in the first
quarter of 2000 versus $1,216,000 in the first quarter of 1999.
The effective tax rate for the three months ended March 31, 2000 is
39.0% as compared to 41.3% in the year earlier period. The
effective tax rate is lower as the result of the effect of
investments in tax exempt securities and loans.
Loans
Ending loan balances at March 31, 2000 were $395,929,000, which was
a slight increase of $332,000 from year-end 1999 balances. The
March 31, 2000 loan balances were $75,810,000 (23.7%) higher than
the year earlier totals. On a year over year basis commercial
loans were up 20%; construction loans were up 39%; and real
estate-other loans were up 27%. The balances at March 31, 2000 for
these loan categories were $155,229,000, $30,310,000 and
$200,137,000, respectively. Loan demand remains strong heading
into the second quarter of 2000.
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 the process of collection.
Real estate and other assets acquired in satisfaction of
indebtedness are recorded at the lower of estimated
11
<PAGE>
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, except percentages) March 31, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Past due 90 days or more and still accruing :
Real estate $ 306 $ 303
Commercial 170 51
Consumer and other - -
----------------- ------------------
476 354
----------------- ------------------
Nonaccrual:
Real estate - 1,565
Commercial 502 11
Consumer and other 44 -
----------------- ------------------
546 1,576
----------------- ------------------
Total nonperforming loans 1,022 1,930
----------------- ------------------
Other real estate owned 180 180
----------------- ------------------
Total nonperforming assets $ 1,202 $ 2,110
================= ==================
Allowance for loan losses as a percentage of nonperforming loans 600% 290%
Nonperforming loans to total loans 0.26% 0.49%
</TABLE>
Nonperforming loans decreased $908,000 during the first quarter of
2000. This decrease coupled with the quarterly provision in the
allowance for loan losses resulted in the improvement in the
coverage ratio of the allowance for loan losses to nonperforming
loans from 290% at year-end to 600%.
At March 31, 2000, the recorded investment in loans that are
considered impaired under SFAS No. 114 was $2,422,000 of which
$546,000 are included in nonaccrual loans above. Such impaired
loans had valuation allowances totalling $588,000 based on the
estimated fair value of the collateral.
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.
12
<PAGE>
Management believes that the allowance for loan losses at March 31,
2000 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.
The following table summarizes activity in the allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
(In thousands, except percentages) Three months ended March 31,
2000 1999
------------ -------------
<S> <C> <C>
Beginning balance $ 5,596 $ 4,352
Provision charged to expense 526 127
Loans charged off (16) (90)
Recoveries 30 9
------------ -------------
Ending balance $ 6,136 $ 4,398
============ =============
Ending loan portfolio $395,929 $320,119
============ =============
Allowance for loan losses as percentage of ending loan portfolio 1.55% 1.37%
</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 Bank assesses the likelihood of projected
funding requirements by reviewing historical funding patterns,
current and forecasted economic conditions and individual client
funding needs. Commitments to fund loans and outstanding standby
letters of credit at March 31, 2000 were approximately $123,780,000
and $2,433,000, 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 sellable government
guaranteed loans. On March 31, 2000 consolidated liquid assets
totaled $98.7 million or 16.2% of total assets as compared to $91.1
million or 15.4% of total consolidated assets on December 31,
1999. In addition to liquid assets, the Bank maintains lines of
credit with correspondent banks for up to $80,000,000 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 $54,207,000 at March
31, 2000 compared to $53,305,000 at December 31, 1999.
The Company and the Bank are subject to regulations issued by the
Board of Governors and the FDIC which require maintenance of a
certain level of capital. A banking 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 less goodwill in core capital, and the
allowance for loan losses in supplementary capital.
13
<PAGE>
The following table shows the Company's actual capital amounts and
ratios at March 31, 2000 and December 31, 1999 as well as the
minimum capital ratios for capital adequacy under the regulatory
framework:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purpose:
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of March 31, 2000
Total Capital (to Risk Weighted Assets): 63,864,000 13.4% 38,002,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 57,967,000 12.2% 19,001,000 4.0%
Tier 1 Capital (to Average Assets): 57,967,000 9.7% 23,813,000 4.0%
As of December 31, 1999:
Total Capital (to Risk Weighted Assets): 62,489,000 13.8% 36,125,000 8.0%
Tier 1 Capital (to Risk Weighted Assets): 56,938,000 12.6% 18,062,000 4.0%
Tier 1 Capital (to Average Assets): 56,938,000 9.7% 23,593,000 4.0%
</TABLE>
Year 2000
During 1998 and 1999, management of the Company focused the appropriate
resources to address the potential problems that could arise regarding
the Year 2000 (Y2K) century date change. The Company's mission critical
systems were evaluated, modified as required and contingency plans were
put into place should the systems have experienced any failures. The
Y2K readiness of vendors and customers was also evaluated and
monitored. The century date change passed without any operational
difficulties for the Company, its vendors or its customers. There are
certain dates within the year 2000 that have been identified as critical
processing dates. The first was January 31, the end of the first month
of the year. The second was February 29, leap year day. The third was
March 31, the end of the first quarter. The Company did not experience
any processing problems on those dates. Upcoming dates during the year
are October 10, the first date to require an 8-digit field (10/10/2000)
and December 31, the end of the year. Those dates were tested as part
of the Y2K project. The Company does not anticipate having any
processing problems on those dates, however failure by third parties to
adequately remediate Y2K issues could have an impact upon Central
Coast Bancorp, which is impossible to quantify. 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
Overview. The goal for managing the assets and liabilities of the
Bank is to maximize shareholder value and earnings while
maintaining a high quality balance sheet without exposing the Bank
to undue interest rate risk. The Board of Directors has overall
responsibility for the Company's interest rate risk management
policies. The Bank has an Asset and Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the
sensitivity of earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and
placing deposits, investing in securities and issuing debt.
Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest
rate changes arises when yields on assets change in a different
time period or in a different amount from that of interest costs on
liabilities. To mitigate interest rate risk, the structure of the
balance sheet is managed with the goal that movements of interest
rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The
asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of
equity under changing interest environments. The Bank uses
simulation models to forecast earnings, net interest margin and
market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer
modeling techniques, the Company is able to estimate the potential
impact of changing interest rates on earnings. A balance sheet
forecast is prepared using inputs of actual loan, securities and
interest bearing liabilities (i.e. deposits/borrowings) positions
as the beginning base. The forecast balance sheet is processed
against three interest rate scenarios. The scenarios include a 200
basis point rising rate forecast, a flat rate forecast and a 200
basis point falling rate forecast which take place within a one
year time frame. The net interest income is measured during the
first year of the rate changes and in the year following the rate
changes. Based on a forecast using year-end 1999 balances and
measuring against a flat rate environment, in a one-year horizon an
increase in interest rates of 200 basis points would result in an
increase of $1,841,000 in net interest income. Conversely, a 200
basis point decrease would result in a decrease of $2,337,000 in
net interest income.
The simulations of earnings do not incorporate any management
actions, which might moderate the negative consequences of interest
rate deviations. Therefore, they do not reflect likely actual
results, but serve as conservative estimates of interest rate
risk. The risk profile of the Bank has not changed materially from
that at year-end 1999.
14
<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
Exhibit 4.8 to Registration Statement on Form S-8,
No. 33-89948, filed with the Commission on March 3,
1995.
(4.1) Specimen form of Central Coast Bancorp stock
certificate, incorporated by reference from the
Company's 1994 Annual Report on Form 10-K, filed with
the Commission on March 31, 1995.
(10.1) Lease agreement dated December 12, 1994,
related to 301 Main Street, Salinas, California,
incorporated by reference from the 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.
15
<PAGE>
*(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)Form of Employment Agreement, incorporated by reference
from Exhibit 10.13 to the Company's 1996 Annual Report
on Form 10-K,filed with the Commission on
March 31, 1997.
*(10.14)Form of Executive Salary Continuation Agreement,
incorporated by reference from Exhibit 10.14 to the
Company's 1996 Annual Report on Form 10-K, filed with
the Commission on March 31, 1997.
*(10.15)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) Form of Indemnification Agreement, incorporated by
reference from Exhibit D to the Proxy Statement
filed with the Commission on September 3, 1996, in
connection with Central Coast Bancorp's 1996 Annual
Shareholders' Meeting held on September 23, 1996.
16
<PAGE>
(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 10-K, 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 10-K, 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 10-K, filed
with the Commission on March 27, 1998.
(21.1) The Registrant's only subsidiary is Community Bank of
Central California (the successor entity resulting
from the merger of Registrant's wholly-owned
subsidiaries, Bank of Salinas and Cypress Bank, as
referenced in Exhibit 2.1 above).
(27.1) Financial Data Schedule
*Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K - None
17
<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.
May 9, 2000 CENTRAL COAST BANCORP
By:
------------------------
Robert M. Stanberry
(Chief Financial Officer and
Principal Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
27.1 Financial Data Schedule 20
<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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 37,532
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26803
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,738
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 395,929
<ALLOWANCE> 6,136
<TOTAL-ASSETS> 609,902
<DEPOSITS> 546,542
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,934
<LONG-TERM> 4,219
0
0
<COMMON> 49,371
<OTHER-SE> 4,836
<TOTAL-LIABILITIES-AND-EQUITY> 609,902
<INTEREST-LOAN> 9,213
<INTEREST-INVEST> 2,236
<INTEREST-OTHER> 116
<INTEREST-TOTAL> 11,565
<INTEREST-DEPOSIT> 3,914
<INTEREST-EXPENSE> 4,062
<INTEREST-INCOME-NET> 7,503
<LOAN-LOSSES> 526
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,120
<INCOME-PRETAX> 3,403
<INCOME-PRE-EXTRAORDINARY> 3,403
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,076
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 5.7
<LOANS-NON> 546
<LOANS-PAST> 476
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,596
<CHARGE-OFFS> 16
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 6,136
<ALLOWANCE-DOMESTIC> 6,136
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
