# ** **

# **FORM 10-QSB**

# ** **

**UNITED STATESSECURITIES 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 June 30,  2005**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                           |                                                                                               |
| **o**                                                                                                                                                                                                                                                                          | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                     |
|                                                                                                                                                                                                                                                                           |
| **For the transition period from                       to                     ** |

 

**Commission File No. 000-32827**

 

**COAST BANCORP**

(Exact name of Registration as Specified in its Charter)

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

** **

**500 Marsh 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)

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes:   ý   No:   o

 

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

# ** **

State the number of shares outstanding of each ofthe issuer’s classes of common equity, as of the latest practicable date:

 

Common Stock – As of August 1, 2005, there were670,900 shares of the issuer’s common stock outstanding.

 

TransitionalSmall Business Disclosure Format (Check one)       Yes:   o   No:   ý

 

 

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**FORWARDLOOKING STATEMENTS**

 

**CERTAIN STATEMENTS IN THISQUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKING INFORMATIONWITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, ASAMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, ASAMENDED, AND ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS.  THESE FORWARD-LOOKING STATEMENTS INVOLVECERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFERMATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.  SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARENOT LIMITED TO, THE FOLLOWING FACTORS: COMPETITIVE PRESSURE IN THE BANKINGINDUSTRY INCREASES SIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENTREDUCE MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS ADETERIORATION IN CREDIT QUALITY AND AN INCREASE IN THE PROVISION FOR POSSIBLELOAN LOSSES; CHANGES IN THE REGULATORY ENVIRONMENT; CHANGES IN BUSINESSCONDITIONS, PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATESENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMSFAILURES OR FRAUD; ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS; CHANGESIN THE SECURITIES MARKETS; THE ABILITY TO SATISFY THE REQUIREMENTS OF THE SARBANES-OXLEYACT AND OTHER REGULATIONS GOVERNING INTERNAL CONTROLS; AND POTENTIAL ECONOMICEFFECT OF THE WAR ON TERRORISM AND THE WAR IN IRAQ .**

 

**THEREFORE,THE INFORMATION CONTAINED IN THIS DOCUMENT SHOULD BE CAREFULLY CONSIDERED WHENEVALUATING THE BUSINESS PROSPECTS OF THE BANCORP.**

 

**MOREOVER,WHEREVER PHRASES ARE USED SUCH AS OR SIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENTBELIEVES,” OR “MANAGEMENT CONSIDERS”, SUCH STATEMENTS ARE AS OF, AND BASED UPONTHE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGE BY THEPASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTS ARESUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TOFORWARD-LOOKING STATEMENTS.**

 

2

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## **INDEX**

## **COAST BANCORP**

 
| **PART I  – FINANCIAL INFORMATION**                                                            | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** |
| **Item 1 - Financial Statements**                                                                        | ** ** |
| ** **                                                                                               | ** ** |
| Statements of Financial Condition                                                                        |       |
| Statements of Operations                                                                                 |       |
| Statement of Changes in Stockholders’ Equity                                                        |       |
| Cash Flow Statement                                                                                      |       |
| Notes to Financial Statements                                                                            |       |
|                                                                                                     |       |
| **Item 2 - Management’s Discussion and Analysis of Financial Condition  and Results of Operations** |       |
|                                                                                                     |       |
| 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 – Unregistered Sales of Securities and Use of Proceeds                                       |       |
| Item 3 – Defaults upon Senior Securities                                                            |       |
| Item 4 – Submission of Matters to a Vote of Security Holders                                        |       |
| Item  5 – Other Information                                                                         |       |
| Item 6 –  Exhibits                                                                                  |       |
|                                                                                                     |       |
| **SIGNATURES**                                                                                           |       |

 

3

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**COAST BANCORP & SUBSIDIARY**

 

**ITEM I - FINANCIAL STATEMENTS**

** **

ConsolidatedBalance Sheets (unaudited)

(Inthousands)

 
| ** **                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                             |       |              |       |                  |       |
| Cash and due from banks                                                                                                |       | $                 | 9,307      |                  | $          | 8,640 |   |
| Federal funds sold                                                                                                     |       | 9,770             |       | 12,050                |       |
| TOTAL CASH  AND CASH EQUIVALENTS                                                                                       |       |              | 19,077     |                  | 20,690     |   |
|                                                                                                                   |       |              |       |                  |       |   |
| Interest-bearing deposits                                                                                              |       |              | —     |                  | —     |   |
|                                                                                                                   |       |              |       |                  |       |   |
| Investment securities:                                                                                                 |       |              |       |                  |       |   |
| Securities held to maturity                                                                                            |       |              | —     |                  | —     |   |
| Securities available for sale                                                                                          |       |              | 12,840     |                  | 12,867     |   |
| TOTAL  INVESTMENT SECURITIES                                                                                           |       |              | 12,840     |                  | 12,867     |   |
| Loans:                                                                                                                 |       |              |       |                  |       |   |
| Commercial                                                                                                             |       |              | 27,410     |                  | 29,430     |   |
| Real estate - construction                                                                                             |       |              | 18,107     |                  | 17,432     |   |
| Real estate - other                                                                                                    |       |              | 81,935     |                  | 66,897     |   |
| Consumer                                                                                                               |       |              | 2,233      |                  | 2,547      |   |
| TOTAL LOANS                                                                                                            |       |              | 129,685    |                  | 116,306    |   |
| Net deferred loan fees                                                                                                 |       |              | (410       | )                     | (418       | ) |
| Allowance for credit losses                                                                                            |       |              | (1,168     | )                     | (1,168     | ) |
| NET LOANS                                                                                                              |       |              | 128,107    |                  | 114,720    |   |
| Premises and equipment                                                                                                 |       |              | 8,416      |                  | 8,728      |   |
| Deferred taxes                                                                                                         |       |              | 341        |                  | 360        |   |
| Federal Reserve Bank and FHLB stock, at  cost                                                                          |       |              | 910        |                  | 883        |   |
| Accrued interest and other assets                                                                                      |       |              | 1,543      |                  | 1,666      |   |
| TOTAL ASSETS                                                                                                           |       |              | $          | 171,234               |       | $ | 159,914 |   |
|                                                                                                                   |       |              |       |                  |       |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                         | ** ** |              |       |                  |       |   |
| Deposits:                                                                                                              |       |              |       |                  |       |   |
| Noninterest-bearing demand                                                                                             |       |              | $          | 39,567                |       | $ | 39,661 |   |
| Money market and NOW                                                                                                   |       |              | 36,518     |                  | 37,043     |   |
| Savings                                                                                                                |       |              | 8,773      |                  | 8,785      |   |
| Time deposits of $100,000 or more                                                                                      |       |              | 56,510     |                  | 44,492     |   |
| Other time deposits                                                                                                    |       |              | 13,583     |                  | 14,483     |   |
| TOTAL  DEPOSITS                                                                                                        |       |              | 154,951    |                  | 144,464    |   |
| Notes payable                                                                                                          |       |              | 55         |                  | 106        |   |
| Junior subordinated debt securities                                                                                    |       |              | 5,155      |                  | 5,155      |   |
| Other liabilities                                                                                                      |       |              | 345        |                  | 216        |   |
| TOTAL  LIABILITIES                                                                                                     |       |              | 160,506    |                  | 149,941    |   |
| 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: 670,900 in 2005 and 652,700 in 2004 |       |              | 6,880      |                  | 6,641      |   |
| Additional paid-in capital                                                                                             |       |              | —     |                  | —     |   |
| Retained earnings                                                                                                      |       |              | 3,921      |                  | 3,393      |   |
| Accumulated other comprehensive income -  net unrealized gains (losses) on available-for-sale securities               |       |              | (73        | )                     | (61        | ) |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                       |       |              | 10,728     |                  | 9,973      |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                       |       |              | $          | 171,234               |       | $ | 159,914 |   |

 

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

 

4

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# **COAST BANCORP & SUBSIDIARY**

 

Statements of Operations (unaudited)

(In thousands, except for per share numbers)

 
| ** **                                           | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Interest income:                                     | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Interest and fees on loans                           |       | $                                             | 2,498      |                                        | $          | 1,992 |   | $ | 4,618 |   | $ | 3,865 | * * |
| Interest on taxable securities                       |       | 81                                            |       | 42                                          |       | 161 |   | 91 | * * |
| Interest on federal funds sold                       |       | 67                                            |       | 16                                          |       | 151 |   | 31 | * * |
| Other interest income                                |       | 21                                            |       | 7                                           |       | 27 |   | 16 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Total interest income                                |       | 2,667                                         |       | 2,057                                       |       | 4,957 |   | 4,003 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Interest expense:                                    | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Interest on money market and NOW accounts            |       | 140                                           |       | 58                                          |       | 246 |   | 115 | * * |
| Interest on savings deposits                         |       | 21                                            |       | 12                                          |       | 33 |   | 25 | * * |
| Interest on time deposits                            |       | 437                                           |       | 281                                         |       | 757 |   | 542 | * * |
| Interest on other borrowings                         |       | 92                                            |       | 64                                          |       | 178 |   | 136 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Total interest expense                               |       | 690                                           |       | 415                                         |       | 1,214 |   | 818 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Net interest income                                  |       | 1,977                                         |       | 1,642                                       |       | 3,743 |   | 3,185 | * * |
| Provision for loan losses                            |       | 0                                             |       | 30                                          |       | 0 |   | 70 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Net interest income after provision for loan  losses |       | 1,977                                         |       | 1,612                                       |       | 3,743 |   | 3,115 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Noninterest income:                                  | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Service charges on deposit accounts and  other       |       | 50                                            |       | 139                                         |       | 125 |   | 208 | * * |
| Gain on sale of loans and servicing fees             |       | 68                                            |       | 256                                         |       | 107 |   | 531 | * * |
| Gain on sale of real estate                          |       | 0                                             |       | 0                                           |       | 47 |   | 43 | * * |
| Gain on sale of securities                           |       | 0                                             |       | 0                                           |       | 0 |   | 0 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Total noninterest income                             |       | 118                                           |       | 395                                         |       | 279 |   | 782 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Noninterest expense:                                 | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Salaries and benefits                                |       | 808                                           |       | 763                                         |       | 1,667 |   | 1,549 | * * |
| Net occupancy expense (net of rental  income)        |       | 116                                           |       | 85                                          |       | 237 |   | 163 | * * |
| Equipment expense                                    |       | 82                                            |       | 69                                          |       | 162 |   | 132 | * * |
| Other expense                                        |       | 539                                           |       | 473                                         |       | 970 |   | 1,003 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Total noninterest expense                            |       | 1,545                                         |       | 1,390                                       |       | 3,036 |   | 2,847 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Income before taxes                                  |       | 550                                           |       | 617                                         |       | 986 |   | 1,050 | * * |
| Income taxes                                         |       | 282                                           |       | 245                                         |       | 458 |   | 420 | * * |
| Net income                                           |       | $                                             | 268        |                                        | $          | 372 |   | $ | 528 |   | $ | 630 | * * |
| * *                                             | * *   | * *                                      | * *   | * *                                    | * *   | * * | * * | * * | * * |
| Earnings per share - Basic                           |       | $                                             | 0.40       |                                        | $          | 0.58 |   | $ | 0.79 |   | $ | 0.99 | * * |
| Earnings per share - Diluted                         |       | $                                             | 0.37       |                                        | $          | 0.53 |   | $ | 0.73 |   | $ | 0.89 | * * |

 

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

 

5

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**COAST BANCORP &SUBSIDIARY**

 

Statementof Changes in Stockholders’ Equity (unaudited)

(In thousands, except number of shares) 

 
| ** **                                                                                   | ** ** | ** **       | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------|------------|------------|------------|-------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **        | ** ** | **Other**    | ** ** | ** **        | ** ** |
| ** **                                                                                   | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **Shares**       | ** ** | **Amount** | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Income**        | ** ** | **Total**  | ** ** |
| **Balance at January 1, 2004**                                                          |       | 638,300          |       | $          | 6,407      |              | $          | —       |       | $                 | 2,375      |       | $          | 31 |   | $ | 8,813 |   |
| Exercise of stock options                                                                    |       | 14,400           |       | 234        |       |              |       |         |       |              |       | 234        |       |
| Cash dividends                                                                               |       |             |       |       |       |              |       | (97          | )          |              |       | (97        | )          |
| **Comprehensive Income**                                                                     |       |             |       |       |       |              |       |         |       |              |       |       |       |
| Net income                                                                                   |       |             |       |       |       | $                 | 1,115      |         | 1,115      |              |       |       | 1,115      |   |
| Unrealized losses on available-for-sale  securities, net of taxes of $46,000                 |       |             |       |       |       | (66               | )          |         |       | (66               | )          | (66        | )          |
| Less reclassification adjustments for gains  included in net income, net of taxes of $18,000 |       |             |       |       |       | (26               | )          |         |       | (26               | )          | (26        | )          |
| **Total comprehensive income**                                                               |       |             |       |       |       | $                 | 1,023      |         |       |              |       |       |       |   |
|                                                                                         |       |             |       |       |       |              |       |         |       |              |       |       |       |
| **Balance at December 31, 2004**                                                        |       | 652,700          |       | $          | 6,641      |              |       |         | $          | 3,393             |       | $          | (61        | ) | $ | 9,973 |   |
| Exercise of stock options                                                                    |       | 18,200           |       | 239        |       |              |       |         |       |              |       | 239        |       |
| Cash dividends                                                                               |       |             |       |       |       |              |       |         |       |              |       |       |       |
| **Comprehensive Income**                                                                     |       |             |       |       |       |              |       |         |       |              |       |       |       |
| Net income                                                                                   |       |             |       |       |       | $                 | 528        |         | 528        |              |       |       | 528        |   |
| Unrealized losses on available-for-sale  securities, net of taxes of $8,000                  |       |             |       |       |       | (12               | )          |         |       | (12               | )          | (12        | )          |
| **Total comprehensive income**                                                               |       |             |       |       |       | $                 | 516        |         |       |              |       |       |       |   |
|                                                                                         |       |             |       |       |       |              |       |         |       |              |       |       |       |
| **Balance at June 30, 2005**                                                            |       | 670,900          |       | $          | 6,880      |              |       |         | $          | 3,921             |       | $          | (73        | ) | $ | 10,728 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

6

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# **COAST BANCORP & SUBSIDIARY**

 

Statements of Cash Flows (unaudited)

(In thousands)

 
| ** **                                                                         | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Operating activities                                                               |       |                                        |       |   |   |
| Net income                                                                         |       | $                                           | 528        |   | $ | 630 |   |
| Adjustments to reconcile net income to Net  cash provided by operating activities: |       |                                        |       |   |   |
| Depreciation and amortization                                                      |       | 235                                         |       | 198 |   |
| Provision for loan losses                                                          |       | —                                      |       | 70 |   |
| Realized gain on investment securities                                             |       | —                                      |       | (43 | ) |
| Other items - net                                                                  |       | 239                                         |       | (180 | ) |
| Net cash  provided by operating activities                                         |       |                                        | 1,002      |   | 675 |   |
|                                                                               |       |                                        |       |   |   |
| Investing activities                                                               |       |                                        |       |   |   |
| Proceeds from sale of investment securities                                        |       | —                                      |       | 5,094 |   |
| Maturities of investment securities                                                |       | —                                      |       | 1,000 |   |
| Purchase of investment securities                                                  |       | —                                      |       | (2,019 | ) |
| Net change in loans                                                                |       | (13,387                                     | )          | (5,064 | ) |
| Increase in Federal Reserve Bank and FHLB  Stock                                   |       | (27                                         | )          | (455 | ) |
| Proceeds from the sale of premises and  equipment                                  |       | 47                                          |       | — |   |
| Purchase of premises and equipment                                                 |       | 77                                          |       | (829 | ) |
| Net cash  used by investing activities                                             |       |                                        | (13,290    | ) | (2,273 | ) |
|                                                                               |       |                                        |       |   |   |
| Financing activities                                                               |       |                                        |       |   |   |
| Increase in deposits                                                               |       | 10,487                                      |       | 11,849 |   |
| Principle payments on notes payable                                                |       | (51                                         | )          | (49 | ) |
| Proceeds from exercise of options                                                  |       | 239                                         |       | 28 |   |
| Net cash  provided by financing actvities                                          |       |                                        | 10,675     |   | 11,828 |   |
|                                                                               |       |                                        |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                  |       |                                        | (1,613     | ) | 10,230 |   |
|                                                                               |       |                                        |       |   |   |
| Cash and cash equivalents at beginning of  period                                  |       | 20,690                                      |       | 14,673 |   |
|                                                                               |       |                                        |       |   |   |
| Cash and cash equivalents at end of period                                         |       | $                                           | 19,077     |   | $ | 24,903 |   |

 

*The accompanyingnotes are an integral part of these consolidated financial statements*

 

7

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**Note 1****                                                             Basisof Presentation**

 

The accompanying financial information has been prepared in accordancewith the Securities and Exchange Commission rules and regulations forquarterly reporting and therefore does not necessarily include all informationand footnote 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 31,2004 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 and six month period ended June 30, 2005 and 2004 reflectall adjustments, consisting only of normal recurring accruals and provisions,necessary for a fair 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 orimplied by 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,*“Earnings per Share”.*  Accordingly, basic earnings per share arecomputed by dividing income available to common shareholders by the weightedaverage number of common shares outstanding during each period.  The computation of diluted earnings per sharealso considers the number of shares issuable upon the assumed exercise ofoutstanding common stock options.  Allearnings per common share amounts presented have been restated in accordancewith the provisions of this statement.

 

| ** **                                    | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Shares**                                    | ** ** | **Shares**                                  | ** ** | **Shares** | ** ** | **Shares** | ** ** |
| Used in Basic EPS                             |       | 669,973                                       |       | 638,104                                     |       | 667,202 |   | 637,305 |   |
| Dilutive Effect of Outstanding Stock  Options |       | 53,802                                        |       | 70,938                                      |       | 53,802 |   | 67,963 |   |
| Used in Dilutive EPS                          |       | 723,775                                       |       | 709,042                                     |       | 721,004 |   | 705,268 |   |

 

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

 

SFAS No. 123, “Accounting for Stock-Based Compensation,”encourages, but does not require, companies to record compensation cost forstock-based employee compensation plans at fair value.  The Company has chosen to continue to accountfor stock-based compensation using the intrinsic value method prescribed inAccounting Principles Board (“APB”) Opinion No. 25, *“Accountingfor Stock Issued to Employees,”* and related interpretations.  Accordingly, compensation cost for stockoptions is measured as the excess, if any, of the quoted market price of theCompany’s stock at the date of the grant over the amount an employee must payto 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 incomeand earnings per share would have been reduced for 2005 and 2004 to the proforma amounts indicated below:

 
| ** **                                                 | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                       |       |                                          |       |                                        |       |   |   |   |   |
| Net Income:                                                |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                |       | $                                             | 268        |                                        | $          | 372 |   | $ | 528 |   | $ | 630 |   |
| Stock-based compensation using the  intrinsic value method |       | $                                             | —     |                                        | —     |   | — |   | — |   |
| Stock-Based compensation that would have  been reported    |       | $                                             | —     |                                        |       |   |   |   |   |   |
| using the fair value method of SFAS 123                    |       | $                                             | (14        | )                                           | (10        | ) | (28 | ) | (20 | ) |
| Pro Forma net income                                       |       | $                                             | 254        |                                        | $          | 362 |   | $ | 500 |   | $ | 610 |   |
|                                                       |       |                                          |       |                                        |       |   |   |   |   |
| Basic earnings per share:                                  |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                |       | $                                             | 0.40       |                                        | $          | 0.58 |   | $ | 0.79 |   | $ | 0.99 |   |
| Proforma                                                   |       | $                                             | 0.38       |                                        | $          | 0.57 |   | $ | 0.75 |   | $ | 0.96 |   |
|                                                       |       |                                          |       |                                        |       |   |   |   |   |
| Diluted earnings per share:                                |       |                                          |       |                                        |       |   |   |   |   |
| As reported                                                |       | $                                             | 0.37       |                                        | $          | 0.53 |   | $ | 0.73 |   | $ | 0.89 |   |
| Pro forma                                                  |       | $                                             | 0.36       |                                        | $          | 0.51 |   | $ | 0.72 |   | $ | 0.86 |   |

 

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

 

In December 2004, Financial Accounting Standards Board (“FASB”)revised SFAS 123 and issued under its new name,*“Share-BasedPayment”. *This statementeliminates the alternative to use Opinion 25’s intrinsic value method ofaccounting discussed in the previous paragraph. Instead, this Statement generally requires entities to recognize thecost of employee services received in exchange for awards of stock options, orother equity instruments, based on the grant-date fair value of thoseawards.  This cost will be recognizedover the period during which an employee is required to provide service inexchange for the award, generally the vesting period.

 

The Bank must adopt this Statement in 2006 for all new stock optionawards as well as any existing awards that are modified, repurchased orcancelled.  In addition, the unvestedportion previously awarded options will also be recognized as expense.  The Bank is unable to estimate the impact ofthis Statement on its financial condition or the results of operations as thedecision to grant option awards is made annually on a case-by-case basis and,accordingly, the Bank cannot estimate the amount of stock awards that will bemade in 2006.

 

#### **Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The unauditedfinancial statements have been prepared in accordance with the instructions toform 10-QSB and contain statements relating to future results of theCompany that are considered to be “forward looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to, among otherthings, credit loss reserve adequacy, and simulation of changes in interestrates.  Actual results may differmaterially from those expressed or implied as a result of certain risks anduncertainties, including, but not limited to, changes in political and economicconditions, interest rate fluctuations, competitive product and pricingpressures within the Company’s markets, equity and fixed income marketfluctuations, personal and corporate customers’ bankruptcies, inflation,acquisitions and integrations of acquired businesses, technological change,changes in law, changes in fiscal, monetary, regulatory and tax policies,monetary fluctuations, political and global changes arising from the terroristattacks of September 11, 2001 as well as the war in Iraq and itsaftermath, 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 ExchangeCommission.  Such forward-lookingstatements speak only as of the date on which such statements are made, and theCompany undertakes no obligation to update any forward-looking statement toreflect events or circumstances after the date on which such statement is madeor to reflect the occurrence of unanticipated events.  The accompanying financial information shouldbe read in conjunction with Coast Bancorp’s Annual Report on Form 10-KSBfor the year ended December 31, 2004.

 

9

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Descriptionof Business

 

*Coast Bancorp*

 

CoastBancorp, (the “Bancorp” or “Coast Bancorp”) headquartered in San Luis Obispo,California, is a California corporation incorporated in 2001.  Coast Bancorp became the bank holding companyof Coast National Bank on May 31, 2001 through a corporatereorganization.  In the reorganization,Coast National Bank became the wholly-owned subsidiary of Coast Bancorp and theshareholders of the Bank became shareholders of Coast Bancorp.  Coast Bancorp is operated through atwo-tiered corporate structure.  At theholding company level the affairs of Coast Bancorp are overseen by a Board ofDirectors elected by the shareholders of Coast Bancorp at the annual meeting ofshareholders.  The business of the Bankis overseen by a Board of Directors elected by Coast Bancorp, the sole owner ofthe Bank.  As of the date of this Form 10-QSBthe respective members of the Board of Directors of the Bank and the Board ofDirectors of Coast Bancorp are identical. Coast Bancorp is subject to the regulations of, and examination by, theBoard of Governors of the Federal Reserve System.  At present, Coast Bancorp does not engage inany material business activities other than the ownership of the Bank.  Financial information presented hereinfor June 30, 2005 and comparative information for December 31, 2004and June 30, 2004 is inclusive of the consolidated Company.

 

*Coast National Bank*

 

CoastNational Bank (the “Bank”) was chartered June 16, 1997 (charter #23222) byThe Office 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 BayBoulevard in Morro Bay, California and another branch office was opened in July 1999at 1193 Los Osos Valley Road in Los Osos, California.  In July 2002, a loan production officewas opened at 930 South Broadway Street in Santa Maria, California and in July 2004moved to 301 S. Miller Street, Ste. 110 in Santa Maria, California.  In October 2004 a loan production officewas opened in Santa Barbara, California at 15 West Carrillo St., Ste. 252.  The Bank applied for and received approvalfrom the Comptroller of the Currency for another branch office which opened in March 2005at 2138 Spring Street, Paso Robles, California. The Bank also purchased a lot at 2045 Spring Street, Paso Robles,California with the intention of relocating the Paso Robles branch sometime inthe future.  In June 2005, the Bankopened a new SBA office at 7429 N. First St. Suite 104, Fresno, California.

 

Whenthe Bank opened for business in June 1997, it purchased the real estateand building that housed the Arroyo Grande branch office.  On October 14, 1999, the Bank purchasedan adjacent lot next to the San Luis Obispo main office on Marsh Street.  A few months later on February 1, 2000,the Bank also purchased the contiguous property and building that was home tothe San Luis Obispo main office at 486 Marsh Street.  Construction of a new head office building onthe adjacent lot began on October 11, 2001 and was completed on November 25,2002.  The new main office, located at500 Marsh Street is approximately 10,700 square feet with the San Luis Obispobranch operation occupying the ground floor and the administrative officesoccupying the second floor.  Half of theoriginal main office at 486 Marsh Street now houses the Bank’s Small BusinessLending Center and the Bank’s Note Department, while the other half is leasedto various businesses.

 

OnMarch 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard inMorro Bay that is approximately one block from the existing branch with theintention of relocating the Morro Bay branch. In October 2003 construction began on the new Morro Bay facilitywhich was completed and occupied in August 2004.  The new branch consists of approximately 2700square feet with two drive-through lanes.

 

Asof June 30, 2005, the Bank had a total of 68 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 60.8 positions.  The Bankvalues its employees and believes that it enjoys satisfactory working relationswith them.  They are actively engagedindividually and as a team in contributing to the Bank’s realization of itsvision and mission.

 

**CriticalAccounting 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 theCompany to make significant estimates and assumptions, which have a materialimpact on the carrying value of certain assets and liabilities, and areconsidered critical accounting policies. The estimates and assumptions used are based on the historicalexperiences and other factors, which are believed to be reasonable under thecircumstances.  Actual results coulddiffer significantly from these estimates and assumptions, which could have amaterial impact on the carrying value of assets and liabilities at the balancesheet dates and results of operations for the reporting periods.  For example, the Company’s determination ofthe adequacy

 

10

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of its allowance for loan losses isparticularly susceptible to management’s judgment and estimates.  The following is a brief description of ourcurrent accounting policies involving significant management valuationjudgments.

 

*Allowance for 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:reviews and evaluation of individual loans, changes in the nature and volume ofthe loan portfolio, current economic conditions and the related impact onspecific borrowers and industry groups, historical loan loss experiences andthe levels of 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 loan agreement.  The measurement of impaired loans isgenerally based on the present value of expected future cash flows discountedat the historical effective interest rate stipulated in the loan agreement,except that all collateral-dependent loans are measured for impairment based onthe fair value of the collateral.  Inmeasuring the fair value of the collateral, management uses assumptions andmethodologies consistent with those that would be utilized by unrelated thirdparties.

 

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.

 

*Available for 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**

 

As of June 30, 2005, total consolidated assets ofCoast Bancorp were $171.2 million in comparison to total assets of $159.9million as of December 31, 2004. This represents an increase of $11.3million, or 7.07%.  Compared to totalassets of $154.8 million at June 30, 2004, the company has increasedassets by $16.4 million, or 10.59%, over the last twelve months.

 

For the three months ended June 30, 2005 the Bancorp reportedconsolidated net income of $268,000 or $0.37 diluted earnings per share comparedto net income of $372,000 and $0.53 diluted earnings per share for the sameperiod during 2004, a 27.9% decrease. For the six months ended June 30, 2005 the Bancorp reportedconsolidated net income of $528,000 or $0.73 diluted earnings per share comparedto consolidated net income of $630,000 or $0.89 diluted earnings per share forthe same period in 2004, a 16.2% decrease. The decrease in net income was due in part to a decrease in the sale ofloans and mortgage servicing fees as well as an increase in non-interestexpense.

 

##### **Net Interest Income**

 

Interest income was$2,667,000 for the quarter ended June 30, 2005, compared to $2,057,000 forthe quarter ended June 30, 2004, representing an increase of 29.6%.  Interest income was $4,957,000 for the six monthsended June 30, 2005, compared to $4,003,000 for the six months ended June 30,2004, an increase of 23.8%.  Theseincreases were the result of rising interest rates and loan growthgenerated by the Bank’s branches.

 

Interestexpense was $690,000 for the quarter ended June 30, 2005 compared to$415,000 for the quarter ended June 30, 2004, representing an increase of66.3%.  Interest expense was $1,214,000for the six months ended June 30, 2005, compared to $818,000 for the sixmonths ended June 30, 2004, an increase of 48.4%.  These increases are a result of higherinterest rates and a 27% increase in time deposits in excess of $100,000.

 

Net interestincome is the amount by which the interest and amortization of fees generatedfrom loans and other earning assets exceed the cost of funding those assets,usually deposit account interest expense. Net interest income depends on the difference between gross interest andfees earned on the loans and investment portfolios and the interest rates paidon deposits and borrowings (“the interest rate spread”).   Net interest income was $1,977,000 for thequarter ended June 30, 2005, compared to $1,642,000 for the quarter ended June 30,2004, representing an increase of 20.4%. Net interest income was $3,743,000 for the six months ended June 30,2005, compared to $3,185,000 for the six months ended June 30, 2004,representing an increase of 17.5%.  Thisincrease was primarily the result of growth in interest earning assetsgenerated by the Banks’ branches and the increase in interest rates.

 

Thenet interest margin is the ratio of net interest income to average earningassets. This ratio is useful in allowing the Company to monitor the spreadbetween interest income and interest expense between reporting periods irrespectiveof the growth of the Company’s assets. The net interest margin increased 0.37% to 5.28% for the quarter ended June 30,2005 as compared to 4.91% for the quarter ended June 30, 2004.  The net interest margin, 5.07% for the sixmonths ending June 30, 2005 was 0.22% higher than the comparable figure,4.85%, for the six month period ending June 30, 2004.

 

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

 
| ** **             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **             | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2004** | ** ** |
|                   |       |                                  |       |                                |       |                              |       |   |   |   |   |
| Interest income        |       | $                                     | 2,667      |                                | $          | 2,057                             |       | $ | 4,957 |   | $ | 4,003 |   | $ | 8,240 |   |
| Interest expense       |       | 690                                   |       | 415                                 |       | 1,214                             |       | 818 |   | 1,727 |   |
|                   |       |                                  |       |                                |       |                              |       |   |   |   |   |
| Net interest income    |       | $                                     | 1,977      |                                | $          | 1,642                             |       | $ | 3,743 |   | $ | 3,185 |   | $ | 6,513 |   |
|                   |       |                                  |       |                                |       |                              |       |   |   |   |   |
| Average earning assets |       | $                                     | 149,699    |                                | $          | 133,706                           |       | $ | 147,532 |   | $ | 131,260 |   | $ | 136,670 |   |
| Net interest margin*   |       | 5.28                                  | %          | 4.91                                | %          | 5.07                              | %          | 4.85 | % | 4.77 | % |

 

----

**Net interest income earned on assets divided by averageearning assets.*

 

11

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##### **Provision for Loan Losses**

 

Management of the Bank and the Bancorp believes thatthe allowance for loan losses is adequate. The Bank has established a monitoring system for loans in order toidentify impaired loans and potential problem loans and to permit periodicevaluation of impairment and adequacy of the allowance for loan losses in atimely manner.  The monitoring system andallowance for loan losses methodology have evolved over a period of years, andloan classifications have been incorporated into the determination of theallowance for loan losses.  Thismonitoring system and allowance methodology includes a loan-by-loan analysisfor all classified loans as well as loss factors for the balance of theunclassified portfolio.  Classified loansare reviewed individually to estimate the amount of probable losses that needsto be 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 no contributions to the allowance forloan losses for the six months ended June 30, 2005 compared to $70,000 forthe same period in 2004.  Managementbelieves that the allowance, which equals 0.9% of total loans at June 30,2005, is adequate to cover future losses. The allowance for loan losses at December 31, 2004 was 1.01% of netloans.

 

Changes in theallowance for loan losses for the three months ended and the six months ended June 30,2005 and 2004 are as follows (dollar amounts in thousands):

 

12

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| ** **                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Allowance, beginning of period        |       | $                                     | 1,168      |                                | $          | 1,146 |   | $ | 1,168 |   | $ | 1,109 |   |
| Provision for loan losses             |       | —                                |       | 30                                  |       | — |   | 70 |   |
| Loans charged off - net of recoveries |       | —                                |       | 1                                   |       | — |   | (2 | ) |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Allowance, end of period              |       | $                                     | 1,168      |                                | $          | 1,177 |   | $ | 1,168 |   | $ | 1,177 |   |
|                                       |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |  |

 

##### **Non-interest Income**

 

Non-interestincome represents deposit account service charges and other types of feeincome.  Non-interest income for thethree months ended June 30, 2005 totaled $118,000 compared to $395,000 forthe same period in 2004, a 70.1% decrease. Non-interest income for the sixmonths ended June 30, 2005 totaled $279,000 compared to $782,000 for thesame period in 2004, a 64.3% decrease. During the six months ended June 30, 2005, the Bank elected not tosell the guaranteed portion of government guaranteed loans.  It has been the Company’s policy to sellsecurities due in one year if the gain will result in higher income afterreinvesting the proceeds.

 

##### **Non-interest Expense**

 

Non-interest expense represents salaries, occupancy expenses,professional expenses, outside services and other miscellaneous expensesnecessary to conduct business. Non-interest expense for the three months ended June 30, 2005totaled $1,545,000 compared to $1,390,000 for the same period in 2004 for anincrease of 11.15%.  Non-interest expensefor the six months ended June 30, 2005 totaled $3,036,000 compared to$2,847,000 for the same period in 2004 for an increase of 6.64%.  The increase is primarily due to an overallrise in salary and benefit expenses and an increase in net occupancy expensedue to the addition of the Paso Robles branch. The number of fulltime equivalent employees necessary to providesuperior customer service was 60.8 in June 2005 as compared to 60 in June 2004.  The continuing growth of the Bank’sgovernment guaranteed lending department specializing in Small BusinessAdministration lending programs, and the overall expansion of the Bank’scustomer base also contribute to the increase.

 

*Earnings Summary*

 

Consolidated net income for the three months ended June 30, 2005was $268,000 or $0.37 diluted earnings per share compared to net income of$372,000 or $0.53 diluted earnings per share for the same period during2004.  Consolidated net income for thesix months ended June 30, 2005 was $528,000 or $0.73 diluted earnings pershare compared to net income of $630,000 or $0.89 diluted earnings per sharefor the same period during 2004.

 

##### **Income Taxes**

 

The Companyrecorded a $282,000 tax provision during the three months ended June 30,2005 compared to $245,000 during the same period in 2004.  The Company recorded a $458,000 tax provisionfor the six months ended June 30, 2005 compared to $420,000 during thesame period in 2004.

 

##### **Financial Condition**

 

*Balance Sheet Summary*

 

As of June 30, 2005, total consolidated assets ofCoast Bancorp were $171.2 million in comparison to total assets of $159.9million as of December 31, 2004. This represents an increase of $11.3million, or 7.07%.  Compared to totalassets of $154.8 million at June 30, 2004, the company has increasedassets by $16.4 million, or 10.59%, over the last twelve months.  These increases are the result of significantgrowth in deposits of all types.

 

The growth in deposits has been reinvested in loans,which have increased by $16.8 million, or 14.9%, from $112.9 million at June 30,2004 to $129.7 million at June 30, 2005. The growth in loans was further funded by Fed Funds which are used tofund the continuing strong loan demand and to meet the ongoing liquidity needsof the Bank.

 

13

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**AssetQuality**

 

As of June 30, 2005 the Company had one loan inthe amount $5,000 on nonaccrual and no loans 90 day past due and stillaccruing. As of June 30, 2004, the Company had no loans on non-accrual andno loans 90 days or more past due and still accruing.  As of December 31, 2004 the company hadno loans on non-accrual or loans 90 days past due and still accruing.

 

As of June 30, 2005 and 2004 the Company had noOREO or restructured loans.

 

##### **Capital**

 

Stockholders equity at June 30, 2005 was $10.728 million, comparedto $9.973 million at December 31, 2004. Stockholders equity increased primarily from employees exercising thevested portion of stock options in the amount of $239,000 as well as net incomeof $528,000.

 

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.

 

Both Coast Bancorp and the Bank maintain capital ratios above theFederal regulatory guidelines for “well-capitalized” bank holdingcompanies.  The ratios for the Bank areas follows:

 
| ** **                      | ** ** | ** **              | ** ** | ** **        | ** ** | **Coast**              | ** ** | **Coast**                  | ** ** |
|---------------------------------|------------|-------------------------|------------|-------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **Regulatory Standard** | ** ** | **National Bank** | ** ** | **National Bank**      | ** ** |
| ** **                      | ** ** | **Adequately**          | ** ** | **Well**          | ** ** | **As of**              | ** ** | **As of**                  | ** ** |
| ** **                      | ** ** | **Capitalized**         | ** ** | **Capitalized**   | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Total risk-based capital ratio  |       | 8.00%                   |       | 10.00%            |       | 11.66%                 |       | 12.56%                     |       |
| Tier 1 risk-based capital ratio |       | 4.00%                   |       | 6.00%             |       | 10.81%                 |       | 11.63%                     |       |
| Tier 1 leverage capital ratio   |       | 4.00%                   |       | 5.00%             |       | 9.12%                  |       | 8.99%                      |       |

 
| ** **                      | ** ** | **Regulatory Standard**     | ** ** | **Coast  Bancorp**    | ** ** | **Coast  Bancorp**            | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **Adequately  Capitalized** | ** ** | **Well  Capitalized** | ** ** | **As of  June 30, 2005** | ** ** | **As of  December 31, 2004** | ** ** |
| Total risk-based capital ratio  |       | 8.00%                       |       | 10.00%                |       | 12.45%                        |       | 12.78% |   |
| Tier 1 risk-based capital ratio |       | 4.00%                       |       | 6.00%                 |       | 10.51%                        |       | 10.44% |   |
| Tier 1 leverage capital ratio   |       | 4.00%                       |       | 5.00%                 |       | 8.34%                         |       | 8.30% |   |

 

**Liquidity**

 

The objectiveof liquidity management is to ensure the continuous availability of funds tomeet the demands of depositors, investors and borrowers.  Asset liquidity is primarily derived fromloan payments and the maturity of other earning assets.  Liquidity from liabilities is obtainedprimarily from the receipt of new deposits. The Bank’s Investment Committee is responsible for the managing of theon- and off- balance sheet commitments to meet the needs of customers whileachieving the Bank’s financial objectives.

 

Management isnot aware of any future capital expenditures or other significant demands oncommitments which would severely impair liquidity.  As of the six months ended June 30,2005, the Bank had a loan-to-deposit ratio of 83.69%.

 

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

 

Based on theirevaluation as of June 30, 2005 of the filing of this Form-10QSB, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed in the reports that the Company filesor submits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect those controlssubsequent to the date of their evaluation.

 

14

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**PART II – OTHER INFORMATION**

 

**ITEM 1 – LEGAL PROCEEDINGS**

 

Notapplicable.

 

**ITEM 2–****UNREGISTEREDSALES OF SECURITIES AND USE OF PROCEEDS**

 

Notapplicable.

 

**ITEM 3– DEFAULTS UPON SENIOR SECURITIES**

 

Notapplicable.

 

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

 

(a)                                  Coast Bancorp’s 2005 Annual Meeting ofShareholders was held on June 22, 2005 (the “Meeting”).  The Meeting involved the following proposals:

 

1.               To elect nine (9) persons to the Boardof Directors to serve until the next Annual Meeting of Shareholders and untiltheir successors are elected and have qualified.

2.               To approve the appointment of Vavrinek,Trine, Day & Co. LLP as independent public accountants for the Company’s2005 fiscal year, and

 

(b)                                 Proxies for the meeting were solicitedpursuant to Regulation 14A under the Securities and Exchange Act of 1934, asamended.  There were no solicitations inopposition to management’s nominees as listed in the proxy statement, and allsuch nominees were elected.

 

OnProposal No. 2 to approve the appointment of Vavrinek, Trine, Day &Co. LLP as independent public accountants for the Company’s 2005 fiscal year,494,093 shares voted in favor of approval, none voted against approval orabstained, and there were zero (0) broker non-votes.  Accordingly, Proposal No. 2 was passedby the shareholders.

 

(c)                                  There was no settlement between the Companyand any other person terminating any solicitation subject to Rule 14a-11.

 

**ITEM 5 – OTHER INFORMATION**

 

(a)                                  The Company entered into a five year leasefor an office located at 2138 Spring Street, Suite A, Paso Robles, California,for the establishment of the Bank’s fifth full service branch.  The office was opened on March 14,2005.  See Exhibit 10.2 for furtherinformation.

 

(b)                                 The Company has entered into a lease toestablish a loan production office at 7429 N. First St., Fresno,California.  This office was opened toexpand the Banks’ government guaranteed lending opportunities in the Fresnoarea.  See exhibit 10.3 for furtherdetail.

 

(c)                                  The 2005 Director’s monthly fees wereincreased to $1250 per month from $1200 per month in 2004.  See Exhibit 10.4 for further detail.

 

**ITEM 6 – EXHIBITS**

 

(a)                                  EXHIBITS

 
| Exhibit 10.1  - | 12/30/04  Summary of Material Modification for the Employee 401K Profit Sharing Plan |
|----------------------|--------------------------------------------------------------------------------------|
|                 |                                                                                 |
| Exhibit 10.2  - | Paso  Robles Lease Agreement                                                         |
|                 |                                                                                 |
| Exhibit 10.3  - | Fresno  SBA Lease Agreement                                                          |

 

15

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| Exhibit 10.4  - | Director’s  fee schedule                   |
|----------------------|-------------------------------------------------|
|                 |                                            |
| Exhibit 10.5  - | Chief  Financial Officer’s Offer Agreement |
|                 |                                            |
| 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       |

 

###### **Signatures**

 

In accordance withthe requirements of the Exchange Act of 1934, the registrant has caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|   |                  | COAST  BANCORP                     |
|--------|-----------------------|------------------------------------|
|   |                  |                               |
|   |                  |                               |
| Date:  | August 12,  2005 | /s/ Jack C.  Wauchope              |   |
|   |                  | Jack C.  Wauchope                  |
|   |                  | Chairman of  the Board             |
|   |                  | President/Chief  Executive Officer |
|   |                  | (Principal  Executive Officer)     |
|   |                  |                               |
|   |                  |                               |
| Date:  | August 12,  2005 | /s/ Karan C.  Pohl                 |   |
|   |                  | Karan C.  Pohl                     |
|   |                  | Senior Vice  President             |
|   |                  | Chief  Financial Officer           |
|   |                  | (Principal  Financial Officer)     |

 

16

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