# ** **

# **FORM10-QSB**

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**(MarkOne)**

** **

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

** **

**For the quarterly period ended September 30, 2005**

** **

o**          TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE EXCHANGE ACT**

** **

**For the transition period from               to                 **

** **

**Commission File No. 000-32827**

** **

**COASTBANCORP**

(Exact name of Registrant 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)

 

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

# ** **

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).          Yes: o   No: ý

 

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

 

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

CommonStock — As of November 14, 2005, there were 674,100 shares of the issuer’scommon stock outstanding.

 

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

 

----

 

**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 “SAFEHARBOR” CREATED BY THOSE SECTIONS.  THESEFORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULDCAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKINGSTATEMENTS.  SUCH RISKS AND UNCERTAINTIESINCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS: COMPETITIVE PRESSURE INTHE BANKING INDUSTRY INCREASES SIGNIFICANTLY; CHANGES IN THE INTEREST RATEENVIRONMENT REDUCE MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY ORREGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGSA DETERIORATION 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;  CHANGES IN THE SECURITIES MARKETS; THEABILITY TO SATISFY THE REQUIREMENTS OF THE SARBANES-OXLEY ACT AND OTHERREGULATIONS GOVERNING INTERNAL CONTROLS; AND POTENTIAL ECOMONMIC EFFECT OF THEWAR ON TERRORISM AND THE WAR IN IRAQ.**

 

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

 

**MOREOVER, WHEREVER PHRASES AREUSED SUCH 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-LOOKINGSTATEMENTS.**

 

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 Shareholders’ Equity                                                       |       |       |       |
| Statements of Cash Flows                                                                                 |       |       |       |
|                                                                                                     |       |       |       |
| **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                                                                                   |       |       |       |
|                                                                                                     |       |       |       |
| **SIGNATURES**                                                                                           |       |       |       |

 

3

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**COAST BANCORP & SUBSIDIARY**

**ITEM I - FINANCIAL STATEMENTS**

** **

ConsolidatedBalance Sheets (Unaudited)

 

 
| ** **                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| **(in  thousands)**                                                                                                   | ** ** | **2005**          | ** ** | **2004**         | ** ** |
| **ASSETS**                                                                                                            |       |              |       |             |       |
| Cash and due from banks                                                                                               |       | $                 | 8,974      |             | $          | 8,640 |   |
| Federal funds sold                                                                                                    |       | 23,450            |       | 12,050           |       |
| TOTAL CASH AND CASH EQUIVALENTS                                                                                       |       | 32,424            |       | 20,690           |       |
|                                                                                                                  |       |              |       |             |       |
| Investment securities:                                                                                                |       |              |       |             |       |
| Securities held to maturity                                                                                           |       | —            |       | —           |       |
| Securities available for sale                                                                                         |       | 10,819            |       | 12,867           |       |
| TOTAL INVESTMENT SECURITIES                                                                                           |       | 10,819            |       | 12,867           |       |
| Loans:                                                                                                                |       |              |       |             |       |
| Commercial                                                                                                            |       | 25,393            |       | 29,430           |       |
| Real estate - construction                                                                                            |       | 19,104            |       | 17,432           |       |
| Real estate - other                                                                                                   |       | 78,689            |       | 66,897           |       |
| Consumer                                                                                                              |       | 3,207             |       | 2,547            |       |
| TOTAL LOANS                                                                                                           |       | 126,393           |       | 116,306          |       |
| Net  deferred loan fees                                                                                               |       | (394              | )          | (418             | )          |
| Allowance  for credit losses                                                                                          |       | (1,188            | )          | (1,168           | )          |
| NET LOANS                                                                                                             |       | 124,811           |       | 114,720          |       |
| Premises  and equipment                                                                                               |       | 8,332             |       | 8,728            |       |
| Deferred  taxes                                                                                                       |       | 384               |       | 360              |       |
| Federal  Reserve Bank and FHLB stock, at cost                                                                         |       | 916               |       | 883              |       |
| Accrued  interest and other assets                                                                                    |       | 1,520             |       | 1,666            |       |
| TOTAL ASSETS                                                                                                          |       | $                 | 179,206    |             | $          | 159,914 |   |
|                                                                                                                  |       |              |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                         |       |              |       |             |       |
| Deposits:                                                                                                             |       |              |       |             |       |
| Noninterest-bearing demand                                                                                            |       | $                 | 39,190     |             | $          | 39,661 |   |
| Money market and NOW                                                                                                  |       | 43,403            |       | 37,043           |       |
| Savings                                                                                                               |       | 8,140             |       | 8,785            |       |
| Time deposits of $100,000 or more                                                                                     |       | 56,678            |       | 44,492           |       |
| Other time deposits                                                                                                   |       | 15,168            |       | 14,483           |       |
| TOTAL DEPOSITS                                                                                                        |       | 162,579           |       | 144,464          |       |
| Notes  payable                                                                                                        |       | 50                |       | 106              |       |
| Junior  subordinated securities                                                                                       |       | 5,155             |       | 5,155            |       |
| Other  liabilities                                                                                                    |       | 408               |       | 216              |       |
| TOTAL LIABILITIES                                                                                                     |       | 168,192           |       | 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: 674,100 in 2005 and 652,700 in 2004 |       | 6,928             |       | 6,641            |       |
| Additional paid-in capital                                                                                            |       | —            |       | —           |       |
| Retained earnings                                                                                                     |       | 4,169             |       | 3,393            |       |
| Accumulated other comprehensive income - net  unrealized gains (losses) on available-for-sale securities              |       | (83               | )          | (61              | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                       |       | 11,014            |       | 9,973            |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                       |       | $                 | 179,206    |             | $          | 159,914 |   |

 

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

 

4

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# **COAST BANCORP & SUBSIDIARY**

 

Statementsof Operations (unaudited)

(InThousands, except for per share numbers)

 
| ** **                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **September 30,**              | ** ** | **September 30,**             | ** ** |
| ** **                                           | ** ** | **2005**                       | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Interest  income:                                    |       |                           |       |                          |       |   |   |   |   |
| Interest and fees on loans                           |       | $                              | 2,682      |                          | $          | 1,940 |   | $ | 7,300 |   | $ | 5,805 |   |
| Interest on taxable securities                       |       | 77                             |       | 41                            |       | 238 |   | 132 |   |
| Interest on federal funds sold                       |       | 145                            |       | 69                            |       | 296 |   | 100 |   |
| Other interest income                                |       | 13                             |       | 14                            |       | 40 |   | 30 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Total interest income                                |       | 2,917                          |       | 2,064                         |       | 7,874 |   | 6,067 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Interest  expense:                                   |       |                           |       |                          |       |   |   |   |   |
| Interest on money market and NOW accounts            |       | 181                            |       | 81                            |       | 427 |   | 196 |   |
| Interest on savings deposits                         |       | 22                             |       | 11                            |       | 55 |   | 36 |   |
| Interest on time deposits                            |       | 598                            |       | 284                           |       | 1,355 |   | 826 |   |
| Interest on other borrowings                         |       | 99                             |       | 75                            |       | 277 |   | 211 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Total interest expense                               |       | 900                            |       | 451                           |       | 2,114 |   | 1,269 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Net interest income                                  |       | 2,017                          |       | 1,613                         |       | 5,760 |   | 4,798 |   |
| Provision for loan losses                            |       | 20                             |       | —                        |       | 20 |   | 70 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Net interest income after provision for loan  losses |       | 1,997                          |       | 1,613                         |       | 5,740 |   | 4,728 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Noninterest  income:                                 |       |                           |       |                          |       |   |   |   |   |
| Service charges on deposit accounts and other        |       | 50                             |       | 77                            |       | 175 |   | 285 |   |
| Gain on sale of loans and net servicing fees         |       | (9                             | )          | 90                            |       | 98 |   | 621 |   |
| Gain on sale of real estate                          |       | —                         |       | —                        |       | 47 |   | — |   |
| Gain on sale of fixed assets                         |       | 5                              |       | —                        |       | 5 |   | — |   |
| Gain on sale of securities                           |       | —                         |       | —                        |       | — |   | 43 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Total noninterest income                             |       | 46                             |       | 167                           |       | 325 |   | 949 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Noninterest  expense:                                |       |                           |       |                          |       |   |   |   |   |
| Salaries and benefits                                |       | 835                            |       | 790                           |       | 2,502 |   | 2,339 |   |
| Net occupancy expense (net of rental income)         |       | 126                            |       | 113                           |       | 363 |   | 276 |   |
| Equipment expense                                    |       | 81                             |       | 67                            |       | 243 |   | 199 |   |
| Other expense                                        |       | 519                            |       | 405                           |       | 1,489 |   | 1,408 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Total noninterest expense                            |       | 1,561                          |       | 1,375                         |       | 4,597 |   | 4,222 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Income before taxes                                  |       | 482                            |       | 405                           |       | 1,468 |   | 1,455 |   |
| Income taxes                                         |       | 234                            |       | 198                           |       | 692 |   | 618 |   |
| Net income                                           |       | $                              | 248        |                          | $          | 207 |   | $ | 776 |   | $ | 837 |   |
|                                                 |       |                           |       |                          |       |   |   |   |   |
| Earnings per share - Basic                           |       | $                              | 0.37       |                          | $          | 0.33 |   | $ | 1.16 |   | $ | 1.32 |   |
| Earnings per share - Diluted                         |       | $                              | 0.35       |                          | $          | 0.30 |   | $ | 1.09 |   | $ | 1.20 |   |

 

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

 

5

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**COAST BANCORP & SUBSIDIARY**

** **

Statementof Changes in Stockholders’ Equity 

(InThousands, Except Number of Shares) (Unaudited)

 
| ** **                                                                                           | ** ** | ** **       | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | **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 onavailable-for-sale  securities,net of taxes of $46,000                           |       |             |       |       |       | (66               | )          |         |       | (66               | )          | (66        | )          |
| Less reclassification adjustmentsfor gains  (losses) 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                                                                           |       | 21,400           |       | 287        |       |              |       |         |       |              |       | 287        |       |
| Cash  dividends                                                                                      |       |             |       |       |       |              |       |         |       |              |       | —     |       |
| **Comprehensive Income**                                                                             |       |             |       |       |       |              |       |         |       |              |       |       |       |
| Net  income                                                                                          |       |             |       |       |       | 776               |       | 776          |       |              |       | 776        |       |
| Less reclassification adjustment for gains  (losses) included in net income; net of taxes            |       |             |       |       |       |              |       |         |       |              |       |       |       |
| Unrealized gain (losses) onavailable-for-sale  securities,net of taxes of $15,000                    |       |             |       |       |       | (22               | )          |         |       | (22               | )          | (22        | )          |
| **Total comprehensive income**                                                                       |       |             |       |       |       | $                 | 754        |         |       |              |       |       |       |   |
|                                                                                                 |       |             |       |       |       |              |       |         |       |              |       |       |       |
| **Balance  at September 30, 2005**                                                                   |       | 674,100          |       | $          | 6,928      |              |       |         | $          | 4,169             |       | $          | (83        | ) | $ | 11,014 |   |

 

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

 

6

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# **COAST BANCORP & SUBSIDIARY**

 

Statementsof Cash Flows (unaudited)

(InThousands)
| ** **                                                                         | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**             | ** ** |
| ** **                                                                         | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Operating  activities                                                              |       |                          |       |   |   |
| Net income                                                                         |       | $                             | 776        |   | $ | 837 |   |
| Adjustments to reconcile net income to Net cash  provided by operating activities: |       |                          |       |   |   |
| Depreciation and amortization                                                      |       | 373                           |       | 299 |   |
| Provision for loan losses                                                          |       | 20                            |       | 70 |   |
| Realized gain on investment securities                                             |       | —                        |       | (43 | ) |
| Other items - net                                                                  |       | 280                           |       | (539 | ) |
| Net cash provided by operating activities                                          |       | 1,449                         |       | 624 |   |
|                                                                               |       |                          |       |   |   |
| Investing  activities                                                              |       |                          |       |   |   |
| Proceeds from sale of investment securities                                        |       | —                        |       | 5,094 |   |
| Maturities of investment securities                                                |       | 2,000                         |       | 2,000 |   |
| Purchase of investment securities                                                  |       | —                        |       | (2,019 | ) |
| Net change in loans                                                                |       | (10,114                       | )          | (8,329 | ) |
| Increase in Federal Reserve Bank and FHLB Stock                                    |       | (33                           | )          | (455 | ) |
| Proceeds from the sale of premises and equipment                                   |       | 424                           |       | — |   |
| Purchase of premises and equipment                                                 |       | (338                          | )          | (1,749 | ) |
| Net cash provided (used) by investing activities                                   |       | (8,061                        | )          | (5,458 | ) |
|                                                                               |       |                          |       |   |   |
| Financing  activities                                                              |       |                          |       |   |   |
| Increase (decrease) in deposits                                                    |       | 18,115                        |       | 18,912 |   |
| Principle payments on notes payable                                                |       | (56                           | )          | (53 | ) |
| Proceeds from exercise of options                                                  |       | 287                           |       | 103 |   |
| Net cash provided (used) by financing actvities                                    |       | 18,346                        |       | 18,962 |   |
|                                                                               |       |                          |       |   |   |
| Increase (decrease) in cash and cash equivalents                                   |       | 11,734                        |       | 14,128 |   |
|                                                                               |       |                          |       |   |   |
| Cash  and cash equivalents at beginning of period                                  |       | 20,690                        |       | 14,673 |   |
|                                                                               |       |                          |       |   |   |
| Cash  and cash equivalents at end of period                                        |       | $                             | 32,424     |   | $ | 28,801 |   |

 

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

 

7

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**Note 1**                    **Basis of Presentation**

 

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 31,2004 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 nine month period ended September 30, 2005 and 2004,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”.

 

 

# **Note2**                    Basis ofEarningsPer Share

 

Effective December 31, 1997, the Bank adopted SFAS No. 128, *“Earnings per Share”*, which has subsequently been adopted bythe Company*.* Accordingly, basic earnings per share are computed by dividing incomeavailable to common shareholders by the weighted average number of commonshares outstanding during each period. The computation of diluted earnings per share also considers the numberof shares issuable upon the assumed exercise of outstanding common stockoptions.  All earnings per common shareamounts presented have been restated in accordance with the provisions of thisstatement.

 
| ** **                                    | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **September 30,**              | ** ** | **September 30,**             | ** ** |
| ** **                                    | ** ** | **2005**                       | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Shares**                     | ** ** | **Shares**                    | ** ** | **Shares** | ** ** | **Shares** | ** ** |
| Used  in Basic EPS                            |       | 671,790                        |       | 636,687                       |       | 668,179 |   | 632,138 |   |
| Dilutive  Effect of Outstanding Stock Options |       | 44,354                         |       | 64,654                        |       | 44,354 |   | 66,853 |   |
| Earnings  per share - Diluted                 |       | 716,144                        |       | 701,341                       |       | 712,533 |   | 698,991 |   |

 

 

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

 

SFASNo. 123, “Accounting for Stock-Based Compensation,” encourages, but does notrequire, companies to record compensation cost for stock-based employeecompensation plans at fair value.  TheCompany has chosen to continue to account for stock-based compensation using theintrinsic value method prescribed in Accounting Principles 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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Hadcompensation costs for the Company’s stock option plans been determined basedon the fair value at the grant dates for awards under this plan consistent withthe method of SFAS No. 123, the Company’s net income and earnings per sharewould have been reduced for 2005 and 2004 to the pro forma amounts indicatedbelow:

 
| ** **                                                                                      | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                      | ** ** | **September 30,**              | ** ** | **September 30,**             | ** ** |
| ** **                                                                                      | ** ** | **2005**                       | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                            |       |                           |       |                          |       |   |   |   |   |
| Net  Income:                                                                                    |       |                           |       |                          |       |   |   |   |   |
| As reported                                                                                     |       | $                              | 248        |                          | $          | 207 |   | $ | 776 |   | $ | 837 |   |
| Stock-based compensation using the intrinsic value  method                                      |       | —                         |       | —                        |       | — |   | — |   |
| Stock-Based compensation that would have been  reported using the fair value method of SFAS 123 |       | (10                            | )          | (10                           | )          | (30 | ) | (30 | ) |
| Pro Forma net income                                                                            |       | $                              | 238        |                          | $          | 197 |   | $ | 746 |   | $ | 807 |   |
|                                                                                            |       |                           |       |                          |       |   |   |   |   |
| Basic  earnings per share:                                                                      |       |                           |       |                          |       |   |   |   |   |
| As reported                                                                                     |       | $                              | 0.37       |                          | $          | 0.33 |   | $ | 1.16 |   | $ | 1.32 |   |
| Proforma                                                                                        |       | $                              | 0.35       |                          | $          | 0.31 |   | $ | 1.12 |   | $ | 1.28 |   |
|                                                                                            |       |                           |       |                          |       |   |   |   |   |
| Diluted  earnings per share:                                                                    |       |                           |       |                          |       |   |   |   |   |
| As reported                                                                                     |       | $                              | 0.35       |                          | $          | 0.30 |   | $ | 1.09 |   | $ | 1.20 |   |
| Pro forma                                                                                       |       | $                              | 0.34       |                          | $          | 0.28 |   | $ | 1.06 |   | $ | 1.15 |   |

 

 

**Note 4****                   Current AccountingPronouncements**

 

InDecember 2004, Financial Accounting Standards Board (“FASB”) revised SFAS 123and issued under its new name,*“Share-Based Payment”. *This statement eliminates thealternative to use Opinion 25’s intrinsic value method of accounting discussedin the previous paragraph.  Instead, thisStatement generally requires entities to recognize the cost of employeeservices received in exchange for awards of stock options, or other equityinstruments, based on the grant-date fair value of those awards.  This cost will be recognized over the periodduring which an employee is required to provide service in exchange for theaward, generally the vesting period.

 

       The Bank must adopt this Statement in2006 for all new stock option awards as well as any existing awards that aremodified,

repurchasedor cancelled.  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 the Companythat are considered to be “forward looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995.  These statements relate to, among otherthings, credit loss reserve adequacy, and simulation of changes in interestrates and litigation results.  Actualresults may differ materially from those expressed or implied as a result ofcertain risks and uncertainties, including, but not limited to, changes inpolitical and economic conditions, interest rate fluctuations, competitiveproduct and pricing pressures within the Company’s markets, equity and fixedincome market fluctuations, personal and corporate customers’ bankruptcies,inflation, acquisitions and integrations of acquired businesses, technologicalchange, changes in law, changes in fiscal, monetary, regulatory and taxpolicies, monetary fluctuations, political and global changes arising from theterrorist attacks 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 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 shouldbe read in conjunction with Coast Bancorp’s Annual Report on Form 10-KSB forthe year ended December 31, 2004.

 

9

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Description of Business

 

*CoastBancorp*

 

Coast Bancorp,headquartered in San Luis Obispo, California, is a California corporationincorporated in 2001.  Coast Bancorpbecame the bank holding company of Coast National Bank on May 31, 2001 througha corporate reorganization.  In thereorganization, Coast National Bank became the wholly-owned subsidiary of CoastBancorp 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 herein for September 30, 2005 and comparative informationfor December 31, 2004 and September 30, 2004 is inclusive of the consolidated Company.

 

*CoastNational Bank*

 

Coast National Bank waschartered June 16, 1997 (charter #23222) by The Office of the Comptroller ofthe Currency as a national bank.  TheBank commenced operations on that date with two offices, 16 employees and $6,250,000in capital.  The original branch officeswere located at 486 Marsh Street, San Luis Obispo and 1199 Grand Avenue, ArroyoGrande, California.  Since that time, anadditional branch office was opened in June 1998 at 948 Morro Bay Boulevard inMorro Bay, California and another branch office was opened in July 1999 at 1193Los Osos Valley Road in Los Osos, California. In July 2002, a loan production office was opened at 930 South BroadwayStreet in Santa Maria, California and in July 2004 moved to 301 S. MillerStreet, Ste. 110 in Santa Maria, California. In October 2004, a loan production office was opened in Santa Barbara,California at 15 West Carrillo St., Ste. 252. The Bank applied for and received approval from the Comptroller of theCurrency for another branch office which opened in March 2005 at 2138 SpringStreet, Paso Robles, California.  TheBank also purchased a lot at 2045 Spring Street, Paso Robles, California withthe intention of relocating the Paso Robles branch sometime in the future.  In June 2005, the Bank opened a new loanproduction office at 7429 N. First St., Suite 104, Fresno California.

 

When the Bank opened forbusiness in June 1997, it purchased the real estate and building that housedthe Arroyo Grande branch office.  OnOctober 14, 1999, the Bank purchased an adjacent lot next to the San LuisObispo main office on Marsh Street.  Afew months later on February 1, 2000, the Bank also purchased the contiguousproperty and building that was home to the San Luis Obispo main office at 486 MarshStreet.  Construction of a new headoffice building on the adjacent lot began on October 11, 2001 and was completedon November 25, 2002.  The new mainoffice, located at 500 Marsh Street is approximately 10,700 square feet withthe San Luis Obispo branch operation occupying the ground floor and theadministrative offices occupying the second floor.  Half of the original main office at 486 MarshStreet now houses the Bank’s Small Business Lending Center and the Bank’s NoteDepartment while the other half is leased to various businesses.

 

On March 29, 2002, theBank purchased a vacant lot at 898 Morro Bay Boulevard in Morro Bay that wasapproximately one block from the existing branch with the intention ofrelocating the Morro Bay branch.  InOctober 2003 construction began on the new Morro Bay facility which wascompleted and occupied in August 2004. The new branch consists of approximately 2,700 square feet with twodrive-through lanes.

 

As of September 30, 2005,the Bank had a total of 68 employees.  Anumber of these employees work part-time however.  Part-time employees are converted tofull-time equivalent employees on the percentage of their weekly hours workedcompared to 40 hours.  On a full-timeequivalent basis, employees represent 61 positions.  The Bank values its employees and believesthat it enjoys satisfactory working relations with them.  They are actively engaged individually and asa team in contributing to the Bank’s realization of its vision and mission.

 

 

**CriticalAccounting Policies**

 

Our accounting policiesare 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 

 

10

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of assets and liabilitiesat the balance sheet dates and results of operations for the reportingperiods.  For example, the Company’sdetermination of the adequacy of its allowance for loan losses is particularlysusceptible to management’s judgment and estimates.  The following is a brief description of ourcurrent accounting policies involving significant management valuationjudgments.

 

*Allowancefor Loan Losses*

 

The allowance for loanlosses represents management’s best estimate of losses inherent in the existingloan portfolio.  The allowance for loanlosses is increased by the provision for loan losses charged to expense andreduced by loans charged off, net of recoveries.  The allowance for loan losses is determinedbased on management’s assessment of several factors: reviews and evaluation ofindividual loans, changes in the nature and volume of the loan portfolio,current economic conditions and the related impact on specific borrowers andindustry groups, historical loan loss experiences and the levels of classifiedand nonperforming loans.

 

Loans are consideredimpaired if, based on current information and events, it is probable that wewill be unable to collect the scheduled payments of principal or interest whendue 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.

 

Changes in the financialcondition of individual borrowers, in economic conditions, in historical lossexperience and in the condition of the various markets in which collateral maybe sold may all affect the required level of the allowance for loan losses andthe associated provision for loan losses.

 

*Availablefor Sale Securities*

 

The fair value of mostsecurities classified as available for sale are based on quoted marketprices.  If quoted market prices are notavailable, fair values are extrapolated from the quoted prices of similarinstruments.

 

##### **Overview**

 

Asof September 30, 2005, total consolidated assets of Coast Bancorp were$179,206,000 in comparison to total assets of $159.9 million as of December 31,2004. This represents an increase of $19.3 million, or 12.07%.  Compared to total assets of $162.0 million atSeptember 30, 2004, the Company has increased assets by $17.2 million, or10.6%, over the last twelve months.

 

For the three months ended September 30, 2005 the Bancorp reportedconsolidated net income of $248,000 or $0.34 diluted earnings per sharecompared to net income of $207,000 and $0.30 diluted earnings per share for thesame period during 2004 a 19.8% increase. For the nine months ended September 30, 2005 the Bancorp reportedconsolidated net income of $776,000 or $1.07 diluted earnings per sharecompared to consolidated net income of $837,000 or $1.20 diluted earnings pershare for the same period in 2004, a 7.3% decrease.  The decrease in net income was due in part toa decrease in the sale of loans and mortgage servicing fees as well as anincrease in both interest income and non-interest expense.

 

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

 

Interest income was $2.9million for the quarter ended September 30, 2005, compared to $2.1 million forthe quarter ended September 30, 2004, representing an increase of 41.3%.  Interest income was $7.9 million for the ninemonths ended September 30, 2005, compared to $6.1 million for the nine monthsended September 30, 2004, an increase of 29.8%. These increases were the result of rising interest rates and loangrowth generated by the Bank’s branches.

 

Interest expense was$900,000 for the quarter ended September 30, 2005 compared to $451,000 for thequarter ended September 30, 2004, representing an increase of 99.6%.  Interest expense was $2,114,000 for the ninemonths ended September 30, 2005, compared to $1,269,000 for the nine monthsended September 30, 2004, an increase of 66.6%. These increases are a result of higher interest rates, a 27% increase intime deposits in excess of $100,000 for the nine months ending September 30,2005 and a 17% increase in money market and NOW accounts for the nine monthperiod ending September 30, 2005.

 

11

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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 interest rate spread, or morespecifically on the difference between gross interest and fees earned on theloans and investment portfolios and the interest rates paid on deposits andborrowings (the interest rate spread).  Net interest income was $2.0 million for the quarter ended September 30,2005, compared to $1.6 million for the quarter ended September 30, 2004,representing an increase of 25%.  Netinterest income was $5.8 million for the nine months ended September 30, 2005,compared to $4.8 million for the nine months ended September 30, 2004,representing an increase of 20.1%.  Theincrease was primarily the result of growth in interest earning assetsgenerated by the Banks’ branches and the increase in interest rates.

 

The net interest marginis the ratio of net interest income to average earning assets. This ratio isuseful in allowing the Company to monitor the spread between interest incomeand interest expense between reporting periods irrespective of the growth ofthe Company’s assets.  The net interestmargin increased 0.59% to 5.11% for the quarter ended September 30, 2005 ascompared to 4.52% for the quarter ended September 30, 2004.  The net interest margin, 5.09% for the ninemonths ending September 30, 2005 was 0.35% higher than the comparable figure,4.74%, for the nine month period ending September 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** | ** ** | **Nine Months Ended** | ** ** | **Year Ended**   | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|------------------|------------|
| ** **              | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** | **December 31,** | ** ** |
| ** **              | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005**         | ** ** | **2004** | ** ** | **2004** | ** ** |
|                    |       |                   |       |                  |       |             |       |   |   |   |   |
| Interest  Income        |       | $                      | 2,917      |                  | $          | 2,064            |       | $ | 7,874 |   | $ | 6,067 |   | $ | 8,240 |   |
| Interest  Expense       |       | 900                    |       | 451                   |       | 2,114            |       | 1,269 |   | 1,727 |   |
|                    |       |                   |       |                  |       |             |       |   |   |   |   |
| Net Interest Income     |       | $                      | 2,017      |                  | $          | 1,613            |       | $ | 5,760 |   | $ | 4,798 |   | $ | 6,513 |   |
|                    |       |                   |       |                  |       |             |       |   |   |   |   |
| Average  Earning Assets |       | $                      | 157,805    |                  | $          | 142,634          |       | $ | 150,994 |   | $ | 135,080 |   | $ | 136,670 |   |
| Net  Interest Margin    |       | 5.11                   | %          | 4.52                  | %          | 5.09             | %          | 4.74 | % | 4.77 | % |

----

**Netinterest income earned on assets divided by average earning assets*

 

 

 

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

 

Management of the Bank and Coast 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 Bank made a $20,000 contribution to the allowancefor loan losses for the nine months ended September 30, 2005 compared to$70,000 for the same period in 2004. Management believes that the allowance, which equals 0.9% of total loansat September 30, 2005, is adequate to cover future losses.  The allowance for loan losses at December 31,2004 was 1.01% of net loans.

 

12

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

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                             | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                   |       |                  |       |   |   |   |   |
| Allowance,  Beginning of Period        |       | $                      | 1,168      |                  | $          | 1,177 |   | $ | 1,168 |   | $ | 1,109 |   |
| Provision  for Loan Losses             |       | $                      | 20         |                  |       |   | 20 |   | 70 |   |
| Loans  Charged Off - net of recoveries |       |                   |       | (4                    | )          |   |   | (6 | ) |
|                                   |       |                   |       |                  |       |   |   |   |   |
| Allowance,  End of Period              |       | $                      | 1,188      |                  | $          | 1,173 |   | $ | 1,188 |   | $ | 1,173 |   |

 

 

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

 

Non-interestincome represents deposit account service charges and other types of feeincome.  Non-interest income for thethree months ended September 30, 2005 totaled $46,000 compared to $167,000 forthe same period in 2004, a 72.5% decrease.   Non-interest income for the nine months ended September 30, 2005 totaled$325,000 compared to $949,000 for the same period in 2004 representing a 65.8%decrease.  During the nine months endedSeptember 30, 2005, the Bank elected not to sell the guaranteed portion ofgovernment guaranteed loans.  It has beenthe Company’s policy to sell securities due in one year if the gain will resultin higher income after reinvesting the proceeds.

 

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

 

Non-interestexpense represents salaries, occupancy expenses, professional expenses, outsideservices and other miscellaneous expenses necessary to conduct business.  Noninterest expense for the three monthsended September 30, 2005 totaled $1.6 million compared to $1.4 million for thesame period in 2004 for an increase of 13.5%. Non-interest expense for the nine months ended September 30, 2005totaled $4.6 million compared to $4.2 million for the same period in 2004 foran increase of 8.9%.  This increase isprimarily due to an overall rise in salary and benefit expenses and an increasein net occupancy expense due to the addition of the Paso Robles branch. Thenumber of fulltime equivalent employees necessary to provide superior customerservice was 61 in September 2005 as compared to 55 in September 30, 2004.  The continuing growth of the Bank’sgovernmental guaranteed lending department specializing in Small BusinessAdministration lending programs, and the overall expansion of the Bank’s customerbase also contribute to the increase.

 

*Earnings Summary*

 

Consolidated net income after taxes for the three months endedSeptember 30, 2005 was $248,000 or $0.34 diluted earnings per share compared tonet income of $207,000 or $0.30 diluted earnings per share for the same periodduring 2004.  Consolidated net income forthe nine months ended September 30, 2005 was $776,000 or $1.07 diluted earningsper share compared to net income of $837,000 or $1.20 diluted earnings pershare for the same period during 2004.

 

##### **Income Taxes**

 

The Companyrecorded a $234,000 tax provision during the three months ended September 30,2005 compared to $198,000 during the same period in 2004.  The Company recorded a $692,000 tax provisionfor the nine months ended September 30, 2005 compared to $618,000 during thesame period in 2004.

 

##### **Financial Condition**

 

*BalanceSheet Summary*

 

As of September 30, 2005, total consolidated assets ofCoast Bancorp were $179.2 million in comparison to total assets of $159.9million as of December 31, 2004. This represents an increase of $19.3 million,or 12.1%.  Compared to total assets of$162.0 million at September 30, 2004, the Company has increased assets by $17.2million, or 10.6%, over the last twelve months. These increases are the result of significant growth in money-market andNOW accounts and time deposits of $100,000 or more.

 

13

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The majority of growth in deposits has been reinvestedin loans.  Total loans have increased by$10.2 million, or 8.8%, from $116.2 million at September 30, 2004 to $126.4million at September 30, 2005.  Thebalance of the deposit growth has been invested in short-term investmentsecurities and in Fed Funds to fund continuing strong loan demand and to meetthe ongoing liquidity needs of the Bank.

 

##### **Asset Quality**

 

As of September 30, 2005, the Company had no loans onnon-accrual and no loans past due 90 days or more and still accruing.  As of September 30, 2004 and December 31,2004, the Company had no loans on nonaccrual and no loans past due 90 days ormore and still accruing.

 

As of September 30, 2005 and 2004 the Company has hadno OREO or restructured loans.

 

##### **Capital**

 

Stockholdersequity at September 30, 2005 was $11.0 million, compared to $10.0 million at December31, 2004.  Stockholders equity increasedprimarily from employees exercising the vested portion of stock options in theamount of $287,000 as well as net income of $776,000.

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.

 

BothCoast Bancorp and Coast National Bank maintain capital ratios above the Federalregulatory guidelines for “well-capitalized” bank holding companies.  The ratios for the Bank and Bancorp are asfollows:

 
| ** **                       | ** ** | ** **              | ** ** | ** **        | ** ** | **Coast**              | ** ** | **Coast**             | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **National Bank** | ** ** | **National Bank**      | ** ** |
| ** **                       | ** ** | **Adequately**          | ** ** | **Well**          | ** ** | **As of**              | ** ** | **As of**             | ** ** |
| ** **                       | ** ** | **Capitalized**         | ** ** | **Capitalized**   | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Total  risk-based capital ratio  |       | 8.00                    | %          | 10.00             | %          | 12.14                  | %          | 12.56                 | %          |
| Tier  1 risk-based capital ratio |       | 4.00                    | %          | 6.00              | %          | 11.25                  | %          | 11.63                 | %          |
| Tier  1 leverage capital ratio   |       | 4.00                    | %          | 5.00              | %          | 8.88                   | %          | 8.99                  | %          |

 
| ** **                       | ** ** | ** **              | ** ** | ** **      | ** ** | **Coast**              | ** ** | **Coast**             | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **Bancorp**     | ** ** | **Bancorp**            | ** ** |
| ** **                       | ** ** | **Adequately**          | ** ** | **Well**        | ** ** | **As of**              | ** ** | **As of**             | ** ** |
| ** **                       | ** ** | **Capitalized**         | ** ** | **Capitalized** | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Total  risk-based capital ratio  |       | 8.00                    | %          | 10.00           | %          | 12.72                  | %          | 12.78                 | %          |
| Tier  1 risk-based capital ratio |       | 4.00                    | %          | 6.00            | %          | 10.84                  | %          | 10.44                 | %          |
| Tier  1 leverage capital ratio   |       | 4.00                    | %          | 5.00            | %          | 8.15                   | %          | 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 nine months ended September 30,2005, the Bank had a loan-to-deposit ratio of 77.7%.

 

14

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

 

Based on theirevaluation as of September 30, 2005, the Bancorp’s Chief Executive Officer and ChiefFinancial Officer have concluded that the Bancorp’s disclosure controls andprocedures are effective to ensure that information required to be disclosed inthe reports that the Bancorp files or submits under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.  There have been no significant changes in theBancorp’s internal controls or in other factors that could significantly affectthose controls subsequent to the date of their evaluation.

 

15

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**PART II —OTHER INFORMATION**

 

 

**ITEM 1 — LEGAL PROCEEDINGS**

 

Not applicable.

 

**ITEM 2 — CHANGES IN SECURITIES**

 

Not applicable.

 

**ITEM 3 — DEFAULTS UPON SENIORSECURITIES**

 

Not applicable.

 

**ITEM 4 — SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

**ITEM 5 — OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6 — EXHIBITS**

 
|   | EXHIBITS     |                           |                                      |
|--------|--------------|--------------------------------|-------------------------------------------|
|   |         |                           |                                      |
|   | 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 |

 

16

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###### **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:  | November  14, 2005 | /s/  Jack C. Wauchope              |
|   |               | Jack  C. Wauchope                  |
|   |               | Chairman  of the Board             |
|   |               | President/Chief  Executive Officer |
|   |               | (Principal  Executive Officer)     |
|   |               |                               |
| Date:  | November  14, 2005 | /s/  Karan Pohl                    |
|   |               | Senior  Vice President             |
|   |               | Chief  Financial Officer           |
|   |               | (Principal  Financial Officer)     |

 

17

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