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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-25418
CENTRAL COAST BANCORP
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0367061
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(State or other jurisdiction of (I.R.S. EmployerIdentification No.)
incorporation or organization)
301 Main Street, Salinas, California 93901
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (408) 422-6642
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock
(no par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 10, 2000 was $113,029,488.
As of March 10, 2000, the registrant had 7,064,343 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K:
Part III, Items 10 through 13 from registrant's definitive proxy statement
for the 1998 annual meeting of shareholders.
The Index to Exhibits is located at page 66 Page 1 of 69 Pages
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS.
Certain matters discussed or incorporated by reference in this
Annual Report on Form 10-K including, but not limited to, matters
described in Item 7- "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to
differ materially from those projected. Changes to such risks and
uncertainties, which could impact future financial performance, include,
among others, (1) competitive pressures in the banking industry; (2)
changes in the interest rate environment; (3) general economic conditions,
nationally, regionally and in the operating market areas of the Company
and the Bank; (4) changes in the regulatory environment; (5) changes in
business conditions and inflation; (6) changes in securities markets; and
(7) effects of Year 2000 problems discussed herein. Therefore, the
information set forth therein should be carefully considered when
evaluating the business prospects of the Company and the Bank.
Central Coast Bancorp (the "Company") is a California corporation,
located in Salinas, California and was organized in 1994 to act as a bank
holding company for Bank of Salinas. In 1996, the Company acquired
Cypress Bank, which was headquartered in Seaside, California. Both banks
were state-charted institutions. In July of 1999, the Company merged
Cypress Bank into the Bank of Salinas and then renamed Bank of Salinas as
Community Bank of Central California (the "Bank"). The Bank is
headquartered in Salinas and serves individuals, merchants, small and
medium-sized businesses, professionals, agribusiness enterprises and wage
earners located in the Salinas Valley and the Monterey Peninsula.
On February 21, 1997, the former Bank of Salinas purchased certain
assets and assumed certain liabilities of the Gonzales and Castroville
branch offices of Wells Fargo Bank. As a result of the transaction the
Bank assumed deposit liabilities, received cash, and acquired tangible
assets. This transaction resulted in intangible assets, representing the
excess of the liabilities assumed over the fair value of the tangible
assets acquired.
In January 1997, the former Cypress Bank opened a new branch office
in Monterey, California, so that it might better serve business and
individual customers on the Monterey Peninsula. In December 1998, the
former Bank of Salinas opened an additional new branch office in Salinas,
California, to better provide services to the growing Salinas community.
Other than holding the shares of the subsidiary Bank, the Company
conducts no significant activities. Although, it is authorized, with the
prior approval of the Board of
2
Governors of the Federal Reserve System (the "Board of Governors"), the
Company's principal regulator, to engage in a variety of activities which
are deemed closely related to the business of banking.
The Bank operates through its main office in Salinas and through
seven branch offices located in Castroville, Gonzales, King City, Marina,
Monterey Salinas, and Seaside, California. The Bank offers a full range
of commercial banking services, including the acceptance of demand,
savings and time deposits, and the making of commercial, real estate
(including residential mortgage), Small Business Administration, personal,
home improvement, automobile and other installment and term loans. The
Bank also currently offers personal and business Visa credit cards. It
also offers ATM and Visa debit cards, travelers' checks, safe deposit
boxes, notary public, customer courier and other customary bank services.
Most of the Bank's offices are open from 9:00 a.m. to 5:00 p.m., Monday
through Thursday and 9:00 a.m. to 6:00 p.m. on Friday. The Westridge and
Marina branches are also open from 9:00 a.m. to 1:00 p.m. on Saturdays.
Additionally, customers can bank by telephone on a 24-hour basis. The Bank
also operates a limited service facility in a retirement home located in
Salinas, California. The facility is open from 10:00 a.m. to 12:00 p.m.
on Wednesday of each week. The Bank has automated teller machines (ATMs)
located at the Castroville, Gonzales, King City, Marina, Monterey, Salinas
and Seaside offices, the Monterey County Fairgrounds, the Soledad
Correctional Training Facility Credit Union, Salinas Valley Memorial
Hospital and Fort Hunter Liggett which is located in Jolon, California.
The Bank is insured under the Federal Deposit Insurance Act and each
depositor's account is insured up to the legal limits thereon. The Bank
is chartered (licensed) by the California Commissioner of Financial
Institutions ("Commissioner") and has chosen not to become a member of the
Federal Reserve System. The Bank has no subsidiaries.
The Bank operates an on-site computer system, which provides
independent processing of its deposits, loans and financial accounting.
The three areas in which the Bank has directed virtually all of its
lending activities are: (i) commercial loans; (ii) consumer loans; and
(iii) real estate loans (including residential construction and home
equity loans). As of December 31, 1999, these three categories accounted
for approximately 40 percent, 3 percent and 57 percent, respectively, of
the Bank's loan portfolio.
The Bank's deposits are attracted primarily from individuals,
merchants, small and medium-sized businesses, professionals and
agribusiness enterprises. The Bank's deposits are not received from a
single depositor or group of affiliated depositors the loss of any one of
which would have a materially adverse effect on the business of the Bank.
A material portion of the Bank's deposits is not concentrated within a
single industry or group of related industries.
As of December 31, 1999, the Bank served a total of 24 municipality
and governmental agency depositors totaling $53,373,000 in deposits. Of
this amount
3
$20,000,000 is attributable to a certificate of deposit for the State of
California. In connection with the deposits of municipalities or other
governmental agencies or entities, the Bank is generally required to
pledge securities to secure such deposits, except for the first $100,000
of such deposits which are insured by the Federal Deposit Insurance
Corporation ("FDIC").
As of December 31, 1999, the Bank had total deposits of
$518,189,000. Of this total, $141,389,000 represented noninterest-bearing
demand deposits, $100,871,000 represented interest-bearing demand
deposits, and $275,929,000 represented interest-bearing savings and time
deposits.
The principal sources of the Bank's revenues are: (i) interest and
fees on loans; (ii) interest on investments (principally government
securities); and (iii) interest on Federal Funds sold (funds loaned on a
short-term basis to other banks). For the fiscal year ended December 31,
1999, these sources comprised 77.6 percent, 22.0 percent, and 0.4 percent,
respectively, of the Bank's total interest income.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended.
The Bank's common stock, however, is exempt from such requirements. The
Company is also subject to the periodic reporting requirements of Section 13
of the Securities Exchange Act of 1934, as amended, which include, but are
not limited to, annual, quarterly and other current reports with the
Securities and Exchange Commission.
The Bank is licensed by the State of California Department of Financial
Institution Commissioner, its deposits are insured by the FDIC, and it has
chosen not to become a member of the Federal Reserve System. The Bank does
not have a subsidiary. Consequently, the Bank is subject to the supervision
of, and is regularly examined by, the Commissioner and the FDIC. Such
supervision and regulation include comprehensive reviews of all major aspects
of the Bank's business and condition, including its capital ratios, allowance
for possible loan losses and other factors. However, no inference should be
drawn that such authorities have approved any such factors. The Company and
the Bank are required to file reports with the Commissioner, the FDIC and the
Board of Governors and provide such additional information as the
Commissioner, FDIC and the Board of Governors may require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
is registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition of shares, the
4
Company would own or control more than 5% of the voting shares of such
bank. The Bank Holding Company Act prohibits the Company from
acquiring any voting shares of, or interest in, all or substantially
all of the assets of, a bank located outside the State of California
unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate
acquisition is also subject to the provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994.
The Company, and any subsidiaries, which it may acquire or
organize, are deemed to be "affiliates" of the Bank within the meaning
of that term as defined in the Federal Reserve Act. This means, for
example, that there are limitations (a) on loans by the Bank to
affiliates, and (b) on investments by the Bank in affiliates' stock as
collateral for loans to any borrower. The Company and its subsidiaries
are also subject to certain restrictions with respect to engaging in
the underwriting, public sale and distribution of securities.
In addition, regulations of the Board of Governors promulgated
under the Federal Reserve Act require that reserves be maintained by
the Bank in conjunction with any liability of the Company under any
obligation (demand deposits, promissory note, acknowledgement of
advance, banker's acceptance or similar obligation) with a weighted
average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying
funds to the Bank for use in its banking business, or to maintain the
availability of such funds.
The Board of Governors and the FDIC have adopted risk-based
capital guidelines for evaluating the capital adequacy of bank holding
companies and banks. The guidelines are designed to make capital
requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to
aid in making the definition of bank capital uniform internationally.
Under the guidelines, the Company and the Bank are required to maintain
capital equal to at least 8.0% of its assets and commitments to extend
credit, weighted by risk, of which at least 4.0% must consist primarily
of common equity (including retained earnings) and the remainder may
consist of subordinated debt, cumulative preferred stock, or a limited
amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items
are categorized according to risk and certain assets considered to
present less risk than others permit maintenance of capital at less
than the 8% ratio. For example, most home mortgage loans are placed in
a 50% risk category and therefore require maintenance of capital equal
to 4% of such loans, while commercial loans are placed in a 100% risk
category and therefore require maintenance of capital equal to 8% of
such loans.
The Company and the Bank are subject to regulations issued by the
Board of Governors and the FDIC which require maintenance of a certain
level of capital. These regulations impose two capital standards: a
risk-based capital standard and a leverage capital standard.
5
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance sheet
items are assigned to risk categories, each of which has an assigned risk
weight. Capital ratios are calculated by dividing the institution's
qualifying capital by its period-end risk-weighted assets. The guidelines
establish two categories of qualifying capital: Tier 1 capital (defined to
include common shareholders' equity and noncumulative perpetual preferred
stock) and Tier 2 capital which includes, among other items, limited life
(and in case of banks, cumulative) preferred stock, mandatory convertible
securities, subordinated debt and a limited amount of reserve for credit
losses. Tier 2 capital may also include up to 45% of the pretax net
unrealized gains on certain available-for-sale equity securities having
readily determinable fair values (i.e. the excess, if any, of fair market
value over the book value or historical cost of the investment security). The
federal regulatory agencies reserve the right to exclude all or a portion of
the unrealized gains upon a determination that the equity securities are not
prudently valued. Unrealized gains and losses on other types of assets, such
as bank premises and available-for-sale debt securities, are not included in
Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion
against risk. Each institution is required to maintain a risk-based capital
ratio (including Tier 1 and Tier 2 capital) of 8%, of which at least half
must be Tier 1 capital.
Under the Board of Governors' leverage capital standard an institution
is required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be
used in place of quarterly average total assets on a case-by-case basis. The
Board of Governors and the FDIC have adopted a minimum leverage ratio for
bank holding companies as a supplement to the risk-weighted capital
guidelines. The leverage ratio establishes a minimum Tier 1 ratio of 3%
(Tier 1 capital to total assets) for the highest rated bank holding companies
or those that have implemented the risk-based capital market risk measure.
All other bank holding companies must maintain a minimum Tier 1 leverage
ratio of 4% with higher leverage capital ratios required for bank holding
companies that have significant financial and/or operational weakness, a high
risk profile, or are undergoing or anticipating rapid growth.
At December 31, 1999, the Bank and the Company are in compliance with
the risk-based capital and leverage ratios described above. See Item 8 below
for a listing of the Company's risk-based capital ratios at December 31, 1999
and 1998.
The Board of Governors and FDIC adopted regulations implementing a
system of prompt corrective action pursuant to Section 38 of the Federal
Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish
five capital categories with the following characteristics: (1) "Well
capitalized" -consisting of institutions with a total risk-based capital
ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater
and a leverage ratio of 5% or greater, and the institution is not subject to
an order, written
6
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized"-consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not
meet the definition of a "well capitalized" institution; (3)
"Undercapitalized" - consisting of institutions with a total risk-based
capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than
4%, or a leverage ratio of less than 4%; (4) "Significantly undercapitalized"
- - consisting of institutions with a total risk-based capital ratio of less
than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%; (5) "Critically undercapitalized" -consisting of an
institution with a ratio of tangible equity to total assets that is equal to
or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance
of directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of
the three "undercapitalized" categories, such as declaration of dividends or
other capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are
classified in one of the three "undercapitalized" categories are subject to
certain mandatory and discretionary supervisory actions. Mandatory
supervisory actions include (1) increased monitoring and review by the
appropriate federal banking agency; (2) implementation of a capital
restoration plan; (3) total asset growth restrictions; and (4) limitation
upon acquisitions, branch expansion, and new business activities without
prior approval of the appropriate federal banking agency. Discretionary
supervisory actions may include (1) requirements to augment capital; (2)
restrictions upon affiliate transactions; (3) restrictions upon deposit
gathering activities and interest rates paid; (4) replacement of senior
executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate
federal banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration
plan to be acceptable, the depository institution's parent holding company
must guarantee that the institution will comply with such capital restoration
plan. The aggregate liability of the parent holding company under the
guaranty is limited to the lesser of (i) an amount equal to 5 percent of the
depository institution's total assets at the time it became undercapitalized,
and (ii) the amount that is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan.
If a depository institution fails to submit an acceptable plan, it is treated
as if it were "significantly undercapitalized." FDICIA also restricts the
solicitation and acceptance of and interest rates payable on brokered
deposits by insured depository institutions that are not "well capitalized."
An "undercapitalized" institution is not
7
allowed to solicit deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other
course of action would better serve the purposes of the regulations.
Critically undercapitalized institutions are also prohibited from making (but
not accruing) any payment of principal or interest on subordinated debt
without the prior approval of the FDIC and the FDIC must prohibit a
critically undercapitalized institution from taking certain other actions
without its prior approval, including (1) entering into any material
transaction other than in the usual course of business, including investment
expansion, acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3) amending articles
or bylaws unless required to do so to comply with any law, regulation or
order; (4) making any material change in accounting methods; (5) engaging in
certain affiliate transactions; (6) paying excessive compensation or bonuses;
and (7) paying interest on new or renewed liabilities at rates which would
increase the weighted average costs of funds beyond prevailing rates in the
institution's normal market areas.
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and
reporting requirements. The FDICIA further generally prohibits an insured
state bank from engaging as a principal in any activity that is impermissible
for a national bank, absent FDIC determination that the activity would not
pose a significant risk to the Bank Insurance Fund, and that the bank is, and
will continue to be, within applicable capital standards. Similar
restrictions apply to subsidiaries of insured state banks. The Company does
not currently intend to engage in any activities which would be restricted or
prohibited under the FDICIA.
The Federal Financial Institution Examination Counsel ("FFIEC") on
December13, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included
in the so-called "CAMEL" rating system which has been used by bank examiners
for a number of years to classify and evaluate the soundness of financial
institutions (including capital adequacy, asset quality, management, earnings
and liquidity), UFIRS includes for all bank regulatory examinations conducted
on or after January1, 1997, a new rating for a sixth category identified as
sensitivity to market risk. Ratings in this category are intended to reflect
the degree to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices may adversely affect an institution's
earnings and capital. The revised rating system is identified as the
"CAMELS" system.
8
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital
adequacy in conjunction with the risk-based capital guidelines including
analysis of interest rate risk, concentrations of credit risk, risk posed by
non-traditional activities, and factors affecting overall safety and
soundness. The safety and soundness standards for insured financial
institutions include analysis of (1) internal controls, information systems
and internal audit systems; (2) loan documentation; (3) credit underwriting;
(4) interest rate exposure; (5) asset growth; (6) compensation, fees and
benefits; and (7) excessive compensation for executive officers, directors or
principal shareholders which could lead to material financial loss. If an
agency determines that an institution fails to meet any standard, the agency
may require the financial institution to submit to the agency an acceptable
plan to achieve compliance with the standard. If the agency requires
submission of a compliance plan and the institution fails to timely submit an
acceptable plan or to implement an accepted plan, the agency must require the
institution to correct the deficiency. The agencies may elect to initiate
enforcement action in certain cases rather than rely on an existing plan
particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point
scale from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form
bank holding companies. In addition, any bank rated in "substantial
noncompliance" with the CRA regulations may be subject to enforcement
proceedings.
The Bank has a current rating of "satisfactory" or better for CRA
compliance.
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of
any cash dividends by the Company would be obtained from its investments as
well as dividends and/or management fees from the Bank. The payment of cash
dividends and/or management fees by the Bank is subject to restrictions set
forth in the California Financial Code, as well as restrictions established
by the FDIC. See Item 5 below for further information regarding the payment
of cash dividends by the Company and the Bank.
COMPETITION
At June 30, 1999, the competing commercial and savings banks had 42
branches in the cities of Castroville, Gonzales, King City, Marina, Salinas,
Seaside and Monterey where the Bank has its eight branches. Additionally,
the Bank competes with thrifts and, to a lesser extent, credit unions,
finance companies and other financial service providers for deposit and loan
customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as
9
trust services, international banking, discount brokerage and insurance
services, which the Bank is not authorized nor prepared to offer currently.
The Bank has made arrangements with its correspondent banks and with others
to provide some of these services for its customers. For borrowers requiring
loans in excess of the Bank's legal lending limits, the Bank has offered, and
intends to offer in the future, such loans on a participating basis with its
correspondent banks and with other independent banks, retaining the portion
of such loans which is within its lending limits. As of December 31, 1999,
the Bank's aggregate legal lending limits to a single borrower and such
borrower's related parties were $9,023,000 on an unsecured basis and
$15,038,000 on a fully secured basis based on regulatory capital of
$60,151,000.
The Bank's business is concentrated in its service area, which
primarily encompasses Monterey County, including the Salinas Valley area and
to a lesser extent, the contiguous areas of San Benito County, Southern Santa
Cruz County, and Santa Clara County. The economy of the Bank's service area
is dependent upon agriculture, tourism, retail sales, population growth and
smaller service oriented businesses.
Based upon data as of the most recent practicable date (June 30,
19991), there were 71 operating commercial and savings bank branches in
Monterey County with total deposits of $3,849,686,000. This was an increase
of $193,410,000 over the June 30, 1998 balances. The Bank held a total of
$504,171,000 in deposits, representing approximately 13.1% of total
commercial and savings banks deposits in Monterey County as of June 30,
1999.
In order to compete with the major financial institutions in their
primary service areas, the Bank uses to the fullest extent possible, the
flexibility which is accorded by its independent status. This includes an
emphasis on specialized services, local promotional activity, and personal
contacts by the Bank's officers, directors and employees. The Bank also
seeks to provide special services and programs for individuals in its primary
service area who are employed in the agricultural, professional and business
fields, such as loans for equipment, furniture, tools of the trade or
expansion of practices or businesses. In the event there are customers whose
loan demands exceed the Bank's lending limits, the Bank seeks to arrange for
such loans on a participation basis with other financial institutions. The
Bank also assists those customers requiring services not offered by the Bank
to obtain such services from correspondent banks.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by the Bank to obtain
their deposits and other borrowings and the interest rate received by the
Bank on loans extended to customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For
instance, yields on corporate
- --------
1 "FDIC Institution Office Deposits", June 30, 1999
10
and government debt securities and other commercial paper affect the ability
of commercial banks to attract and hold deposits. Commercial banks also
compete for loans with savings and loan associations, credit unions, consumer
finance companies, mortgage companies and other lending institutions.
The interest rate differentials of the Bank, and therefore its
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United
States as set by statutes and as implemented by federal agencies,
particularly the Federal Reserve Board. This Agency can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States government
securities, adjustments in the amount of interest free reserves that banks
and other financial institutions are required to maintain, and adjustments to
the discount rates applicable to borrowing by banks from the Federal Reserve
Board. These activities influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on
deposits. The nature and timing of any future changes in monetary policies
and their impact on the Bank are not predictable.
In 1996, pursuant to Congressional mandate, the FDIC reduced bank
deposit insurance assessment rates to a range from $0 to $0.27 per $100 of
deposits, dependent upon a bank's risk. Based upon the above risk-based
assessment rate schedule, the Bank's current capital ratios and the Bank's
current levels of deposits, the Bank anticipates no change in the assessment
rate applicable to the Bank during 2000 from that in 1999.
Since 1996, California law implementing certain provisions of prior
federal law has (1)permitted interstate merger transactions; (2)prohibited
interstate branching through the acquisition of a branch business unit
located in California without acquisition of the whole business unit of the
California bank; and (3)prohibited interstate branching through de novo
establishment of California branch offices. Initial entry into California by
an out-of-state institution must be accomplished by acquisition of or merger
with an existing whole bank which has been in existence for at least five
years.
The federal financial institution agencies, especially the OCC and the
Board of Governors, have taken steps to increase the types of activities in
which national banks and bank holding companies can engage, and to make it
easier to engage in such activities. The OCC has issued regulations
permitting national banks to engage in a wider range of activities through
subsidiaries. "Eligible institutions" (those national banks that are well
capitalized, have a high overall rating and a satisfactory CRA rating, and
are not subject to an enforcement order) may engage in activities related to
banking through operating subsidiaries subject to an expedited application
process. In addition, a national bank may apply to the OCC to engage in an
activity through a subsidiary in which the bank itself may not engage.
On November 12, 1999, President Clinton signed into law The Financial
Services Modernization Act of 1999 (the "FSMA"), which is potentially the
most significant
11
banking legislation in many years. The FSMA eliminates most of the remaining
depression-era "firewalls" between banks, securities firms and insurance
companies which was established by The Banking Act of 1933, also known as the
Glass-Steagall Act ("Glass-Steagall). Glass-Steagall sought to insulate
banks as depository institutions from the perceived risks of securities
dealing and underwriting, and related activities. The FSMA repeals Section
20 of Glass-Steagall which prohibited banks from affiliating with securities
firms. Bank holding companies that can qualify as "financial holding
companies" can now acquire securities firms or create them as subsidiaries,
and securities firms can now acquire banks or start banking activities
through a financial holding company. The FSMA includes provisions which
permit national banks to conduct financial activities through a subsidiary
that are permissible for a national bank to engage in directly, as well as
certain activities authorized by statute, or that are financial in nature or
incental to financial activities to the same extent as permitted to a
"financial holding company" or its affiliates. This liberalization of United
States banking and financial services regulation applies both to domestic
institutions and foreign institutions conducting business in the United
States. Consequently, the common ownership of banks, securities firms and
insurance firms is now possible, as is the conduct of commercial banking,
merchant banking, investment management, securities underwriting and
insurance within a single financial institution using a "financial holding
company" structure authorized by the FSMA.
Prior to the FSMA, significant restrictions existed on the affiliation
of banks with securities firms and on the direct conduct by banks of
securities dealing and underwriting and related securities activities. Banks
were also (with minor exceptions) prohibited from engaging in insurance
activities or affiliating with insurers. The FSMA removes these restrictions
and substantially eliminates the prohibitions under the Bank Holding Company
Act on affiliations between banks and insurance companies. Bank holding
companies which qualify as financial holding companies can now insure,
guarantee, or indemnify against loss, harm, damage, illness, disability, or
death; issue annuities; and act as a principal, agent, or broker regarding
such insurance services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the FSMA, its bank holding company must
qualify as a financial holding company. A bank holding company will qualify
if (i) its banking subsidiaries are "well capitalized" and "well managed" and
(ii) it files with the Board of Governors a certification to such effect and
a declaration that it elects to become a financial holding company. The
amendment of the Bank Holding Company Act now permits financial holding
companies to engage in activities, and acquire companies engaged in
activities, that are financial in nature or incidental to such financial
activities. Financial holding companies are also permitted to engage in
activities that are complementary to financial activities if the Board of
Governors determines that the activity does not pose a substantial risk to
the safety or soundness of depository institutions or the financial system in
general. These standards expand upon the list of activities "closely related
to banking" which have to date defined the permissible activities of bank
holding companies under the Bank Holding Company Act.
12
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. Implementing regulations have recently been
issued for comment by all of the federal financial institution regulatory
agencies and the Securities and Exchange Commission. These regulations will
require, in general, that financial institutions (1) may not disclose
non-public personal information of customers to non-affiliated third parties
without notice to their customers, who must have opportunity to direct that
such information not be disclosed; (2) may not disclose customer account
numbers except to consumer reporting agencies; and (3) must give prior
disclosure of their privacy policies before establishing new customer
relationships.
The Company and the Bank have not determined whether or when either of
them may seek to acquire and exercise new powers or activities under the
FSMA, and the extent to which competition will change among financial
institutions affected by the FSMA has not yet become clear.
Certain legislative and regulatory proposals that could affect the Bank
and the banking business in general are periodically introduced before the
United States Congress, the California State Legislature and Federal and
state government agencies. It is not known to what extent, if any,
legislative proposals will be enacted and what effect such legislation would
have on the structure, regulation and competitive relationships of financial
institutions. It is likely, however, that such legislation could subject the
Company and the Bank to increased regulation, disclosure and reporting
requirements and increase competition and the Bank's cost of doing business.
In addition to legislative changes, the various federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot
be predicted whether or in what form any such rules or regulations will be
enacted or the effect that such and regulations may have on the Company and
the Bank.
ITEM 2. PROPERTIES
The headquarters office and centralized operations of the Company are
located at 301 Main Street, Salinas, California. The Company owns and leases
properties that house administrative and data processing functions and eight
banking offices. Owned and leased facilities are listed below.
301 Main Street 1658 Fremont Boulevard
Salinas, California Seaside, California
Leased-term expired 12/99 Leased-term expires 2009
Extension under option pending
13
10601 Merritt Street 228-C Reservation Road
Castroville, California Marina, California
Owned Leased-term expires 2004
400 Alta Street 599 Lighthouse Avenue
Gonzales, California Monterey, California.
Leased-term expires 2003 Leased-term expires 2004
532 Broadway 1285 North Davis Road
King City, California Salinas, California.
Leased-term expires 2009 Leased-term expires 2008
The above leases contain options to extend for three to fifteen years.
Included in the above are two facilities leased from shareholders at terms
and conditions which management believes are consistent with the commercial
lease market. Rental rates are adjusted annually for changes in certain
economic indices. The annual minimum lease commitments are set forth in
Footnote 5 of Item 8 Financial Statements and Supplementary Data included in
this report and incorporated herein by reference. The foregoing summary
descriptions of leased premises are qualified in their entirety by reference
to the lease agreements listed as exhibits hereto at page 64.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the Bank to
which any director, officer, affiliate of the Company or 5% shareholder of
the Company or the Bank, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company or Bank are a party, and none of
the above persons has a material interest adverse to the Company or the Bank.
Neither the Company nor the Bank are a party to any pending legal or
administrative proceedings (other than ordinary routine litigation incidental
to the Company's or the Bank's business) and no such proceedings are known to
be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
------------------
Prior to the second quarter of 1998, there was limited trading in and
no established public trading market for the Company's common stock. As of
the second quarter of 1998, the Company's common stock was listed on the
Nasdaq National Market exchange (trading symbol: CCBN). Sandler O'Neill &
Partners, L.P. and Hoefer & Arnett, Incorporated are registered as market
makers in the Company's stock. The table below presents the range of high
and low prices for the common stock for the two most recent fiscal years
based on information provided to the Company from Nasdaq and Hoefer & Arnett
(for those quarters prior to the Company's Nasdaq listing). The prices have
been restated to reflect the 5-for-4 stock split effected in February 1999
and the 10% stock dividend paid in February 2000.
Calendar Year Low High
- ------------- --- ----
1999
First Quarter $12.84 $16.73
Second Quarter 13.81 14.94
Third Quarter 14.20 20.00
Fourth Quarter 14.32 19.09
1998
First Quarter $13.23 $17.45
Second Quarter 15.00 18.55
Third Quarter 12.00 16.82
Fourth Quarter 13.09 14.64
The closing price for the Company's common stock was $16.00 as of March 9,
2000
(b) Holders
-------
As of March 9, 2000, there wereapproximately 3,100 holders of the
common stock of the Company. There are no other classes of common equity
outstanding.
(c) Dividends
---------
The Company's shareholders are entitled to receive dividends when and
as declared by its Board of Directors, out of funds legally available
therefor, subject to the restrictions set forth in the California General
Corporation Law (the "Corporation Law"). The Corporation Law provides that a
corporation may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed distribution.
The Corporation Law further provides that, in the event that sufficient
retained earnings are not available for the proposed distribution, a
corporation
15
may nevertheless make a distribution to its shareholders if it meets two
conditions, which generally stated are as follows: (1) the corporation's
assets equal at least 1-1/4 times its liabilities; and (2) the
corporation's current assets equal at least its current liabilities or, if
the average of the corporation's earnings before taxes on income and before
interest expenses for the two preceding fiscal years was less than the
average of the corporation's interest expenses for such fiscal years, then
the corporation's current assets must equal at least 1-1/4 times its current
liabilities. Funds for payment of any cash dividends by the Company would be
obtained from its investments as well as dividends and/or management fees
from the Bank.
The payment of cash dividends by the subsidiary Bank is subject to
restrictions set forth in the California Financial Code (the "Financial
Code"). The Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lesser of (a) the bank's
retained earnings; or (b) the bank's net income for its last three fiscal
years, less the amount of any distributions made by the bank or by any
majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the Commissioner,
make a distribution to its shareholders in an amount not exceeding the
greater of (a) its retained earnings; (b) its net income for its last fiscal
year; or (c) its net income for its current fiscal year. In the event that
the Commissioner determines that the shareholders' equity of a bank is
inadequate or that the making of a distribution by the bank would be unsafe
or unsound, the Commissioner may order the bank to refrain from making a
proposed distribution.
The FDIC may also restrict the payment of dividends if such payment
would be deemed unsafe or unsound or if after the payment of such dividends,
the bank would be included in one of the "undercapitalized" categories for
capital adequacy purposes pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991. Additionally, while the Board of
Governors has no general restriction with respect to the payment of cash
dividends by an adequately capitalized bank to its parent holding company,
the Board of Governors might, under certain circumstances, place restrictions
on the ability of a particular bank to pay dividends based upon peer group
averages and the performance and maturity of the particular bank, or object
to management fees on the basis that such fees cannot be supported by the
value of the services rendered or are not the result of an arm's length
transaction.
Under these provisions and considering minimum regulatory capital
requirements, the amount available for distribution from the Bank to the
Company was approximately $20,494,000 as of December 31, 1999.
To date, the Company has not paid a cash dividend and presently does
not intend to pay cash dividends in the foreseeable future. The Company
distributed a ten percent stock dividend in February 2000, a five-for-four
stock split in February 1999 and a ten percent stock dividend in 1998. The
Board of Directors will determine payment of dividends in the future after
consideration of various factors including the profitability and capital
adequacy of the Company and the Bank.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain consolidated financial information
concerning the business of the Company and its subsidiary Bank. This
information should be read in conjunction with the Consolidated Financial
Statements, the notes thereto, and Management's Discussion and Analysis
included in this report.
As of and for the Year Ended December 31
------------------------------------------------------------------------
(Dollars amounts in thousands, 1999 1998 1997 1996 1995
except per share data)
Operating Results
Total Interest Income $ 41,517 $ 37,354 $ 33,916 $ 29,301 $ 26,964
Total Interest Expense 13,648 13,319 12,041 9,859 10,008
------------------------------------------------------------------------
Net Interest Income 27,869 24,035 21,875 19,442 16,956
Provision for Loan Losses 1,484 159 64 352 695
------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 26,385 23,876 21,811 19,090 16,261
Other Income 2,231 2,084 1,765 1,456 1,302
Other Expenses 16,043 13,859 12,573 11,115 10,263
------------------------------------------------------------------------
Income before Income Taxes 12,573 12,101 11,003 9,431 7,300
Income Taxes 4,522 4,948 4,500 3,571 2,975
------------------------------------------------------------------------
Net Income $ 8,051 $ 7,153 $ 6,503 $ 5,860 $ 4,325
- -------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.14 $ 1.08 $ 0.99 $ 0.92 $ 0.68
Diluted Earnings Per Share 1.10 0.99 0.92 0.86 0.64
- -------------------------------------------------------------------------------------------------------------
Financial Condition and
Capital-Year-End Balances
Net Loans $ 390,001 $ 307,818 $ 251,271 $ 235,992 $ 191,000
Total Assets 593,445 543,933 497,674 376,832 357,236
Deposits 518,189 489,192 450,301 338,663 326,089
Shareholders' Equity 53,305 51,199 43,724 36,332 29,916
- -------------------------------------------------------------------------------------------------------------
Financial Condition and
Capital-Average Balances
Net Loans $ 348,086 $ 271,590 $ 238,793 $ 203,117 $ 173,065
Total Assets 562,073 499,354 441,013 355,386 329,502
Deposits 494,266 447,598 396,457 319,110 300,291
Shareholders' Equity 52,069 47,587 39,969 33,228 27,684
- -------------------------------------------------------------------------------------------------------------
Selected Financial Ratios
Rate of Return on:
Average Total Assets 1.43% 1.43% 1.47% 1.65% 1.31%
Average Shareholders' Equity 15.46% 15.03% 16.27% 17.64% 15.62%
Rate of Average Shareholders' Equity
to Total Average Assets 9.26% 9.53% 9.06% 9.35% 8.40%
- -------------------------------------------------------------------------------------------------------------
17
(a)
(1) Distribution of Assets, Liabilities and Equity; Interest Rates
and Interest Differential
Table One in Management's Discussion and Analysis included
in this report sets forth the Company's average balance sheets
(based on daily averages) and an analysis of interest rates and
the interest rate differential for each of the three years in the
period ended December 31, 1999 and is hereby incorporated by
reference.
(2) Volume/Rate Analysis
Information as to the impact of changes in average rates
and average balances on interest earning assets and interest
bearing liabilities is set forth in Table Two in Management's
Discussion and Analysis.
(b) Investment Portfolio
(1) The book value of investment securities at December 31, 1999 and
1998 is set forth in Note 3 of Item 8-"Financial Statements and
Supplementary Data" included in this report and incorporated
herein by reference.
(2) The book value, maturities and weighted average yields of
investment securities as of December 31, 1999 are set forth in
Table Thirteen of Management's Discussion and Analysis included in
this report and incorporated herein by reference.
(3) There were no issuers of securities for which the book value was
greater than 10% of shareholders' equity other than U.S.
Government and U.S. Government Agencies and Corporations.
(c) Loan Portfolio
(1) The composition of the loan portfolio is summarized in Table
Three of Management's Discussion and Analysis included in this
report and is incorporated herein by reference.
(2) The maturity distribution of the loan portfolio at December 31,
1999 is summarized in Table Twelve of Management's Discussion and
Analysis included in this report and is incorporated herein by
reference.
(3) Nonperforming Loans
The Company's current policy is to cease accruing interest when a
loan becomes 90 days past due as to principal or interest, when
the full timely collection of interest or principal becomes
uncertain or when a portion of the principal balance has been
charged off, unless the loan is well secured and in the process
of collection. When a loan is placed on nonaccrual status, the
accrued and uncollected interest receivable is reversed and the
loan is accounted for on the cash or cost recovery method
thereafter, until
18
qualifying for return to accrual status. Generally, a loan may
be returned to accrual status when all delinquent interest and
principal become current in accordance with the terms of the loan
agreement or when the loan is both well secured and in process of
collection.
For further discussion of nonperforming loans, refer to Risk
Elements section of Management Discussion Analysis in this report.
(d) Summary of Loan Loss Experience
(1) An analysis of the allowance for loan losses showing charged off and
recovery activity as of December 31, 1999 is summarized in Table
Five of Management's Discussion and Analysis included in this
report and is incorporated herein by reference. Factors used in
determination of the allowance for loan losses are discussed in
greater detail in the "Risk Elements" section of Management's
Discussion and Analysis included in this report and are
incorporated herein by reference.
(2) In evaluating the adequacy of the allowance for loan losses, the
Company attempts to allocate the allowance for loan losses to
specific categories of loans. Management believes that any
breakdown or allocation of the allowance for possible loan losses
into loan categories lends an appearance of exactness, which does
not exist in that the allowance is utilized as a single
unallocated allowance available for all loans. Further,
management believes that the breakdown of historical losses in
the preceding table is a reasonable representation of
management's expectation of potential losses in the next full
year of operation. However, the allowance for loan losses should
not be interpreted as an indication of when charge-offs will
occur or as an indication of future charge-off trends.
(e) Deposits
(1)Table One in Management's Discussion and Analysis included in
this report sets forth the distribution of average deposits for
the years ended December 31, 1999, 1998 and 1997 and is
incorporated herein by reference.
(2) Table Eleven in Management's Discussion and Analysis included in this
report sets forth the maturities of time certificates of deposit
of $100,000 or more at December 31, 1999 and is incorporated
herein by reference.
(f) Return on Equity and Assets
(1) The table at page 18 of this section sets forth the ratios of net
income to average assets and average shareholders' equity, and
average shareholders' equity to average assets. As the Company
has never paid a cash dividend, the dividend payout ratio is not
indicated.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical information contained herein, this Annual
Report contains certain forward-looking statements. The reader of this
Annual Report should understand that all such forward-looking statements are
subject to various uncertainties and risks that could affect their outcome.
The Company's actual results could differ materially from those suggested by
such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, variances in the actual
versus projected growth in assets, return on assets, loan losses, expenses,
rates charged on loans and earned on securities investments, rates paid on
deposits, competition effects, fee and other noninterest income earned,
general economic conditions, nationally, regionally and in the operating
market areas of the Company and the Bank, changes in the regulatory
environment, changes in business conditions and inflation, changes in
securities markets, effects of Year 2000 problems discussed herein, as well
as other factors. This entire Annual Report should be read to put such
forward-looking statements in context and to gain a more complete
understanding of the uncertainties and risks involved in the Company's
business.
Business Organization
Central Coast Bancorp (the "Company") is a California corporation, located in
Salinas, California and was organized in 1994 to act as a bank holding
company for Bank of Salinas. In 1996, the Company acquired Cypress Bank,
which was headquartered in Seaside, California. Both banks were
state-charted institutions. In July of 1999, the Company merged Cypress Bank
into the Bank of Salinas and then renamed Bank of Salinas as Community Bank
of Central California (the "Bank"). As of December 31, 1999, the Bank
operated eight full-service branch offices and one limited-service branch
office in Monterey County, California. The Bank is headquartered in Salinas
and serves individuals, merchants, small and medium-sized businesses,
professionals, agribusiness enterprises and wage earners located in the
Salinas Valley and the Monterey Peninsula.
On February 21, 1997, the former Bank of Salinas purchased certain assets and
assumed certain liabilities of the Gonzales and Castroville branch offices of
Wells Fargo Bank. As a result of the transaction, the Bank assumed deposit
liabilities, received cash, and acquired tangible assets. This transaction
resulted in intangible assets, representing the excess of the liabilities
assumed over the fair value of the tangible assets acquired.
In January 1997, the former Cypress Bank opened a new branch office in
Monterey, California, so that it might better serve business and individual
customers on the Monterey Peninsula. In December 1998, the former Bank of
Salinas opened an additional new branch office in Salinas, California, to
better provide services to the growing Salinas community.
Other than holding the shares of the subsidiary Bank, the Company conducts no
significant activities. Although, it is authorized, with the prior approval
of the Board of Governors of the Federal Reserve System (the "Board of
Governors"), the Company's principal regulator, to engage in a variety of
activities which are deemed closely related to the business of banking.
The following analysis is designed to enhance the reader's understanding of
the Company's financial condition and the results of its operations as
reported in the Consolidated Financial Statements included in this Annual
Report. Reference should be made to those statements and the Selected
Financial Data presented elsewhere in this report for additional detailed
information. Average balances, including such balances used in calculating
certain financial ratios, are
20
generally comprised of average daily balances for the Company. Except within
the "overview" section, interest income and net interest income are presented
on a tax equivalent basis.
Overview
Central Coast Bancorp earned record net income for the 16th consecutive year
for the year ended December 31, 1999. Net income in 1999 increased 12.6% to
$8,051,000 versus $7,153,000 in 1998. Diluted earnings per share for the two
years were $1.10 and $0.99, respectively. For 1999, the Company realized a
return on average equity of 15.5% and a return on average assets of 1.43%, as
compared to 15.0% and 1.43% for 1998. The earnings per share for 1999 and
1998 have been adjusted for the 10 percent stock dividend distributed on
February 28, 2000.
During 1999, total assets of the Company increased $49,512,000 (9.1%) to a
total of $593,445,000 at year-end. At December 31, 1999, loans totaled
$395,597,000, up $77,259,000 (24.3%) from the ending balances on December 31,
1998. Deposit growth for the year, including $20,000,000 of State of
California certificates of deposit, was 5.9% resulting in ending deposit
balances of $518,189,000. Central Coast Bancorp ended 1999 with a Tier 1
capital ratio of 12.6% and a total risk-based capital ratio of 13.8%.
During 1999, much staff and management time was devoted to the planning,
testing and preparation for the century date change on January 1, 2000. All
systems performed without incident on the date roll over.
As mentioned in the preceding section, Bank of Salinas and Cypress Bank
were merged together and renamed Community Bank of Central California in July
1999. Unifying the banks helped to create a single image for the Bank in
Monterey County. This has improved customer recognition. It has also
improved operating efficiencies. The name conveys to the public the
character of the institution and differentiates the Bank from the large
state/nationwide banking institutions. Merger expenses of approximately
$263,000 for this transaction are included in the 1999 operating income.
Several upgrades were made to the Bank's physical facilities during the
year. The King City branch was remodeled; the Marina branch moved into a new
shopping center; and the Monterey branch moved into a larger more customer
friendly location. Each of these moves was made to better serve our
customers.
The Bank continues to expand its products and services to make banking more
convenient for the customer. Both retail and business customers find
"Anytime Teller", our new 24 hour banking by telephone, a quick and easy way
to check balances and account activity, transfer funds between accounts, make
loan payments, order statements faxed and much more. The VISA Check Card is
another new product offered in 1999. It can be used to purchase merchandise
at any store that honors VISA and it doubles as an ATM card. The design of
our new web site and on-line banking product was well along the way at
year-end. This product should be rolled out to the Bank's customers in the
second quarter of 2000. Community Bank of Central California's web site
address is "www.community-bnk.com".
In its June 1999 issue, U.S. Banker magazine rated the nation's mid-sized
banks for their performance, safety and strength. Central Coast Bancorp was
rated 7th place overall and number-one in California. We are pleased to have
received such a high ranking, but the true measure of success is the
acceptance by our customers and communities that we serve.
21
As we stated last year, "Management's continuing goal is for the Bank to
deliver a full array of competitive products to its customers while
maintaining the personalized customer service of a community bank." We look
to expanding both our products offered and the Bank's service area. We
believe this strategy will provide continued growth and the ability to
achieve above average returns for our shareholders.
(A) Results of Operations
Net Interest Income/Net Interest Margin
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income (fully taxable equivalent) for 1999 was $28,634,000, a
$4,504,000 (18.7%) increase over 1998. The interest income component was up
$4,833,000 to $42,282,000 (12.9%). Most of the increase was attributable to
growth in the earning assets. Average outstanding loan balances of
$348,086,000 for 1999 reflected a 28.2% increase over 1998 balances. This
increase contributed an additional $7,619,000 to interest income. However,
due to lower rates in the first half of the year and competitive pressures,
the average yield was down 70 basis points, which offset the increase by
$2,422,000. As a result of the Federal Reserve Bank's actions, there have
been three 25 basis point increases in the Bank's base lending rate from
August 25, 1999 through February 3, 2000. These increases will favorably
impact interest income going forward. The securities portfolio average
balances grew $30,041,000(24.0%) which added $2,027,000 to interest income.
The average yield received on securities was up 33 basis points and added
$297,000 to interest income. Federal Funds sold interest income decreased
$2,688,000 as the average balances decreased $50,031,000. Federal Funds were
repositioned into securities and loans during 1999.
Interest expense increased $329,000 (2.5%) in 1999 over 1998. The average
balances of interest bearing liabilities increased $43,021,000 (12.9%). The
higher balances were due to internal growth of deposits, $8,125,000 of
average borrowings (including Federal Funds purchased) and approximately
$16,000,000 in average balances of State of California certificates of
deposit. Interest expense attributable to the higher volume was $1,776,000.
Rates paid on all interest bearing liabilities were 36 basis points lower in
1999 than in 1998. The lower rates offset the higher expense by $1,447,000.
Net interest margin for 1999 was 5.65% versus 5.36% in 1998.
Net interest income for 1998 totaled $24,130,000 and was up 10.1%
($2,223,000) over 1997. Average earning assets were $450,154,000 in 1998 for
an increase of $51,738,000 over 1997. This year over year change was mostly
the result of internal growth. In 1998, interest income increased by
$3,501,000 to $37,449,000. The higher volume of earning assets added
$4,681,000 to interest income in 1998. The average yield received on all
interest earning assets fell 20 basis points to 8.32%. The yield
differential reduced interest income by $1,180,000.
Interest expense increased $1,278,000 (10.6%) in 1998 over 1997. Average
balances of interest bearing liabilities increased $31,307,000 in 1998.
Interest expense was up $1,787,000 due to the higher average balances.
Changes due to rate variations helped offset the increase by $509,000. Net
interest margin for 1998 was 5.36% versus 5.50% in 1997.
22
Table One, Analysis of Net Interest Margin on Earning Assets, and Table Two,
Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are
provided to enable the reader to understand the components and past trends of
the Banks' interest income and expenses. Table One provides an analysis of
net interest margin on earning assets setting forth average assets,
liabilities and shareholders' equity; interest income earned and interest
expense paid and average rates earned and paid; and the net interest margin
on earning assets. Table Two presents an analysis of volume and rate change
on net interest income and expense.
Table One: Analysis of Net Interest Margin on Earning Assets
- -----------------------------------------------------------------------------------------------------------------------
(Taxable Equivalent Basis) 1999 1998 1997
Avg Avg Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield Balance Interest Yield Balance Interest Yield
Assets:
Earning Assets
Loans (1) (2) $348,086 $ 32,234 9.26% $271,590 $ 27,037 9.96% $ 238,793 $ 24,828 10.40%
Taxable investment securities 120,422 7,596 6.31% 121,133 7,282 6.01% 98,493 5,760 5.85%
Tax-exempt investment securities(3) 34,999 2,296 6.56% 4,247 286 6.73% 1,160 8.19%
Federal funds sold 3,153 156 4.95% 53,184 2,844 5.35% 59,970 3,26 5.44%
-------- -------- -------- ------- -------- -------
Total Earning Assets 506,660 $ 42,282 8.35% 450,154 $ 37,449 8.32% 398,416 $ 33,948 8.52%
-------- ------- --------
Cash & due from banks 42,595 38,889 33,144
Other assets 12,818 10,311 9,453
-------- -------- -------
$562,073 $499,354 $ 441,013
======== ======== =======
Liabilities & Shareholders' Equity:
Interest bearing liabilities:
Demand deposits $103,716 $ 1,792 1.73% $ 89,637 $ 1,720 1.92% $ 93,161 $ 1,881 2.02%
Savings 105,000 3,447 3.28% 101,256 3,774 3.73% 95,767 3,875 4.05%
Time deposits 159,653 7,980 5.00% 142,580 7,825 5.49% 111,370 6,187 5.56%
Other borrowings 8,125 429 5.28% - - n/a 1,868 5.25%
-------- ------ ----- ------- ------ ----- ------- ------
Total interest bearing
liabilities 376,494 13,648 3.63% 333,473 13,319 3.99% 302,166 12,041 3.98%
------ ------ ------
Demand deposits 125,897 114,125 96,159
Other Liabilities 7,613 4,169 2,719
-------- -------- -------
Total Liabilities 510,004 451,767 401,044
Shareholders' Equity 52,069 47,587 39,969
-------- -------- -------
-------- -------
$562,073 $499,354 $ 441,013
======== ======== ========
Net interest income & margin (3) $ 28,634 5.65% $ 24,130 5.36% $ 21,907 5.50%
======== ====== ======== ===== ======= =====
1. Loans interest includes loan fees of $1,096,000, $951,000
and $1,037,000 in 1999, 1998 and 1997.
2. Average balances of loans include average allowance for loan losses of
$4,850,000, $4,260,000 and $4,229,000, and average deferred
loan fees of $796,000, $587,000 and $571,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
3. Includes taxable-equivalent adjustments for income on securities that is
exempt from federal income taxes. The federal statutory tax
rate was 35% for 1999, 1998 and 1997.
4. Net interest margin is computed by dividing net interest income by
total average earning assets.
23
Table Two: Volume/Rate Analysis
- --------------------------------------------------------------------------------------------------------------
(In thousands) 1999 over 1998
Increase (decrease) due to change in:
Net
Interest-earning assets: Volume Rate (4) Change
------ -------- ------
Net Loans (1)(2) $ 7,619 $(2,422) $ 5,197
Taxable investment securities (43) 357 314
Tax exempt investment securities (3) 2,070 (60) 2,010
Federal funds sold (2,677) (11) (2,688)
----------- ----------- -----------
Total 6,969 (2,136) 4,833
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits 270 (198) 72
Savings deposits 140 (467) (327)
Time deposits 937 (782) 155
Other borrowings 429 - 429
----------- ----------- -----------
Total 1,776 (1,447) 329
----------- ----------- -----------
Interest differential $ 5,193 $ (689) $ 4,504
=========== =========== ===========
(In thousands) 1998 over 1997
Increase (decrease) due to change in:
Net
Volume Rate (4) Change
------ -------- ------
Interest-earning assets:
Net Loans (1)(2) $ 3,410 $(1,201) $ 2,209
Taxable investment securities 1,324 198 1,522
Tax exempt investment securities(3) 253 (62) 191
Federal funds sold & other (370) (51) (421)
----------- ----------- -----------
Total 4,617 (1,116) 3,501
----------- ----------- -----------
Interest-bearing liabilities:
Demand deposits (71) (90) (161)
Savings deposits 222 (323) (101)
Time deposits 1,734 (96) 1,638
Other borrowings (98) 0 (98)
----------- ----------- -----------
Total 1,787 (509) 1,278
----------- ----------- -----------
Interest differential $ 2,830 $ (607) $ 2,223
=========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------
1. The average balance of non-accruing loans is immaterial as a percentage
of total loans and, as such, has been included in net loans.
2. Loan fees of $1,096,000, $951,000 and $1,037,000 for the years ended
December 31, 1999, 1998 and 1997, respectively have
been included in the interest income
computation.
3. Includes taxable-equivalent adjustments for income on securities that
is exempt from federal income taxes. The federal
statutory tax rate was 35% for 1999, 1998 and 1997.
4. The rate / volume variance has been included
in the rate variance.
24
Provision for Loan Losses
The Bank provided $1,484,000 for loan losses in 1999. Of that amount,
$1,058,000 compensated for the $77,260,000 loan growth during the year. Net
loans charged-off in 1999 totaled only $240,000 or .07% of average loans
outstanding. In 1998, net loans charged-off totaled $30,000 or .01% of
average loans outstanding. Consequently, the Company made provisions for
loan losses of only $159,000. In 1997, the Company provided $64,000.
Service Charges and Fees and Other Income
Noninterest income was up $147,000 (7.1%) to $2,231,000 in 1999 from the 1998
level. Service charges and fees related to deposit accounts made up $113,000
of the increase. Several new fees were implemented late in the year. These
new fees added about $40,000 of the increase. The remainder was due to
higher volumes. Other income increased only $34,000 (4.0%) from the 1998
level. This change reflected some good growth in certain service fees that
was offset in part by lower mortgage origination fees due to the higher
mortgage interest rates and reduced up-charges on Bank supplied check stock.
For 1998, noninterest income was up $319,000 (18.1%) from 1997 results to
$2,084,000. Service charges and fees related to deposit accounts accounted
for $159,000 of the increase. The growth came from both higher volumes and
some selective fee increases. Other income was up $160,000 to $849,000 over
1997 results. Mortgage origination fees accounted for $136,000 of that
increase as mortgage activity was significantly higher in 1998.
Salaries and Benefits
For 1999, increases in salaries and benefits totaled $903,000 (11.0%). Base
salaries increased $644,000 (10.4%) due to normal merit reviews, 11
additional months of operations for the Westridge Branch and staffing
additions during the year. Benefit costs increased commensurate with the
salaries. At the end of 1999, the full time equivalent (FTE) staff was 204
versus 197 at the end of 1998.
Salary and benefits expenses increased $747,000 (10.0%) to $8,213,000 in 1998
from the level in 1997. Components of salaries and benefits that increased
significantly included; base salary and wages, $533,000 and benefits
including employer taxes $214,000. Part of the higher expense was attributable
to the full year effect in 1998 of the two branch offices purchasedfrom Wells
Fargo Bank in late February 1997 and the December 1998 opening of the new
Westridge branch office in Salinas. Additional staff was added Company wide
due to growth. The full time equivalent (FTE) staff was up 16 from 181 at
the end of 1997.
Occupancy and Furniture and equipment
Occupancy and fixed assets expense increased $585,000 (28.5%) in 1999. Much
of the increase is attributable to the remodeling of two branch offices and
operations office space during the year as well as the full year of Westridge
operations and upgrades to the MIS systems and computer network. Additional
costs were incurred for an outside security service during the last quarter
as the Bank increased its vault cash in preparation for Y2K.
Premises and fixed asset related expenses were $2,054,000 in 1998. This was
an increase of $281,000 over 1997. During 1998, the Company installed a wide
area network, a Year 2000 compliant central computer and software system and
upgraded many of its computer workstations. These enhancements provide the
platform for growth, but contributed significantly
25
to the increase in premises and fixed asset expenses. There were other
significant increases in repairs and maintenance of equipment, janitorial and
gardening and rent on leased quarters.
Other Expenses
In 1999, other expenses increased $696,000 (19.4%). These include one-time
costs of approximately $263,000 associated with merging the Bank of Salinas and
Cypress Bank to form the Bank. Also in 1999, the Bank recorded a
$73,000 expense to write-down its former Gonzales branch office building to
estimated net realizable value. Normal price increases and growth in the
Bank's operations accounted for the remaining higher expenses. The overhead
efficiency ratio, calculated by dividing noninterest expense by the sum of
net interest income and noninterest income, for 1999 was 53.3% as compared to
53.1% in 1998.
Other expenses increased $258,000 (7.7%) to $3,592,000 in 1998. ATM expense
was up $77,000 (51.3%) as the Bank added more locations and changed the
service provider. Promotional expenses were up $51,000 (46.3%) as the Bank
increased its advertising campaign. Consulting costs rose $56,000 (155%) as
the Bank contracted for a special project. Those three categories saw the
largest changes from the prior year. The overhead efficiency ratio for 1997
was 53.2%.
Provision for Taxes
The effective tax rate on income was 36.0%, 40.9%, and 40.9% in 1999, 1998
and 1997, respectively. The effective tax rate of the Company in 1999 was
reduced 4.6% from the prior year as a result of investments made in tax
qualified municipal bonds. The effective tax rate was greater than the
federal statutory tax rate due to state tax expense of $1,326,000,
$1,292,000, and $1,213,000 in these years. Tax-exempt income of $1,998,000,
$266,000 and $90,000 from investment securities and loans in these years
helped to reduce the effective tax rate.
(B) Balance Sheet Analysis
Central Coast Bancorp's total assets at December 31, 1999 were $593,445,000
compared to $543,933,000 at December 31, 1998, representing an increase of
9.1%. The average balances of total assets of $562,073,000 in 1999 represent
an increase of $62,719,000 or 12.6% over $499,354,000 in 1998.
Loans
The Bank concentrates its lending activities in four principal areas:
commercial loans (including agricultural loans); installment loans; real
estate construction loans (both commercial and personal) and real
estate-other loans. At December 31, 1999, these four categories accounted
for approximately 40%, 3%, 9% and 48% of the Bank's loan portfolio,
respectively, as compared to 44%, 4%, 6% and 46% at December 31, 1998.
Continuing strong economic activity in the Bank's market area coupled with
lower interest rates early in 1999 resulted in some shifting loan demands
during 1999. While all loan categories reflect year over year growth from
1998 to 1999, the largest growth took place in the real estate-other
category. However, the largest percentage gain of 77% was in the real
estate-construction category. Table Three summarizes the composition of the
loan portfolio for the past five years as of December 31:
26
Table Three: Loan Portfolio Composite
- ----------------------------------------------------------------------------------------------------------------
In thousands
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
Commercial $159,385 $ 136,685 $ 124,714 $ 111,545 $ 85,823
Real Estate:
Construction 35,330 19,929 14,645 27,997 24,852
Other 188,600 144,685 107,354 93,241 79,644
Installment 13,003 11,545 9,349 8,230 5,677
Deferred Loans Fees (721) (674) (568) (649) (550)
- ----------------------------------------------------------------------------------------------------------------
Total Loans 395,597 312,170 255,494 240,364 195,446
Allowance for
Loan Losses (5,596) (4,352) (4,223) (4,372) (4,446)
- ----------------------------------------------------------------------------------------------------------------
Total $390,001 $ 307,818 $ 251,271 $ 235,992 $ 191,000
- ----------------------------------------------------------------------------------------------------------------
The majority of the Bank's loans are direct loans made to individuals, local
businesses and agri-businesses. The Bank relies substantially on local
promotional activity, personal contacts by Bank officers, directors and
employees to compete with other financial institutions. The Bank makes loans
to borrowers whose applications include a sound purpose, a viable repayment
source and a plan of repayment established at inception and generally backed
by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan
products. Installment loans include a range of traditional consumer loan
products offered by the Bank such as personal lines of credit and loans to
finance purchases of autos, boats, recreational vehicles, mobile homes and
various other consumer items. The construction loans are generally composed
of commitments to customers within the Bank's service area for
construction of both commercial properties and custom and semi-custom single
family residences. Other real estate loans consist primarily of loans to the
Bank's depositors secured by first trust deeds on commercial and residential
properties typically with short-term maturities and original loan to value
ratios not exceeding 75%. In general, except in the case of loans with SBA
guarantees, the Bank does not make long-term mortgage loans; however, the
Bank has informal arrangements in place with mortgage lenders to assist
customers in securing single-family mortgage financing.
Average net loans in 1999 were $348,086,000 representing an increase of
$76,496,000 or 28.2% over 1998. The favorable economic conditions and lower
interest rates provided the impetus for continuing loan growth. Average net
loans in 1998 were $271,590,000 representing an increase of $32,797,000 or
13.7% over 1997.
Risk Elements-The Bank assesses and manages credit risk on an ongoing
basis through stringent credit review and approval policies, extensive
internal monitoring and established formal lending policies. Additionally,
the Bank contracts with an outside loan review consultant to periodically
grade new loans and to review the existing loan portfolio. Management
believes its ability to identify and assess risk and return characteristics
of the Company's loan portfolio is critical for profitability and growth.
Management strives to continue the historically low level of credit losses by
continuing its emphasis on credit quality in the loan approval process,
active credit administration and regular monitoring. With this in mind,
management has designed and implemented a comprehensive loan review and
grading system that functions to continually assess the credit risk inherent
in the loan portfolio.
27
Ultimately, credit quality may be influenced by underlying trends in the
economic and business cycles. The Bank's business is concentrated in
Monterey County, California whose economy is highly dependent on the
agricultural industry. As a result, the Bank lends money to individuals
and companies dependent upon the agricultural industry. In addition, the
Bank has significant extensions of credit and commitments to extend credit
which are secured by real estate, totaling approximately $263.2 million at
December 31, 1999. The ultimate recovery of these loans is generally
dependent on the successful operation, sale or refinancing of the real
estate. The Bank monitors the effects of current and expected market
conditions and other factors on the collectability of real estate loans.
When, in management's judgement, these loans are impaired, an appropriate
provision for losses is recorded. The more significant assumptions
management considers involve estimates of the following: lease, absorption
and sale rates; real estate values and rates of return; operating expenses;
inflation; and sufficiency of collateral independent of the real estate
including, in limited instances, personal guarantees.
In extending credit and commitments to borrowers, the Bank generally
requires collateral and/or guarantees as security. The repayment of such
loans is expected to come from cash flow or from proceeds from the sale of
selected assets of the borrowers. The Bank's requirement for collateral
and/or guarantees is determined on a case-by-case basis in connection with
management's evaluation of the credit-worthiness of the borrower. Collateral
held varies but may include accounts receivable, inventory, property, plant
and equipment, income-producing properties, residences and other real
property. The Bank secures its collateral by perfecting its interest in
business assets, obtaining deeds of trust, or outright possession among other
means. Loan losses from lending transactions related to real estate and
agriculture compare favorably with the Bank's loan losses on its loan
portfolio as a whole.
Management believes that its lending policies and underwriting standards will
tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances. The Bank's
loan policies and underwriting standards include, but are not limited to, the
following: 1) maintaining a thorough understanding of the Bank's service area
and limiting investments outside of this area, 2) maintaining a thorough
understanding of borrowers' knowledge and capacity in their field of
expertise, 3) basing real estate construction loan approval not only on
salability of the project, but also on the borrowers' capacity to support the
project financially in the event it does not sell within the original
projected time period, and 4) maintaining conforming and prudent loan to
value and loan to cost ratios based on independent outside appraisals and
ongoing inspection and analysis by the Bank's construction lending officers.
In addition, the Bank strives to diversify the risk inherent in the
construction portfolio by avoiding concentrations to individual borrowers and
on any one project.
Nonaccrual, Past Due and Restructured Loans
Management generally places loans on nonaccrual status when they become 90
days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management,
collection appears unlikely. Table Four sets forth nonaccrual loans and loans
past due 90 days or more for December 31:
28
Table Four: Non-Performing Loans
- --------------------------------------------------------------------------------------------------------------------
In thousands 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing
Commercial $ 51 $ 73 $ 73 $ 60 $ 35
Real estate 303 1,174 6 59 71
Consumer and other - - - 90 -
- --------------------------------------------------------------------------------------------------------------------
354 1,247 79 209 106
- --------------------------------------------------------------------------------------------------------------------
Nonaccrual:
Commercial 11 333 188 184 194
Real estate 1,565 543 628 419 633
Consumer and other - - - 1 24
- --------------------------------------------------------------------------------------------------------------------
1,576 876 816 604 851
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 1,930 $ 2,123 $ 895 $ 813 $ 957
====================================================================================================================
Interest due but excluded from interest income on nonaccrual loans was
approximately $82,000 in 1999, $45,000 in 1998 and $7,000 in 1997. In 1999,
1998 and 1997 interest income recognized from payments received on nonaccrual
loans was $21,000, $17,000 and $7,000, respectively.
At December 31, 1999, the recorded investment in loans that are considered
impaired was $2,165,000 of which $1,568,000 is included in nonaccrual loans
above. Such impaired loans had a valuation allowance of $821,000. The
average recorded investment in impaired loans during 1999 was $2,357,000.
The Company recognized interest income on impaired loans of $92,000, $64,000
and $33,000 in 1999, 1998 and 1997, respectively.
There were no troubled debt restructurings or loan concentrations in excess
of 10% of total loans not otherwise disclosed as a category of loans as of
December 31, 1999. Management is not aware of any potential problem loans,
which were accruing and current at December 31, 1999, where serious doubt
exists as to the ability of the borrower to comply with the present repayment
terms.
The Company held no real estate acquired by foreclosure at December 31, 1999
or 1998.
Allowance for Loan Losses Activity
The provision for loan losses is based upon management's evaluation of the
adequacy of the existing allowance for loans outstanding. This allowance is
increased by provisions charged to expense and reduced by loan charge-offs
net of recoveries. Management determines an appropriate provision based upon
the interaction of three primary factors: (1) the loan portfolio growth in
the period, (2) a comprehensive grading and review formula for total loans
outstanding, and (3) actual previous charge-offs.
The allowance for loan losses totaled $5,596,000 or 1.41% of total loans at
December 31, 1999 compared to $4,352,000 or 1.39% at December 31, 1998 and
$4,223,000 or 1.65% at December 31, 1997. The loan growth of $77,260,000 in
1999, necessitated an increase of $1,058,000 in the allowance for loan loses
to maintain the percentage at the 1998 level. Because of the generally
strong economic environment, it was not necessary to significantly increase
the allowance percentage above the 1998 level. It is the policy of
management to maintain the allowance for loan losses at a level adequate for
known and future risks inherent in the loan portfolio. Based on information
currently available to analyze loan loss potential, including economic
factors, overall credit quality, historical delinquency and a history of
actual charge-offs, management believes
29
that the loan loss provision and allowance is prudent and adequate. However,
no prediction of the ultimate level of loans charged off in future years can
be made with any certainty.
Table Five summarizes, for the years indicated, the activity in the allowance
for loan losses.
Table Five: Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
In thousands(except percentages) 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- -------------------------------------------------------------------------------------------------------------
Average loans outstanding $ 353,732 $ 276,437 $ 243,593 $ 208,169 $ 178,012
- -------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
at beginning of period $ 4,352 $ 4,223 $ 4,372 $ 4,446 $ 4,068
Loans charged off:
Commercial (333) (130) (279) (391) (302)
Real estate (41) (16) (100) (207) (52)
Installment (26) (31) (61) (22) (80)
- -------------------------------------------------------------------------------------------------------------
(400) (177) (440) (620) (434)
- -------------------------------------------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial 143 116 162 156 88
Real estate 7 20 28 11 -
Installment 10 11 37 27 29
- -------------------------------------------------------------------------------------------------------------
160 147 227 194 117
- -------------------------------------------------------------------------------------------------------------
Net loans charged off (240) (30) (213) (426) (317)
Additions to allowance charged
to operating expenses 1,484 159 64 352 695
- -------------------------------------------------------------------------------------------------------------
Allowance for possible loans
losses at end of period $ 5,596 $ 4,352 $ 4,223 $ 4,372 $ 4,446
- -------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to
average loans outstanding 0.07% 0.01% 0.09% 0.20% 0.18%
Provision of allowance for possible loan
losses to average loans outstanding 0.42% 0.06% 0.03% 0.17% 0.39%
Allowance for possible loan losses to loans
net of deferred fees at year end 1.41% 1.39% 1.65% 1.82% 2.27%
- -------------------------------------------------------------------------------------------------------------
30
As part of its loan review process, Management has allocated the overall
allowance based on specific identified problem loans and historical loss
data. Table Six summarizes the allocation of the allowance for loan losses at
December 31, 1999 and 1998.
Table Six: Allowance for Loan Losses by Loan Category
- --------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
Percent of Percent of
loans in each loans in each
category to category to
In thousands(except percentages) Amount total loans Amount total loans
- --------------------------------------------------------------------------------------------
Commercial $ 3,511 40% $ 3,416 44%
Real estate 390 57% 678 52%
Consumer 215 3% 139 4%
- --------------------------------------------------------------------------------------------
Total allocated 4,116 100% 4,233 100%
Total unallocated 1,480 119
- --------------------------------------------------------------------------------------------
Total $ 5,596 $ 4,352
- --------------------------------------------------------------------------------------------
Other Real Estate Owned
The Company held no real estate acquired by foreclosure at December 31, 1999
or 1998.
Deposits
During 1999, deposits increased $28,997,000 (5.9%) to total $518,189,000 at
year-end. State of California certificates of deposit accounted for
$20,000,000 of the deposit growth. Management believes that depressed prices
in the vegetable markets played a significant role in slowing deposit growth
in 1999. Deposits at December 31, 1998 totaled $489,192,000 and were up
$38,891,000 (8.6%) over the 1997 year-end balances of $450,301,000. The
increase in year-end total deposits is attributable to internal growth in
noninterest-bearing demand, interest-bearing demand, savings and time deposit
categories.
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies is reviewed regularly by management. The
Company's capital position represents the level of capital available to support
continued operations and expansion.
Since October of 1998 and through December 31, 1999, the Board of Directors of
the Company has authorized the repurchase of up to 5% of outstanding shares of
the Company's common stock from time to time, subject to appropriate regulatory
and other accounting requirements. The Company acquired approximately 182,000
shares of its common stock in the open market during 1999 and
approximately 27,000 in 1998 at an average price of approximately
$14.66 and $13.87 per share, respectively. These repurchases were made
periodically in the open market with the intention to lessen the dilutive
impact of issuing new shares to meet stock performance, options plans,
acquisitions and other requirements.
The Company's primary capital resource is shareholders' equity, which increased
$2.1 million or 4.1% from the previous year end. The ratio of total risk-based
capital to risk-adjusted assets was 13.8% at December 31, 1999, compared to
14.8% at December 31, 1998. Tier 1 risk-based capital to risk-adjusted assets
was 12.6% at December 31, 1999, compared to 13.6% at December 31, 1998.
Table Seven: Capital Ratio:
As of December 31,
------------------
1999 1998
---- ----
Tier 1 Capital 12.6% 13.6%
Total Capital 13.8% 14.8%
Leverage 9.7% 9.9%
See "Supervision and Regulation" on page 4 and Note 13 in the financial
statements included in Item 8 for more information.
Inflation
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing, or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company indirectly through its effect on
market rates of interest, and thus the ability of the Bank to attract loan
customers. Inflation affects the growth of total assets by increasing the
level of loan demand, and potentially adversely affects the Company's
capital adequacy because loan growth in inflationary periods can increase
at rates higher than the rate that capital grows through retention of earnings
which the Company may generate in the future. In addition to its effects on
interest rates, inflation directly affects the Company by increasing the
Company's operating expenses.
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
31
interest rates. The asset/liability management policy sets limits on the
acceptable amount of variance in net interest margin and market value of
equity under changing interest environments. The Bank uses simulation models
to forecast earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer modeling techniques, the
Company is able to estimate the potential impact of changing interest rates
on earnings. A balance sheet forecast is prepared quarterly using inputs of
actual loan, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance
sheet is processed against three interest rate scenarios. The scenarios
include a 200 basis point rising rate forecast, a flat rate forecast and a
200 basis point falling rate forecast which take place within a one year time
frame. The net interest income is measured during the first year of the rate
changes and in the year following the rate changes. The Company's 2000 net
interest income, as forecast below, was modeled utilizing a forecast balance
sheet projected from year-end 1999 balances.
The following assumptions were used in the modeling activity:
Earning asset growth of 8.1% based on ending balances
Loan growth of 4.6% based on ending balances
Investment and funds sold growth of 13.2% based on ending balances
Deposit growth of 6.9% based on ending balances
Balance sheet target balances were the same for all rate scenarios
The following table summarizes the effect on net interest income of a (+/-)
200 basis point change in interest rates as measured against a flat rate
(no change) scenario.
Table Eight: Interest Rate Risk Simulation of Net Interest Income as of
December 31, 1999
Estimated Impact on
2000 Net Interest
Income
------
(in thousands)
Variation from flat rate scenario
+200 $1,841
-200 ($2,337)
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk.
The Company also uses a second simulation scenario that rate shocks the
balance sheet with an immediate parallel shift in interest rates of +/-200
basis points. This scenario provides estimates of the future market value of
equity (MVE) and net interest income (NII). MVE measures the impact on
equity due to the changes in the market values of assets and liabilities as a
result of a change in interest rates. The Bank measures the volatility of
these benchmarks using a twelve month time horizon. Using the December 31,
1999 balance sheet as the base for the simulation, the following table
summarizes the effect on net interest income of a +/-200 basis point change
in interest rates:
32
Table Nine: Interest Rate Risk Simulation of NII as of December 31, 1999
% Change Change
in NII in NII
from Current from Current
12 Mo. Horizon 12 Month Horizon
-------------- ----------------
(in thousands)
+ 200bp 11.1% $3,497
-200bp ( 13.7%) ($4,294)
These results indicate that the balance sheet is asset sensitive since
earnings increase when interest rates rise. The magnitude of the NII change
is within the Company's policy guidelines. The asset liability management
policy limits aggregate market risk, as measured in this fashion, to an
acceptable level within the context of risk-return trade-offs.
Gap analysis provides another measure of interest rate risk. The Company
does not actively use gap analysis in managing interest rate risk. It is
presented here for comparative purposes. Interest rate sensitivity is a
function of the repricing characteristics of the Bank's portfolio of assets
and liabilities. These repricing characteristics are the time frames within
which the interest-bearing assets and liabilities are subject to change in
interest rates either at replacement, repricing or maturity. Interest rate
sensitivity management focuses on the maturity of assets and liabilities and
their repricing during periods of changes in market interest rates. Interest
rate sensitivity is measured as the difference between the volumes of assets
and liabilities in the Bank's current portfolio that are subject to repricing
at various time horizons. The differences are known as interest sensitivity
gaps.
As reflected in Table Ten, at December 31, 1999, the cumulative gap through
the one-year time horizon indicates a liability sensitive position.
Somewhere between one and five years the Bank moves into an asset sensitive
position. This interest rate sensitivity table categorizes interest-bearing
transaction deposits and savings deposits as repricing immediately. However,
as has been observed through interest rate cycles, the deposit liabilities do
not reprice immediately. Consequently, the Bank's net interest income varies
as though the Bank is asset sensitive, i.e. as interest rates rise net
interest income increases and vice versa. This phenomenon is validated by
the modeling as presented in Tables Eight and Nine.
33
Table Ten: Interest Rate Sensitivity December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
Assets and Liabilities Over three
which Mature or Reprice: Next day months and Over one
and within within and within Over
In thousands Immediately three months one year five years five years Total
- ---------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Investment securities $ 1,684 $ 3,996 $ 7,971 $ 6,475 $ 125,309 $ 145,435
Loans, excluding
nonaccrual loans
and overdrafts 11,635 243,402 24,323 92,125 24,833 396,318
- ---------------------------------------------------------------------------------------------------------------------
Total $ 13,319 $ 247,398 $32,294 $98,600 $ 150,142 $ 541,753
=====================================================================================================================
Interest bearing
liabilities:
Interest bearing demand $ 100,871 $- $- $- $- $ 100,871
Savings 97,833 - - - - 97,833
Time certificates 14 74,547 86,553 16,781 201 178,096
Other Borrowings 12,662 69 213 1,328 2,679 16,951
- ---------------------------------------------------------------------------------------------------------------------
Total $ 211,380 $ 74,616 $86,766 $18,109 $ 2,880 $ 393,751
=====================================================================================================================
Interest rate
sensitivity gap $ (198,061) $ 172,782 $(54,472) $80,491 $ 147,262
Cumulative interest
rate sensitivity gap $ (198,061) $ (25,279) $(79,751) $ 740 $ 148,002
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998
Interest rate
sensitivity gap $ (186,856) $ 193,845 $(61,972) $94,883 $ 110,623
Cumulative interest
rate sensitivity gap $ (186,856) $ 6,989 $(54,983) $39,900 $ 150,523
- ---------------------------------------------------------------------------------------------------------------------
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 assess the likelihood of projected
funding requirements by reviewing historical funding patterns, current and
forecasted economic conditions and individual client funding needs.
Commitments to fund loans and outstanding standby letters of credit at
December 31, 1999, were approximately $128,867,000 and $2,530,000,
respectively. Such loans relate primarily to revolving lines of credit and
other commercial loans, and to real estate construction loans.
The Company's sources of liquidity consist of overnight funds sold to
correspondent banks, unpledged marketable investments and loans held for
sale. On December 31, 1999, consolidated liquid assets totaled $91.1 million
or 15.4% 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
Bank maintains short term lines of credit with correspondent banks. At
December 31, 1999, the Bank had $67,338,000 available under these credit
lines. Additionally, the Bank is a member of the Federal Home Loan Bank. At
December 31, 1999, the Bank could have arranged for up to
34
$148,000,000 in secured borrowings from the FHLB. Informal agreements are
also in place with various other banks to purchase participations in loans,
if necessary. The Company serves primarily a business and professional
customer base and, as such, its deposit base is susceptible to economic
fluctuations. Accordingly, management strives to maintain a balanced
position of liquid assets to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of interest
rate fluctuations on the marketability of both assets and liabilities. In
1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities". In
conjunction with the adoption of SFAS 133 the Bank reclassified all
securities into the available-for-sale category. This enables the Bank to
sell any of its unpledged securities to meet liquidity needs. Due to the
rising interest rate environment throughout the last half of 1999, much of
the investment portfolio has experienced price declines, which has resulted
in unrealized losses. These unrealized losses limit the Bank's ability to
sell these securities without realizing those losses. However, these
securities are available to pledge as collateral for borrowings if the need
should arise. The Bank has established a master repurchase agreement with a
correspondent bank to enable such transactions.
The maturity distribution of certificates of deposit in denominations of
$100,000 or more is set forth in Table Eleven. These deposits are generally
more rate sensitive than other deposits and, therefore, are more likely to be
withdrawn to obtain higher yields elsewhere if available.
Table Eleven: Certificates of Deposit in Denominations of $100,000 or More
- --------------------------------------------------------------------
Year
Ended
12/31/99
- --------------------------------------------------------------------
Three months or less $59,494,000
Over three months through six months 20,469,000
Over six months through twelve months 35,732,000
Over twelve months 12,619,000
- --------------------------------------------------------------------
Total $128,314,000
====================================================================
Loan demand also affects the Bank's liquidity position. Table Twelve
presents the maturities of loans for the period indicated.
35
Table Twelve: Loan Maturities-December 31, 1999
- ---------------------------------------------------------------------------------------------------------
One year
One year through Over
In thousands or less five years five years Total
- ---------------------------------------------------------------------------------------------------------
Commercial,
financial and
agricultural $ 85,237,000 $ 55,147,000 $ 19,001,000 $ 159,385,000
Real estate -
construction 32,529,000 2,078,000 723,000 35,330,000
Real estate -
other 20,546,000 62,213,000 105,841,000 188,600,000
Installment 8,329,000 4,219,000 455,000 13,003,000
- ---------------------------------------------------------------------------------------------------------
Total $ 146,641,000 $ 123,657,000 $ 126,020,000 $ 396,318,000
- ---------------------------------------------------------------------------------------------------------
Loans shown above with maturities greater than one year include $177,584,000
of floating interest rate loans and $72,093,000 of fixed rate loans.
Table Thirteen: Securities Maturities and Weighted Average Yields-December 31, 1999 and 1998
- ---------------------------------------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market Average
In thousands(except percentages) Cost Gain Losses Value Yield
- ---------------------------------------------------------------------------------------------------
December 31, 1999
Available for sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 12,002 $- $ 35 $ 11,967 6.03%
Maturing after 1 year but within 5 years 6,462 8 217 6,253 5.62%
Maturing after 5 years but within 10 years 72,639 - 3,629 69,010 6.24%
Maturing after 10 years 12,265 - 625 11,640 6.27%
State & Political Subdivision
Maturing after 1 year but within 5 years 247 - 25 222 5.70%
Maturing after 5 year but within 10 Years 11,513 - 888 10,625 6.45%
Maturing after 10 years 25,091 - 2,436 22,655 6.73%
Corporate Debt Securities
Maturing after 10 years 11,500 - 121 11,379 7.18%
Other 1,684 - - 1,684 -
- ---------------------------------------------------------------------------------------------------
Total investment securities $153,403 $ 8 $ 7,976 $ 145,435 6.36%
===================================================================================================
December 31, 1998
Available for sale securities:
U.S. Treasury and agency securities
Maturing within 1 year $ 13,976 $ 119 $- $ 14,095 6.16%
Maturing after 1 year but within 5 years 27,248 239 - 27,487 6.16%
Maturing after 5 years but within 10 years 20,037 15 - 20,052 6.27%
Maturing after 10 years 48,655 41 - 49,066 6.15%
State & Political Subdivision
Maturing after 5 year but within 10 Years 3,159 9 14 3,154 6.09%
Maturing after 10 years 25,562 59 219 25,402 6.30%
Corporate Debt Securities
Maturing within 1 year 29,608 - 2 29,606 5.92%
Other 1,525 - - 1,525 -
- --------------------------------------------------------------------------------------------------
Total investment securities $169,770 $ 852 $ 23 $ 170,387 6.15%
===================================================================================================
36
The principal cash requirements of the Company are for expenses incurred in
the support of administration and operations of the Bank. These cash
requirements are funded through direct reimbursement billings to the Bank.
For nonbanking functions, the Company is dependent upon the payment of cash
dividends by the Bank to service its commitments. The Company expects that
the cash dividends paid by the Bank to the Company will be sufficient to meet
this payment schedule.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating leases. (See Note 5
of the financial statements for the terms.) These commitments do not
significantly impact operating results.
As of December 31, 1999, commitments to extend credit were the only financial
instruments with off-balance sheet risk. The Bank has not entered into any
contracts for financial derivative instruments such as futures, swaps,
options etc. Loan commitments increased to $128,867,000 from $122,423,000 at
December 31, 1998. The commitments represent 32.6% of total loans at
year-end 1999 versus 39.1% a year ago.
Disclosure of Fair Value
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Statements, requires the disclosure of fair value of most financial
instruments, whether recognized or not recognized in the financial
statements. The intent of presenting the fair values of financial instruments
is to depict the market's assessment of the present value of net future cash
flows discounted to reflect both current interest rates and the market's
assessment of the risk that the cash flows will not occur.
In determining fair values, the Company used the carrying amount for cash,
short-term investments, accrued interest receivable, short-term borrowings
and accrued interest payable as all of these instruments are short term in
nature. Securities are reflected at quoted market values. Loans and
deposits have a long term time horizon which required more complex
calculations for fair value determination. Loans are grouped into
homogeneous categories and broken down between fixed and variable rate
instruments. Loans with a variable rate, which reprice immediately, are
valued at carrying value. The fair value of fixed rate instruments is
estimated by discounting the future cash flows using current rates. Credit
risk and repricing risk factors are included in the current rates. Fair
value for nonaccrual loans is reported at carrying value and is included in
the net loan total. Since the allowance for loan losses exceeds any
potential adjustment for nonaccrual valuation, no further valuation
adjustment has been made.
Demand deposits, savings and certain money market accounts are short term in
nature so the carrying value equals the fair value. For deposits that extend
over a period in excess of four months, the fair value is estimated by
discounting the future cash payments using the rates currently offered for
deposits of similar remaining maturities.
At year-end 1999, the fair values calculated on the Bank's assets are 0.4%
below the carrying values versus .09% above the carrying values at year-end
1998. The change in the calculated fair value percentage relates to the loan
category and is the result of changes in interest rates in 1999 (see Note 10
of the financial statements).
37
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 Company did not experience any processing problems on those
dates. Upcoming dates during the year are March 31, the end of the first
quarter, 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 adequately to 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.
Accounting Pronouncements
The Financial Standards Accounting Board has proposed the elimination of
"pooling of interests" accounting by December 31, 2000. The result of this
accounting change will be that all mergers consummated after December 31,
2000 will be accounted for as "purchase" transactions, resulting in the
amortization of goodwill in any merger where the purchase price exceeds the
asset value of the acquired company. The goodwill amortization will reduce
future reported income of the merged companies. Additionally, in bank
mergers, the goodwill in a purchase accounting transaction will not be
included in the calculation of regulatory capital requirements. Some
investment bankers have expressed the view that the elimination of "pooling
of interests" accounting will result in lower merger premiums for sellers
with the possibility of fewer transactions occurring after December 31, 2000.
For additional discussion of accounting pronouncements, see Note One in the
Consolidated Financial Statements at Item 8.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A of Form 10-K is contained in Item 7-
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 40
Consolidated Balance Sheets, December 31, 1999 and 1998 41
Consolidated Statements of Income for theyears ended
December 31, 1999, 1998 and 1997 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 43
ConsolidatedStatements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997 44
Notes to Consolidated Financial Statements 45-60
All schedules have been omitted since the required information is not present
in amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements or
notes thereto.
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Central Coast Bancorp:
We have audited the accompanying consolidated balance sheets of Central Coast
Bancorp and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Coast Bancorp and subsidiary at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Salinas, California
January 24, 2000
(February 28, 2000 as to the stock dividend information in Note 1)
40
CONSOLIDATED BALANCE SHEETS
CENTRAL COAST BANCORP AND SUBSIDIARY
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 39,959,000 $ 44,684,000
Federal funds sold - 4,202,000
- -------------------------------------------------------------------------------------------------------------------------
Total cash and equivalents 39,959,000 48,886,000
Available-for-sale securities 145,435,000 170,387,000
Loans held for sale - 6,168,000
Loans:
Commercial 159,385,000 136,685,000
Real estate-construction 35,330,000 19,929,000
Real estate-other 188,600,000 144,685,000
Consumer 13,003,000 11,545,000
Deferred loan fees, net (721,000) (674,000)
- -------------------------------------------------------------------------------------------------------------------------
Total loans 395,597,000 312,170,000
Allowance for loan losses (5,596,000) (4,352,000)
- -------------------------------------------------------------------------------------------------------------------------
Net Loans 390,001,000 307,818,000
- -------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,888,000 3,069,000
Accrued interest receivable and other assets 14,162,000 7,605,000
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 593,445,000 $ 543,933,000
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 141,389,000 $ 149,757,000
Demand, interest bearing 100,871,000 98,226,000
Savings 97,833,000 104,447,000
Time 178,096,000 136,762,000
- -------------------------------------------------------------------------------------------------------------------------
Total Deposits 518,189,000 489,192,000
Accrued interest payable and other liabilities 21,951,000 3,542,000
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 540,140,000 492,734,000
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 5 and 11)
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: 6,440,257 shares in 1999
and 6,112,045 shares in 1998 40,223,000 41,103,000
Shares held in deferred compenstion trust ( 247,148 shares in 1999
and 71,949 shares in 1998), net of deferred obligation - -
Retained earnings 17,784,000 9,733,000
Accumulated other comprehensive income (loss), net of taxes of
$3,267,000 in 1999 and $254,000 in 1998 (4,702,000) 363,000
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 53,305,000 51,199,000
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 593,445,000 $ 543,933,000
=========================================================================================================================
See notes to Consolidated Financial Statements
41
CONSOLIDATED STATEMENTS OF INCOME
CENTRAL COAST BANCORP AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans (including fees) $ 32,234,000 $ 27,037,000 $ 24,828,000
Investment securities 9,127,000 7,473,000 5,823,000
Fed funds sold 156,000 2,844,000 3,265,000
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 41,517,000 37,354,000 33,916,000
- --------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 13,218,000 13,319,000 11,943,000
Other 430,000 - 98,000
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,648,000 13,319,000 12,041,000
- --------------------------------------------------------------------------------------------------------------------------
Net Interest Income 27,869,000 24,035,000 21,875,000
Provision for Loan Losses (1,484,000) (159,000) (64,000)
- --------------------------------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 26,385,000 23,876,000 21,811,000
- --------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposits 1,348,000 1,235,000 1,076,000
Other income 883,000 849,000 689,000
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,231,000 2,084,000 1,765,000
- --------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and benefits 9,116,000 8,213,000 7,466,000
Occupancy 1,301,000 1,049,000 973,000
Furniture and equipment 1,338,000 1,005,000 800,000
Other 4,288,000 3,592,000 3,334,000
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 16,043,000 13,859,000 12,573,000
- --------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 12,573,000 12,101,000 11,003,000
Provision for Income Taxes 4,522,000 4,948,000 4,500,000
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 8,051,000 $ 7,153,000 $ 6,503,000
==========================================================================================================================
Basic Earnings per Share $ 1.14 $ 1.08 $ 0.99
Diluted Earnings per Share $ 1.10 $ 0.99 $ 0.92
==========================================================================================================================
See Notes to Consolidated Financial Statements
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
CENTRAL COAST BANCORP AND SUBSIDIARY
- ----------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operations:
Net income $ 8,051,000 $ 7,153,000 $ 6,503,000
Reconciliation of net income to net cash provided
by operating activities:
Provision for loan losses 1,484,000 159,000 64,000
Depreciation 936,000 656,000 513,000
Amortization and accretion 136,000 (6,000) (369,000)
Deferred income taxes (871,000) (333,000) 31,000
Gain on sale of securities (45,000) (58,000) -
Net (gain) loss on sale of equipment 126,000 - (19,000)
Gain on sale of other real estate owned - (20,000) (21,000)
Decrease (increase) in accrued interest receivable
and other assets (2,241,000) 129,000 (1,779,000)
Increase in accrued interest payable and other liabilities 2,110,000 364,000 1,939,000
Increase (decrease) in deferred loan fees 47,000 106,000 (81,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 9,733,000 8,150,000 6,781,000
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net decrease in interest-bearing
deposits in financial institutions - - 999,000
Proceeds from maturities of investment securities
Available-for-sale 100,042,000 107,423,000 63,750,000
Held-to-maturity - 20,959,000 41,882,000
Proceeds from sale of available-for-sale securities 5,988,000 9,119,000 -
Purchase of investment securities
Available-for-sale (89,498,000) (176,593,000) (154,353,000)
Held-to-maturity - - (10,181,000)
Net change in loans held for sale 6,168,000 (4,837,000) (884,000)
Net increase in loans (84,049,000) (56,812,000) (15,723,000)
Proceeds from sale of other real estate owned 387,000 125,000 725,000
Proceeds from sale of equipment 26,000 - 31,000
Purchases of equipment (2,087,000) (1,724,000) (1,386,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (63,023,000) (102,340,000) (75,140,000)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in deposit accounts 28,997,000 38,891,000 111,638,000
Net increase (decrease) in short-term borrowings 12,662,000 (289,000) 289,000
Net increase in long-term borrowings 4,288,000 - -
Proceeds from sale of stock 1,098,000 264,000 380,000
Shares repurchased under stock repurchase plan (2,674,000) (374,000) -
Fractional shares repurchased (8,000) (13,000) (8,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 44,363,000 38,479,000 112,299,000
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (8,927,000) (55,711,000) 43,940,000
Cash and equivalents, beginning of year 48,886,000 104,597,000 60,657,000
- ----------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 39,959,000 $48,886,000 $104,597,000
======================================================================================================================
Noncash Investing and Financing Activities:
The Company obtained $335,000 in 1999 and $461,000 in 1997 of real estate (OREO) in connection with forclosures of delinquent
loans (none 1998). In 1999 and 1998 stock option exercises and stock repurchases totalling $666,000 and $384,000, respectively
were performed through a "stock for stock" exercise under the Company's deferred compensation plan (see Note 9).
- ----------------------------------------------------------------------------------------------------------------------
Other Cash Flow Information:
Interest paid $ 13,733,000 $13,100,000 $ 11,367,000
Income taxes paid 3,569,000 3,497,000 4,063,000
======================================================================================================================
See Notes to Consolidated Financial Statements
43
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CENTRAL COAST BANCORP AND SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income (Loss) -
Net Unrealized
Gain (Loss) on Available-
Years Ended December 31, Common Stock Retained For-Sale
1999, 1998 and 1997 Shares Amount Earnings Securities Total
- ------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1997 5,341,534 $ 30,856,000 $ 5,476,000 $ - $ 36,332,000
Net income - - 6,503,000 - 6,503,000
Changes in unrealized gains
on securities available for sale,
net of taxes of $71,000 - - - 101,000 101,000
--------------
Comprehensive income 6,604,000
--------------
Shares repurchased (434) (8,000) - - (8,000)
Stock options and warrants
exercised 119,486 380,000 - - 380,000
Tax benefit of stock options
exercised - 416,000 - - 416,000
- ------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 5,460,586 31,644,000 11,979,000 101,000 43,724,000
Net income - - 7,153,000 - 7,153,000
Changes in unrealized gains
on securities available for sale,
net of taxes of $223,000 - - - 320,000 320,000
Reclassification adjustment for
gains included in income,
net of taxes of $40,000 - - - (58,000) (58,000)
--------------
Comprehensive income 7,415,000
--------------
10% stock dividend 546,059 9,399,000 (9,399,000) -
Stock options and warrants
exercised 153,019 647,000 - - 647,000
Shares repurchased (47,619) (770,000) (770,000)
Tax benefit of stock options
exercised 183,000 183,000
- ------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 6,112,045 41,103,000 9,733,000 363,000 51,199,000
Net income - - 8,051,000 - 8,051,000
Changes in unrealized gains (losses)
on securities available for sale,
net of taxes of $3,502,000 - - - (5,039,000) (5,039,000)
Reclassification adjustment for
gains included in income,
net of taxes of $19,000 - - - (26,000) (26,000)
--------------
Comprehensive income - - - 2,986,000
--------------
Stock options and warrants
exercised 534,232 1,764,000 - - 1,764,000
Shares repurchased (206,020) (3,348,000) (3,348,000)
Tax benefit of stock options -
exercised - 704,000 - - 704,000
- ------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 6,440,257 $ 40,223,000 $ 17,784,000 $ (4,702,000) $ 53,305,000
- ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CENTRAL COAST BANCORP AND SUBSIDIARY
Years ended December 31, 1999, 1998 and 1997
Note 1. Significant Accounting Policies and Operations.
The consolidated financial statements include Central Coast Bancorp
(the "Company") and its wholly-owned subsidiary, Community Bank of
Central California (the "Bank"). On July 9, 1999, Cypress Bank, a
wholly owned subsidiary of the Company, was merged into the Bank of
Salinas whose name was then changed to Community Bank of Central
California. All material intercompany accounts and transactions are
eliminated in consolidation. The accounting and reporting policies of
the Company and the Bank conform to generally accepted accounting
principles and prevailing practices within the banking industry. In
preparing such financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly
from those estimates. Material estimates that are particularly
susceptible to significant changes in the near term relate to the
determination of the allowance for 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.
Community Bank of Central California operates eight full service
branches in the Salinas Valley and on the Monterey Peninsula, serving
small and medium sized business customers, as well as individuals. The
Bank focuses on business loans and deposit services to customers
throughout Monterey County.
Investment Securities -
are classified at the time of purchase into one of three categories:
held-to-maturity, trading or available-for-sale. Investment securities
classified as held-to-maturity are measured at amortized cost based on
the Company's positive intent and ability to hold such securities to
maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term and are carried at market
value with a corresponding recognition of unrecognized holding gain or
loss in the results of operations. The remaining investment securities
are classified as available-for-sale and are measured at market value
with a corresponding recognition of the unrealized holding gain or loss
(net of tax effect) as a separate component of shareholders' equity
until realized. Accretion of discounts and amortization of premiums
arising at acquisition are included in income using methods
approximating the effective interest method. Gains and losses on sales
of investments, if any, are determined on a specific identification
basis.
Loans -
are stated at the principal amount outstanding, reduced by any
charge-offs or specific valuation allowance. Loan origination fees and
certain direct loan origination costs are deferred and the net amount
is recognized using the effective yield method, generally over the
contractual life of the loan.
Interest income is accrued as earned. The accrual of interest on loans
is discontinued and any accrued and unpaid interest is reversed when
principal or interest is ninety days past due, when payment in full of
principal or interest is not expected or when a portion of the
principal balance
45
has been charged off. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of
principal is probable. Senior management may grant a waiver from
nonaccrual status if a loan is well secured and in the process of
collection. When a loan is placed on nonaccrual status, the accrued
and unpaid interest receivable is reversed and the loan is accounted
for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to
accrual status when all delinquent interest and principal become
current in accordance with the original terms of the loan agreement or
when the loan is both well secured and in process of collection.
Loans held for sale are stated at the lower of cost or aggregate market
value.
The allowance for loan losses -
is an amount that management believes will be adequate to absorb losses
inherent in existing loans and commitments to extend credit, based on
evaluations of collectibility and prior loss experience. The allowance
is established through a provision charged to expense. Loans are
charged against the allowance when management believes that the
collectibility of the principal is unlikely. In evaluating the
adequacy of the allowance, management considers numerous factors such
as changes in the composition of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans, and current and
anticipated local economic conditions that may affect the borrowers'
ability to pay.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired
loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral-dependent.
Real estate and other assets acquired in satisfaction of indebtedness
are recorded at the lower of estimated fair market value net of
anticipated selling costs or the recorded loan amount, and any
difference between this and the loan amount is treated as a loan loss.
Costs of maintaining other real estate owned, subsequent write downs
and gains or losses on the subsequent sale are reflected in current
earnings.
Premises and equipment -
are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on a straight-line basis
over the lesser of the lease terms or estimated useful lives of the
assets, which are generally 3 to 30 years.
Intangible assets -
representing the excess of the purchase price over the fair value of
tangible net assets acquired, are being amortized on a straight-line
basis over seven years and are included in other assets.
Stock Compensation.
The Company accounts for its stock-based awards using the intrinsic
value method in accordance with Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees and its related
interpretations. No compensation expense has been recognized in the
financial statements for employee stock arrangements. Note 9 to the
Consolidated Financial Statements contains a summary of the pro forma
effects to reported net income and earnings per share as if the Company
had elected to recognize compensation cost
46
based on the fair value of the options granted at grant date as
prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation.
Income taxes -
are provided using the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities arise principally from
differences in reporting provisions for loan losses, interest on
nonaccrual loans, depreciation, state franchise taxes and accruals
related to the salary continuation plan. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings per share.
Basic earnings per share is computed by dividing net income by the
weighted average of common shares outstanding for the period
(7,072,000, 6,641,000 and 6,563,000 in 1999, 1998 and 1997,
respectively). Diluted earnings per share reflects the potential
dilution that could occur if outstanding stock options and stock
purchase warrants were exercised. Diluted earnings per share is
computed by dividing net income by the weighted average common shares
outstanding for the period plus the dilutive effect of options and
warrants (245,000, 601,000 and 533,000 in 1999, 1998 and 1997,
respectively). All earnings per share information has been adjusted
retroactively for stock dividends of 10% in January 2000 and January
1998, a 3-for-2 stock split in March 1997 and a 5-for-4 stock split in
January 1999.
Stock dividend.
On January 31, 2000 the Board of Directors declared a 10% stock
dividend which was distributed on February 28, 2000, to shareholders of
record as of February 14, 2000. All share and per share data including
stock option and warrant information have been retroactively adjusted
to reflect the stock dividend.
Comprehensive income.
In 1998 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, which requires that an
enterprise report, by major components and as a single total, the
change in net assets during the period from nonowner sources. Such
amounts have been reported in the accompanying statements of
shareholders' equity.
Segment reporting.
In 1998 the Company adopted Financial Accounting Standards Statement
(FAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers.
Management has determined that since all of the commercial banking
products and services offered by the Company are available in each
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.
47
Reclassification of investment securities.
Effective July 1, 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities.
In connection with the adoption of SFAS 133 the Company reclassified
certain securities with an amortized cost of $18,085,000 and a fair
value of $18,202,000 from held-to-maturity to available-for-sale.
Adoption of this statement did not have any other impact on the
Company's consolidated financial position and had no impact on the
Company's results of operations or cash flows.
Reclassifications.
Certain prior year amounts have been reclassified to conform to the
financial statement presentation for the current year. The
reclassifications had no impact on results of operations or
shareholders' equity.
Note 2. Cash and Due from Banks.
The Company, through its bank subsidiary, is required to maintain
reserves with the Federal Reserve Bank. Reserve requirements are based
on a percentage of deposits. At December 31, 1999 the Company
maintained reserves of approximately $109,000 in the form of vault cash
and balances at the Federal Reserve to satisfy regulatory requirements.
Note 3. Securities.
The Company's investment securities portfolio as of December 31, 1999 and 1998
consisted of the following:
- --------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
In thousands Cost Gain Losses Value
- --------------------------------------------------------------------------------
December 31, 1999
Available for sale securities:
U.S. Treasury and agency securities $ 103,368 $ 8 $ 4,506 $ 98,870
State & Political Subdivision 36,851 - 3,349 33,502
Corporate Debt Securities 11,500 121 11,379
Other 1,684 - - 1,684
- --------------------------------------------------------------------------------
Total investment securities $ 153,403 $ 8 $ 7,976 $145,435
================================================================================
December 31, 1998
Available for sale securities:
U.S. Treasury and agency securities $ 109,916 $ 784 $- $ 110,700
State & Political Subdivision 28,721 68 233 28,556
Corporate Debt Securities 29,608 - 2 29,606
Other 1,525 - - 1,525
- --------------------------------------------------------------------------------
Total investment securities $ 169,770 $ 852 $ 235 $170,387
================================================================================
At December 31, 1999 and 1998, securities with a book value of
$80,593,000 and $56,936,000 were pledged as collateral for deposits of
public funds and other purposes as required by law or contract.
U.S. Treasury Securities with a market value of $6,033,000 and
$9,119,000 and an amortized cost of $5,988,000 and $9,061,000 were sold
during the fiscal years ended December 31, 1999 and 1998,
respectively. There were no sales of securities in 1997.
48
Note 4. Loans and allowance for loan losses.
The Company's business is concentrated in Monterey County, California
whose economy is highly dependent on the agricultural industry. As a
result, the Company lends money to individuals and companies dependent
upon the agricultural industry. In addition, the Company has
significant extensions of credit and commitments to extend credit which
are secured by real estate, the ultimate recovery of which is generally
dependent on the successful operation, sale or refinancing of real
estate, totaling approximately $263 million. The Company monitors the
effects of current and expected market conditions and other factors on
the collectibility of real estate loans. When, in management's
judgment, these loans are impaired, appropriate provisions for losses
are recorded. The more significant assumptions management considers
involve estimates of the following: lease, absorption and sale rates;
real estate values and rates of return; operating expenses; inflation;
and sufficiency of collateral independent of the real estate including,
in limited instances, personal guarantees.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of
such loans is expected to come from cash flow or from proceeds from the
sale of selected assets of the borrowers. The Company's requirement
for collateral and/or guarantees is determined on a case-by-case basis
in connection with management's evaluation of the credit worthiness of
the borrower. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, income-producing
properties, residences and other real property. The Company secures
its collateral by perfecting its interest in business assets, obtaining
deeds of trust, or outright possession among other means. Loan losses
from lending transactions related to real estate and agriculture
compare favorably with the Company's loan losses on its loan portfolio
as a whole.
The activity in the allowance for loan losses is summarized as follows:
In thousands 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Balances, beginning of year $ 4,352 $ 4,223 $ 4,372
Provision charged to expense 1,484 159 64
Loans charged off (400) (177) (440)
Recoveries 160 147 227
- --------------------------------------------------------------------------------------------------------------
Balance, end of year $ 5,596 $ 4,352 $ 4,223
==============================================================================================================
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.
49
Management believes that the allowance for loan losses at December 31,
1999 is prudent and warranted, based on information currently
available. However, no prediction of the ultimate level of loans
charged off in future years can be made with any certainty.
Nonperforming loans at December 31 are summarized below:
- ----------------------------------------------------------------------------------------------------------------------
In thousands 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Past due 90 days or more and still accruing:
Real estate $ 303 $ 1,174
Commercial 51 73
Consumer and other - -
- ----------------------------------------------------------------------------------------------------------------------
354 1,247
- ----------------------------------------------------------------------------------------------------------------------
Nonaccrual:
Real estate 1,565 543
Commercial 11 333
Consumer and other - -
- ----------------------------------------------------------------------------------------------------------------------
1,576 876
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 1,930 $ 2,123
======================================================================================================================
Interest due but excluded from interest income on nonaccrual loans was
approximately $82,000, $45,000 and $7,000 in 1999, 1998 and 1997
respectively. In 1999, 1998 and 1997, interest income recognized from
payments received on nonaccrual loans was $21,000, $17,000 and $7,000,
respectively.
At December 31, 1999 and 1998, the recorded investment in loans that
are considered impaired under SFAS No. 114 was $2,165,000 and $727,000
of which $1,568,000 and $335,000 are included as nonaccrual loans
above. Such impaired loans had valuation allowances totalling $821,000
and $164,000 based on the estimated fair values of the collateral. The
average recorded investment in impaired loans during 1999 and 1998 was
$2,357,000 and $776,000. The Company recognized interest income on
impaired loans of $92,000 and $64,000 in 1999 and 1998, respectively.
The Company held no real estate acquired by foreclosure at December 31,
1999 or 1998.
Note 5. Premises and equipment.
Premises and equipment at December 31 are summarized as follows:
In thousands 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Land $ 121 $ 145
Building 215 460
Furniture and equipment 5,982 5,641
Leasehold improvement 2,067 1,310
- ----------------------------------------------------------------------------------------------------------------------
8,385 7,556
Accumulated depreciation and amortization (4,497) (4,487)
- ----------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 3,888 $ 3,069
- ----------------------------------------------------------------------------------------------------------------------
The Company's facilities leases expire in March 2003 through October
2009 with options to extend for five to fifteen years. These include
two facilities leased from shareholders at terms
50
and conditions which management believes are consistent with the
market. Rental rates are adjusted annually for changes in certain
economic indices. Rental expense was approximately $565,000, $456,000
and $422,000, including lease expense to shareholders of $121,000,
$134,000 and $152,000 in 1999, 1998 and 1997 respectively. The minimum
annual rental commitments under these leases, including the remaining
rental commitment under the leases to shareholders, are as follows:
- -------------------------------------------------------------------------------------------------------
Operating
In thousands Leases
- -------------------------------------------------------------------------------------------------------
2000 $ 595
2001 595
2002 595
2003 558
2004 542
Thereafter 949
- -------------------------------------------------------------------------------------------------------
Total $ 3,834
- -------------------------------------------------------------------------------------------------------
Note 6. Income Taxes.
The provision for income taxes is as follows:
- -----------------------------------------------------------------------------------------------------
In thousands 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Current:
Federal $ 3,863 $ 3,946 $ 3,255
State 1,530 1,335 1,214
- -----------------------------------------------------------------------------------------------------
Total 5,393 5,281 4,469
- -----------------------------------------------------------------------------------------------------
Deferred:
Federal (667) (290) 32
State (204) (43) (1)
- -----------------------------------------------------------------------------------------------------
Total (871) (333) 31
- -----------------------------------------------------------------------------------------------------
Total $ 4,522 $ 4,948 $ 4,500
- -----------------------------------------------------------------------------------------------------
A reconciliation of the Federal income tax rate to the effective tax
rate is as follows:
- ---------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State uncome taxes (net of
Federal income tax benefit) 7.0% 7.1% 7.2%
Tax exempt interest income (5.4%) (0.8%) (0.8%)
Other (0.6%) (0.4%) (0.5%)
- ---------------------------------------------------------------------------------------------------------
Effective tax rate 36.0% 40.9% 40.9%
- ---------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998, respectively, are presented below:
51
- ----------------------------------------------------------------------------------------------------------
In thousands 1999 1998
- ----------------------------------------------------------------------------------------------------------
Deferred Tax assets (liabilities):
Unrealized (gain) loss on available for sale securities $ 3,267 $ (253)
Provision for loan losses 2,287 1,680
Salary continuation plan 438 265
Depreciation and amortization 308 254
State income taxes 196 263
Excess serving rights 74 86
Interest on nonaccrual loans 72 35
Accrual to cash adjustments 15 30
Other 33 1
- ----------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 6,690 $ 2,361
- ----------------------------------------------------------------------------------------------------------
Note 7. Detail of Other Expense.
Other expense for the years ended December 31, 1999, 1998 and 1997
consists of the following:
- -----------------------------------------------------------------------------------------------------------------
In thousands 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Professional fees $ 452 $ 461 $ 358
Customer expenses 398 431 340
Data processing 306 386 334
Marketing 475 335 302
Stationary and supplies 444 326 466
Shareholder and director 250 262 249
Amortization of intangibles 257 257 209
Insurance 180 196 180
Dues and assessments 139 109 123
Other 1,387 829 773
- ----------------------------------------------------------------------------------------------------------------------
Total $ 4,288 $ 3,592 $ 3,334
- ----------------------------------------------------------------------------------------------------------------------
Note 8. Stock Purchase Warrants.
During 1995 and 1994, warrants were issued in connection with the sale
of the Company's common stock at a rate of one warrant for every share
of stock purchased. The warrants expired on June 30, 1999. During
1999, 1998 and 1997, respectively 145,313 , 17,454 and 6,463 warrants
were exercised. During 1999, 6,481 options expired.
Note 9. Employee Benefit Plans.
The Company has two stock option plans under which incentive stock
options or nonqualified stock options may be granted to certain key
employees or directors to purchase authorized, but unissued, common
stock. Shares may be purchased at a price not less than the fair
market value of such stock on the date of grant. Options vest over
various periods not in excess of ten years from date of grant and
expire not more than ten years from date of grant.
Activity under the stock option plans adjusted for stock dividends and
stock splits is as follows:
52
- --------------------------------------------------------------------------------------------------------------------
Weighted
Average
Shares Price per share Price
- --------------------------------------------------------------------------------------------------------------------
Balances, January 1, 1997 1,351,662 $ 1.29 - 9.48 $ 5.14
Granted (wt. avg. fair value $3.15 per share) 41,593 9.04 - 15.00 10.33
Canceled (105,311) 2.11 - 8.93 7.61
Exercised (138,113) 1.29 - 5.61 2.59
- --------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 1,149,831 2.11 - 15.00 5.40
Granted (wt. avg. fair value $5.09 per share) 74,937 14.00 - 17.09 15.19
Expired (24,200) 8.92 - 8.92 8.92
Exercised (150,865) 2.11 - 8.93 3.85
- --------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 1,049,703 2.32 - 17.09 6.24
Granted (wt. avg. fair value $5.06 per share) 20,831 15.09 - 15.09 15.09
Expired (11,570) 8.93 - 8.93 8.93
Exercised (442,340) 2.11 - 8.93 2.74
- --------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 616,624 $ 4.29 - 17.09 $ 9.00
- --------------------------------------------------------------------------------------------------------------------
Additional information regarding options outstanding as of December 31,
1999 is as follows:
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------- -------------------
Weighted Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
$4.29 - 5.61 153,833 5.7 $5.38 143,065 $5.41
7.31 - 9.04 361,728 7.9 8.78 361,728 8.78
14.00 17.09 101,063 9.3 15.28 36,089 15.26
- -----------------------------------------------------------------------------------------------------------------------
$ 2.11 - 17.09 616,624 6.1 $9.00 540,882 $8.32
- -----------------------------------------------------------------------------------------------------------------------
At December 31, 1999, 1,314,920 shares were available for additional
grants.
401(k) Savings Plan
The Company has a 401(k) Savings Plan under which eligible employees
may elect to make tax deferred contributions from their annual salary,
to a maximum established annually by the IRS. The Company matches 20%
of the employees' contributions. The Company may make additional
contributions to the plan at the discretion of the Board of Directors.
All employees meeting age and service requirements are eligible to
participate in the Plan. Company contributions vest after 3 years of
service. Company contributions during 1999, 1998 and 1997 which are
funded currently, totaled $94,000, $68,000 and $56,000, respectively.
Salary Continuation Plan
In 1996 the Company established a salary continuation plan for five
officers which provides for retirement benefits upon reaching age 63.
During 1997 two of such officers terminated their employment with the
Company without vesting in the plan. The Company accrues such
post-retirement benefits over the vesting periods (of five or ten
years) based on a discount rate of
53
7.5%. In the event of a change in control of the Company, the
officers' benefits will fully vest. The Company recorded compensation
expense of $256,000, $225,000 and $117,000 in 1999, 1998 and 1997,
respectively. Accrued compensation payable under the salary
continuation plan totaled $848,000 and $592,000 at December 31, 1999
and 1998, respectively.
Deferred Compensation Plan
In 1998 the Company established a deferred compensation plan for the
benefit of the Board of Directors and certain officers. In addition to
the deferral of compensation, the plan allows participants the
opportunity to defer taxable income derived from the exercise of stock
options. The participant's may, after making an election to defer
receipt of the option shares for a specified period of time, use a
"stock-for-stock" exercise to tender to the Company mature shares with a
fair value equal to the exercise price of the stock options exercised.
The Company simultaneously delivers new shares to the participant equal
to the value of shares surrendered and the remaining shares under
option are placed in a trust administered by the Company, to be
distributed in accordance with the terms of each participant's election
to defer. During 1999 and 1998 respectively, 43,728 and 24,673 shares
with a fair value of approximately $666,000 and $384,000 were tendered
to the Company using a "stock-for-stock" exercise and, at December 31,
1999, 247,148 shares (with a fair value of approximately $4,078,000 at
December 31, 1999) were held in the Deferred Compensation Trust.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees and its related interpretations. No compensation expense has
been recognized in the financial statements for employee stock
arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro
forma net income and earnings per share had the Company adopted the
fair value method as of the beginning of fiscal 1995. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility
and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions:
expected life, four years following vesting; average stock volatility
of 14.9%; risk free interest rates ranging from 4.52% to 5.77%; and no
dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the 1999,
1998 and 1997 awards had been amortized to expense over the vesting
period of the awards, pro forma net income would have been $7,939,000
($1.12 basic and $1.09 diluted earnings per share, $6,957,000 ($1.05
basic and $0.96 diluted earnings per share) and $6,345,000 ($0.97 basic
and $0.90 diluted per share) in 1999, 1998 and 1997, respectively.
However, the impact of outstanding non-vested stock options granted
prior to 1995
54
has been excluded from the pro forma calculation; accordingly, the
1999, 1998 and 1997 pro forma adjustments are not indicative of future
period pro forma adjustments, when the calculation will apply to all
applicable stock options.
Note 10. Disclosures About Fair Value of Financial Instruments.
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, "Disclosures About Fair Value of Financial Instruments". The
estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions
and/or estimation techniques may have a material effect on the
estimated fair value amounts.
- ------------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and equivalents $ 39,959 $ 39,959 $ 48,886 $ 48,886
Securities 145,435 145,435 170,387 170,387
Loans held for sale - - 6,168 6,208
Loans, net 390,001 387,581 307,818 308,253
Financial Liabilities
Demand deposits 242,260 242,260 247,983 247,983
Time Deposits 178,096 178,147 136,762 137,559
Savings 97,833 97,833 104,447 104,447
Other borrowings 16,950 16,950 - -
- ------------------------------------------------------------------------------------------------------------------
The following estimates and assumptions were used to estimate the fair
value of the financial instruments.
Cash and equivalents -
The carrying amount is a reasonable estimate of fair value.
Securities -
Fair values of securities are based on quoted market prices or dealer
quotes. If a quoted market price was not available, fair value was
estimated using quoted market prices for similar securities.
Loans, net -
Fair values for certain commercial, construction, revolving customer
credit and other loans were estimated by discounting the future cash
flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and similar maturities, adjusted
for the allowance for credit losses.
Certain adjustable rate loans have been valued at their carrying
values, if no significant changes in credit standing have occurred
since origination and the interest rate adjustment characteristics of
the loan effectively adjust the interest rate to maintain a market rate
of return. For adjustable
55
rate loans which have had changes in credit quality, appropriate
adjustments to the fair value of the loans are made.
Demand, time and savings deposits -
The fair value of noninterest-bearing and adjustable rate deposits and
savings is the amount payable upon demand at the reporting date. The
fair value of fixed-rate interest-bearing deposits with fixed maturity
dates was estimated by discounting the cash flows using rates currently
offered for deposits of similar remaining maturities.
Off-balance sheet instruments -
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
credit-worthiness of the counterparties. The fair values of standby
and commercial letters of credit are based on fees currently charged
for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. The fair
values of such off-balance sheet instruments were not significant at
December 31, 1999 and 1998 and, therefore, have not been included in
the table above.
Note 11. Commitments and Contingencies.
In the normal course of business there are various commitments
outstanding to extend credit which are not reflected in the financial
statements, including loan commitments of approximately $128,867,000
and standby letters of credit and financial guarantees of $2,530,000 at
December 31, 1999. The Bank does not anticipate any losses as a result
of these transactions.
Approximately $17,021,000 of loan commitments outstanding at December
31, 1999 relate to construction loans and are expected to fund within
the next twelve months. The remainder relate primarily to revolving
lines of credit or other commercial loans. Many of these loan
commitments are expected to expire without being drawn upon. Therefore
the total commitments do not necessarily represent future cash
requirements.
Stand-by letters of credit are commitments written by the Bank to
guarantee the performance of a customer to a third party. These
guarantees are issued primarily relating to purchases of inventory by
the Bank's commercial customers, are typically short-term in nature and
virtually all such commitments are collateralized.
Most of the outstanding commitments to extend credit are at variable
rates tied to the Bank's reference rate of interest. The Company's
exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit issued is the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. The Company controls the credit risk of the off-balance
sheet financial instruments through the normal credit approval and
monitoring process.
Note 12. Related Party Loans.
The Company makes loans to officers and directors and their associates
subject to loan committee approval and ratification by the Board of
Directors. These transactions are on substantially the same terms as
those prevailing at the time for comparable transactions with
unaffiliated parties and do not involve more than normal risk of
collectibility.
56
An analysis of changes in related party loans for the year ended
December 31, 1999 is as follows:
- -----------------------------------------------------------------------------------------
Beginning Balance Additions Repayments Ending Balance
- -----------------------------------------------------------------------------------------
$ 6,208,000 $ 6,480,000 $ 5,716,000 $ 6,972,000
- -----------------------------------------------------------------------------------------
Committed lines of credit, undisbursed loans and standby letters of
credit to directors and officers at December 31, 1999 were
approximately $3,137,000.
Note 13. Regulatory Matters.
The Company is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly,
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Capital adequacy guidelines and the regulatory framework
for prompt corrective action require that the Company meet specific
capital adequacy guidelines that involve quantitative measures of the
Company's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's
capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weighting and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum ratios of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and a minimum leverage ratio of Tier 1 capital to average
assets (as defined). Management believes, as of December 31, 1999 that
the Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999 and 1998, the most recent notifications from
the Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since
that notification that management believes have changed the
institution's category.
The following table shows the Company's and the Bank's actual capital
amounts and ratios at December 31, as well as the minimum capital
ratios to be categorized as "well capitalized" under the regulatory
framework:
57
- ------------------------------------------------------------------------------------------------------------------------------
To Be Categorized
Well Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1999:
Total Capital (to Risk Weighted Assets):
Company 62,489,000 13.8% 36,125,000 8.0% N/A
Community Bank 60,151,000 13.3% 36,173,000 8.0% 45,216,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 56,938,000 12.6% 18,062,000 4.0% N/A
Community Bank 54,600,000 12.1% 18,086,000 4.0% 27,130,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 56,938,000 9.7% 23,593,000 4.0% N/A
Community Bank 54,600,000 9.2% 23,686,000 4.0% 29,608,000 5.0%
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Company 53,588,000 14.8% 29,004,000 8.0% N/A
Community Bank 51,200,000 14.2% 28,745,000 8.0% 35,931,000 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Company 49,326,000 13.6% 14,502,000 4.0% N/A
Community Bank 46,938,000 13.1% 14,373,000 4.0% 21,559,000 6.0%
Tier 1 Capital (to Risk Average Assets)
Company 49,326,000 9.9% 19,935,000 4.0% N/A
Community Bank 46,938,000 9.2% 20,314,000 4.0% 25,392,000 5.0%
- ------------------------------------------------------------------------------------------------------------------------------
The ability of the Company to pay cash dividends in the future will
largely depend upon the cash dividends paid to it by its subsidiary
Bank . Under State and Federal law regulating banks, cash dividends
declared by a Bank in any calendar year generally may not exceed its
net income for the preceding three fiscal years, less distributions to
the Company, or its retained earnings. Under these provisions, and
considering minimum regulatory capital requirements, the amount
available for distribution from the Bank to the Company was
approximately $20,494,000 as of December 31, 1999.
The Bank is subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates.
In particular, the Bank is prohibited from lending to the Company
unless the loans are secured by specified types of collateral. Such
secured loans and other advances from the Bank is limited to 10% of
Bank shareholders' equity, or a maximum of $5,140,000 at December 31,
1999. No such advances were made during 1999 or 1998.
Note 14. Central Coast Bancorp (Parent Company Only)
The condensed financial statements of Central Coast Bancorp follow (in
thousands):
58
Condensed Balance Sheets
- ---------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------
Assets:
Cash-interest bearing account with Bank $ 893 $ 2,339
Investment in Bank 51,403 48,629
Premises and equipment, net 1,896 1,506
Other Assets 518 549
- ---------------------------------------------------------------------------------------------------
Total assets $ 54,710 $ 53,023
===================================================================================================
Liabilities and Shareholders' Equity
Liabilities $ 1,405 $ 1,824
Shareholders' Equity 53,305 51,199
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 54,710 $ 53,023
===================================================================================================
Condensed Income Statements
- -------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Management fees $ 7,704 $ 5,957 $ 3,624
Other income 14 1 11
Cash dividends received from the Bank 500 1,500 2,000
- -------------------------------------------------------------------------------------------------------
Total income 8,218 7,458 5,635
Operating expenses 8,212 7,435 6,386
- -------------------------------------------------------------------------------------------------------
Income(loss) before income taxes and equity
in undistributed net income of Bank 6 23 (751)
Provision (credit) for income taxes (206) (604) (1,125)
Equity in undistributed
net income of Bank 7,839 6,526 6,129
- -------------------------------------------------------------------------------------------------------
Net income 8,051 7,153 6,503
Other comprehensive income (loss) (5,065) 262 101
- -------------------------------------------------------------------------------------------------------
Comprehensive income $ 2,986 $ 7,415 $ 6,604
=======================================================================================================
59
Condensed Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash:
Operations:
Net income $ 8,051 $ 7,153 $ 6,503
Adjustments to reconcile net
income to net cash provided
by operations:
Equity in undistributed
net income of Bank (7,839) (6,526) (6,129)
Depreciation 546 213 71
Gain on sale of assets (10) - -
(Increase) decrease in other assets 31 1,367 (656)
Increase (decrease) in liabilities 285 1,292 450
- ---------------------------------------------------------------------------------------------------
Net cash provided by operations 1,064 3,499 239
- ---------------------------------------------------------------------------------------------------
Investing Activities -
Proceeds from sale of property 18 - -
Purchases of equipment (944) (1,228) (494)
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (926) (1,228) (494)
- ---------------------------------------------------------------------------------------------------
Financing Activities:
Stock repurchases (2,682) (387) (8)
Stock options and warrants exercised 1,098 264 380
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,584) (123) 372
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,446) 2,148 117
Cash balance, beginning of year 2,339 191 74
- ---------------------------------------------------------------------------------------------------
Cash balance, end of year $ 893 $ 2,339 $ 191
===================================================================================================
Note 15. Selected Quarterly Information (unaudited)
In thousands (except per share data)
- --------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------- ----------------------------------
Three months ended Dec.31 Sep.30 June.30 Mar.31 Dec.31 Sep.30 June.30 Mar.31
- --------------------------------------------------------------------------------------------------------
Interest revenue $11,269 $ 10,755 $ 10,031 $ 9,462 $ 9,498 $ 9,583 $ 9,281 $ 8,992
Interest expense 3,681 3,525 3,329 3,113 3,211 3,358 3,415 3,335
- --------------------------------------------------------------------------------------------------------
Net interest revenue 7,588 7,230 6,702 6,349 6,287 6,225 5,866 5,657
Provision for loan losses 529 418 410 127 78 40 24 17
- --------------------------------------------------------------------------------------------------------
Net interest revenue after
provision for loan losses 7,059 6,812 6,292 6,222 6,209 6,185 5,842 5,640
Total noninterest revenues 569 529 591 542 670 490 530 394
Total noninterest expenses 4,285 4,111 3,824 3,823 3,635 3,314 3,458 3,452
- --------------------------------------------------------------------------------------------------------
Income before taxes 3,343 3,230 3,059 2,941 3,244 3,361 2,914 2,582
Income taxes 1,014 1,227 1,065 1,216 1,284 1,391 1,205 1,068
- --------------------------------------------------------------------------------------------------------
Net income 2,329 2,003 1,994 1,725 1,960 1,970 1,709 1,514
- --------------------------------------------------------------------------------------------------------
Per common share:
Basic earnings per share $ 0.33 $ 0.28 $ 0.28 $ 0.25 $ 0.29 $ 0.30 $ 0.25 $ 0.23
Dilutive earnings per share 0.32 0.27 0.27 0.24 0.27 0.27 0.24 0.21
- --------------------------------------------------------------------------------------------------------
The principal market on which the company's common stock is
traded is Nasdaq.
The earnings per share in the preceding table have been adjusted retroactively
for stock dividends of 10% in January 1998 and 2000, and a 5-for-4 stock
split in January 1999.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Form 10-K is
incorporated by reference to the information contained in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders which will
be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated
by reference to the information contained in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders which will be
filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated
by reference to the information contained in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders which will be
filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated
by reference to the information contained in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders which will be
filed pursuant to Regulation 14A.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1)Financial Statements. Listed and included in Part II, Item 8.
(2)Financial Statement Schedules. Not applicable.
(3)Exhibits.
(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 December5, 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.
*(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.
62
*(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.
63
(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).
(23.1) Independent auditors' consent
(27.1) Financial Data Schedule
*Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K. Not Applicable.
An Annual Report for the fiscal year ended December 31, 1999, and
Notice of Annual Meeting and Proxy Statement for the Company's 2000
Annual Meeting will be mailed to security holders subsequent to the
date of filing this Report. Copies of said materials will be furnished
to the Commission in accordance with the Commission's Rules and
Regulations.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CENTRAL COAST BANCORP
Date: March 16, 2000 By: /S/ NICK VENTIMIGLIA
-------------------------
Nick Ventimiglia, President and Chief
Executive Officer (Principal Executive Officer)
Date: March 16, 2000 By: /S/ ROBERT STANBERRY
------------------------
Robert Stanberry, Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
- ---------- ----- ----
/S/ C. EDWARD BOUTONNET Director 3/16/00
- -----------------------
(C. Edward Boutonnet)
- ----------------------- Director 3/16/00
(Bradford G. Crandall)
/S/ ALFRED P. GLOVER Director 3/16/00
- -----------------------
(Alfred P. Glover)
/S/ MICHAEL T. LAPSYS Director 3/16/00
- -----------------------
(Michael T. Lapsys)
/S/ ROBERT M. MRAULE Director 3/16/00
- -----------------------
(Robert M. Mraule)
/S/ DUNCAN L. MCCARTER Director 3/16/00
- -----------------------
(Duncan L. McCarter)
/S/ LOUIS A. SOUZA Director 3/16/00
- -----------------------
(Louis A. Souza)
Director 3/16/00
- -----------------------
(Mose E. Thomas)
/S/ NICK VENTIMIGLIA Chairman,President 3/16/00
- -------------------- and CEO
(Nick Ventimiglia)
65
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
23.1 Independent auditors' consent. 67
27.1 Financial Data Schedule 68
66