**FORM 10-QSB**

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20429**

 

**(Mark One)**

**ý****        ****QUARTERLY REPORT UNDERSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2003**

 

**o****        ****TRANSITIONREPORT 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 since  last 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 common equity,as of the latest practicable date:

 

CommonStock – As of October 31, 2003, there were 633,300 shares of the issuer’scommon stock outstanding.

 
| Transitional  Small Business Disclosure Format (Check one) |   | 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; AND CHANGES IN THE SECURITIES MARKETS.**

 

**THEREFORE, THE INFORMATION SETFORTH THEREIN SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESSPROSPECTS OF THE BANCORP.**

 

**MOREOVER, WHEREVER PHRASES ARE USEDSUCH AS OR SIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENT BELIEVES,” OR“MANAGEMENT CONSIDERS”, SUCH STATEMENTS ARE AS OF, AND BASED UPON THE KNOWLEDGEOF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGE BY THE PASSAGE OFTIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TOTHE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TO FORWARD-LOOKING STATEMENTS.**

 

2

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**INDEXCOAST 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** |
|                                                                                                     |   |
|                                                                                                     | 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 on Form 8-K |
|                                                                                                     |   |
| **SIGNATURES**                                                                                           |
|                                                                                                          |  |  |

 

3

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**COASTBANCORP & SUBSIDIARIES**

 

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

 

Consolidated Balance Sheet (Unaudited)

 
| **(in  thousands)**                                                                                                              |   | **September 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
| **ASSETS**                                                                                                                       |   |                    |    |                   |   |
| Cash and due from banks                                                                                                          |   | $                       | 8,586   |                   | $      | 7,742 |   |
| Federal funds sold                                                                                                               |   | 5,975                   |    | 15,470                 |   |
| TOTAL CASH AND CASH  EQUIVALENTS                                                                                                 |   | 14,561                  |    | 23,212                 |   |
|                                                                                                                             |   |                    |    |                   |   |
| Interest-bearing deposits                                                                                                        |   | —                  |    | —                 |   |
|                                                                                                                             |   |                    |    |                   |   |
| Investment securities:                                                                                                           |   |                    |    |                   |   |
| Securities held to maturity                                                                                                      |   | —                  |    | —                 |   |
| Securities available for sale                                                                                                    |   | 12,174                  |    | 2,092                  |   |
| TOTAL INVESTMENT SECURITIES                                                                                                      |   | 12,174                  |    | 2,092                  |   |
| Loans:                                                                                                                           |   |                    |    |                   |   |
| Commercial                                                                                                                       |   | 30,514                  |    | 30,530                 |   |
| Real estate - construction                                                                                                       |   | 10,340                  |    | 6,055                  |   |
| Real estate - other                                                                                                              |   | 60,759                  |    | 45,765                 |   |
| Consumer                                                                                                                         |   | 4,318                   |    | 7,420                  |   |
| TOTAL LOANS                                                                                                                      |   | 105,931                 |    | 89,770                 |   |
| Net deferred loan fees                                                                                                           |   | (362                    | )       | (355                   | )      |
| Allowance for credit losses                                                                                                      |   | (1,073                  | )       | (1,000                 | )      |
| NET LOANS                                                                                                                        |   | 104,496                 |    | 88,415                 |   |
| Premises and equipment                                                                                                           |   | 7,017                   |    | 6,684                  |   |
| Deferred taxes                                                                                                                   |   | 237                     |    | 286                    |   |
| Federal Reserve Bank and FHLB stock, at cost                                                                                     |   | 414                     |    | 287                    |   |
| Other assets                                                                                                                     |   | 1,148                   |    | 981                    |   |
| TOTAL ASSETS                                                                                                                     |   | $                       | 140,047 |                   | $      | 121,957 |   |
|                                                                                                                             |   |                    |    |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                    |   |                    |    |                   |   |
| Deposits:                                                                                                                        |   |                    |    |                   |   |
| Noninterest-bearing demand                                                                                                       |   | $                       | 31,890  |                   | $      | 26,496 |   |
| Money market and NOW                                                                                                             |   | 37,075                  |    | 29,581                 |   |
| Savings                                                                                                                          |   | 7,285                   |    | 5,906                  |   |
| Time deposits of $100,000 or more                                                                                                |   | 31,873                  |    | 28,269                 |   |
| Other time deposits                                                                                                              |   | 17,496                  |    | 17,584                 |   |
| TOTAL DEPOSITS                                                                                                                   |   | 125,619                 |    | 107,836                |   |
| Notes payable                                                                                                                    |   | 669                     |    | 721                    |   |
| Company obligated manditorily redeemable preferred  securities of subsidiary trust holding solely junior subordinated debentures |   | 5,000                   |    | 5,000                  |   |
| Other liabilities                                                                                                                |   | 180                     |    | 571                    |   |
| TOTAL LIABILITIES                                                                                                                |   | 131,468                 |    | 114,128                |   |
| 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: 633,300 in 2003 and 632,400 in 2002            |   | 6,337                   |    | 6,324                  |   |
| Additional paid-in capital                                                                                                       |   |                    |    |                   |   |
| Retained earnings                                                                                                                |   | 2,194                   |    | 1,456                  |   |
| Accumulated other comprehensive income - net  unrealized gains on available-for-sale securities                                  |   | 48                      |    | 49                     |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                  |   | 8,579                   |    | 7,829                  |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                 |   | $                       | 140,047 |                   | $      | 121,957 |   |

 

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

 

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**COAST BANCORP & SUBSIDIARIES**

 

Statement of Operations (unaudited)

(In Thousands, except for per share numbers)

 
|                                                |   | **For the Three Months Ended  September 30,** |   | **For the Nine Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
|                                                |   | **2003**                                      |   | **2002**                                     |   | **2003** |   | **2002** |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Interest income:                                    |   |                                          |   |                                         |   |   |   |   |   |
| Interest and fees on loans                          |   | $                                             | 1,839  |                                         | $      | 1,534 |   | $ | 5,276 |   | 4,410 |   |
| Interest on taxable securities                      |   | 45                                            |   | 76                                           |   | 84 |   | 261 |   |
| Interest on federal funds sold                      |   | 28                                            |   | 24                                           |   | 118 |   | 79 |   |
| Other interest income                               |   | 10                                            |   | 3                                            |   | 24 |   | 9 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Total interest income                               |   | 1,922                                         |   | 1,637                                        |   | 5,502 |   | 4,759 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Interest expense:                                   |   |                                          |   |                                         |   |   |   |   |   |
| Interest on money market and NOW accounts           |   | 52                                            |   | 82                                           |   | 184 |   | 256 |   |
| Interest on savings deposits                        |   | 15                                            |   | 14                                           |   | 41 |   | 43 |   |
| Interest on time deposits                           |   | 280                                           |   | 270                                          |   | 860 |   | 833 |   |
| Interest on other borrowings                        |   | 75                                            |   | 13                                           |   | 229 |   | 33 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Total interest expense                              |   | 422                                           |   | 379                                          |   | 1,314 |   | 1,165 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Net interest income                                 |   | 1,500                                         |   | 1,258                                        |   | 4,188 |   | 3,594 |   |
| Provision for loan losses                           |   | 20                                            |   | 36                                           |   | 174 |   | 116 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Net interest income after provision for loan losses |   | 1,480                                         |   | 1,222                                        |   | 4,014 |   | 3,478 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Noninterest income:                                 |   |                                          |   |                                         |   |   |   |   |   |
| Service charges on deposit accounts and other       |   | 75                                            |   | 57                                           |   | 233 |   | 162 |   |
| Mortgage loan referral fees                         |   | 120                                           |   | —                                       |   | 186 |   | — |   |
| Gain on sale of loans and servicing fees            |   | 118                                           |   | 119                                          |   | 397 |   | 377 |   |
| Gain on sale of securities                          |   | —                                        |   | 39                                           |   | 0 |   | 135 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Total noninterest income                            |   | 313                                           |   | 215                                          |   | 816 |   | 674 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Noninterest expense:                                |   |                                          |   |                                         |   |   |   |   |   |
| Salaries and benefits                               |   | 699                                           |   | 579                                          |   | 1,973 |   | 1,691 |   |
| Net occupancy expense (net of rental income)        |   | 82                                            |   | 80                                           |   | 267 |   | 222 |   |
| Equipment expense                                   |   | 62                                            |   | 47                                           |   | 192 |   | 146 |   |
| Other expense                                       |   | 394                                           |   | 413                                          |   | 1,134 |   | 1,104 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Total noninterest expense                           |   | 1,237                                         |   | 1,119                                        |   | 3,566 |   | 3,163 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Income before taxes                                 |   | 556                                           |   | 318                                          |   | 1,264 |   | 989 |   |
| Income taxes                                        |   | 231                                           |   | 102                                          |   | 526 |   | 403 |   |
| Net income                                          |   | $                                             | 325    |                                         | $      | 216 |   | $ | 738 |   | $ | 586 |   |
|                                                |   |                                          |   |                                         |   |   |   |   |   |
| Earnings per share - Basic                          |   | $                                             | 0.51   |                                         | $      | 0.34 |   | $ | 1.16 |   | $ | 0.93 |   |
| Earnings per share - Diluted                        |   | $                                             | 0.48   |                                         | $      | 0.33 |   | $ | 1.11 |   | $ | 0.89 |   |

 

5

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**COAST BANCORP & SUBSIDIARIES**

 

Statement of changes inStockholders’ Equity

(InThousands, Except Number of Shares) (Unaudited)

 
|                                                                                         |   | **Common Stock**      |   |       |   |                      |   | **Accumulated  Other** |   |                      |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------|--------|------------|--------|---------------------------|--------|------------------------|--------|---------------------------|--------|
|                                                                                         |   | **Number of  Shares** |   | **Amount** |   | **Comprehensive  Income** |   | **Retained  Earnings** |   | **Comprehensive  Income** |   | **Total** |   |
| **Balance at January 1, 2002**                                                               |   | 632,400               |   | $          | 6,324  |                      |   |                   | $      | 732                       |   | $ | 100 |   | $ | 7,156 |   |
| Exercise of stock options                                                                    |   |                  |   |       |   |                      |   |                   |   |                      |   | — |   |
| Cash dividends                                                                               |   |                  |   |       |   |                      |   | (47                    | )      |                      |   | (47 | ) |
| **Comprehensive Income**                                                                     |   |                  |   |       |   |                      |   |                   |   |                      |   |   |   |
| Net income                                                                                   |   |                  |   |       |   | $                         | 771    |                   | 771    |                      |   |   | 771 |   |
| Unrealized gain on available-for-sale securities,  net of taxes of $47,268                   |   |                  |   |       |   | 68                        |   |                   |   | 68                        |   | 68 |   |
| Less reclassification adjustments for gains  included in net income, net of taxes of $82,815 |   |                  |   |       |   | (119                      | )      |                   |   | (119                      | )      | (119 | ) |
| **Total comprehensive income**                                                               |   |                  |   |       |   | $                         | 720    |                   |   |                      |   |   |   |   |
|                                                                                         |   |                  |   |       |   |                      |   |                   |   |                      |   |   |   |
| **Balance at December 31, 2002**                                                             |   | 632,400               |   | $          | 6,324  |                      |   |                   | $      | 1,456                     |   | $ | 49 |   | $ | 7,829 |   |
| Exercise of stock options                                                                    |   | 900                   |   | 13         |   |                      |   |                   |   |                      |   | 13 |   |
| Cash dividends                                                                               |   |                  |   |       |   |                      |   |                   |   |                      |   | — |   |
| **Comprehensive Income**                                                                     |   |                  |   |       |   |                      |   |                   |   |                      |   |   |   |
| Net income                                                                                   |   |                  |   |       |   | $                         | 738    |                   | 738    |                      |   |   | 738 |   |
| Unrealized gain on available-for-sale securities,  net of taxes                              |   |                  |   |       |   | (1                        | )      |                   |   | (1                        | )      | (1 | ) |
| **Total comprehensive income**                                                               |   |                  |   |       |   | $                         | 737    |                   |   |                      |   |   |   |   |
|                                                                                         |   |                  |   |       |   |                      |   |                   |   |                      |   |   |   |
| **Balance at September 30, 2003**                                                            |   | 633,300               |   | $          | 6,337  |                      |   |                   | $      | 2,194                     |   | $ | 48 |   | $ | 8,579 |   |

 

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

 

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**COAST BANCORP & SUBSIDIARIES**

 

Statement of Cash Flows (unaudited)

(InThousands)

 
|                                                                               |   | **For the Nine Months Ended  September 30,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                               |   | **2003**                                     |   | **2002** |   |
| Operating activities                                                               |   |                                         |   |   |   |
| Net income                                                                         |   | $                                            | 738    |   | $ | 586 |   |
| Adjustments to reconcile net income to Net cash  provided by operating activities: |   |                                         |   |   |   |
| Depreciation and amortization                                                      |   | 264                                          |   | 158 |   |
| Provision for loan losses                                                          |   | 174                                          |   | 116 |   |
| Realized gain on investment securities                                             |   | —                                       |   | (135 | ) |
| Other items - net                                                                  |   | (88                                          | )      | (337 | ) |
| Net cash provided by  operating activities                                         |   | 1,088                                        |   | 388 |   |
|                                                                               |   |                                         |   |   |   |
| Investing activities                                                               |   |                                         |   |   |   |
| Change in interest-bearing deposits                                                |   | —                                       |   | — |   |
| Proceeds from sale of investment securities                                        |   | —                                       |   | 6,191 |   |
| Maturities of investment securities                                                |   | —                                       |   | 1,000 |   |
| Purchase of investment securities                                                  |   | (10,093                                      | )      | (2,012 | ) |
| Net change in loans                                                                |   | (16,255                                      | )      | (4,254 | ) |
| Increase in Federal Reserve Bank and FHLB Stock                                    |   | (125                                         | )      | (13 | ) |
| Purchase of premises and equipment                                                 |   | (1,010                                       | )      | (1,952 | ) |
| Net cash provided (used) by  investing activities                                  |   | (27,483                                      | )      | (1,040 | ) |
|                                                                               |   |                                         |   |   |   |
| Financing activities                                                               |   |                                         |   |   |   |
| Increase (decrease) in deposits                                                    |   | 17,783                                       |   | 2,458 |   |
| Proceeds from trust preferred securities                                           |   | —                                       |   | 5,000 |   |
| Principle payments on notes payable                                                |   | (52                                          | )      | (10 | ) |
| Proceeds from exercise of options                                                  |   | 13                                           |   | — |   |
| Net cash provided (used) by  financing actvities                                   |   | 17,744                                       |   | 7,448 |   |
|                                                                               |   |                                         |   |   |   |
| Increase (decrease) in cash  and cash equivalents                                  |   | (8,651                                       | )      | 6,796 |   |
|                                                                               |   |                                         |   |   |   |
| Cash and cash equivalents at beginning of period                                   |   | 23,212                                       |   | 12,549 |   |
|                                                                               |   |                                         |   |   |   |
| Cash and cash equivalents at end of period                                         |   | $                                            | 14,561 |   | $ | 19,345 |   |

 

7

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**Note1**                                                             **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 31,2002 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 nine month period ended September 30, 2003 and 2002,reflect all adjustments, consisting only of normal recurring accruals andprovisions, 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 Bank adopted SFAS No. 128, *“Earningsper Share”*, which has subsequently been adopted by the Company*.*  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 pershare also 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  September 30,** |   | **For  the Nine Months Ended  September 30,** |   |
|----------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                         |   | **2003**                                       |   | **2002**                                      |   | **2003** |   | **2002** |   |
|                                         |   | **Shares**                                     |   | **Shares**                                    |   | **Shares** |   | **Shares** |   |
| Used in Basic EPS                            |   | 633,300                                        |   | 632,400                                       |   | 633,119 |   | 632,400 |   |
| Dilutive Effect of Outstanding Stock Options |   | 41,864                                         |   | 24,432                                        |   | 34,315 |   | 25,572 |   |
| Earnings per share - Diluted                 |   | 675,164                                        |   | 656,832                                       |   | 667,434 |   | 657,972 |   |

 

**Note3**                                                             **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  September 30,** |   | **For the Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                            |   | **2003**                                      |   | **2002**                                     |   | **2003** |   | **2002** |   |
|                                                                                            |   |                                          |   |                                         |   |   |   |   |   |
| Net Income:                                                                                     |   |                                          |   |                                         |   |   |   |   |   |
| As reported                                                                                     |   | $                                             | 325    |                                         | $      | 216 |   | $ | 738 |   | $ | 586 |   |
| 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                                          | )      | (34 | ) | (32 | ) |
| Pro Forma net income                                                                            |   | $                                             | 314    |                                         | $      | 205 |   | $ | 704 |   | $ | 554 |   |
|                                                                                            |   |                                          |   |                                         |   |   |   |   |   |
| Basic earnings per share:                                                                       |   |                                          |   |                                         |   |   |   |   |   |
| As reported                                                                                     |   | $                                             | 0.51   |                                         | $      | 0.34 |   | $ | 1.17 |   | $ | 0.93 |   |
| Proforma                                                                                        |   | $                                             | 0.50   |                                         | $      | 0.32 |   | $ | 1.11 |   | $ | 0.88 |   |
|                                                                                            |   |                                          |   |                                         |   |   |   |   |   |
| Diluted earnings per share:                                                                     |   |                                          |   |                                         |   |   |   |   |   |
| As reported                                                                                     |   | $                                             | 0.48   |                                         | $      | 0.33 |   | $ | 1.11 |   | $ | 0.89 |   |
| Pro forma                                                                                       |   | $                                             | 0.47   |                                         | $      | 0.31 |   | $ | 1.05 |   | $ | 0.84 |   |

 

**Item2****.  Management’s Discussion and Analysis ofFinancial 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 ExchangeCommission.  Such forward-lookingstatements speak only as of the date on which such statements are made, and thecorporation 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 should be read inconjunction with Coast Bancorp’s Annual Report on Form 10-KSB for the yearended December 31, 2002.

 

Descriptionof Business

 

*CoastBancorp*

 

CoastBancorp, headquartered in San Luis Obispo, California, is a Californiacorporation incorporated in 2001.  CoastBancorp became the bank holding company of Coast National Bank on May 31, 2001through a corporate reorganization.  Inthe reorganization, Coast National Bank became the wholly-owned subsidiary ofCoast Bancorp and the shareholders of the Bank became shareholders of CoastBancorp.  Coast Bancorp is operatedthrough a two-tiered corporate structure. At the holding company level the affairs of Coast Bancorp are overseenby a Board of Directors elected by the shareholders of Coast Bancorp at theannual meeting of shareholders.  Thebusiness of the Bank is overseen by a Board of Directors elected by CoastBancorp, the sole owner of the Bank.  Asof the date of this Form 10-QSB the respective members of the Board ofDirectors of the Bank and the Board of Directors of Coast Bancorp areidentical.  Coast Bancorp is subject tothe regulations of, and examination by, the Board of Governors of the FederalReserve System.  At present, CoastBancorp does not engage in any material business activities other than theownership of the Bank.  Financialinformation presented for September 30, 2003 and comparative information forDecember 31, 2002 and September 30, 2002 is inclusive of the consolidatedCompany.

 

9

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*CoastNational Bank*

 

CoastNational Bank was chartered June 16, 1997 (charter #23222) by The Office of theComptroller of the Currency as a national bank.  The Bank commenced operations on that date with two offices, 16employees and $6,250,000 in capital. The original branch offices were located at 486 Marsh Street, San LuisObispo and 1199 Grand Avenue, Arroyo Grande, California.  Since that time, an additional branch officewas opened in June 1998 at 948 Morro Bay Boulevard in Morro Bay, California andanother branch office was opened in July 1999 at 1193 Los Osos Valley Road inLos Osos, California.  In July 2002, aloan production office was opened at 930 South Broadway Street in Santa Maria,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.  One-half of theoriginal main office at 486 Marsh Street now houses the Bank’s Small BusinessLending Center and the Bank’s Note Department. The other half of the building is leased to two tenants including alocal title insurance company and a long-time real estate developer.  The title insurance company lease is at arate of $2,850.00 per month until December 31, 2004 with no options toextend.  The real estate developer is ona month-to-month basis at a rate of approximately $825.00 per month.

 

Alsolocated on the San Luis Obispo property is a modular building of approximately3,500 square feet that was formerly a banking facility occupied by WestAmericaBank under a ground lease.  The addressof this facility is 545 Higuera Street, San Luis Obispo, California.  On November 9, 2001, the modular branchfacility and the deposits of this WestAmerica Bank branch office were acquiredby Heritage Oaks Bank and the office was subsequently closed.  The Bank then negotiated with Heritage OaksBank for the early termination of the underlying ground lease for valuableconsideration, namely the assignment of title of the modular facility to theBank.  For several months thereafter,the modular facility housed the Bank’s Small Business Lending Center until itwas relocated to the 486 Marsh Street building upon completion of the Bank’snew head office.  Beginning on July 1,2003, the modular facility has been leased to the County of San Luis Obispounder a one-year lease at $5,500.00 per month with a one-year option to renew.

 

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.  Thecommencement of construction is anticipated for the fourth quarter of 2003.

 

InApril 2003, the Bank purchased a vacant lot at the southeast corner of Main andSeventh Streets in Templeton.  Thepurpose for this acquisition was the eventual construction of a new Templetonbranch with a drive-through lane in order to serve northern San Luis ObispoCounty.  The Bank subsequently submitteda branch application with the Office of the Comptroller of the Currency forthis location when completed.  Thatbranch application has been approved by the OCC.

 

InMay 2003, the Bank entered into a lease agreement for office space at 5060California Avenue, Suite 530, in Bakersfield, California, that became effectiveon June 1, 2003.  The Bank subsequentlynotified the Office of the Comptroller of the Currency that this office spacewill serve as a loan production office primarily for the expansion of theBank’s government-guaranteed lending activities in that market.

 

Asof September 30, 2003, the Bank had a total of 58 employees, including 11part-time employees.  Part-timeemployees are converted to full-time equivalent employees on the percentage oftheir weekly hours worked compared to 40 hours.  On a full-time equivalent basis, employees represent 52positions.  The Bank values itsemployees and believes that it enjoys satisfactory relations with them.  They are actively engaged individually andas a team in contributing to the Bank’s realization of its vision and mission.

 

CoastNational Bank anticipates being able to satisfy its cash requirements, nearterm, with continuing deposit growth.

 

10

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**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 results could differ significantlyfrom these estimates and assumptions, which could have a material impact on thecarrying value of assets and liabilities at the balance sheet dates and resultsof operations 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: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 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 by unrelatedthird 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 September 30, 2003, total consolidated assets of Coast Bancorp were $140.0million in comparison to total assets of $122.0 million as of December 31,2002. This represents an increase of $18.0 million, or 14.75%.  Compared to total assets of $112.7 millionat September 30, 2002, the Company has increased assets by $27.3 million, or24.2%, over the last twelve months.

 

For the three months ended September 30, 2003 the Bancorp reportedconsolidated net income of $325,000 or $0.48 diluted earnings per sharecompared to net income of $216,000 and $0.33 diluted earnings per share for thesame period during 2002.  For the ninemonths ended September 30, 2003 the Bancorp reported consolidated net income of$738,000 or $1.11 diluted earnings per share compared to consolidated netincome of $586,000 or $0.89 diluted earnings per share for the same period in2002.

 

**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 the interestrate spread, or more specifically on the difference between gross interest andfees earned on the loans and investment portfolios and the interest rates paidon deposits and borrowings.   Netinterest income was $1,500,000 for the quarter ended September 30, 2003,compared to $1,258,000 for the quarter ended September 30, 2002, representingan increase of 19.2%.  Net interestincome was $4,188,000 for the nine months ended September 30, 2003, compared to$3,594,000 for the nine months ended September 30, 2002, representing anincrease of 16.5%.  This increase, whileoffset somewhat by lower interest rates, was primarily the result of thesignificant loan growth generated by the Bank’s branches.

 

11

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

 
|                   |   | **Three Months Ended  September 30,** |    | **Nine Months Ended  September 30,** |   | **Year Ended  December 31,  2002** |   |
|------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|------------------------------------|--------|
|                   |   | **2003**                              |    | **2002**                             |   | **2003**                           |   | **2002** |   |   |
|                   |   |                                  |    |                                 |   |                               |   |   |   |   |   |
| Interest Income        |   | $                                     | 1,921   |                                 | $      | 1,637                              |   | $ | 5,502 |   | $ | 4,759 |   | $ | 6,406 |   |
| Interest Expense       |   | 421                                   |    | 379                                  |   | 1,314                              |   | 1,165 |   | 1,614 |   |
|                   |   |                                  |    |                                 |   |                               |   |   |   |   |   |
| Net Interest Income    |   | $                                     | 1,500   |                                 | $      | 1,258                              |   | $ | 4,188 |   | $ | 3,594 |   | $ | 4,792 |   |
|                   |   |                                  |    |                                 |   |                               |   |   |   |   |   |
| Average Earning Assets |   | $                                     | 122,132 |                                 | $      | 95,437                             |   | $ | 116,482 |   | $ | 95,208 |   | $ | 97,661 |   |
| Net Interest Margin    |   | 4.91                                  | %       | 5.27                                 | %      | 4.79                               | %      | 5.03 | % | 4.91 | % |

 

The decrease in the net interest margin for the three-month and thenine-month periods ending September 30, 2003 as compared to the net interestmargin for the three-month and nine-month periods ending September 30, 2002 wasdue primarily to the lingering effect that followed a 50 basis point reductionin short-term interest rates by the Federal Reserve on November 7, 2002 and asubsequent 25 basis point reduction in short-term interest rates on June 25,2003.

 

**Provision for Loan Losses**

 

Management of the Bank and the Bancorp 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 loan classificationshave been incorporated into the determination of the allowance for loanlosses.  This monitoring system andallowance methodology includes a loan-by-loan analysis for all classified loansas well as loss factors for the balance of the unclassified portfolio.  Classified loans are reviewed individuallyto estimate the amount of probable losses that needs to be included in theallowance.  These reviews includeanalysis of financial information as well as evaluation of collateral securingthe credit.  Loss factors on theunclassified portion of the portfolio are based on such factors as historicalloss experience, current portfolio delinquency and trends, and other inherentrisk factors such as economic conditions, concentrations in the portfolio, risklevels of particular loan categories, internal loan review and managementoversight.

 

The Company made a $174,000 contribution to the allowance for loanlosses for the nine months ended September 30, 2003 compared to $116,000 forthe same period in 2002.  Managementbelieves that the allowance, which equals 1.02% of total loans at September 30,2003, is adequate to cover future losses. The allowance for loan losses at December 31, 2002 was 1.11% of totalloans.

 

Changes in the allowance for loan losses for the three months ended andthe nine months ended September 30, 2003 and 2002 are as follows (dollaramounts in thousands):

 
|                                  |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                  |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                  |   |                                  |   |                                 |   |   |   |   |   |
| Allowance, Beginning of Period        |   | $                                     | 1,050  |                                 | $      | 940 |   | $ | 1,000 |   | $ | 850 |   |
| Provision for Loan Losses             |   | 20                                    |   | 36                                   |   | 174 |   | 116 |   |
| Loans Charged Off - net of recoveries |   | 3                                     |   | (6                                   | )      | (101 | ) | 4 |   |
|                                  |   |                                  |   |                                 |   |   |   |   |   |
| Allowance, End of Period              |   | $                                     | 1,073  |                                 | $      | 970 |   | $ | 1,073 |   | $ | 970 |   |

 

**Non-interest Income**

 

Non-interest income represents deposit account service charges andother types of fee income.  Non-interestincome for the three months ended September 30, 2003 totaled $313,000 comparedto $215,000 for the same period in 2002 representing a 45.6% increase.  Non-interest income for the nine monthsended September 30, 2003 totaled $816,000 compared to $674,000 for the

 

12

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same period in 2002representing a 21.1% increase.  Comparedto the same nine-month period in 2002, the increases in non-interest income for2003 have been due to increases in service charges of $71,000 on our growingportfolio of deposit accounts, increases in the amount of servicing fees andrealized gains on the sale of the guaranteed portion of government-guaranteedloans totaling $20,000, and loan referral fees of $186,000 generated by theBank’s new mortgage loan referral program. For reference, the mortgage loan referral program commenced operationsin 2003 so there was no income from this program in 2002.

 

Over the nine-month period in 2002, the Bank realized $135,000 in gainsfrom the sale of investment securities. However, during the nine months ended September 30, 2003, the Bankelected to not realize any gains from the sale of investment securities.

 

**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 three months ended September 30, 2003totaled $1,237,000 compared to $1,119,000 for the same period in 2002 for anincrease of 10.5%.  Non-interest expensefor the nine months ended September 30, 2003 totaled $3,566,000 compared to$3,163,000 for the same period in 2002 for an increase of 12.7%.  This increase is primarily due to thecontinuing growth of the Bank’s government guaranteed lending departmentspecializing in Small Business Administration lending programs, the opening ofthe Bank’s new head office building during the latter part of 2002 and the overallexpansion of the Bank’s customer base.

 

**IncomeTaxes**

 

The Company recorded a $231,000 tax provision during the three monthsended September 30, 2003 compared to $102,000 during the same period in2002.  The Company recorded a $526,000tax provision for the nine months ended September 30, 2003 compared to $403,000during the same period in 2002.

 

**Financial Condition**

 

*BalanceSheet Summary*

 

As of September 30, 2003, total consolidated assets of Coast Bancorpwere $140.0 million in comparison to total assets of $122.0 million as ofDecember 31, 2002. This represents an increase of $18.0 million, or14.75%.  Compared to total assets of$112.7 million at September 30, 2002, the Company has increased assets by $27.3million, or 24.2%, over the last twelve months.  These increases are the result of significant growth innon-interest-bearing demand deposits, money-market and NOW accounts, as well asmodest growth in savings and time deposit accounts.

 

It should be noted that for several quarters prior to September 30,2002, management consciously restricted asset and deposit growth in order tomaintain well-capitalized regulatory ratios. With the completion of the trust preferred offering immediately prior tothe end of the third quarter at September 30, 2002, the Company wassubsequently well-positioned to finance future growth.  Most of the company’s asset growth hasoccurred since September 30, 2002.  Inthe last twelve months, growth in deposits has represented the majority of theincrease in assets.  Management furtherbelieves that recent increases are also due to the continuing businessdevelopment efforts put forth by the Bank’s staff in conjunction with theopening of the Bank’s new head office building in November 2002.

 

The majority of the growth in deposits has been reinvested in loans,which have increased by $24.7 million, or 30.4%, from $81.2 million atSeptember 30, 2002 to $105.9 million at September 30, 2003.  The balance of the deposit growth has beeninvested in short-term investment securities and in Fed Funds to fundcontinuing strong loan demand and to meet the ongoing liquidity needs of theBank.

 

*Earnings Summary*

 

Consolidated net income for the three months ended September 30, 2003was $325,000 or $0.48 diluted earnings per share compared to net income of$216,000 or $0.33 diluted earnings per share for the same period during2002.  Consolidated net income for thenine months ended September 30, 2003 was $738,000 or $1.11 diluted earnings pershare compared to net income of $586,000 or $0.89 diluted earnings per sharefor the same period during 2002.  Theincrease in earnings in 2003 as compared to the same three and nine-monthperiod in 2002 was primarily due to the increase in net interest income resultingfrom the growth of the Bank’s earning assets. This increase in net interest income was still attained in the face ofthe lingering effects on the Bank’s net interest margin following reductions inshort-term rates by the Federal Reserve of 50 basis points on November 7, 2002and another 25 basis points on June 25, 2003, as well as increases innon-interest expenses such as those associated with the opening of the Bank’snew head office building, the continuing expansion of the Bank’s GovernmentGuaranteed lending department, and the payment of quarterly interest on theCompany’s Trust Preferred borrowing. Also contributing to the growth in earnings during 2003 was additionalloan referral fee income from the Bank’s new mortgage loan referral program of$186,000.

 

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**Asset Quality**

 

As of September 30, 2003, the Company had one loan on non-accrual.  The non-accrual loan represents a businessterm loan having an outstanding balance of $32,758, seventy-five percent (75%)of which is guaranteed by the U.S. Small Business Administration.  There were no other loans 90 days or morepast due and still accruing.  As ofSeptember 30, 2002 the Company had no loans on nonaccrual or loans 90 day pastdue and still accruing. As of December 31, 2002 the company had no loans onnon-accrual or loans 90 days past due and still accruing.  As of September 30, the Company has had noOREO or restructured loans during 2003 or 2002.

 

**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 September 30, 2003 was $8.579 million, comparedto $7.829 million at December 31, 2002. Stockholders equity increased primarily from net income of$738,000.  The balance of the increasewas the result of a former employee exercising the vested amount of thatemployee’s stock options immediately upon that employee’s departure from theBank.

 

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.

 

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

 
|                            |   | **Regulatory Standard**     |   | **Coast  Bancorp**    |   | **Coast  Bancorp**            |   |
|---------------------------------|--------|-----------------------------|--------|-----------------------|--------|-------------------------------|--------|
|                            |   | **Adequately  Capitalized** |   | **Well  Capitalized** |   | **As of  September 30, 2003** |   | **As of  December 31, 2002** |   |
| Total risk-based capital ratio  |   | 8.00                        | %      | 10.00                 | %      | 14.08                         | %      | 14.10 | % |
| Tier 1 risk-based capital ratio |   | 4.00                        | %      | 6.00                  | %      | 11.14                         | %      | 10.60 | % |
| Tier 1 leverage capital ratio   |   | 4.00                        | %      | 5.00                  | %      | 8.78                          | %      | 8.81 | % |

 
|                            |   | **Regulatory  Standard**    | ** ** | **Coast  National Bank** | ** ** | **Coast  National Bank**      | ** ** |
|---------------------------------|--------|-----------------------------|------------|--------------------------|------------|-------------------------------|------------|
|                            |   | **Adequately  Capitalized** |       | **Well  Capitalized**    | ** ** | **As of  September 30, 2003** | ** ** | **As of  December 31, 2002** | ** ** |
| Total risk-based capital ratio  |   | 8.00                        | %          | 10.00                    | %          | 12.32                         | %          | 13.33 | % |
| Tier 1 risk-based capital ratio |   | 4.00                        | %          | 6.00                     | %          | 11.37                         | %          | 12.30 | % |
| Tier 1 leverage capital ratio   |   | 4.00                        | %          | 5.00                     | %          | 9.28                          | %          | 10.18 | % |

 

**Liquidity**

 

The objective of liquidity management is to ensure the continuousavailability of funds to meet the demands of depositors, investors andborrowers.  Asset liquidity is primarilyderived from loan 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. The Investment Committee meets regularly to assess the projected fundingrequirements by reviewing historical funding patterns, current and forecastedeconomic conditions, and individual customer funding needs.  Deposits generated from Bank customers serveas the primary source of liquidity.  TheBank has credit arrangements with correspondent banks that serve as a secondaryliquidity source.  The Bank has alsobeen approved for membership in the Federal Home Loan Bank of San Francisco(FHLBSF) and has the capability of borrowing from this source as well.  However, the Bank has not historically hadthe need to borrow from these sources.

 

Management is not aware of any future capital expenditures or othersignificant demands on commitments which would severely impair liquidity.  As of the nine months ended September 30,2003, the Bank had a loan-to-deposit ratio of 84.3%.

 

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

 

Based on their evaluation as of September 30, 2003, the Bancorp’s ChiefExecutive Officer and Chief Financial Officer have concluded that the Bancorp’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in the reports that the Bancorp files or submits underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Therehave been no significant changes in the Bancorp’s internal controls or in otherfactors that could significantly affect those controls subsequent to the dateof their evaluation.

 

15

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**PART II****– OTHERINFORMATION**

 

**ITEM 1 – LEGAL PROCEEDINGS**

 

Notapplicable.

 

**ITEM 2 – CHANGES IN SECURITIES**

 

Notapplicable.

 

**ITEM 3 – DEFAULTS UPON SENIOR SECURITIES**

 

Notapplicable.

 

**ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

Notapplicable.

 

**ITEM 5 – OTHER INFORMATION**

 

Notapplicable.

 

**ITEM 6 – EXHIBITS AND 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 Company during the quarter ended September 30,2003.

 

16

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**Signatures**

 

In accordancewith the requirements of the Exchange Act of 1934, the registrant has causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|   |               | COAST  BANCORP                     |
|--------|--------------------|------------------------------------|
|   |               |                               |
|   |               |                               |
| Date:  | November 12,  2003 | /s/ Jack C.  Wauchope              |   |
|   |               | Jack C.  Wauchope                  |
|   |               | Chairman of  the Board             |
|   |               | Chief  Executive Officer           |
|   |               | (Principal  Executive Officer)     |
|   |               |                               |
|   |               |                               |
| Date:  | November 12,  2003 | /s/ Thomas  J. Sherman             |   |
|   |               | Thomas J.  Sherman                 |
|   |               | President/Chief  Operating Officer |
|   |               | Chief  Financial Officer           |
|   |               | (Principal  Financial Officer)     |

 

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