**FORM 10-QSB**

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20429**

 

**(Mark One)**
| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2003**

 
| **o** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE  ACT** |
|-------|----------------------------------------------------------------------|

 

**For the transition periodfrom             to             **

 

**Commission File No. 000-32827**

 

**COAST BANCORP**

(Exactname of Registration as Specified in its Charter)

 

| **California**                                                                      |   | **77-0567091**                    |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|
| (State of incorporation or organization)                                            |   | (IRS Employer Identification No.) |
|                                                                                |   |                              |
| **500 Marsh Street, San Luis Obispo, CA 93401**                                     |
| (Address of principal executive offices)                                            |
|                                                                                |   |                              |
| **(805)  541-0400**                                                                 |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |                              |
| **Not applicable**                                                                  |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 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)has been subject to such filing requirements for the past 90days.    Yes:     ý     No:     o

 

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

 

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

 

Common Stock – As of July 31, 2003, there were 633,300 shares ofthe issuer’s common stock outstanding.

 

Transitional Small Business Disclosure Format(Checkone)             Yes:     o     No:     ý

 

 

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**FORWARD LOOKING STATEMENTS**

 

**CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSBINCLUDE FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF SECTION 27A OF THESECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGEACT 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, BUTARE NOT 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; ANDCHANGES IN THE SECURITIES MARKETS.**

 

**THEREFORE, THE INFORMATION SET FORTH THEREIN SHOULD BECAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF THE BANCORP.**

 

**MOREOVER, WHEREVER PHRASES ARE USED SUCH AS OR SIMILAR TO,“IN MANAGEMENT’S OPINION,”“MANAGEMENT BELIEVES,” OR “MANAGEMENT CONSIDERS”,SUCH STATEMENTS ARE AS OF, AND BASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THETIME MADE AND ARE SUBJECT TO CHANGE BY THE PASSAGE OF TIME AND/OR SUBSEQUENTEVENTS, AND ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THE SAME RISKS ANDUNCERTAINTIES NOTED ABOVE WITH RESPECT 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** |
|                                                                                                     |   |   |
|                                                                                                     |   | Overview |
|                                                                                                     |   | Net Interest Income |
|                                                                                                     |   | Provision for Loan Losses |
|                                                                                                     |   | Non-interest Income |
|                                                                                                     |   | Non-interest Expense |
|                                                                                                     |   | Income  Taxes |
|                                                                                                     |   | Financial Condition |
|                                                                                                     |   | Asset  Quality |
|                                                                                                     |   | Capital |
|                                                                                                     |   | Liquidity |
|                                                                                                     |   |   |
| **Item 3 – Controls and Procedures**                                                                |
|                                                                                                     |   |   |
| **PART II – OTHER  INFORMATION**                                                                    |
|                                                                                                     |   |   |
|                                                                                                     | Item 1 – Legal Proceedings |
|                                                                                                     | Item 2 – Changes in Securities |
|                                                                                                     | Item 3 – Defaults upon Senior Securities |
|                                                                                                     | Item 4 – Submission of Matters to a Vote of  Security Holders |
|                                                                                                     | Item 5 – Other Information |
|                                                                                                     | Item 6 – Exhibits and Reports of Form 8-K |
|                                                                                                     |   |   |
| **SIGNATURES**                                                                                           |

 

3

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**COAST BANCORP &SUBSIDIARIES**

 

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

 

ConsolidatedBalance Sheet (Unaudited)

 
| **(in thousands)**                                                                                                                                                               |   | **June 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
| **ASSETS**                                                                                                                                                                       |   |                    |    |                        |   |
| Cash and due from banks                                                                                                                                                          |   | $                       | 8,408   |                        | $      | 7,742 |   |
| Federal funds sold                                                                                                                                                               |   | 11,050                  |    | 15,470                      |   |
| TOTAL CASH AND CASH  EQUIVALENTS                                                                                                                                                 |   | 19,458                  |    | 23,212                      |   |
|                                                                                                                                                                             |   |                    |    |                        |   |
| Interest-bearing deposits                                                                                                                                                        |   | —                  |    | —                      |   |
|                                                                                                                                                                             |   |                    |    |                        |   |
| Investment securities:                                                                                                                                                           |   |                    |    |                        |   |
| Securities held to maturity                                                                                                                                                      |   | —                  |    | —                      |   |
| Securities available for sale                                                                                                                                                    |   | 2,085                   |    | 2,092                       |   |
| TOTAL INVESTMENT SECURITIES                                                                                                                                                      |   | 2,085                   |    | 2,092                       |   |
| Loans:                                                                                                                                                                           |   |                    |    |                        |   |
| Commercial                                                                                                                                                                       |   | 36,826                  |    | 30,530                      |   |
| Real estate - construction                                                                                                                                                       |   | 8,814                   |    | 6,055                       |   |
| Real estate - other                                                                                                                                                              |   | 55,250                  |    | 45,765                      |   |
| Consumer                                                                                                                                                                         |   | 3,758                   |    | 7,420                       |   |
| TOTAL LOANS                                                                                                                                                                      |   | 104,648                 |    | 89,770                      |   |
| Net deferred loan fees                                                                                                                                                           |   | (358                    | )       | (355                        | )      |
| Allowance for credit losses                                                                                                                                                      |   | (1,050                  | )       | (1,000                      | )      |
| NET LOANS                                                                                                                                                                        |   | 103,240                 |    | 88,415                      |   |
| Premises and equipment                                                                                                                                                           |   | 7,032                   |    | 6,684                       |   |
| Deferred taxes                                                                                                                                                                   |   | 265                     |    | 286                         |   |
| Federal Reserve Bank and FHLB stock, at cost                                                                                                                                     |   | 413                     |    | 287                         |   |
| Other assets                                                                                                                                                                     |   | 1,123                   |    | 981                         |   |
| TOTAL ASSETS                                                                                                                                                                     |   | $                       | 133,616 |                        | $      | 121,957 |   |
|                                                                                                                                                                             |   |                    |    |                        |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |   |                    |    |                        |   |
| Deposits:                                                                                                                                                                        |   |                    |    |                        |   |
| Noninterest-bearing demand                                                                                                                                                       |   | $                       | 31,930  |                        | $      | 26,496 |   |
| Money market and NOW                                                                                                                                                             |   | 30,376                  |    | 29,581                      |   |
| Savings                                                                                                                                                                          |   | 6,764                   |    | 5,906                       |   |
| Time deposits of $100,000 or more                                                                                                                                                |   | 32,092                  |    | 28,269                      |   |
| Other time deposits                                                                                                                                                              |   | 18,370                  |    | 17,584                      |   |
| TOTAL DEPOSITS                                                                                                                                                                   |   | 119,532                 |    | 107,836                     |   |
| Notes payable                                                                                                                                                                    |   | 673                     |    | 721                         |   |
| Company obligated manditorily redeemable preferred  securities of subsidiary trust holding solely junior subordinated debentures                                                 |   | 5,000                   |    | 5,000                       |   |
| Other liabilities                                                                                                                                                                |   | 159                     |    | 571                         |   |
| TOTAL LIABILITIES                                                                                                                                                                |   | 125,364                 |    | 114,128                     |   |
| Commitments and contingencies                                                                                                                                                    |   | —                  |    | —                      |   |
| Stockholders’ equity                                                                                                                                                        |   |                    |    |                        |   |
| Preferred stock - 10,000,000 authorized, none  outstanding Common stock no par value; 10,000,000 shares authorized; issued  and outstanding: 633,300 in 2003 and 632,400 in 2002 |   | 6,337                   |    | 6,324                       |   |
| Additional paid-in capital                                                                                                                                                       |   |                    |    |                        |   |
| Retained earnings                                                                                                                                                                |   | 1,869                   |    | 1,456                       |   |
| Accumulated other comprehensive income - net  unrealized gains on available-for-sale securities                                                                                  |   | 46                      |    | 49                          |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                  |   | 8,252                   |    | 7,829                       |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                 |   | $                       | 133,616 |                        | $      | 121,957 |   |

 

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

 

4

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# **COAST BANCORP & SUBSIDIARIES**

 

Statement of Operations(unaudited)

(InThousands, except for per share numbers)

 
|                                                |   | **For the Three Months Ended  June 30,** |   | **For the Six Months Ended  June 30,** |   |
|-----------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------------|--------|
|                                                |   | **2003**                                      |   | **2002**                                    |   | **2003** |   | **2002** |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Interest income:                                    |   |                                          |   |                                        |   |   |   |   |   |
| Interest and fees on loans                          |   | $                                             | 1,793  |                                        | $      | 1,460 |   | $ | 3,437 |   | 2,876 |   |
| Interest on taxable securities                      |   | 20                                            |   | 86                                          |   | 39 |   | 185 |   |
| Interest on federal funds sold                      |   | 42                                            |   | 29                                          |   | 90 |   | 55 |   |
| Other interest income                               |   | 9                                             |   | 3                                           |   | 14 |   | 6 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Total interest income                               |   | 1,864                                         |   | 1,578                                       |   | 3,580 |   | 3,122 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Interest expense:                                   |   |                                          |   |                                        |   |   |   |   |   |
| Interest on money market and NOW accounts           |   | 64                                            |   | 85                                          |   | 132 |   | 174 |   |
| Interest on savings deposits                        |   | 14                                            |   | 14                                          |   | 26 |   | 29 |   |
| Interest on time deposits                           |   | 297                                           |   | 272                                         |   | 580 |   | 563 |   |
| Interest on other borrowings                        |   | 77                                            |   | 11                                          |   | 154 |   | 20 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Total interest expense                              |   | 452                                           |   | 382                                         |   | 892 |   | 786 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Net interest income                                 |   | 1,412                                         |   | 1,196                                       |   | 2,688 |   | 2,336 |   |
| Provision for loan losses                           |   | 145                                           |   | 60                                          |   | 154 |   | 80 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Net interest income after provision for loan losses |   | 1,267                                         |   | 1,136                                       |   | 2,534 |   | 2,256 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Noninterest income:                                 |   |                                          |   |                                        |   |   |   |   |   |
| Service charges on deposit accounts and other       |   | 140                                           |   | 53                                          |   | 224 |   | 105 |   |
| Gain on sale of loans and servicing fees            |   | 254                                           |   | 257                                         |   | 279 |   | 258 |   |
| Gain on sale of securities                          |   | 0                                             |   | 38                                          |   | 0 |   | 96 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Total noninterest income                            |   | 394                                           |   | 348                                         |   | 503 |   | 459 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Noninterest expense:                                |   |                                          |   |                                        |   |   |   |   |   |
| Salaries and benefits                               |   | 643                                           |   | 552                                         |   | 1,274 |   | 1,112 |   |
| Net occupancy expense (net of rental income)        |   | 90                                            |   | 70                                          |   | 185 |   | 142 |   |
| Equipment expense                                   |   | 65                                            |   | 50                                          |   | 130 |   | 99 |   |
| Other expense                                       |   | 377                                           |   | 380                                         |   | 740 |   | 691 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Total noninterest expense                           |   | 1,175                                         |   | 1,052                                       |   | 2,329 |   | 2,044 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Income before taxes                                 |   | 486                                           |   | 432                                         |   | 708 |   | 671 |   |
| Income taxes                                        |   | 203                                           |   | 198                                         |   | 295 |   | 301 |   |
| Net income                                          |   | $                                             | 283    |                                        | $      | 234 |   | $ | 413 |   | $ | 370 |   |
|                                                |   |                                          |   |                                        |   |   |   |   |   |
| Earnings per share - Basic                          |   | $                                             | 0.45   |                                        | $      | 0.37 |   | $ | 0.65 |   | $ | 0.59 |   |
| Earnings per share - Diluted                        |   | $                                             | 0.43   |                                        | $      | 0.36 |   | $ | 0.62 |   | $ | 0.56 |   |

 

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

 

5

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**COASTBANCORP & SUBSIDIARIES**

 

Statement of changes inStockholders’ Equity 

(InThousands, Except Number of Shares) (Unaudited)

 
|                                                                                         |   | **Common Stock** |   | **Comprehensive  Income** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income** |   | **Total** |   |
|----------------------------------------------------------------------------------------------|--------|------------------|--------|---------------------------|--------|------------------------|--------|-----------------------------------------------|--------|-----------|--------|
| **Number of  Shares**                                                                        |   | **Amount**       |
| **Balance at January 1, 2002**                                                          |   | 632,400          |   | $                         | 6,324  |                   |   |                                          | $      | 732       |   | $ | 100 |   | $ | 7,156 |   |
| Exercise of stock options                                                                    |   |             |   |                      |   |                   |   |                                          |   |      |   | — |   |
| Cash dividends                                                                               |   |             |   |                      |   |                   |   | (47                                           | )      |      |   | (47 | ) |
| **Comprehensive Income**                                                                     |   |             |   |                      |   |                   |   |                                          |   |      |   |   |   |
| Net income                                                                                   |   |             |   |                      |   | $                      | 771    |                                          | 771    |      |   |   | 771 |   |
| Unrealized gain on available-for-sale securities,  net of taxes of $47,268                   |   |             |   |                      |   | 68                     |   |                                          |   | 68        |   | 68 |   |
| Less reclassification adjustments for gains  included in net income, net of taxes of $82,815 |   |             |   |                      |   | (119                   | )      |                                          |   | (119      | )      | (119 | ) |
| **Total comprehensive income**                                                               |   |             |   |                      |   | $                      | 720    |                                          |   |      |   |   |   |   |
|                                                                                         |   |             |   |                      |   |                   |   |                                          |   |      |   |   |   |   |
| **Balance at December 31, 2002**                                                        |   | 632,400          |   | $                         | 6,324  |                   |   |                                          | $      | 1,456     |   | $ | 49 |   | $ | 7,829 |   |
| Exercise of stock options                                                                    |   | 900              |   | 13                        |   |                   |   |                                          |   |      |   | 13 |   |
| Cash dividends                                                                               |   |             |   |                      |   |                   |   |                                          |   |      |   | — |   |
| **Comprehensive Income**                                                                     |   |             |   |                      |   |                   |   |                                          |   |      |   |   |   |
| Net income                                                                                   |   |             |   |                      |   | $                      | 413    |                                          | 413    |      |   |   | 413 |   |
| Unrealized gain on available-for-sale securities,  net of taxes                              |   |             |   |                      |   | (3                     | )      |                                          |   | (3        | )      | (3 | ) |
| **Total comprehensive income**                                                               |   |             |   |                      |   | $                      | 410    |                                          |   |      |   |   |   |   |
|                                                                                         |   |             |   |                      |   |                   |   |                                          |   |      |   |   |   |   |
| **Balance at June 30, 2003**                                                            |   | 633,300          |   | $                         | 6,337  |                   |   |                                          | $      | 1,869     |   | $ | 46 |   | $ | 8,252 |   |

 

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

 

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# **COAST BANCORP & SUBSIDIARIES**

 

Statement of Cash Flows(unaudited)

(InThousands)

 
|                                                                               |   | **For the Six Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                               |   | **2003**                                    |   | **2002** |   |
| Operating activities                                                               |   |                                        |   |   |   |
| Net income                                                                         |   | $                                           | 413    |   | $ | 370 |   |
| Adjustments to reconcile net income to Net cash  provided by operating activities: |   |                                        |   |   |   |
| Depreciation and amortization                                                      |   | 177                                         |   | 108 |   |
| Provision for loan losses                                                          |   | 154                                         |   | 80 |   |
| Realized gain on investment securities                                             |   | —                                      |   | (96 | ) |
| Other items - net                                                                  |   | (117                                        | )      | (38 | ) |
| Net cash provided by  operating activities                                         |   | 627                                         |   | 424 |   |
|                                                                               |   |                                        |   |   |   |
| Investing activities                                                               |   |                                        |   |   |   |
| Change in interest-bearing deposits                                                |   | —                                      |   | — |   |
| Proceeds from sale of investment securities                                        |   | —                                      |   | 4,133 |   |
| Maturities of investment securities                                                |   | —                                      |   | 1,000 |   |
| Purchase of investment securities                                                  |   | —                                      |   | (2,012 | ) |
| Net change in loans                                                                |   | (14,979                                     | )      | (2,426 | ) |
| Increase in Federal Reserve Bank and FHLB Stock                                    |   | (125                                        | )      | (13 | ) |
| Purchase of premises and equipment                                                 |   | (938                                        | )      | (1,328 | ) |
| Net cash provided (used) by  investing activities                                  |   | (16,042                                     | )      | (646 | ) |
|                                                                               |   |                                        |   |   |   |
| Financing activities                                                               |   |                                        |   |   |   |
| Increase (decrease) in deposits                                                    |   | 11,696                                      |   | (1,067 | ) |
| Principle payments on notes payable                                                |   | (48                                         | )      | (5 | ) |
| Proceeds from exercise of options                                                  |   | 13                                          |   | — |   |
| Net cash provided (used) by  financing actvities                                   |   | 11,661                                      |   | (1,072 | ) |
|                                                                               |   |                                        |   |   |   |
| Increase (decrease) in cash  and cash equivalents                                  |   | (3,754                                      | )      | (1,294 | ) |
|                                                                               |   |                                        |   |   |   |
| Cash and cash equivalents at beginning of period                                   |   | 23,212                                      |   | 12,549 |   |
|                                                                               |   |                                        |   |   |   |
| Cash and cash equivalents at end of period                                         |   | $                                           | 19,458 |   | $ | 11,255 |   |

 

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

 

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, 2002 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 and six month period endedJune 30, 2003 and 2002, reflect all adjustments, consisting only of normalrecurring accruals and provisions, 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”.

 

**Note 2**                                                             **Earnings Per Share**

 

Effective December 31, 1997, the Bankadopted 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 pershare also considers the number of shares issuable upon the assumed exercise ofoutstanding common stock options.  Allearnings per common share amounts presented have been restated in accordancewith the provisions of this statement.

 
|                                         |   | **For  the Three Months Ended  June 30,** |   | **For  the Six Months Ended  June 30,** |   |
|----------------------------------------------|--------|------------------------------------------------|--------|----------------------------------------------|--------|
|                                         |   | **2003**                                       |   | **2002**                                     |   | **2003** |   | **2002** |   |
|                                         |   | **Shares**                                     |   | **Shares**                                   |   | **Shares** |   | **Shares** |   |
| Used in Basic EPS                            |   | 633,300                                        |   | 632,400                                      |   | 633,027 |   | 632,400 |   |
| Dilutive Effect of Outstanding Stock Options |   | 29,453                                         |   | 20,305                                       |   | 30,546 |   | 26,144 |   |
| Earnings per share - Diluted                 |   | 662,753                                        |   | 652,705                                      |   | 663,573 |   | 658,544 |   |

 

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

 

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

 

8

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

 
|                                                                                            |   | **For the Three Months Ended  June 30,** |   | **For the Six Months Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                            |   | **2003**                                      |   | **2002**                                    |   | **2003** |   | **2002** |   |
|                                                                                            |   |                                          |   |                                        |   |   |   |   |   |
| Net Income:                                                                                     |   |                                          |   |                                        |   |   |   |   |   |
| As reported                                                                                     |   | $                                             | 283    |                                        | $      | 234 |   | $ | 413 |   | $ | 370 |   |
| Stock-based compensation using the intrinsic value  method                                      |   | —                                        |   | —                                      |   | — |   | — |   |
| Stock-Based compensation that would have been  reported using the fair value method of SFAS 123 |   | (12                                           | )      | (10                                         | )      | (23 | ) | (21 | ) |
| Pro Forma net income                                                                            |   | $                                             | 271    |                                        | $      | 224 |   | $ | 390 |   | $ | 349 |   |
|                                                                                            |   |                                          |   |                                        |   |   |   |   |   |
| Basic earnings per share:                                                                       |   |                                          |   |                                        |   |   |   |   |   |
| As reported                                                                                     |   | $                                             | 0.45   |                                        | $      | 0.37 |   | $ | 0.65 |   | $ | 0.59 |   |
| Proforma                                                                                        |   | $                                             | 0.43   |                                        | $      | 0.35 |   | $ | 0.62 |   | $ | 0.55 |   |
|                                                                                            |   |                                          |   |                                        |   |   |   |   |   |
| Diluted earnings per share:                                                                     |   |                                          |   |                                        |   |   |   |   |   |
| As reported                                                                                     |   | $                                             | 0.43   |                                        | $      | 0.36 |   | $ | 0.62 |   | $ | 0.56 |   |
| Pro forma                                                                                       |   | $                                             | 0.41   |                                        | $      | 0.34 |   | $ | 0.59 |   | $ | 0.53 |   |

 

#### **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 other things, credit lossreserve adequacy, and simulation of changes in interest rates and litigationresults.  Actual results may differmaterially from those expressed or implied as a result of certain risks anduncertainties, including, but not limited to, changes in political and economicconditions, interest rate fluctuations, competitive product and pricingpressures within the Company’s markets, equity and fixed income marketfluctuations, personal and corporate customers’ bankruptcies, inflation,acquisitions and integrations of acquired businesses, technological change,changes in law, changes in fiscal, monetary, regulatory and tax policies,monetary fluctuations, political and global changes arising from the terroristattacks of September 11, 2001 as well as the war in Iraq and itsaftermath, success in gaining regulatory approvals when required as well as otherrisks and uncertainties detailed elsewhere in this quarterly report or fromtime to time in the filings of the Company with the Securities ExchangeCommission.  Such forward-lookingstatements speak only as of the date on which such statements are made, and thecorporation undertakes no obligation to update any forward-looking statement toreflect events or circumstances after the date on which such statement is madeor to reflect the occurrence of unanticipated events.  The accompanying financial information should be read inconjunction with Coast Bancorp’s Annual Report on Form 10-KSB for the yearended December 31, 2002.

 

Description ofBusiness

 

*CoastBancorp*

 

Coast Bancorp, headquartered in San Luis Obispo, California, is aCalifornia corporation incorporated in 2001. Coast Bancorp became the bank holding company of Coast National Bank onMay 31, 2001 through a corporate reorganization.  In the reorganization, Coast National Bank became thewholly-owned subsidiary of Coast Bancorp and the shareholders of the Bankbecame shareholders of Coast Bancorp. Coast Bancorp is operated through a two-tiered corporate structure.  At the holding company level the affairs ofCoast Bancorp are overseen by a Board of Directors elected by the shareholdersof Coast Bancorp at the annual meeting of shareholders.  The business of the Bank is overseen by aBoard of Directors elected by Coast Bancorp, the sole owner of the Bank.  As of the date of this Form 10-QSB therespective members of the Board of Directors of the Bank and the Board ofDirectors of Coast Bancorp are identical. Coast Bancorp is subject to the regulations of, and examination by, theBoard of Governors of the Federal Reserve System.  At present, Coast Bancorp does not engage in any materialbusiness activities other than the ownership of the Bank.  Financial information presentedherein for June 30, 2003 and comparative information for December 31,2002 and June 30, 2002 is inclusive of the consolidated Company.

 

9

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*CoastNational Bank*

 

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

 

Whenthe Bank opened for business in June 1997, it purchased the real estateand building that housed the Arroyo Grande branch office.  On October 14, 1999, the Bank purchasedan adjacent lot next to the San Luis Obispo main office on Marsh Street.  A few months later on February 1, 2000,the Bank also purchased the contiguous property and building that was home tothe San Luis Obispo main office at 486 Marsh Street.  Construction of a new head office building on the adjacent lotbegan 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.  One-half ofthe original main office at 486 Marsh Street now houses the Bank’s SmallBusiness Lending Center and the Bank’s Note Department.  The other half of the building is leased totwo tenants including a local title insurance company and a long-time realestate developer.  The title insurance companylease is at a rate of $2,850.00 per month until December 31, 2004 with nooptions to extend.  The real estatedeveloper is on a month-to-month basis at a rate of approximately $825.00 permonth.

 

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

 

OnMarch 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard inMorro Bay that is approximately one block from the existing branch.  The purpose for this acquisition was theeventual construction and relocation of the Morro Bay branch to a largerfacility with a drive-through lane.  Thecommencement of construction is anticipated for the fourth quarter of 2003 orthe first quarter of 2004.

 

InApril 2003, the Bank purchased a vacant lot at the southeast corner ofMain and Seventh Streets in Templeton. The purpose for this acquisition was the eventual construction of a newTempleton branch with a drive-through lane in order to serve northern San LuisObispo County.  The Bank subsequentlysubmitted a branch application with the Office of the Comptroller of theCurrency for this location when completed. That branch application has been approved by the OCC.

 

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

 

Asof June 30, 2003, the Bank had a total of 59 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 53 positions.  The Bank valuesits employees and feels that it enjoys satisfactory relations with them.  They are actively engaged individually and asa team in contributing to the Bank’s realization of its vision and mission.

 

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

 

10

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**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 the Company to make significantestimates and assumptions, which have a material impact on the carrying valueof certain assets and liabilities, and are considered critical accountingpolicies.  The estimates and assumptionsused are based on the historical experiences and other factors, which arebelieved to be reasonable under the circumstances.  Actual results could differ significantly from these estimatesand assumptions, which could have a material impact on the carrying value ofassets and liabilities at the balance sheet dates and results of operations forthe reporting periods.  For example, theCompany’s determination of the adequacy of its allowance for loan losses isparticularly susceptible to management’s judgment and estimates.  The following is a brief description of ourcurrent accounting policies involving significant management valuationjudgments.

 

*Allowancefor Loan Losses*

 

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

 

Loansare considered impaired if, based on current information and events, it isprobable that we will be unable to collect the scheduled payments of principalor interest when due according to the contractual terms of the loan agreement.  The measurement of impaired loans isgenerally based on the present value of expected future cash flows discountedat the historical effective interest rate stipulated in the loan agreement,except that all collateral-dependent loans are measured for impairment based onthe fair value of the collateral.  Inmeasuring the fair value of the collateral, management uses assumptions andmethodologies consistent with those that would be utilized by unrelated thirdparties.

 

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

 

*Availablefor Sale Securities*

 

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

 

##### **Overview**

 

As of June 30, 2003, total consolidated assets of Coast Bancorpwere $133.6 million in comparison to total assets of $122.0 million as ofDecember 31, 2002. This represents an increase of $11.6 million, or9.5%.  Compared to total assets of$103.9 million at June 30, 2002, the company has increased assets by $29.7million, or 28.6%, over the last twelve months.

 

For the three months ended June 30, 2003the Bancorp reported consolidated net income of $283,000 or $0.43 dilutedearnings per share compared to net income of $234,000 and $0.36 dilutedearnings per share for the same period during 2002.  For the six months ended June 30, 2003 the Bancorp reportedconsolidated net income of $413,000 or $0.62 diluted earnings per sharecompared to consolidated net income of $370,000 or $0.56 diluted earnings pershare for the same period in 2002.

 

##### **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 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.  Net interest income was$1,412,000 for the quarter ended June 30, 2003, compared to $1,196,000 forthe quarter ended June 30, 2002, representing an increase of 18.1%.  Net interest income was $2,688,000 for thesix months ended June 30, 2003, compared to $2,336,000 for the six monthsended June 30, 2002, representing an increase of 15.1%.  This increase, while offset somewhat bylower interest rates, was primarily the result of the significant loan growthgenerated by the Bank’s branches.

 

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

 

11

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|                   |   | **Three Months Ended  June 30,** |     | **Six Months Ended  June 30,** |     | **Year Ended  December 31,  2002** |   |
|------------------------|--------|---------------------------------------|----------|-------------------------------------|----------|-----------------------------------------|--------|
| **2003**               |   | **2002**                              | **2003** |                                | **2002** |
|                   |   |                                  |     |                                |     |                                    |   |   |   |   |   |
| Interest Income        |   | $                                     | 1,864    |                                | $        | 1,578                                   |   | $ | 3,580 |   | $ | 3,122 |   | $ | 6,406 |   |
| Interest Expense       |   | 452                                   |     | 382                                 |     | 892                                     |   | 786 |   | 1,614 |   |
|                   |   |                                  |     |                                |     |                                    |   |   |   |   |   |
| Net Interest Income    |   | $                                     | 1,412    |                                | $        | 1,196                                   |   | $ | 2,688 |   | $ | 2,336 |   | $ | 4,792 |   |
|                   |   |                                  |     |                                |     |                                    |   |   |   |   |   |
| Average Earning Assets |   | $                                     | 118,374  |                                | $        | 95,190                                  |   | $ | 114,619 |   | $ | 96,592 |   | $ | 97,661 |   |
| Net Interest Margin    |   | 4.77                                  | %        | 5.03                                | %        | 4.69                                    | %      | 4.84 | % | 4.91 | % |

 

The decrease in the net interest margin inthe first half of 2003 as compared to the net interest margin atDecember 31, 2002 was due primarily to the lingering effect that followeda 50 basis point reduction in short-term interest rates by the Federal Reserveon November 7, 2002 and a subsequent 25 basis point reduction inshort-term interest rates on June 25, 2003.

 

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

 

Management of the Bank and the Bancorp believes thatthe allowance for loan losses is adequate. The Bank has established a monitoring system for loans in order toidentify impaired loans and potential problem loans and to permit periodicevaluation of impairment and adequacy of the allowance for loan losses in atimely manner.  The monitoring systemand allowance for loan losses methodology have evolved over a period of years,and loan 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.  Classifiedloans are reviewed individually to estimate the amount of probable losses thatneeds to be included in the allowance. These reviews include analysis of financial information as well asevaluation of collateral securing the credit. Loss factors on the unclassified portion of the portfolio are based onsuch factors as historical loss experience, current portfolio delinquency andtrends, and other inherent risk factors such as economic conditions,concentrations in the portfolio, risk levels of particular loan categories,internal loan review and management oversight.

 

The Company made a $154,000 contribution to theallowance for loan losses for the six months ended June 30, 2003 comparedto $80,000 for the same period in 2002. Management believes that the allowance, which equals 1.00% of totalloans at June 30, 2003, is adequate to cover future losses.  The allowance for loan losses at December 31,2002 was 1.11% of total loans.

 

Changes in theallowance for loan losses for the three months ended and the six months endedJune 30, 2003 and 2002 are as follows (dollar amounts in thousands):

 
|                                  |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|---------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                  |   | **2003**                              |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                  |   |                                  |   |                                |   |   |   |   |   |
| Allowance, Beginning of Period        |   | $                                     | 1,010  |                                | $      | 875 |   | $ | 1,000 |   | $ | 850 |   |
| Provision for Loan Losses             |   | 145                                   |   | 60                                  |   | 154 |   | 80 |   |
| Loans Charged Off - net of recoveries |   | (105                                  | )      | 5                                   |   | (105 | ) | 10 |   |
|                                  |   |                                  |   |                                |   |   |   |   |   |
| Allowance, End of Period              |   | $                                     | 1,050  |                                | $      | 940 |   | $ | 1,050 |   | $ | 940 |   |

 

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

 

Non-interestincome represents deposit account service charges and other types of feeincome.  Non-interest income for thethree months ended June 30, 2003 totaled $394,000 compared to $348,000 forthe same period in 2002 a 13.2% increase. Non-interest

 

12

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income for the six months ended June 30,2003 totaled $503,000 compared to $459,000 for the same period in 2002 a 9.6%increase.  This increase is primarilydue to the realized gains on the sale of the guaranteed portion ofgovernment-guaranteed loans and loan referral fees generated by the Bank’smortgage loan referral program.  Duringthe six months ended June 30, 2003, the Bank elected to not realize anygains from the sale of investment securities.

 

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

 

Non-interest expense represents salaries, occupancy expenses,professional expenses, outside services and other miscellaneous expensesnecessary to conduct business. Noninterest expense for the three months ended June 30, 2003totaled $1,175,000 compared to $1,052,000 for the same period in 2002 for anincrease of 11.7%.  Non-interest expensefor the six months ended June 30, 2003 totaled $2,329,000 compared to$2,044,000 for the same period in 2002 for an increase of 13.9%.  This increase is primarily due to thecontinuing growth of the Bank’s government guaranteed lending departmentspecializing in Small Business Administration lending programs, the opening ofthe Bank’s new head office building during the latter part of 2002 and theoverall expansion of the Bank’s customer base.

 

##### **Income Taxes**

 

The Companyrecorded a $203,000 tax provision during the three months ended June 30,2003 compared to $198,000 during the same period in 2002.  The Company recorded a $295,000 taxprovision for the six months ended June 30, 2003 compared to $301,000during the same period in 2002.

 

##### **Financial Condition**

 

*BalanceSheet Summary*

 

As of June 30, 2003, total consolidated assets ofCoast Bancorp were $133.6 million in comparison to total assets of $122.0million as of December 31, 2002. This represents an increase of $11.6million, or 9.5%.  Compared to totalassets of $103.9 million at June 30, 2002, the company has increasedassets by $29.7 million, or 28.6%, over the last twelve months.  These increases are the result ofsignificant growth in deposits of all types.

 

It should be noted that for several quarters prior toSeptember 30, 2002, management consciously restricted asset and depositgrowth in order to maintain well-capitalized regulatory ratios.  With the completion of the trust preferredoffering immediately prior to the end of the third quarter atSeptember 30, 2002, the Company was well-positioned to finance futuregrowth.  Subsequently, the majority ofthe company’s asset growth has occurred since September 30, 2002.  In the last nine months, assets haveincreased $20.9 million, or 18.6%, with growth in deposits representing themajority of this increase.  Managementbelieves that these recent increases are primarily due to the businessdevelopment efforts put forth by the Bank’s staff in conjunction with theopening of the Bank’s new head office building in November 2002.

 

The majority of the growth in deposits has beenreinvested in loans, which have increased by $25.2 million, or 31.8%, from$79.4 million at June 30, 2002 to $104.6 million at June 30,2003.  The balance of the deposit growthhas been invested in Fed Funds to fund continuing strong loan demand and tomeet the ongoing liquidity needs of the Bank.

 

*EarningsSummary*

* *

Consolidated net income for the three monthsended June 30, 2003 was $283,000 or $0.43 diluted earnings per sharecompared to net income of $234,000 or $0.36 diluted earnings per share for thesame period during 2002.  Consolidated netincome for the six months ended June 30, 2003 was $413,000 or $0.62diluted earnings per share compared to net income of $370,000 or $0.56 dilutedearnings per share for the same period during 2002.  The increase in earnings in 2003 as compared to the same threeand six-month period in 2002 was still attained in the face of the lingeringeffects on the Bank’s net interest margin following reductions in short-termrates by the Federal Reserve of 50 basis points on November 7, 2002 andanother 25 basis points on June 25, 2003, as well as increases innon-interest expenses such as those associated with the opening of the Bank’snew head office building as well as the continuing expansion of the Bank’sGovernment Guaranteed lending department, and the payment of quarterly intereston the Company’s Trust Preferred borrowing.

 

13

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##### **Asset Quality**

 

As of June 30, 2003, the Company had one loan onnon-accrual in an amount of $54,000 and no loans 90 days or more past due andstill accruing.  As of June 30,2002 the Company had no loans on nonaccrual or loans 90 day past due and stillaccruing. As of December 31, 2002 the company had no loans on non-accrualor loans 90 days past due and still accruing. As of June 30, the Company has had no OREO during 2003 or 2002.

 

##### **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 maintainingadequate net interest margins and spreads to provide an appropriate return tothe stockholders.

 

Stockholders equity at June 30, 2003 was$8.252 million, compared to $7.829 million at December 31, 2002.  Stockholders equity increased primarily fromnet income of $413,000.  The balance ofthe increase was the result of a former employee exercising the vested amountof that employee’s stock options immediately upon that employee’s departurefrom the Bank.

 

The Company is required to meet certainminimum risk-based capital guidelines and leverage ratios set by the bankregulatory authorities. The risk-based capital standards establish capitalrequirements that are more sensitive to risk differences between variousassets, consider off balance sheet activities in assessing capital adequacy,and minimize the disincentives to holding liquid, low risk assets.  The leverage ratio consists of tangible TierI capital divided by average total assets.

 

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

 
|                            |   | **Regulatory Standard**     |   | **Coast  National Bank** |   | **Coast  National Bank**      |   |
|---------------------------------|--------|-----------------------------|--------|--------------------------|--------|-------------------------------|--------|
|                            |   | **Adequately  Capitalized** |   | **Well  Capitalized**    |   | **As of  June 30, 2003** |   | **As of  December 31, 2002** |   |
| Total risk-based capital ratio  |   | 8.00                        | %      | 10.00                    | %      | 12.28                         | %      | 13.33 | % |
| Tier 1 risk-based capital ratio |   | 4.00                        | %      | 6.00                     | %      | 11.33                         | %      | 12.30 | % |
| Tier 1 leverage capital ratio   |   | 4.00                        | %      | 5.00                     | %      | 9.37                          | %      | 10.18 | % |

 

**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 ofthe on- and off- balance sheet commitments to meet the needs of customers whileachieving the Bank’s financial objectives. The Investment Committee meets regularly to assess the projected fundingrequirements by reviewing historical funding patterns, current and forecastedeconomic conditions, and individual customer funding needs.  Deposits generated from Bank customers serveas the primary source of liquidity.  TheBank has credit arrangements with correspondent banks that serve as a secondaryliquidity source.  The Bank has alsobeen approved for membership in the Federal Home Loan Bank of San Francisco(FHLBSF) and has the capability of borrowing from this source as well.  However, the Bank has not historically hadthe need to borrow from these sources.

 

Management isnot aware of any future capital expenditures or other significant demands oncommitments which would severely impair liquidity.  As of the six months ended June 30, 2003, the Bank had aloan-to-deposit ratio of 87.5%.

 

**Item3.  Controls and****Procedures**

 

Based on theirevaluation as of June 30, 2003, the Bancorp’s Chief Executive Officer andChief Financial Officer have concluded that the Bancorp’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed in the reports that the Bancorp files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.  There have been no significantchanges in the Bancorp’s internal controls or in other factors that couldsignificantly affect those controls subsequent to the date of their evaluation.

 

14

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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 SENIOR SECURITIES**

 

Not applicable.

 

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

 

(a)                                  Coast Bancorp’s 2003 Annual Meeting ofShareholders was held on May 15, 2003 (the “Meeting”).  The Meeting involved the followingproposals:

 

1.               To elect ten (10) persons to the Board ofDirectors to serve until the next Annual Meeting of Shareholders and untiltheir successors are elected and have qualified.

2.               To approve the appointment of Vavrinek,Trine, Day & Co. LLP as independent public accountants for the Company’s2003 fiscal year, and

 

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

 

OnProposal No. 2 to approve the appointment of Vavrinek, Trine, Day & Co. LLPas independent public accountants for the Company’s 2003 fiscal year, 492,611shares voted in favor of approval, five hundred shares voted against approval,900 shares abstained, and there were zero (0) broker non-votes.  Accordingly, Proposal No. 2 was passed bythe shareholders.

 

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

 

**ITEM 5 – OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)          EXHIBITS

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

 

15

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(b)         Reportson Form 8-K

 

NoForm 8-K’s were filed by the Bank during the quarter ended June 30, 2003.

 

 

###### **Signatures**

 

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

 

 
|   |                 | COAST BANCORP                     |
|--------|----------------------|-----------------------------------|
|   |                 |                              |
|   |                 |                              |
| Date:  | August 11, 2003 | /s/ Jack C. Wauchope              |   |
|   |                 | Jack C. Wauchope                  |
|   |                 | Chairman of the Board             |
|   |                 | Chief Executive Officer           |
|   |                 | (Principal Executive Officer)     |
|   |                 |                              |
|   |                 |                              |
| Date:  | August 11, 2003 | /s/ Thomas J. Sherman             |   |
|   |                 | Thomas J. Sherman                 |
|   |                 | President/Chief Operating Officer |
|   |                 | Chief Financial Officer           |
|   |                 | (Principal Financial Officer)     |

 

16

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**SECURITIES ANDEXCHANGE COMMISSION**

 

 

**Washington, D.C.20219**

 

**Exhibits**

 

**To**

 

**FORM 10 – QSB**

 

**QUARTERLY REPORT**

 

**UNDER**

 

**SECTION 13 OR 15 (D)OF**

 

**THE SECURITIESEXCHANGE ACT OF 1934**

 

 

**COAST BANCORP**

 

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