# ** **

# **FORM10-QSB**

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20429**

 

**(MarkOne)**

 

| **ý** | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                              |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                    |
| ** ** | **For the quarterly period ended March 31,  2005**                                                                                                       |
| ** ** | ** **                                                                                                                                                    |
| **o**      | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                                                |
| ** ** | ** **                                                                                                                                                    |
| ** ** | **For the transition period  from          to          ** |
| ** ** | ** **                                                                                                                                                    |
| ** ** | **Commission File No. 000-32827**                                                                                                                        |

 

**COASTBANCORP**

(Exact name of Registration as Specified in its Charter)

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

 

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

(Address of principal executive offices)

 

**(805) 541-0400**

(Registrant’s telephone number, including area code)

 

**Not applicable**

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

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes:   ý   No:   o 

 

# **APPLICABLEONLY 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 May 1, 2005, there were 660,200 shares of the issuer’scommon stock outstanding.

 

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

 

 

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**FORWARDLOOKING STATEMENTS**

 

**CERTAINSTATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKINGINFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,AS AMENDED, AND ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSESECTIONS.  THESE FORWARD-LOOKINGSTATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUALRESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.  SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARENOT LIMITED TO, THE FOLLOWING FACTORS: COMPETITIVE PRESSURE IN THE BANKINGINDUSTRY INCREASES SIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENTREDUCE MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS ADETERIORATION IN CREDIT QUALITY AND AN INCREASE IN THE PROVISION FOR POSSIBLELOAN LOSSES; CHANGES IN THE REGULATORY ENVIRONMENT; CHANGES IN BUSINESSCONDITIONS, PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATESENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMSFAILURES OR FRAUD; ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS; CHANGESIN THE SECURITIES MARKETS; THE ABILITY TO SATISFY THE REQUIREMENTS OF THESARBANES-OXLEY ACT AND OTHER REGULATIONS GOVERNING INTERNAL CONTROLS; AND POTENTIALECONOMIC EFFECT OF THE WAR ON TERRORISM AND THE WAR IN IRAQ .**

 

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

 

**MOREOVER,WHEREVER PHRASES SUCH AS SIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENTBELIEVES,” OR “MANAGEMENT CONSIDERS” ARE USED, SUCH STATEMENTS ARE AS OF, ANDBASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGEBY THE PASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCHSTATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITHRESPECT TO FORWARD-LOOKING STATEMENTS.**

 

2

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## **INDEX**

## **COAST BANCORP**

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

 

3

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**COAST BANCORP & SUBSIDIARY**

 

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

Consolidated BalanceSheet (Unaudited)

(inthousands)

 
| ** **                                                                                                                                                                         | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                         |       |                     |       |                        |       |
| Cash and due from banks                                                                                                                                                            |       | $                        | 9,376      |                        | $          | 8,640 |   |
| Federal funds sold                                                                                                                                                                 |       | 10,300                   |       | 12,050                      |       |
| TOTAL CASH AND CASH EQUIVALENTS                                                                                                                                                    |       | 19,676                   |       | 20,690                      |       |
| ** **                                                                                                                                                                         | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Interest-bearing deposits                                                                                                                                                          |       | —                   |       | —                      |       |
| Investment securities:                                                                                                                                                             |       |                     |       |                        |       |
| Securities held to maturity                                                                                                                                                        |       | —                   |       | —                      |       |
| Securities available for sale                                                                                                                                                      |       | 12,776                   |       | 12,866                      |       |
| TOTAL INVESTMENT SECURITIES                                                                                                                                                        |       | 12,776                   |       | 12,866                      |       |
| Loans:                                                                                                                                                                             |       |                     |       |                        |       |
| Commercial                                                                                                                                                                         |       | 34,553                   |       | 29,429                      |       |
| Real estate - construction                                                                                                                                                         |       | 17,188                   |       | 17,432                      |       |
| Real estate - other                                                                                                                                                                |       | 68,794                   |       | 66,897                      |       |
| Consumer                                                                                                                                                                           |       | 2,416                    |       | 2,548                       |       |
| TOTAL LOANS                                                                                                                                                                        |       | 122,951                  |       | 116,306                     |       |
| Net deferred loan fees                                                                                                                                                             |       | (977                     | )          | (418                        | )          |
| Allowance for loan losses                                                                                                                                                          |       | (1,168                   | )          | (1,168                      | )          |
| NET LOANS                                                                                                                                                                          |       | 120,806                  |       | 114,720                     |       |
| Premises and equipment                                                                                                                                                             |       | 8,379                    |       | 8,729                       |       |
| Deferred taxes                                                                                                                                                                     |       | 348                      |       | 360                         |       |
| Federal reserve bank stock, at cost                                                                                                                                                |       | 884                      |       | 883                         |       |
| Accrued interest and other assets                                                                                                                                                  |       | 1,673                    |       | 1,666                       |       |
| TOTAL ASSETS                                                                                                                                                                       |       | $                        | 164,542    |                        | $          | 159,914 |   |
|                                                                                                                                                                               |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Deposits:                                                                                                                                                                          |       |                     |       |                        |       |
| Noninterest-bearing demand                                                                                                                                                         |       | $                        | 39,897     |                        | $          | 39,661 |   |
| Money market and NOW                                                                                                                                                               |       | 36,945                   |       | 37,043                      |       |
| Savings                                                                                                                                                                            |       | 8,751                    |       | 8,785                       |       |
| Time deposits of $100,000 or more                                                                                                                                                  |       | 48,268                   |       | 44,492                      |       |
| Other time deposits                                                                                                                                                                |       | 14,720                   |       | 14,483                      |       |
| TOTAL DEPOSITS                                                                                                                                                                     |       | 148,581                  |       | 144,464                     |       |
| Notes payable                                                                                                                                                                      |       | 61                       |       | 106                         |       |
| Junior subordinated debt securities                                                                                                                                                |       | 5,155                    |       | 5,155                       |       |
| Other liabilities                                                                                                                                                                  |       | 454                      |       | 217                         |       |
| TOTAL LIABILITIES                                                                                                                                                                  |       | 154,251                  |       | 149,942                     |       |
| 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: 660,200 in 2005 and  639,300  in 2004 |       | 6,748                    |       | 6,641                       |       |
| Retained earnings                                                                                                                                                                  |       | 3,655                    |       | 3,392                       |       |
| Accumulated other comprehensive income -  net unrealized gains on available-for-sale  securities                                                                                   |       | (112                     | )          | (61                         | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                    |       | 10,291                   |       | 9,972                       |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                    |       | $                        | 164,542    |                        | $          | 159,914 |   |

 

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

 

4

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**COAST BANCORP &SUBSIDIARY**

 

Statement of Operations(unaudited)

(InThousands, except for per share numbers)

 
| ** **                                     | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| Interest income:                               |       |                                           |       |   |   |
| Interest and fees on loans                     |       | $                                              | 2,120      |   | $ | 1,873 |   |
| Interest on taxable securities                 |       | 80                                             |       | 49 |   |
| Interest on federal funds sold                 |       | 84                                             |       | 15 |   |
| Other interest income                          |       | 6                                              |       | 9 |   |
|                                           |       |                                           |       |   |   |
| Total interest income                          |       | 2,290                                          |       | 1,946 |   |
|                                           |       |                                           |       |   |   |
| Interest expense:                              |       |                                           |       |   |   |
| Interest on money market and NOW accounts      |       | 106                                            |       | 53 |   |
| Interest on savings deposits                   |       | 12                                             |       | 13 |   |
| Interest on time deposits                      |       | 320                                            |       | 261 |   |
| Interest on other borrowings                   |       | 86                                             |       | 72 |   |
| Total Interest Expense                         |       | 524                                            |       | 399 |   |
|                                           |       |                                           |       |   |   |
| Net interest income                            |       | 1,766                                          |       | 1,547 |   |
| Provision for loan losses                      |       | —                                         |       | 40 |   |
|                                           |       |                                           |       |   |   |
| Net interest income after provision for        |       |                                           |       |   |   |
| loan losses                                    |       | 1,766                                          |       | 1,507 |   |
|                                           |       |                                           |       |   |   |
| Noninterest income:                            |       |                                           |       |   |   |
| Service charges on deposit accounts and  other |       | 75                                             |       | 69 |   |
| Gain on sale of loans and servicing fees       |       | 39                                             |       | 275 |   |
| Gain on sale of real estate                    |       | 47                                             |       | 43 |   |
|                                           |       |                                           |       |   |   |
| Total noninterest income                       |       | 161                                            |       | 387 |   |
|                                           |       |                                           |       |   |   |
| Noninterest expense:                           |       |                                           |       |   |   |
| Salaries and benefits                          |       | 859                                            |       | 786 |   |
| Net occupancy expense (net of rental  income)  |       | 121                                            |       | 78 |   |
| Equipment expense                              |       | 80                                             |       | 63 |   |
| Other expense                                  |       | 431                                            |       | 534 |   |
|                                           |       |                                           |       |   |   |
| Total noninterest expense                      |       | 1,491                                          |       | 1,461 |   |
|                                           |       |                                           |       |   |   |
| Income before taxes                            |       | 436                                            |       | 433 |   |
| Income taxes                                   |       | 176                                            |       | 175 |   |
| Net income                                     |       | $                                              | 260        |   | $ | 258 |   |
|                                           |       |                                           |       |   |   |
| Earnings per share - Basic                     |       | $                                              | 0.40       |   | $ | 0.40 |   |
| Earnings per share - Diluted                   |       | $                                              | 0.37       |   | $ | 0.39 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements*

 

5

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**COAST BANCORP & SUBSIDIARY**

 

Statementof changes in Stockholders’ Equity(Unaudited)

(InThousands, Except Number of Shares)

 
| ** **                                                                                   | ** ** | **Common Stock**      | ** ** | ** ** | ** ** | ** **                | ** ** | **Accumulated  Other** | ** ** | ** **                | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                                   | ** ** | **Number of  Shares** | ** ** | **Amount** | ** ** | **Comprehensive  Income** | ** ** | **Retained  Earnings** | ** ** | **Comprehensive  Income** | ** ** | **Total** | ** ** |
| **Balance  at January 1, 2004**                                                         |       | 638,300               |       | $          | 6,407      |                      |       |                   | $          | 2,375                     |       | $ | 31 |   | $ | 8,813 |   |
| Exercise of stock options, including the realization  of tax benefits of $58,000             |       | 14,400                |       | 234        |       |                      |       |                   |       |                      |       | 234 |   |
| Cash dividends                                                                               |       |                  |       |       |       |                      |       | (97                    | )          |                      |       | (97 | ) |
| **Comprehensive  Income**                                                                    |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| Net income                                                                                   |       |                  |       |       |       | 1,115                     |       | 1,115                  |       |                      |       | 1,115 |   |
| Unrealized loss on available-for-sale  securities, net of taxes of $45,672                   |       |                  |       |       |       | (66                       | )          |                   |       | (66                       | )          | (66 | ) |
| Less reclassification adjustments for gains  included in net income, net of taxes of $17,779 |       |                  |       |       |       | (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                                                                    |       | 7,500                 |       | 107        |       |                      |       |                   |       |                      |       | 107 |   |
| Cash dividends                                                                               |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| **Comprehensive  Income**                                                                    |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| Net income                                                                                   |       |                  |       |       |       | $                         | 262        |                   | 262        |                      |       |   | 262 |   |
| Unrealized loss on available-for-sale  securities, net of taxes $36,000.00                   |       |                  |       |       |       | (51                       | )          |                   |       | (51                       | )          | (51 | ) |
| Less reclassification adjustments for  losses included in net income net of taxes            |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
|                                                                                         |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| **Total  comprehensive income**                                                              |       |                  |       |       |       | $                         | 173        |                   |       |                      |       |   |   |   |
|                                                                                         |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| **Balance  at March 31, 2005**                                                          |       | 660,200               |       | $          | 6,748      |                      |       |                   | $          | 3,655                     |       | $ | (112 | ) | $ | 10,291 |   |

 

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

 

6

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**COAST BANCORP &SUBSIDIARIES**

 

Statement of Cash Flows (unaudited)

(InThousands)

 
| ** **                                                                         | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
| Operating activities                                                               |       |                                           |       |   |   |
| Net income                                                                         |       | $                                              | 262        |   | $ | 258 |   |
| Adjustments to reconcile net income to Net  cash provided by operating activities: |       |                                           |       |   |   |
| Depreciation and amortization                                                      |       | 115                                            |       | 98 |   |
| Provision for loan losses                                                          |       | —                                         |       | 40 |   |
| Realized gain on investment securities                                             |       | —                                         |       | (43 | ) |
| Other items - net                                                                  |       | 462                                            |       | 165 |   |
| Net cash  provided by operating activities                                         |       | 839                                            |       | 518 |   |
|                                                                               |       |                                           |       |   |   |
| Investing activities                                                               |       |                                           |       |   |   |
| Purchase of investment securities                                                  |       | —                                         |       | (2,019 | ) |
| Proceeds from sale of investment securities                                        |       | —                                         |       | 5,094 |   |
| Maturities of investment securities                                                |       | —                                         |       | 1,000 |   |
| Net change in loans                                                                |       | (6,086                                         | )          | (7,143 | ) |
| Purchase of premises and equipment                                                 |       | 55                                             |       | (393 | ) |
| Net cash  used by investing activities                                             |       | (6,031                                         | )          | (3,461 | ) |
|                                                                               |       |                                           |       |   |   |
| Financing activities                                                               |       |                                           |       |   |   |
| Increase in deposits                                                               |       | 4,116                                          |       | 4,941 |   |
| Principle payments on notes payable                                                |       | (45                                            | )          | (44 | ) |
| Proceeds from exercise of options                                                  |       | 107                                            |       | 16 |   |
| Net cash  provided (used) by financing actvities                                   |       | 4,178                                          |       | 4,913 |   |
|                                                                               |       |                                           |       |   |   |
| Increase in  cash and cash equivalents                                             |       | (1,014                                         | )          | 1,970 |   |
|                                                                               |       |                                           |       |   |   |
| Cash and cash equivalents at beginning of  period                                  |       | 20,690                                         |       | 14,673 |   |
|                                                                               |       |                                           |       |   |   |
| Cash and  cash equivalents at end of period                                        |       | $                                              | 19,676     |   | $ | 16,643 |   |

 

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

 

7

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

 

The accompanying financial information hasbeen prepared in accordance with the Securities and Exchange Commission rulesand regulations for quarterly reporting and therefore does not necessarilyinclude all information and footnote disclosures normally included in financialstatements prepared in accordance with generally accepted accountingprinciples.  This information should beread in conjunction with the Company’s Annual Report for the year endedDecember 31, 2004 filed on Form 10-KSB.

 

Operating results for interim periods are notnecessarily indicative of operating results for an entire fiscal year.  In the opinion of management, the unauditedfinancial information for the three month periods ended March 31, 2005 and 2004reflect all adjustments, consisting only of normal recurring accruals andprovisions, necessary for a fair presentation thereof.

 

Some matters discussed in this Form 10-QSBmay be “forward-looking statements” within the meaning of the PrivateLitigation Reform Act of 1995 and therefore may involve risks, uncertaintiesand other factors which may cause our actual results to be materially differentfrom the results expressed or implied by our forward-looking statements.  These statements generally appear with wordssuch as “anticipate”, “believe”, “estimate”, “may”, “intend”, and “expect”.

 

# **Note2**                    Basis ofEarningsPer Share

 

Effective December 31, 1997, the Companyadopted SFAS No. 128, *“Earnings per Share”.*  Accordingly, basic earnings per share arecomputed by dividing income available to common shareholders by the weightedaverage number of common shares outstanding during each period.  The computation of diluted earnings per sharealso considers the number of shares issuable upon the assumed exercise ofoutstanding common stock options.  Allearnings per common share amounts presented have been restated in accordancewith the provisions of this statement.

 
| ** **                                    | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Shares**                                | ** ** | **Shares** | ** ** |
| Used in Basic EPS                             |       | 656,515                                   |       | 637,399 |   |
| Dilutive Effect of outstanding Stock  Options |       | 50,400                                    |       | 64,988 |   |
| Earnings per share - Diluted                  |       | 706,915                                   |       | 702,387 |   |

 

# **Note 3**                    Stock-Based Compensation

 

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 StockIssued 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 2004 and 2003 to the pro formaamounts indicated below:

 
| ** **                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                            |       |     |       |     |       |
| Net Income:                                                                                     |       |     |       |     |       |
| As reported                                                                                     |       | $        | 260        |     | $          | 258 |   |
| Stock-based compensation using the  intrinsic value method                                      |       | —   |       | —   |       |
| Stock-Based compensation that would have  been reported using the fair value method of SFAS 123 |       | (14      | )          | (11      | )          |
| Pro Forma net income                                                                            |       | $        | 246        |     | $          | 247 |   |
|                                                                                            |       |     |       |     |       |
| Basic earnings per share:                                                                       |       |     |       |     |       |
| As reported                                                                                     |       | $        | 0.40       |     | $          | 0.40 |   |
| Proforma                                                                                        |       | $        | 0.38       |     | $          | 0.39 |   |
|                                                                                            |       |     |       |     |       |
| Diluted earnings per share:                                                                     |       |     |       |     |       |
| As reported                                                                                     |       | $        | 0.37       |     | $          | 0.39 |   |
| Pro forma                                                                                       |       | $        | 0.36       |     | $          | 0.35 |   |

 

**Note 4**   **Current Accounting Pronouncements**

 

In December 2004, Financial Accounting Standards Board (“FASB”) revisedSFAS 123 and 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 in 2006 for all new stock optionawards as well as any existing awards that are modified, repurchased orcancelled.  In addition, the unvestedportion previously awarded options will also be recognized as expense.  The Bank is unable to estimate the impact ofthis Statement on its financial condition or the results of operations as thedecision to grant option awards is made annually on a case-by-case basis and,accordingly, the Bank cannot estimate the amount of stock awards that will bemade in 2006.

 

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

 

The unauditedfinancial statements have been prepared in accordance with the instructions toForm 10-QSB.  This report  contains 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-looking statementsspeak 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

 

*Coast Bancorp*

 

Coast Bancorp (the “Bancorp” or “Coast Bancorp”), headquartered in SanLuis Obispo, California, is a California corporation incorporated in 2001.  Coast Bancorp became the bank holding companyof Coast National Bank on May 31, 2001 through a corporate reorganization.  In the reorganization, Coast National Bankbecame the wholly-owned subsidiary of Coast     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 herein for March 31, 2005 and comparative information forDecember 31, 2004 and March 31, 2004 is inclusive of the consolidated Company.

 

*Coast National Bank*

 

CoastNational Bank (the “Bank”) was chartered June 16, 1997 (charter #23222) by TheOffice of the Comptroller of the Currency as a national bank.  The Bank commenced operations on that datewith two offices, 16 employees and $6,250,000 in capital.  The original branch offices were located at486 Marsh Street, San Luis Obispo and 1199 Grand Avenue, Arroyo Grande,California.  Since that time, anadditional branch office was opened in June 1998 at 948 Morro Bay Boulevard inMorro Bay, California and another branch office was opened in July 1999 at 1193Los Osos Valley Road in Los Osos, California. In July 2002, a loan production office was opened at 930 South BroadwayStreet in Santa Maria, California and in July 2004 moved to 301 S. MillerStreet, Ste. 110 in Santa Maria, California. In October 2004 a loan productionoffice was opened in Santa Barbara, California at 15 West Carrillo Street, Ste.252.  The Bank applied for and receivedapproval from the Comptroller of the Currency for another branch office at 2138Spring Street, Paso Robles, California which opened in March 2005.  The Bank also purchased a lot at 2045 Spring Street,Paso Robles, California with the intention of relocating the Paso Robles branchsometime in the future.

 

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 anadjacent lot next to the San Luis Obispo main office on Marsh Street.  A few months later on February 1, 2000, theBank also purchased the contiguous property and building that was home to theSan Luis Obispo main office at 486 Marsh Street.  Construction of a new head office building onthe adjacent lot began on October 11, 2001 and was completed on November 25,2002.  The new main office, located at500 Marsh Street is approximately 10,700 square feet with the San Luis Obispobranch operation occupying the ground floor and the administrative officesoccupying the second floor.  The originalmain office at 486 Marsh Street now houses the Bank’s Small Business LendingCenter and the Bank’s Note Department.

 

OnMarch 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard inMorro Bay that is approximately one block from the existing branch.  The purpose for this acquisition was theeventual construction and relocation of the Morro Bay branch to a largerfacility with a drive-through lane.  InOctober 2003 construction began on the new Morro Bay facility which wascompleted and occupied in August 2004. The branch consists of approximately2700 square feet with two drive through lanes.

 

Asof March 31, 2005, the Bank had a total of 61 employees.  A number of these employees are part-timehowever. Part-time employees are converted to full-time equivalent employees onthe percentage of their weekly hours worked compared to 40 hours.  On a full-time equivalent basis, employeesrepresent 57 positions.  The Bank valuesits employees.  They are actively engagedindividually and as a team in contributing to the Bank’s realization of itsvision and mission.

 

10

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**CriticalAccounting Policies**

 

Ouraccounting policies are integral to understanding the results reported.  In preparing its consolidated financialstatements, the Company is required to make judgments and estimates that mayhave a significant impact upon its financial results.  Certain accounting policies require theCompany to make significant estimates and assumptions, which have a materialimpact on the carrying value of certain assets and liabilities, and areconsidered critical accounting policies. The estimates and assumptions used are based on the historicalexperiences and other factors, which are believed to be reasonable under thecircumstances.  Actual results coulddiffer significantly from these estimates and assumptions, which could have amaterial impact on the carrying value of assets and liabilities at the balancesheet dates and results of operations for the reporting periods.  For example, the Company’s determination ofthe adequacy of its allowance for loan losses is particularly susceptible tomanagement’s judgment and estimates.  Thefollowing is a brief description of our current accounting policies involvingsignificant management valuation judgments.

 

*Allowance for Loan Losses*

 

Theallowance for loan losses represents management’s best estimate of lossesinherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loanlosses charged to expense and reduced by loans charged off, net 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.

 

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 thecollateral, management uses assumptions and methodologies consistent with thosethat would be utilized by unrelated third parties.

 

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

 

*Available for Sale Securities*

 

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

 

##### **Overview**

 

As of March 31, 2005, total consolidated assets of Coast Bancorp were$164.5 million in comparison to total assets of $159.9 million as of December31, 2004. This represents an increase of $4.6 million, or 2.88%.  Compared to total assets of $147.7 million atMarch 31, 2004, the Company has increased assets by $16.8 million, or 11.37%,over the last twelve months.

 

For the three months ended March 31, 2005 theBancorp reported consolidated net income of $262,000 or $0.37 diluted earningsper share compared to net income of $258,000 and $0.37 diluted earnings pershare for the same period during 2004.

 

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

 

Net interestincome is the amount by which the interest and amortization of fees generatedfrom loans and other earning assets exceed the cost of funding those assets,usually deposit account interest expense. Net interest income depends on the difference between gross interest andfees earned on the loans and investment portfolios and the interest rates paidon deposits and borrowings (the “interest rate spread”).   Net interest income was $1,766,000 for thequarter ended March 31, 2005, compared to $1,547,000 for the quarter endedMarch 31, 2004, representing an increase of 14.16%.  This increase was primarily the result ofgrowth in interest-earning assets generated by the Bank’s branches and theincrease in interest rates.

 

11

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The following table sets forth the componentsof net interest income, average earning assets and net interest margin: (inthousands)

 
| ** **             | ** ** | **Three Months Ended  March 31,** | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------|------------|-----------------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **2005**                          | ** ** | **2004**                     | ** ** | **2004** | ** ** |
|                   |       |                              |       |                         |       |   |   |
| Interest Income        |       | $                                 | 2,290      |                         | $          | 1,946 |   | $ | 8,240 |   |
| Interest Expense       |       | 524                               |       | 399                          |       | 1,727 |   |
|                   |       |                              |       |                         |       |   |   |
| Net Interest  Income   |       | $                                 | 1,766      |                         | $          | 1,547 |   | $ | 6,513 |   |
|                   |       |                              |       |                         |       |   |   |
| Average Earning Assets |       | $                                 | 145,341    |                         | $          | 128,013 |   | $ | 154,280 |   |
| Net Interest Margin    |       | 4.86                              | %          | 4.83                         | %          | 4.77 | % |

 

The increase in the net interest margin inthe first quarter of 2005 as compared to the net interest margin at December31, 2004 was due primarily to the continued growth in loans while maintainingquality and the Bank’s ability to respond to the changes in interest rates.

 

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

 

Management of the Bank and the Company 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 periodic evaluationof impairment and adequacy of the allowance for loan losses in a timelymanner.  The monitoring system andallowance for loan losses methodology have evolved over a period of years, andloan classifications have been incorporated into the determination of theallowance for loan losses.  Thismonitoring system and allowance methodology includes a loan-by-loan analysisfor all classified loans as well as loss factors for the balance of theunclassified portfolio.  Classified loansare reviewed individually to estimate the amount of probable losses that needsto be included in the allowance.  Thesereviews include analysis of financial information as well as evaluation ofcollateral securing the credit.  Lossfactors on the unclassified portion of the portfolio are based on such factorsas historical loss experience, current portfolio delinquency and trends, andother inherent risk factors such as economic conditions, concentrations in theportfolio, risk levels of particular loan categories, internal loan review andmanagement oversight.

 

The Company did not make a contribution to theallowance for loan losses for the three months ended March 31, 2005 compared to$40,000 for the same period in 2004. Management believes that the allowance, which equals 0.95% of totalloans at March 31, 2005, is adequate to cover future losses.  The allowance for loan losses at December 31,2004 was 1.01% of total loans.

 

Changes in theallowance for loan losses for the quarter ended March 31, 2005 and 2004 are asfollows (dollar amounts in thousands):

 
| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                           |       |                              |       |   |   |
| Allowance, Beginning of Period |       | $                                 | 1,168      |   | $ | 1,109 |   |
| Provision for Loan Losses      |       | —                            |       | 40 |   |
| Net Recoveries (Charge-offs)   |       | —                            |       | (11 | ) |
|                           |       |                              |       |   |   |
| Allowance, End of Period       |       | $                                 | 1,168      |   | $ | 1,138 |   |

 

12

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

 

Non-interestincome represents deposit account service charges and other types of feeincome.  Non-interest income for thequarter ended March 31, 2005 totaled $161,000 compared to $387,000 for the sameperiod in 2004 a 58.40% decrease.  Duringthe three months ended March 31, 2005, the Company elected not to sell theguaranteed portion of government guaranteed loans.  It has been the Company’s policy to sellsecurities due in one year if the gain will result in higher income afterreinvesting the proceeds.

 

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

 

Non-interest expense represents salaries, occupancy expenses,professional expenses, outside services and other miscellaneous expensesnecessary to conduct business. Noninterest expense for the quarter ended March 31, 2005 totaled$1,491,000 compared to $1,461,000 for the same period in 2004 for an increaseof 2.05 %.  This increase is primarilydue to the continuing growth of the

Bank’s government guaranteed lending department specializing in SmallBusiness Administration lending programs and the overall expansion of theBank’s customer base.  The number of fulltime equivalent employees was 57 in March, 2005 compared to 56 for March, 2004.  The increase in loans and deposits of $6.68million and $4.1 million respectively compared to March, 2004 requiredadditional personnel to provide the service our customers deserve.   Other expense also reflects the cost ofprocessing and servicing these increased loans and deposits.  Net occupancy expense increased by $43,000due to the addition of the Paso Robles branch.

#### ** **

*Earnings Summary*

 

Consolidated net income for the three months ended March 31, 2005 was$262,000 or $0.37 diluted earnings per share compared to net income of $258,000or $0.37 diluted earnings per share for the same period during 2004.

 

##### **Income Taxes**

 

The Companyrecorded a $176,000 tax provision during the first quarter of 2005 compared to$175,000 during the same period in 2004.

 

##### **Financial Condition**

 

*Balance Sheet Summary*

 

As of March 31, 2005, total consolidated assets ofCoast Bancorp were $164.5 million in comparison to total assets of $159.9million as of December 31, 2004. This represents an increase of $4.6 million,or 2.88%.  Compared to total assets of$147.7 million at March 31, 2004, the Company has increased assets by $16.8million, or 11.37%, over the last twelve months.  These increases are the result of expansionof our customer base and overall growth in deposits of all types.

 

The majority of the growth in deposits has beenreinvested in loans, which have increased by $7.9 million, or 6.91%, from$115.0 million at March 31, 2004 to $122.9 million at March 31, 2005.  The balance of the deposit growth has beeninvested in Fed Funds pending funding of continuing strong loan demand and tomeet the ongoing liquidity needs of the Bank.

 

##### **Asset Quality**

 

As of March 31, 2005, the Company had no loans onnon-accrual and no loans 90 days or more past due and still accruing.  As of March 31, 2004 the Company had oneloans on nonaccrual in the amount of $21,000 and no loans 90 day past due andstill accruing. As of December 31, 2004 the company had no loans on non-accrualand no loans 90 days past due and still accruing.

 

As of March 31, 2005 and 2004 the Company had no OREOor restructured loans.

#### ** **

##### **Capital**

 

The objective of the Company’s asset/liabilitystrategy is to manage liquidity and interest rate risk.  Ultimately, management seeks to monitor thesafety and soundness of the Bank and its capital base, while maintaining adequatenet interest margins and spreads to provide an appropriate return to thestockholders.

 

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Stockholders equity at March 31, 2005 was$10.2 million, compared to $9.9 at December 31, 2004.  Stockholders equity increased primarily fromemployees exercising the vested portion of stock options of $107,000 as well asnet income of $262,000.

 

The Company is required to meet certainminimum risk-based capital guidelines and leverage ratios set by the bank regulatoryauthorities. The risk-based capital standards establish capital requirementsthat are more sensitive to risk differences between various assets, consideroff balance sheet activities in assessing capital adequacy, and minimize thedisincentives to holding liquid, low risk assets.  The leverage ratio consists of tangible TierI capital divided by average total assets.

 

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

 
| ** **                      | ** ** | **Regulatory Standard**     | ** ** | **Coast  National Bank** | ** ** | **Coast  Bancorp**        | ** ** |
|---------------------------------|------------|-----------------------------|------------|--------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Adequately  Capitalized** | ** ** | **Well  Capitalized**    | ** ** | **As of  March 31, 2005** | ** ** | **As of  March 31, 2005** | ** ** |
| Total risk-based capital ratio  |       | 8.00%                       |       | 10.00%                   |       | 12.04%                    |       | 12.93% |   |
| Tier 1 risk-based capital ratio |       | 4.00%                       |       | 6.00%                    |       | 11.13%                    |       | 10.75% |   |
| Tier 1 leverage capital ratio   |       | 4.00%                       |       | 5.00%                    |       | 9.11%                     |       | 8.25% |   |

 

**Liquidity**

 

Management isnot aware of any future capital expenditures or other significant demands oncommitments which would severely impair liquidity.

 

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

 

Based on theirevaluation as of March 31, 2005 of the filing of this Form 10-QSB, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed in the reports that the Company filesor submits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect those controlssubsequent to the date of their evaluation.

 

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**PART II****– OTHER INFORMATION**

 

**ITEM 1 – LEGAL****PROCEEDINGS**

 

Notapplicable.

 

**ITEM 2 – UNREGISTERED****SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

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**

 
|   | (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                                                  |

 

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###### **Signatures**

 

Inaccordance with the requirements of the Exchange Act of 1934, the registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|   |         | COAST BANCORP                     |
|--------|--------------|-----------------------------------|
|   |         |                              |
|   |         |                              |
| Date:  | May 10, 2005 | /s/Jack Wauchope                  |   |
|   |         | Jack Wauchope                     |
|   |         | President/Chief Executive Officer |
|   |         | Chairman of the Board             |
|   |         | (Principal Executive Officer)     |
|   |         |                              |
|   |         |                              |
| Date:  | May 10, 2005 | /s/Berta Olson                    |   |
|   |         | Berta Olson                       |
|   |         | Senior Vice President             |
|   |         | Chief Financial Officer           |
|   |         | (Principal Financial Officer)     |

 

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