# ** **

# **FORM 10-QSB**

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20429**

 

**(Mark One)**
| **ý**                                                                                                                                                                                           | **QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|
|                                                                                                                                                                                                 |
| **For the quarterly period ended March 31, 2004**                                                                                                                                                    |
|                                                                                                                                                                                                 |
| **o**                                                                                                                                                                                                | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE  ACT**                    |
|                                                                                                                                                                                                 |
| **For the transition period from                 to             ** |

 

**Commission File No. 000-32827**

 

**COASTBANCORP**

(Exact name of Registration as Specified in its Charter)

 
| **California**                           |   | **77-0567091**                    |
|------------------------------------------|--------|-----------------------------------|
| (State of incorporation or organization) |   | (IRS Employer Identification No.) |

 

**500Marsh Street, San Luis Obispo, CA 93401**

(Address of principal executive offices)

 

**(805)541-0400**

(Registrant’s telephone number, including area code)

 

**Not applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes:    ý   No:     o

# ** **

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date:

 

CommonStock – As of April 15, 2004, there were 639,300 shares of the issuer’s commonstock outstanding.

 

TransitionalSmall Business Disclosure Format (Checkone)               Yes:     o    No:    ý

 

 

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**FORWARD LOOKING STATEMENTS**

 

**CERTAIN STATEMENTS IN THISQUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKING INFORMATION WITHIN THEMEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND ARE SUBJECT TO THE“SAFE HARBOR” CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIESTHAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THEFORWARD-LOOKING STATEMENTS.  SUCH RISKSAND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS:COMPETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASES SIGNIFICANTLY; CHANGESIN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS; GENERAL ECONOMIC CONDITIONS,EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTINGIN, AMONG OTHER THINGS A DETERIORATION IN CREDIT QUALITY AND AN INCREASE IN THEPROVISION FOR POSSIBLE LOAN LOSSES; CHANGES IN THE REGULATORY ENVIRONMENT;CHANGES IN BUSINESS CONDITIONS, PARTICULARLY IN SAN LUIS OBISPO COUNTY;VOLATILITY OF RATE SENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATAPROCESSING SYSTEMS FAILURES OR FRAUD; ASSET/LIABILITY MATCHING RISKS ANDLIQUIDITY RISKS; CHANGES IN THE SECURITIES MARKETS; AND RISKS ASSOCIATED WITHTHE WAR ON TERRORISM AND IN IRAQ .**

 

**THEREFORE, THE INFORMATIONCONTAINED IN THIS DOCUMENT SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THEBUSINESS PROSPECTS OF COAST BANCORP.**

 

**MOREOVER, WHEREVER PHRASES SUCH ASSIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENT BELIEVES,” OR “MANAGEMENTCONSIDERS” ARE USED, SUCH STATEMENTS ARE AS OF, AND BASED UPON THE KNOWLEDGE OFMANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGE BY THE PASSAGE OF TIMEAND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THESAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TO FORWARD-LOOKINGSTATEMENTS.**

 

2

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**INDEX**

**COAST BANCORP**

 
| **PART I – FINANCIAL INFORMATION**                                                                  |                                                               |
|----------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                                                     |                                                               |
| **Item 1 - Financial Statements**                                                                        |                                                               |
|                                                                                                     |                                                               |
|                                                                                                     | Statement of Financial Condition                                   |   |
|                                                                                                     | Statement of Operations                                            |   |
|                                                                                                     | Statement of Changes in Shareholders’  Equity                 |   |
|                                                                                                     | Cash Flow Statement                                                |   |
|                                                                                                     |                                                               |
| **Item 2 - Management’s Discussion and  Analysis of Financial Condition and Results of Operations** |                                                               |
|                                                                                                     |                                                               |
|                                                                                                     | Business Description                                               |   |
|                                                                                                     | Overview                                                           |   |
|                                                                                                     | Net Interest Income                                                |   |
|                                                                                                     | Provision for Loan Losses                                          |   |
|                                                                                                     | Non-interest Income                                                |   |
|                                                                                                     | Non-interest Expense                                               |   |
|                                                                                                     | Income  Taxes                                                      |   |
|                                                                                                     | Financial Condition                                                |   |
|                                                                                                     | Asset  Quality                                                     |   |
|                                                                                                     | Capital                                                            |   |
|                                                                                                     | Liquidity                                                          |   |
|                                                                                                     |                                                               |   |
| **Item 3 – Controls and Procedures**                                                                |                                                               |
|                                                                                                     |                                                               |
| **PART II – OTHER INFORMATION**                                                                     |                                                               |
|                                                                                                     |                                                               |
|                                                                                                     | Item 1 –  Legal Proceedings                                   |   |
|                                                                                                     | Item 2 –  Changes in Securities                               |   |
|                                                                                                     | Item 3 –  Defaults upon Senior Securities                     |   |
|                                                                                                     | Item 4 –  Submission of Matters to a Vote of Security Holders |   |
|                                                                                                     | Item 5 –  Other Information                                   |   |
|                                                                                                     | Item 6 –  Exhibits and Reports of Form 8-K                    |   |
|                                                                                                     |                                                               |
| **SIGNATURES**                                                                                           |                                                               |
|                                                                                                          |                                                                    |  |  |

 

3

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**COASTBANCORP & SUBSIDIARIES**

 

**ITEM I****- FINANCIAL STATEMENTS**

 

Consolidated Balance Sheet (Unaudited)

(in thousands)

 
|                                                                                                                   |   |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------|---------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                             |   |   |                |    |                    |
| Cash and due from banks                                                                                                |   |   | $                   | 7,543   |                    | $      | 9,273 |   |
| Federal funds sold                                                                                                     |   |   | 9,100               |    | 5,400                   |   |
| TOTAL CASH  AND CASH EQUIVALENTS                                                                                       |   |   | 16,643              |    | 14,673                  |   |
|                                                                                                                   |   |   |                |    |                    |   |
| Interest-bearing deposits                                                                                              |   |   | —              |    | —                  |   |
|                                                                                                                   |   |   |                |    |                    |   |
| Investment securities:                                                                                                 |   |   |                |    |                    |   |
| Securities held to maturity                                                                                            |   |   | —              |    | —                  |   |
| Securities available for sale                                                                                          |   |   | 8,029               |    | 12,073                  |   |
| TOTAL  INVESTMENT SECURITIES                                                                                           |   |   | 8,029               |    | 12,073                  |   |
| Loans:                                                                                                                 |   |   |                |    |                    |   |
| Commercial                                                                                                             |   |   | 30,655              |    | 28,244                  |   |
| Real estate - construction                                                                                             |   |   | 15,802              |    | 13,501                  |   |
| Real estate - other                                                                                                    |   |   | 64,895              |    | 62,282                  |   |
| Consumer                                                                                                               |   |   | 3,655               |    | 3,849                   |   |
| TOTAL LOANS                                                                                                            |   |   | 115,007             |    | 107,876                 |   |
| Net deferred loan fees                                                                                                 |   |   | (405                | )       | (414                    | )      |
| Allowance for loan losses                                                                                              |   |   | (1,146              | )       | (1,109                  | )      |
| NET LOANS                                                                                                              |   |   | 113,456             |    | 106,353                 |   |
| Premises and equipment                                                                                                 |   |   | 7,386               |    | 7,091                   |   |
| Deferred taxes                                                                                                         |   |   | 369                 |    | 367                     |   |
| Federal reserve bank stock, at cost                                                                                    |   |   | 416                 |    | 415                     |   |
| Accrued interest and other assets                                                                                      |   |   | 1,436               |    | 1,312                   |   |
| TOTAL ASSETS                                                                                                           |   |   | $                   | 147,735 |                    | $      | 142,284 |   |
|                                                                                                                   |   |   |                |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                          |   |   |                |    |                    |
| Deposits:                                                                                                              |   |   |                |    |                    |   |
| Noninterest-bearing demand                                                                                             |   |   | $                   | 36,179  |                    | $      | 34,636 |   |
| Money market and NOW                                                                                                   |   |   | 34,531              |    | 35,754                  |   |
| Savings                                                                                                                |   |   | 6,963               |    | 7,015                   |   |
| Time deposits of $100,000 or more                                                                                      |   |   | 36,351              |    | 32,412                  |   |
| Other time deposits                                                                                                    |   |   | 18,940              |    | 18,206                  |   |
| TOTAL  DEPOSITS                                                                                                        |   |   | 132,964             |    | 128,023                 |   |
| Notes payable                                                                                                          |   |   | 120                 |    | 164                     |   |
| Junior subordinated debt securities                                                                                    |   |   | 5,155               |    | 5,155                   |   |
| Other liabilities                                                                                                      |   |   | 414                 |    | 129                     |   |
| TOTAL  LIABILITIES                                                                                                     |   |   | 138,653             |    | 133,471                 |   |
| Commitments and contingencies                                                                                          |   |   | —              |    | —                  |   |
| Stockholders’ equity                                                                                              |   |   |                |    |                    |   |
| Preferred stock - 10,000,000 authorized,  none outstanding                                                             |   |   |                |    |                    |   |
| Common stock no par value; 10,000,000  shares authorized; issued and outstanding: 639,300 in 2004 and 638,300 in  2003 |   |   | 6,423               |    | 6,407                   |   |
| Additional paid-in capital                                                                                             |   |   |                |    |                    |   |
| Retained earnings                                                                                                      |   |   | 2,633               |    | 2,375                   |   |
| Accumulated other comprehensive income -  net unrealized gains on available-for-sale securities                        |   |   | 26                  |    | 31                      |   |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                       |   |   | 9,082               |    | 8,813                   |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                       |   |   | $                   | 147,735 |                    | $      | 142,284 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements*

 

4

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**COAST BANCORP & SUBSIDIARIES**

 

Statementof Operations(unaudited)

(In Thousands, except for per share numbers)

 
|                                                 |   | **For the  Three Months Ended  March 31,** |   |
|------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                 |   | **2004**                                   |   | **2003** |   |
|                                                 |   |                                       |   |   |   |
| Interest income:                                     |   |                                       |   |   |   |
| Interest and fees on loans                           |   | $                                          | 1,873  |   | $ | 1,644 |   |
| Interest on taxable securities                       |   | 49                                         |   | 19 |   |
| Interest on federal funds sold                       |   | 15                                         |   | 48 |   |
| Other interest income                                |   | 9                                          |   | 5 |   |
|                                                 |   |                                       |   |   |   |
| Total interest income                                |   | 1,946                                      |   | 1,716 |   |
|                                                 |   |                                       |   |   |   |
| Interest expense:                                    |   |                                       |   |   |   |
| Interest on money market and NOW accounts            |   | 57                                         |   | 68 |   |
| Interest on savings deposits                         |   | 13                                         |   | 12 |   |
| Interest on time deposits                            |   | 261                                        |   | 283 |   |
| Interest on other borrowings                         |   | 72                                         |   | 77 |   |
| Total Interest Expense                               |   | 403                                        |   | 440 |   |
|                                                 |   |                                       |   |   |   |
| Net interest income                                  |   | 1,543                                      |   | 1,276 |   |
| Provision for loan losses                            |   | 40                                         |   | 9 |   |
|                                                 |   |                                       |   |   |   |
| Net interest income after provision for  loan losses |   | 1,503                                      |   | 1,267 |   |
|                                                 |   |                                       |   |   |   |
| Noninterest income:                                  |   |                                       |   |   |   |
| Service charges on deposit accounts and  other       |   | 69                                         |   | 84 |   |
| Gain on sale of loans and servicing fees             |   | 275                                        |   | 25 |   |
| Gain on sale of securities                           |   | 43                                         |   | — |   |
|                                                 |   |                                       |   |   |   |
| Total noninterest income                             |   | 387                                        |   | 109 |   |
|                                                 |   |                                       |   |   |   |
| Noninterest expense:                                 |   |                                       |   |   |   |
| Salaries and benefits                                |   | 786                                        |   | 631 |   |
| Net occupancy expense (net of rental  income)        |   | 78                                         |   | 95 |   |
| Equipment expense                                    |   | 63                                         |   | 65 |   |
| Other expense                                        |   | 534                                        |   | 363 |   |
|                                                 |   |                                       |   |   |   |
| Total noninterest expense                            |   | 1,461                                      |   | 1,154 |   |
|                                                 |   |                                       |   |   |   |
| Income before taxes                                  |   | 433                                        |   | 222 |   |
| Income taxes                                         |   | 175                                        |   | 92 |   |
| Net income                                           |   | $                                          | 258    |   | $ | 130 |   |
|                                                 |   |                                       |   |   |   |
| Earnings per share - Basic                           |   | $                                          | 0.40   |   | $ | 0.20 |   |
| Earnings per share - Diluted                         |   | $                                          | 0.37   |   | $ | 0.19 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements*

 

5

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**COASTBANCORP & SUBSIDIARIES**

 

Statement of changes inStockholders’ Equity(Unaudited)

(In Thousands, Except Number of Shares) 

 
|                                                                              |   | **Common  Stock**     |   |       |   |                      |   | **Accumulated**        |   |                             |   |
|-----------------------------------------------------------------------------------|--------|-----------------------|--------|------------|--------|---------------------------|--------|------------------------|--------|----------------------------------|--------|
|                                                                              |   | **Number of  Shares** |   | **Amount** |   | **Comprehensive  Income** |   | **Retained  Earnings** |   | **Other  Comprehensive  Income** |   | **Total** |   |
| **Balance at January 1, 2003**                                                    |   | 632,400               |   | $          | 6,324  |                      |   |                   | $      | 1,456                            |   | $ | 49 |   | $ | 7,829 |   |
| Exercise of stock options                                                         |   | 5,900                 |   | 83         |   |                      |   |                   |   |                             |   | 83 |   |
| Cash dividends                                                                    |   |                  |   |       |   |                      |   | (63                    | )      |                             |   | (63 | ) |
| **Comprehensive Income**                                                          |   |                  |   |       |   |                      |   |                   |   |                             |   |   |   |
| Net income                                                                        |   |                  |   |       |   | $                         | 982    |                   | 982    |                             |   |   | 982 |   |
| Unrealized loss on available-for-sale  securities, net of taxes                   |   |                  |   |       |   | (3                        | )      |                   |   | (3                               | )      | (3 | ) |
| Less reclassification adjustments for gains  included in net income, net of taxes |   |                  |   |       |   | (15                       | )      |                   |   | (15                              | )      | (15 | ) |
| **Total comprehensive income**                                                    |   |                  |   |       |   | $                         | 964    |                   |   |                             |   |   |   |   |
|                                                                              |   |                  |   |       |   |                      |   |                   |   |                             |   |   |   |
| **Balance at December 31, 2003**                                                  |   | 638,300               |   | $          | 6,407  |                      |   |                   | $      | 2,375                            |   | $ | 31 |   | $ | 8,813 |   |
| Exercise of stock options                                                         |   | 1,000                 |   | 16         |   |                      |   |                   |   |                             |   | 16 |   |
| Cash dividends                                                                    |   |                  |   |       |   |                      |   |                   |   |                             |   |   |   |
| **Comprehensive Income**                                                          |   |                  |   |       |   |                      |   |                   |   |                             |   |   |   |
| Net income                                                                        |   |                  |   |       |   | $                         | 258    |                   | 258    |                             |   |   | 258 |   |
| Unrealized gain on available-for-sale  securities, net of taxes                   |   |                  |   |       |   | 20                        |   |                   |   | 20                               |   | 20 |   |
| Less reclassification adjustments for gains  included in net income net of taxes  |   |                  |   |       |   | (25                       | )      |                   |   | (25                              | )      | (25 | ) |
| **Total comprehensive income**                                                    |   |                  |   |       |   | $                         | 204    |                   |   |                             |   |   |   |   |
|                                                                              |   |                  |   |       |   |                      |   |                   |   |                             |   |   |   |
| **Balance at March 31, 2004**                                                     |   | 639,300               |   | $          | 6,423  |                      |   |                   | $      | 2,633                            |   | $ | 26 |   | $ | 9,082 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

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**COASTBANCORP & SUBSIDIARIES**

 

Statement of Cash Flows (unaudited)

(InThousands)

 
|                                                                               |   |   | **For the  Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|--------|--------------------------------------------|--------|
|                                                                               |   |   | **2004**                                   |   | **2003** |   |
| Operating activities                                                               |   |   |                                       |   |   |   |
| Net income                                                                         |   |   | $                                          | 258    |   | $ | 130 |   |
| Adjustments to reconcile net income to Net  cash provided by operating activities: |   |   |                                       |   |   |   |
| Depreciation and amortization                                                      |   |   | 98                                         |   | 87 |   |
| Provision for loan losses                                                          |   |   | 40                                         |   | 9 |   |
| Realized gain on investment securities                                             |   |   | (43                                        | )      |   |   |
| Other items - net                                                                  |   |   | 165                                        |   | 11 |   |
| Net cash  provided by operating activities                                         |   |   | 518                                        |   | 237 |   |
|                                                                               |   |   |                                       |   |   |   |
| Investing activities                                                               |   |   |                                       |   |   |   |
| Purchase of investment securities                                                  |   |   | (2,019                                     | )      | — |   |
| Proceeds from sale of investment securities                                        |   |   | 5,094                                      |   | — |   |
| Maturities of investment securities                                                |   |   | 1,000                                      |   | — |   |
| Net change in loans                                                                |   |   | (7,143                                     | )      | (5,699 | ) |
| Purchase of premises and equipment                                                 |   |   | (393                                       | )      | (501 | ) |
| Net cash  used by investing activities                                             |   |   | (3,461                                     | )      | (6,200 | ) |
|                                                                               |   |   |                                       |   |   |   |
| Financing activities                                                               |   |   |                                       |   |   |   |
| Increase in deposits                                                               |   |   | 4,941                                      |   | 8,421 |   |
| Principle payments on notes payable                                                |   |   | (44                                        | )      | (44 | ) |
| Proceeds from exercise of options                                                  |   |   | 16                                         |   | 13 |   |
| Net cash  provided (used) by financing actvities                                   |   |   | 4,913                                      |   | 8,390 |   |
|                                                                               |   |   |                                       |   |   |   |
| Increase in  cash and cash equivalents                                             |   |   | 1,970                                      |   | 2,427 |   |
|                                                                               |   |   |                                       |   |   |   |
| Cash and cash equivalents at beginning of  period                                  |   |   | 14,673                                     |   | 23,212 |   |
|                                                                               |   |   |                                       |   |   |   |
| Cash and  cash equivalents at end of period                                        |   |   | $                                          | 16,643 |   | $ | 25,639 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

7

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**Note 1**                                                             **Basis ofPresentation**

 

The accompanying financial information has been prepared in accordancewith the Securities and Exchange Commission rules and regulations for quarterlyreporting and therefore does not necessarily include all information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles.  This information should be read inconjunction with the Company’s Annual Report for the year ended December 31,2003 filed on Form 10-KSB.

 

Operating results for interim periods are not necessarily indicative ofoperating results for an entire fiscal year. In the opinion of management, the unaudited financial information forthe three month periods ended March 31, 2004 and 2003 reflect all adjustments,consisting only of normal recurring accruals and provisions, necessary for afair presentation thereof.

 

Some matters discussed in this Form 10-QSB may be “forward-lookingstatements” within the meaning of the Private Litigation Reform Act of 1995 andtherefore may involve risks, uncertainties and other factors which may causeour actual results to be materially different from the results expressed or impliedby our forward-looking statements. These statements generally appear with words such as “anticipate”,“believe”, “estimate”, “may”, “intend”, and “expect”.

 

**Note 2****                                                             EarningsPer Share**

 

Effective December 31, 1997, the Company adopted SFAS No. 128, *“Earningsper Share”.*  Accordingly,basic earnings per share are computed by dividing income available to commonshareholders by the weighted average number of common shares outstanding duringeach period.  The computation of dilutedearnings per share also considers the number of shares issuable upon theassumed exercise of outstanding common stock options.  All earnings per common share amounts presented have beenrestated in accordance with the provisions of this statement.

 
|                                          |   | **For the  Three Months Ended  March 31,** |   |
|-----------------------------------------------|--------|--------------------------------------------|--------|
|                                          |   | **2004**                                   |   | **2003** |   |
|                                          |   | **Shares**                                 |   | **Shares** |   |
| Used in Basic EPS                             |   | 637,399                                    |   | 632,750 |   |
| Dilutive Effect of outstanding Stock  Options |   | 64,988                                     |   | 31,638 |   |
| Earnings per share – Diluted             |   | 702,387                                    |   | 664,388 |   |

 

**Note 3**                                                             **Stock-BasedCompensation**

 

SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages,but does not require, companies to record compensation cost for stock-basedemployee compensation plans at fair value. The Company has chosen to continue to account for stock-basedcompensation using the intrinsic value method prescribed in AccountingPrinciples Board (“APB”) Opinion No. 25, *“Accounting for Stock Issued to Employees,”*and related interpretations. Accordingly, compensation cost for stock options is measured as theexcess, if any, of the quoted market price of the Company’s stock at the dateof the grant over the amount an employee must pay to acquire the stock.

 

8

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Had compensation costs for the Company’s stock option plan beendetermined based on the fair value at the grant dates for awards under thisplan consistent with the method of SFAS No. 123, the Company’s net income andearnings per share would have been reduced for 2003 and 2002 to the pro formaamounts indicated below:

 
|                                                                                            |   | **For the  Three Months Ended  March 31,** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                            |   | **2004**                                   |   | **2003** |   |
|                                                                                            |   |                                       |   |   |   |
| Net Income:                                                                                     |   |                                       |   |   |   |
| As reported                                                                                     |   | $                                          | 258    |   | $ | 130 |   |
| Stock-based compensation using the  intrinsic value method                                      |   | —                                     |   | — |   |
| Stock-Based compensation that would have  been reported using the fair value method of SFAS 123 |   | (11                                        | )      | (11 | ) |
| Pro Forma net income                                                                            |   | $                                          | 247    |   | $ | 119 |   |
|                                                                                            |   |                                       |   |   |   |
| Basic earnings per share:                                                                       |   |                                       |   |   |   |
| As reported                                                                                     |   | $                                          | 0.40   |   | $ | 0.20 |   |
| Proforma                                                                                        |   | $                                          | 0.39   |   | $ | 0.19 |   |
|                                                                                            |   |                                       |   |   |   |
| Diluted earnings per share:                                                                     |   |                                       |   |   |   |
| As reported                                                                                     |   | $                                          | 0.39   |   | $ | 0.20 |   |
| Pro forma                                                                                       |   | $                                          | 0.35   |   | $ | 0.19 |   |

 

**Note 4**                                                             **CurrentAccounting Pronouncements**

 

In December 2003, FASB issued FASB Interpretation (FIN) No. 46, “*Consolidationof Variable Interest Entities, an interpretation of ARB No. 51.”*  This interpretation addresses theconsolidation of variable interest entities as defined in theInterpretations.  This Interpretationwill require companies that have issued trust preferred securities todeconsolidate the related entities.  TheCompany has deconsolidated the trust preferred securities, which did not have amaterial impact on the Company’s financial statements.

 

**Item 2****.****                                                           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The unaudited financial statements have been prepared in accordancewith the instructions to form 10-QSB and contain statements relating to futureresults of the Company that are considered to be “forward looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  These statements relate to, amongother things, credit loss reserve adequacy, and simulation of changes ininterest rates and litigation results. Actual results may differ materially from those expressed or implied asa result of certain risks and uncertainties, including, but not limited to,changes in political and economic conditions, interest rate fluctuations,competitive product and pricing pressures within the Company’s markets, equityand fixed income market fluctuations, personal and corporate customers’bankruptcies, inflation, acquisitions and integrations of acquired businesses,technological change, changes in law, changes in fiscal, monetary, regulatoryand tax policies, monetary fluctuations, political and global changes arisingfrom the terrorist attacks of September 11, 2001 as well as the war in Iraq andits aftermath, success in gaining regulatory approvals when required as well asother risks and uncertainties detailed elsewhere in this quarterly report orfrom time to time in the filings of the Company with the Securities Exchange Commission.  Such forward-looking statements speak onlyas of the date on which such statements are made, and the corporationundertakes no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events.  The accompanying financial information should be read inconjunction with Coast Bancorp’s Annual Report on Form 10-KSB for the yearended December 31, 2003.

 

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Description of Business

 

*CoastBancorp*

 

CoastBancorp (the “Bancorp” or “Coast Bancorp”), headquartered in San Luis Obispo,California, and is a California corporation incorporated in 2001.  Coast Bancorp became the bank holding companyof Coast National Bank on May 31, 2001 through a corporate reorganization.  In the reorganization, Coast National Bankbecame the wholly-owned subsidiary of Coast Bancorp and the shareholders of theBank became shareholders of Coast Bancorp. Coast Bancorp is operated through a two-tiered corporate structure.  At the holding company level the affairs ofCoast Bancorp are overseen by a Board of Directors elected by the shareholdersof Coast Bancorp at the annual meeting of shareholders.  The business of the Bank is overseen by aBoard of Directors elected by Coast Bancorp, the sole owner of the Bank.  As of the date of this Form 10-QSB therespective members of the Board of Directors of the Bank and the Board of Directorsof Coast Bancorp are identical.  CoastBancorp is subject to the regulations of, and examination by, the Board ofGovernors of the Federal Reserve System. At present, Coast Bancorp does not engage in any material businessactivities other than the ownership of the Bank.  Financial information presented herein for March 31, 2004and comparative information for December 31, 2003 and March 31, 2003 isinclusive of the consolidated Company.

 

*CoastNational Bank*

 

CoastNational Bank (the “Bank”) was chartered June 16, 1997 (charter #23222) by TheOffice of the Comptroller of the Currency as a national bank.  The Bank commenced operations on that datewith two offices, 16 employees and $6,250,000 in capital.  The original branch offices were located at486 Marsh Street, San Luis Obispo and 1199 Grand Avenue, Arroyo Grande,California.  Since that time, anadditional branch office was opened in June 1998 at 948 Morro Bay Boulevard inMorro Bay, California and another branch office was opened in July 1999 at 1193Los Osos Valley Road in Los Osos, California. In July 2002, a loan production office was opened at 930 South BroadwayStreet in Santa Maria, California. In May 2003 the Bank opened another loanproduction office in Bakersfield, California.

 

Whenthe Bank opened for business in June 1997, it purchased the real estate andbuilding that housed the Arroyo Grande branch office.  On October 14, 1999, the Bank purchased an adjacent lot next tothe San Luis Obispo main office on Marsh Street.  A few months later on February 1, 2000, the Bank also purchasedthe contiguous property and building that was home to the San Luis Obispo mainoffice at 486 Marsh Street. Construction of a new head office building on the adjacent lot began onOctober 11, 2001 and was completed on November 25, 2002.  The new main office, located at 500 MarshStreet is approximately 10,700 square feet with the San Luis Obispo branchoperation occupying the ground floor and the administrative offices occupyingthe second floor.  The original mainoffice at 486 Marsh Street now houses the Bank’s Small Business Lending Centerand the Bank’s Note Department.

 

OnMarch 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard inMorro Bay that is approximately one block from the existing branch.  The purpose for this acquisition was theeventual construction and relocation of the Morro Bay branch to a largerfacility with a drive-through lane.  InOctober 2003 construction began on the new Morro Bay facility with ananticipated completion date in the summer of 2004.  The branch will consist of approximately 2700 square feet withtwo drive through lanes.

 

Asof March 31, 2004, the Bank had a total of 64 employees.  A number of these employees are part-timehowever. Part-time employees are converted to full-time equivalent employees onthe percentage of their weekly hours worked compared to 40 hours.  On a full-time equivalent basis, employeesrepresent 56 positions.  The Bank valuesits employees and believes that it enjoys satisfactory relations withthem.  They are actively engagedindividually and as a team in contributing to the Bank’s realization of itsvision and mission.

 

**Critical Accounting Policies**

 

Ouraccounting policies are integral to understanding the results reported.  In preparing its consolidated financialstatements, the Company is required to make judgments and estimates that mayhave a significant impact upon its financial results.  Certain accounting policies require the Company to makesignificant estimates and assumptions, which have a material impact on thecarrying value of certain assets and liabilities, and are considered criticalaccounting policies.  The estimates andassumptions used are based on the historical experiences and other factors,which are believed to be reasonable under the circumstances.  Actual

 

10

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results could differ significantly from theseestimates and assumptions, which could have a material impact on the carryingvalue of assets and liabilities at the balance sheet dates and results ofoperations for the reporting periods. For example, the Company’s determination of the adequacy of itsallowance for loan losses is particularly susceptible to management’s judgmentand estimates.  The following is a briefdescription of our current accounting policies involving significant managementvaluation judgments.

 

*Allowancefor Loan Losses*

 

Theallowance for loan losses represents management’s best estimate of lossesinherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loanlosses charged to expense and reduced by loans charged off, net ofrecoveries.  The allowance for loanlosses is determined based on management’s assessment of several factors: reviewsand evaluation of individual loans, changes in the nature and volume of theloan portfolio, current economic conditions and the related impact on specificborrowers and industry groups, historical loan loss experiences and the levelsof classified and nonperforming loans.

 

Loansare considered impaired if, based on current information and events, it isprobable that we will be unable to collect the scheduled payments of principalor interest when due according to the contractual terms of the loanagreement.  The measurement of impairedloans is generally based on the present value of expected future cash flowsdiscounted at the historical effective interest rate stipulated in the loanagreement, except that all collateral-dependent loans are measured forimpairment based on the fair value of the collateral.  In measuring the fair value of the collateral, management usesassumptions and methodologies consistent with those that would be utilized byunrelated third parties.

 

Changesin the financial condition of individual borrowers, in economic conditions, inhistorical loss experience and in the condition of the various markets in whichcollateral may be sold may all affect the required level of the allowance forloan losses and the associated provision for loan losses.

 

*Availablefor Sale Securities*

 

Thefair value of most securities classified as available for sale are based onquoted market prices.  If quoted marketprices are not available, fair values are extrapolated from the quoted pricesof similar instruments.

 

**Overview**

 

Asof March 31, 2004, total consolidated assets of Coast Bancorp were$147.7million in comparison to total assets of $142.2 million as of December31, 2003. This represents an increase of $5.5 million, or 3.87%.  Compared to total assets of $130.0 millionat March 31, 2003, the company has increased assets by $17.7 million, or13.62%, over the last twelve months.

 

For the three months ended March 31, 2004 the Bancorp reportedconsolidated net income of $258,000 or $0.37 diluted earnings per sharecompared to net income of $130,000 and $0.19 diluted earnings per share for thesame period during 2003.

 

**Net Interest Income**

 

Net interest income is the amount by which the interest andamortization of fees generated from loans and other earning assets exceed thecost of funding those assets, usually deposit account interest expense.  Net interest income depends on thedifference between gross interest and fees earned on the loans and investmentportfolios and the interest rates paid on deposits and borrowings (the“interest rate spread”).   Net interestincome was $1,543,000 for the quarter ended March 31, 2004, compared to$1,276,000 for the quarter ended March 31, 2003, representing an increase of20.92%.  This increase was primarily theresult of growth in interest-earning assets generated by the Bank’s branches.

 

The following table sets forth the components of net interest income,average earning assets and net interest margin: (in thousands)

 
|                   |   | **Three  Months Ended  March 31,** |    | **Year Ended  December 31,  2003** |   |
|------------------------|--------|------------------------------------|---------|------------------------------------|--------|
| **2004**               |   | **2003**                           |
|                   |   |                               |    |                               |   |   |   |
| Interest Income        |   | $                                  | 1,946   |                               | $      | 1,716 |   | $ | 7,443 |   |
| Interest Expense       |   | 403                                |    | 440                                |   | 1,693 |   |
| Net Interest  Income   |   | $                                  | 1,543   |                               | $      | 1,276 |   | $ | 5,750 |   |
|                   |   |                               |    |                               |   |   |   |
| Average Earning Assets |   | $                                  | 128,013 |                               | $      | 108,467 |   | $ | 120,807 |   |
| Net Interest Margin    |   | 4.82                               | %       | 4.71                               | %      | 4.76 | % |

 

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The increase in the net interest margin in the first quarter of 2004 ascompared to the net interest margin at December 31, 2003 was due primarily tothe continued growth in loans while maintaining quality and the Bank’s abilityto respond to the changes in interest rates.

 

**Provision for Loan Losses**

 

Management of the Bank and the Company believes that the allowance forloan losses is adequate.  The Bank hasestablished a monitoring system for loans in order to identify impaired loansand potential problem loans and to permit periodic evaluation of impairment andadequacy of the allowance for loan losses in a timely manner.  The monitoring system and allowance for loanlosses methodology have evolved over a period of years, and loanclassifications have been incorporated into the determination of the allowancefor loan losses.  This monitoring systemand allowance methodology includes a loan-by-loan analysis for all classifiedloans as well as loss factors for the balance of the unclassifiedportfolio.  Classified loans arereviewed individually to estimate the amount of probable losses that needs tobe included in the allowance.  Thesereviews include analysis of financial information as well as evaluation ofcollateral securing the credit.  Lossfactors on the unclassified portion of the portfolio are based on such factorsas historical loss experience, current portfolio delinquency and trends, andother inherent risk factors such as economic conditions, concentrations in theportfolio, risk levels of particular loan categories, internal loan review andmanagement oversight.

 

The Company made a $40,000 contribution to the allowance for loanlosses for the three months ended March 31, 2004 compared to $9,000 for thesame period in 2003.  Managementbelieves that the allowance, which equals .99% of total loans at March 31,2004, is adequate to cover future losses. The allowance for loan losses at December 31, 2003 was 1.03% of totalloans.

 

Changes in the allowance for loan losses for the quarter ended March31, 2004 and 2003 are as follows (dollar amounts in thousands):

 
|                           |   | **Three  Months Ended  March 31,** |   |
|--------------------------------|--------|------------------------------------|--------|
|                           |   | **2004**                           |   | **2003** |   |
|                           |   |                               |   |   |   |
| Allowance, Beginning of Period |   | $                                  | 1,109  |   | $ | 1,000 |   |
| Provision for Loan Losses      |   | 40                                 |   | 9 |   |
| Net Recoveries (Charge-offs)   |   | (3                                 | )      | 1 |   |
|                           |   |                               |   |   |   |
| Allowance, End of Period       |   | $                                  | 1,146  |   | $ | 1,010 |   |

 

**Non-interestIncome**

 

Non-interest income represents deposit account service charges andother types of fee income.  Non-interestincome for the quarter ended March 31, 2004 totaled $387,000 compared to$109,000 for the same period in 2003 a 255% increase.  During the three months ended March 31, 2004, the Company electedto realize gains of $215,000 from the sale of the guaranteed portion ofgovernment guaranteed loans.  It hasbeen the Company’s policy to sell securities due in one year if the gain willresult in higher income after reinvesting the proceeds.  The gain on these sales for quarter endingMarch 31, 2004 was $43,000.  The portionof these funds reinvested in securities gained 59 basis points.  There were no sales in the same periodending March 31, 2003.

 

**Non-interest Expense**

 

Non-interest expense represents salaries, occupancy expenses,professional expenses, outside services and other miscellaneous expensesnecessary to conduct business. Noninterest expense for the quarter ended March 31, 2004 totaled$1,461,000 compared to $1,154,000 for the same period in 2003 for an increaseof 26.6%.  This increase is primarilydue to the continuing growth of the

Bank’s government guaranteed lending department specializing in SmallBusiness Administration lending programs and the overall expansion of theBank’s customer base.  The number offull time equivalent employees was 56 in March, 2004 compared to 44 for March,2003.  The increase in loans anddeposits of $19.8 million and $15.7 million respectively compared to March,2003 required additional personnel to provide the service our customersdeserve.   Other expense also reflectsthe cost of processing and servicing these increased loans and deposits.

 

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**IncomeTaxes**

 

The Bank recorded a $175,000 tax provision during the first quarter of2004 compared to $92,000 during the same period in 2003.

 

**FinancialCondition**

 

*BalanceSheet Summary*

 

As of March 31, 2004, total consolidated assets of Coast Bancorp were$147.7 million in comparison to total assets of $142.2 million as of December31, 2003. This represents an increase of $5.5 million, or 3.87%.  Compared to total assets of $130.0 millionat March 31, 2003, the company has increased assets by $17.7 million, or13.62%, over the last twelve months. These increases are the result of expansion of our customer base andoverall growth in deposits of all types.

 

The majority of the growth in deposits has been reinvested in loans,which have increased by $19.7 million, or 20.4%, from $95.5 million at March31, 2003 to $115.0 million at March 31, 2004. The balance of the deposit growth has been invested in Fed Funds pendingfunding of continuing strong loan demand and to meet the ongoing liquidityneeds of the Bank.

 

*Earnings Summary*

 

Consolidated net income for the three months ended March 31, 2004 was$258,000 or $0.37 diluted earnings per share compared to net income of $130,000or $0.19 diluted earnings per share for the same period during 2003.  The increase in earnings in 2004 as comparedto the same three-month period in 2003 was due primarily to the profitability ofthe Bank’s SBA program, gain on sale of securities and the Bank’s response tothe changing rate environment, producing an increased net interest margin.

 

**AssetQuality**

 

As of March 31, 2004, the Company had one loan on non-accrual in anamount of $21,000 and no loans 90 days or more past due and stillaccruing.  As of March 31, 2003 theCompany had no loans on nonaccrual or loans 90 day past due and still accruing.As of December 31, 2003 the company had no loans on non-accrual or loans 90days past due and still accruing.

 

As of March 31, 2004 and 2003 the Company has had no OREO orrestructured loans.

 

**Capital**

 

The objective of the Company’s asset/liability strategy is to manageliquidity and interest rate risk. Ultimately, management seeks to monitor the safety and soundness of theBank and its capital base, while maintaining adequate net interest margins andspreads to provide an appropriate return to the stockholders.

 

Stockholders equity at March 31, 2004 was $9,082 million, compared to$8,813 at December 31, 2003. Stockholders equity increased primarily from net income of$258,000.  The balance of the increasewas the result of employees exercising the vested amount of their stockoptions.

 

The Company is required to meet certain minimum risk-based capitalguidelines and leverage ratios set by the bank regulatory authorities. Therisk-based capital standards establish capital requirements that are moresensitive to risk differences between various assets, consider off balancesheet activities in assessing capital adequacy, and minimize the disincentivesto holding liquid, low risk assets.  Theleverage ratio consists of tangible Tier I capital divided by average totalassets.

 

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Coast Bancorp maintains capital ratios above the Federal regulatoryguidelines for “well-capitalized” bank holding companies.  The ratios for the Company are as follows:

 
|                            |   | **Regulatory  Standard**    |   | **Coast  National Bank** |   | **Coast  Bancorp**        |   |
|---------------------------------|--------|-----------------------------|--------|--------------------------|--------|---------------------------|--------|
|                            |   | **Adequately  Capitalized** |   | **Well  Capitalized**    |   | **As of  March 31, 2004** |   | **As of  March 31, 2003** |   |
| Total risk-based capital ratio  |   | 8.00                        | %      | 10.00                    | %      | 12.04                     | %      | 10.48 | % |
| Tier 1 risk-based capital ratio |   | 4.00                        | %      | 6.00                     | %      | 11.09                     | %      | 9.41 | % |
| Tier 1 leverage capital ratio   |   | 4.00                        | %      | 5.00                     | %      | 9.37                      | %      | 7.15 | % |

 

**Liquidity**

 

Management is not aware of any future capital expenditures or othersignificant demands on commitments which would severely impair liquidity.

 

**Item 3****.  Controls and****Procedures**

 

Based on their evaluation as of March 31, 2004 of the filing of thisForm 10-QSB, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures areeffective to ensure that information required to be disclosed in the reportsthat the Company files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect those controls subsequent to the date of their evaluation.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 1****– LEGALPROCEEDINGS**

 

Notapplicable.

 

**ITEM 2****– CHANGES INSECURITIES**

 

Notapplicable.

 

**ITEM 3****– DEFAULTSUPON SENIOR SECURITIES**

 

Notapplicable.

 

**ITEM 4****– SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Notapplicable

 

**ITEM 5****– OTHERINFORMATION**

 

Notapplicable.

 

**ITEM 6****– EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)          EXHIBITS

 
| Exhibit  11 - | EARNINGS  PER SHARE (See Note 2 under Item 1 – Basis of Presentation on page 8 of this  report) |
|---------------|------------------------------------------------------------------------------------------------------|
|          |                                                                                                 |
| Exhibit  31 - | RULE  13a-14(a) CERTIFICATIONS                                                                       |
|          |                                                                                                 |
|          | 31.1                                                                                                 | Certification  of Chief Executive Officer |
|          | 31.2                                                                                                 | Certification  of Chief Financial Officer |
|          |                                                                                                 |
| Exhibit  32 - | SECTION  1350 CERTIFICATIONS                                                                         |
|          |                                                                                                 |
|          | 32.1                                                                                                 | Certification  of Chief Executive Officer |
|          | 32.2                                                                                                 | Certification  of Chief Financial Officer |

 

(b)         Reportson Form 8-K

 

NoForm 8-K’s were filed by the Bancorp during the quarter ended March 31, 2004.

 

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**Signatures**

 

In accordance with therequirements of the Exchange Act of 1934, the registrant has caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   |           | COAST BANCORP                     |
|--------|----------------|-----------------------------------|
|   |           |                              |
| Date:  | April 21, 2004 | /s/Jack Wauchope                  |   |
|   |           | Jack Wauchope                     |
|   |           | President/Chief Executive Officer |
|   |           | Chairman of the Board             |
|   |           | (Principal Executive Officer)     |
|   |           |                              |
| Date:  | April 21, 2004 | /s/Berta Olson                    |   |
|   |           | Berta Olson                       |
|   |           | Senior Vice President             |
|   |           | Chief Financial Officer           |
|   |           | (Principal Financial Officer)     |

 

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