**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20429**

** **

**FORM 10-QSB**

** **

** **
| **(Mark One)**                                    | ** ** | ** **                                                                              |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| **x**                                             | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                        | ** ** | ** **                                                                              |
| **For the  quarterly period ended June 30, 2007** |
| ** **                                        | ** ** | ** **                                                                              |
| **o**                                             | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE EXCHANGE ACT**                    |
|                                                   |            |                                                                                         |  |

 

**For thetransition period from         to        **

**CommissionFile No. 000-32827**

**COAST BANCORP**

(Exact name of Registration as Specified in its Charter)

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

** **

**500 Marsh Street, San LuisObispo, CA 93401**

(Address ofprincipal executive offices)

**(805)541-0400**

(Registrant’s telephone number, including area code)

**Notapplicable**

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

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.      Yes:     x     No:    o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).   Yes:     o     No:    x

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

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

CommonStock — As of August 7, 2007 there were 711,200 shares of the issuer’s commonstock outstanding.

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

 

 

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

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

**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 TOCHANGE BY 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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## **COAST BANCORP & SUBSIDIARY**

## **INDEX**

 
| **PART I — FINANCIAL INFORMATION**                                                                       |       |       |
|---------------------------------------------------------------------------------------------------------------|------------|------------|
| **Item  1 — Financial Statements**                                                                       |       |       |
| Consolidated Balance Sheets                                                                                   |       | 4          |
| Consolidate Statements of Income                                                                              |       | 5          |
| Statement  of Changes in Stockholders’ Equity                                                            |       | 6          |
| Consolidated  Statement of Cash Flows                                                                         |       | 7          |
| Notes to Financial Statements                                                                                 |       | 8          |
| **Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | ** ** | ** ** |
| Overview                                                                                                      |       | 12         |
| Net  Interest Income                                                                                          |       | 12         |
| Non-Interest  Income                                                                                          |       | 15         |
| Non-Interest  Expense                                                                                         |       | 16         |
| Income Taxes                                                                                                  |       | 16         |
| Investment  Portfolio                                                                                         |       | 16         |
| Loan  Portfolio                                                                                               |       | 17         |
| Asset  Quality                                                                                                |       | 18         |
| Provision  for Credit Losses                                                                                  |       | 18         |
| Funding                                                                                                       |       | 19         |
| Return  on Equity and Assets                                                                                  |       | 20         |
| Capital  Resources                                                                                            |       | 20         |
| Liquidity                                                                                                     |       | 21         |
| **Item 3 — Controls and Procedures**                                                                     |       | 21         |
| **PART II — OTHER INFORMATION**                                                                          |       |       |
| Item  1 — Legal Proceedings                                                                              |       | 22         |
| Item 2 — Unregistered Sales of Securities and Use of  Proceeds                                           |       | 22         |
| Item 3 — Defaults upon Senior Securities                                                                 |       | 22         |
| Item 4 — Submission of Matters to a Vote of Security  Holders                                            |       | 22         |
| Item  5 — Other Information                                                                              |       | 22         |
| Item 6 —  Exhibits                                                                                       |       | 22         |
| **SIGNATURES**                                                                                                |       | 23         |

 

3

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**COASTBANCORP & SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS (unaudited)**

**June 30, 2007 andDecember 31, 2006**

**ITEM I - FINANCIAL STATEMENTS**

** **

*(In thousands)*

 
| ** **                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                             |       |              |       |                  |       |
| Cash and due from banks                                                                                                |       | $                 | 6,763      |                  | $          | 7,173 |   |
| Federal funds sold                                                                                                     |       | 17,350            |       | 17,800                |       |
| TOTAL CASH AND  CASH EQUIVALENTS                                                                                       |       | 24,113            |       | 24,973                |       |
|                                                                                                                   |       |              |       |                  |       |
| Investment securities  available for sale                                                                              |       | 9,581             |       | 7,926                 |       |
|                                                                                                                   |       |              |       |                  |       |
| Loans:                                                                                                                 |       |              |       |                  |       |
| Commercial                                                                                                             |       | 45,406            |       | 41,726                |       |
| Real estate -  construction                                                                                            |       | 40,655            |       | 28,126                |       |
| Real estate -  other                                                                                                   |       | 51,462            |       | 62,298                |       |
| Consumer                                                                                                               |       | 3,751             |       | 4,705                 |       |
| TOTAL LOANS                                                                                                            |       | 141,274           |       | 136,855               |       |
| Net deferred loan fees                                                                                                 |       | (247              | )          | (352                  | )          |
| Allowance for credit  losses                                                                                           |       | (1,416            | )          | (1,388                | )          |
| NET LOANS                                                                                                              |       | 139,611           |       | 135,115               |       |
| Premises and equipment                                                                                                 |       | 8,946             |       | 9,740                 |       |
| Deferred taxes                                                                                                         |       | 508               |       | 472                   |       |
| Federal Reserve Bank  and FHLB stock, at cost                                                                          |       | 974               |       | 946                   |       |
| Accrued interest and  other assets                                                                                     |       | 1,375             |       | 1,567                 |       |
| TOTAL ASSETS                                                                                                           |       | $                 | 185,108    |                  | $          | 180,739 |   |
|                                                                                                                   |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Deposits:                                                                                                              |       |              |       |                  |       |
| Noninterest-bearing  demand                                                                                            |       | $                 | 38,708     |                  | $          | 39,556 |   |
| Money market and  NOW                                                                                                  |       | 49,575            |       | 50,036                |       |
| Savings                                                                                                                |       | 6,854             |       | 6,673                 |       |
| Time deposits of  $100,000 or more                                                                                     |       | 52,778            |       | 50,709                |       |
| Other time  deposits                                                                                                   |       | 18,048            |       | 15,556                |       |
| TOTAL DEPOSITS                                                                                                         |       | 165,963           |       | 162,530               |       |
| Junior  subordinated debt securities                                                                                   |       | 5,155             |       | 5,155                 |       |
| Other liabilities                                                                                                      |       | 408               |       | 343                   |       |
| TOTAL  LIABILITIES                                                                                                     |       | 171,526           |       | 168,028               |       |
|                                                                                                                   |       |              |       |                  |       |
| 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: 706,200 in  2007 and 679,600 in 2006 |       | 7,343             |       | 7,035                 |       |
| Additional  paid-in capital                                                                                            |       | 119               |       | 76                    |       |
| Retained  earnings                                                                                                     |       | 6,134             |       | 5,611                 |       |
| Accumulated  other comprehensive income - net unrealized losses on available-for-sale  securities                      |       | (14               | )          | (11                   | )          |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                       |       | 13,582            |       | 12,711                |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                       |       | $                 | 185,108    |                  | $          | 180,739 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

4

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**COASTBANCORP & SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF INCOME (unaudited)**

**For the PeriodsEnded June 30, 2007 and 2006**

*(Inthousands, except for per share numbers)*

* *
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** **                                             | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Interest income:                                       |       |                                               |       |                                             |       |   |   |   |   |
| Interest and fees on loans                             |       | $                                                  | 3,288      |                                             | $          | 3,199 |   | $ | 6,379 |   | $ | 6,116 |   |
| Interest on investment securities                      |       | 108                                                |       | 52                                               |       | 195 |   | 108 |   |
| Interest on federal funds sold                         |       | 229                                                |       | 204                                              |       | 446 |   | 446 |   |
| Other interest income                                  |       | 16                                                 |       | 22                                               |       | 42 |   | 30 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| TOTAL INTEREST INCOME                                  |       | 3,641                                              |       | 3,477                                            |       | 7,062 |   | 6,700 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Interest  expense:                                     |       |                                               |       |                                             |       |   |   |   |   |
| Interest on money market and NOW accounts              |       | 412                                                |       | 343                                              |       | 830 |   | 610 |   |
| Interest on savings deposits                           |       | 37                                                 |       | 31                                               |       | 73 |   | 58 |   |
| Interest on time deposits                              |       | 834                                                |       | 693                                              |       | 1,629 |   | 1,369 |   |
| Interest on junior subordinated debt securities        |       | 122                                                |       | 117                                              |       | 242 |   | 226 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                                 |       | 1,405                                              |       | 1,184                                            |       | 2,774 |   | 2,263 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Net interest income                                    |       | 2,236                                              |       | 2,293                                            |       | 4,288 |   | 4,437 |   |
| Provision for loan losses                              |       | —                                             |       | 20                                               |       | 25 |   | 60 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| NET INTEREST INCOME AFTER PROVISION  FOR CREDIT LOSSES |       | 2,236                                              |       | 2,273                                            |       | 4,263 |   | 4,377 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Noninterest  income:                                   |       |                                               |       |                                             |       |   |   |   |   |
| Service charges on deposit accounts and other          |       | 94                                                 |       | 90                                               |       | 179 |   | 166 |   |
| Gain on sale of loans and servicing fees               |       | 6                                                  |       | 17                                               |       | 42 |   | 146 |   |
| Mortgage packaging fees                                |       | 23                                                 |       | —                                           |       | 38 |   | — |   |
| Gain on sale of premises and equipment                 |       | (6                                                 | )          | —                                           |       | (5 | ) | — |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| TOTAL NONINTEREST INCOME                               |       | 117                                                |       | 107                                              |       | 254 |   | 312 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Noninterest  expense:                                  |       |                                               |       |                                             |       |   |   |   |   |
| Salaries and benefits                                  |       | 937                                                |       | 962                                              |       | 1,912 |   | 1,875 |   |
| Net occupancy expense (net of rental income)           |       | 121                                                |       | 125                                              |       | 250 |   | 263 |   |
| Equipment expense                                      |       | 81                                                 |       | 83                                               |       | 157 |   | 169 |   |
| Other expense                                          |       | 667                                                |       | 660                                              |       | 1,273 |   | 1,293 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| TOTAL NONINTEREST EXPENSE                              |       | 1,806                                              |       | 1,830                                            |       | 3,592 |   | 3,600 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| INCOME BEFORE TAXES                                    |       | 547                                                |       | 550                                              |       | 925 |   | 1,089 |   |
| Income taxes                                           |       | 240                                                |       | 217                                              |       | 402 |   | 436 |   |
| NET INCOME                                             |       | $                                                  | 307        |                                             | $          | 333 |   | $ | 523 |   | $ | 653 |   |
|                                                   |       |                                               |       |                                             |       |   |   |   |   |
| Per share data                                         |       |                                               |       |                                             |       |   |   |   |   |
| Earnings per share - Basic                             |       | $                                                  | 0.45       |                                             | $          | 0.49 |   | $ | 0.76 |   | $ | 0.97 |   |
| Earnings per  share - Diluted                          |       | $                                                  | 0.42       |                                             | $          | 0.47 |   | $ | 0.72 |   | $ | 0.93 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

5

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**COAST BANCORP & SUBSIDIARY**

**STATEMENTOF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)**

*(In thousands, except number ofshares)*
| ** **                                                                       | ** ** | ** **                | ** ** | **Common Stock**      | ** ** | **Additonal** | ** ** | ** **           | ** ** | **Accumulated  Other** | ** ** | ** **                | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|---------------|------------|----------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                       | ** ** | **Comprehensive  Income** | ** ** | **Number of  Shares** | ** ** | **Amount**    | ** ** | **Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Comprehensive  Income** | ** ** | **Total** | ** ** |
| **Balance  at January 1, 2006**                                                  |       |                      |       | 674,100                    |       | $             | 6,950      |                 | $          | —                 |       | $                         | 4,373      |   | (80 | ) | $ | 11,243 |   |
| Exercise of stock options, including the realization  of $7,716 in tax benefits  |       |                      |       | 5,500                      |       | 85            |       |                 |       |                   |       |                      |       | 85 |   |
| Stock-based  compensation expense                                                |       |                      |       |                       |       |          |       | 76                   |       |                   |       |                      |       | 76 |   |
| Cash  dividends                                                                  |       |                      |       |                       |       |          |       |                 |       | (136                   | )          |                      |       | (136 | ) |
| **Comprehensive  Income**                                                        | ** ** |                      | ** ** |                       | ** ** |          | ** ** |                 | ** ** |                   | ** ** |                      | ** ** | ** ** | ** ** |
| Net  income                                                                      |       | $                         | 1,374      |                       |       |          |       |                 |       |                   | 1,374      |                      |       |   | 1,374 |   |
| Unrealized loss on available-for-sale securities, net  of taxes of $46,569       |       | 69                        |       |                       |       |          |       |                 |       |                   |       | 69                        |       | 69 |   |
| **Total  comprehensive income**                                                  |       | $                         | 1,443      |                       |       |          |       |                 |       |                   |       |                      |       |   |   |   |
|                                                                             |       |                      |       |                       |       |          |       |                 |       |                   |       |                      |       |   |   |
| **Balance  at December 31, 2006**                                                |       |                      |       | 679,600                    |       | $             | 7,035      |                 | $          | 76                     |       | $                         | 5,611      |   | $ | (11 | ) | $ | 12,711 |   |
| Exercise of stock options including the  realization of $4,259 in tax benefits   |       |                      |       | 26,600                     |       | 308           |       | 13                   |       |                   |       |                      |       | 321 |   |
| Stock-based  compensation expense                                                |       |                      |       |                       |       |          |       | 30                   |       |                   |       |                      |       | 30 |   |
| **Comprehensive  Income**                                                        | ** ** |                      | ** ** |                       | ** ** |          | ** ** |                 | ** ** |                   | ** ** |                      | ** ** | ** ** | ** ** |
| Net  income                                                                      |       | $                         | 523        |                       |       |          |       |                 |       |                   | 523        |                      |       |   | 523 |   |
| Unrealized loss on available-for-sale securities, net  of $1,725 in tax benefits |       | (3                        | )          |                       |       |          |       |                 |       |                   |       | (3                        | )          | (3 | ) |
| **Total  comprehensive income**                                                  |       | $                         | 1,963      |                       |       |          |       |                 |       |                   |       |                      |       |   |   |   |
|                                                                             |       |                      |       |                       |       |          |       |                 |       |                   |       |                      |       |   |   |
| **Balance at June 30, 2007**                                                     |       |                      |       | 706,200                    |       | $             | 7,343      |                 | $          | 119                    |       | $                         | 6,134      |   | $ | (14 | ) | $ | 13,582 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

6

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# **COAST BANCORP & SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (unaudited)**

**For theSix Months Ended June 30, 2007 and 2006**

 

*(In thousands)*
| ** **                                                                         | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| *** ***                                                                       | ** ** | **June 30,**                                | ** ** |
| ** **                                                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Operating  activities:                                                             |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 523        |   | $ | 653 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                      |       | 215                                              |       | 249 |   |
| Provision for credit losses                                                        |       | 25                                               |       | 60 |   |
| Stock-based compensation                                                           |       | 30                                               |       | 38 |   |
| Gain on sale of loans                                                              |       | (14                                              | )          | (176 | ) |
| Other items - net                                                                  |       | 333                                              |       | 239 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 1,112                                            |       | 1,063 |   |
|                                                                               |       |                                             |       |   |   |
| Investing  activities:                                                             |       |                                             |       |   |   |
| Net increase in loans                                                              |       | (4,853                                           | )          | (12,024 | ) |
| Proceeds from loans sold                                                           |       | 243                                              |       | 2,179 |   |
| Proceeds of Federal Reserve Bank and Federal Home  Loan Bank stock                 |       | (28                                              | )          | (15 | ) |
| Net proceeds/purchase of available-for-sale securities                             |       | (1,636                                           | )          | 1,000 |   |
| Net proceeds/purchase of premises and equipment                                    |       | 549                                              |       | (84 | ) |
| NET CASH USED BY INVESTING ACTIVITIES                                              |       | (5,725                                           | )          | (8,944 | ) |
|                                                                               |       |                                             |       |   |   |
| Financing  activities:                                                             |       |                                             |       |   |   |
| Increase (decrease) in deposits                                                    |       | 3,432                                            |       | (2,463 | ) |
| Principle payments on notes payable                                                |       | —                                           |       | (45 | ) |
| Proceeds from exercise of options, including tax  benefits                         |       | 321                                              |       | 36 |   |
| NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                   |       | 3,753                                            |       | (2,472 | ) |
|                                                                               |       |                                             |       |   |   |
| DECREASE IN CASH AND CASH EQUIVALENTS                                              |       | (860                                             | )          | (10,353 | ) |
|                                                                               |       |                                             |       |   |   |
| Cash and Cash  Equivalents at Beginning of Period                                  |       | 24,973                                           |       | 34,670 |   |
|                                                                               |       |                                             |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                        |       | $                                                | 24,113     |   | $ | 24,317 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

7

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**Item 1.Financial Statements- Continued**

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

The accompanyingfinancial information has been prepared in accordance with the Securities andExchange Commission rules and regulations for quarterly reporting and thereforedoes not necessarily include all information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles.  This informationshould be read in conjunction with the Company’s Annual Report for the yearended December 31, 2006 filed on Form 10-KSB.

Operating results forinterim periods are not necessarily indicative of operating results for anentire fiscal year.  In the opinion ofmanagement, the unaudited financial information for the three month and sixmonth period ended June 30, 2007 and 2006 reflect all adjustments, consistingonly of normal recurring accruals and provisions, necessary for a fairpresentation thereof.

Some matters discussed inthis Form 10-QSB may be “forward-looking statements” within the meaning of thePrivate Litigation Reform Act of 1995 and therefore may involve risks,uncertainties and other factors which may cause our actual results to bematerially different from the results expressed or implied by ourforward-looking statements.  Thesestatements generally appear with words such as “anticipate”, “believe”, “estimate”,“may”, “intend”, and “expect.”

# **Note 2                    Earnings Per Share**

Effective December 31,1997, Coast National Bank (the “Bank”) adopted SFAS No. 128, *“Earnings per Share,”*which has subsequently been adopted bythe Coast Bancorp (the “Company” or “Coast Bancorp” or “Bancorp”).  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 are in accordance with theprovisions of this statement.

***Earnings Per Share Note***
| ** **                                    | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007  Shares**                                                  | ** ** | **2006  Shares**                                                | ** ** | **2007  Shares** | ** ** | **2006  Shares** | ** ** |
| Used in Basic EPS                             |       | 689,280                                                           |       | 676,100                                                         |       | 685,059 |   | 675,341 |   |
| Dilutive Effect of  Outstanding Stock Options |       | 38,507                                                            |       | 26,362                                                          |       | 39,894 |   | 25,235 |   |
| Used in Earnings Per Share - Diluted          |       | 727,787                                                           |       | 702,462                                                         |       | 724,953 |   | 700,576 |   |

 

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

InDecember 2004, Financial Accounting Standards Board (“FASB”) revised SFAS 123and issued under its new name,*“Share-Based Payment.” *This statement eliminates thepreviously allowable alternative to use Opinion 25’s intrinsic value method ofaccounting.  Instead, this Statementgenerally requires entities to recognize the cost of employee services receivedin exchange for awards of stock options, or other equity instruments, based onthe grant-date fair value of those awards. This cost is recognized over the period during which an employee isrequired to provide service in exchange for the award, generally the vestingperiod.

TheCompany adopted this Statement in 2006 for all new stock option awards as wellas any existing awards that are modified, repurchased or cancelled.  In addition, the unvested portions of previouslyawarded options have also been recognized as expense during the first sixmonths of 2007.  During the first half of2007, $30,261 was expensed by the Company for stock option relatedcompensation.

Priorto January 1, 2006, the Company accounted for stock-based compensation underthe FASB’s SFAS No. 123, “Accounting for Stock-Based Compensation,” whichallowed companies to use an intrinsic value method prescribed in AccountingPrinciples Board (“APB”) Opinion No. 25, *“Accounting for StockIssued to Employees,”* and related interpretations.

8

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SFASNo. 123 (R) requires that cash flows resulting from the realization of taxdeductions in excess of the compensation cost recognized (excess tax benefits)are to be classified as financing cash flows. Before the adoption of SFAS No. 123 (R), the Company presented all taxbenefits realized from the exercise of stock options as operating cash flows inthe Statement of Cash Flows.  The $4,259excess tax benefit classified as a financing cash inflow would have beenclassified as an operating cash inflow if we had not adopted SFAS 123 (R).

**Note 4                    CurrentAccounting Pronouncements**

Asdiscussed in the preceding note, SFAS No.123 (R) became effective January 1,2006 and has been fully implemented by the Company.

InMarch 2006, the FASB issued SFAS No. 156, *“Accounting for Servicingof Financial Assets, an amendment of FASB Statement No. 140.”* The statement amends SFAS No. 140 by  (1) requiring the separate accounting forservicing assets and servicing liabilities, which arise from the sale offinancial assets; (2) requiring all separately recognized serving assets andservicing liabilities to be initially measured at fair value, if practicable;and (3) permitting an entity to choose between an amortization method or a fairvalue method for subsequent measurement for each class of separately recognizedservicing assets and servicing liabilities. The Company adopted the statement as of January 1, 2007.  Management does not expect that the adoptionof this new standard will have a material impact on the Company’s financialposition, results of operations or cash flows.

InJune 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes*.”  This interpretation applies to all taxpositions accounted for in accordance with SFAS No. 109, *“Accountingfor Income Taxes.”* FIN 48clarifies the application of SFAS No. 109 by defining the criteria that anindividual tax position must meet in order for the position to be recognizedwithin the financial statements and provides guidance on measurement,derecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition for tax positions.  The Company adopted the interpretation in2007.  Management does not expect thatthe adoption of this new interpretation will have a material impact on theCompany’s financial position, results of operations or cash flows.

In September 2006, the FASB issuedSFAS No. 157*, “Fair ValueMeasurements.”* SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.   SFAS No. 157 iseffective for the Company on January 1, 2008 although early adoption is permitted.The Company has chosen not to implement the early adoption ofSFAS No. 157 and is currently evaluating the impact of this standardon its consolidated financial statements.

InFebruary 2007, FASB issued SFAS 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities*.”  The Standard permits an entity to measurecertain financial assets and financial liabilities at fair value.  The Standard’s objective is to improvefinancial reporting by allowing entities to mitigate volatility in reportedearnings caused by the measurement of related assets and liabilities usingdifferent attributes without having to apply complex hedge accountingprovisions.   The Standard becomeseffective as of the beginning of the fiscal year that begins after November 15,2007.  Early adoption is allowed, within120 days after the first day of the fiscal year, as long as the requirements ofSFAS 157 are met either currently or prior to the adoption of SFAS 159.  The Company has chosen not to implement theearly adoption of SFAS 159 and is currently assessing the impact the adoptionof the standard will have on its consolidated financial statements.

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

The unauditedfinancial statements have been prepared in accordance with the instructions toForm 10-QSB and contain statements relating to future results of the Companythat are considered to be “forward looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995.  These statements relate to, among otherthings, credit loss reserve adequacy and the simulation of changes in interestrates.  Actual results may differ materiallyfrom those expressed or implied as a 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 withinthe Company’s markets, equity and fixed income market fluctuations, personaland corporate customers’ bankruptcies, inflation, acquisitions and integrationsof acquired businesses, technological change, changes in law, changes infiscal, monetary, regulatory and tax policies, monetary fluctuations, politicaland global changes arising from the terrorist attacks of September 11, 2001 aswell as the war in Iraq and its aftermath, success in gaining regulatoryapprovals when required as well as other risks and uncertainties detailedelsewhere in this quarterly report or from time to time in the filings of theCompany with the Securities Exchange Commission.  Forward-looking statements speak only as ofthe date on which the statements are made, and the Company undertakes noobligation to update any forward-looking statement to reflect events or circumstancesafter the date on which such statement is made or to reflect the occurrence ofunanticipated events.

9

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The accompanyingfinancial information should be read in conjunction with Coast Bancorp’s AnnualReport on Form 10-KSB for the year ended December 31, 2006.

**Descriptionof Business**

*Coast Bancorp*

Coast Bancorp, headquartered in San Luis Obispo,California, is a California corporation incorporated in 2001.  Coast Bancorp became the bank holding companyof Coast National Bank on May 31, 2001 through a corporate reorganization.  In the reorganization, Coast National Bankbecame the wholly-owned subsidiary of Coast Bancorp and the shareholders of theBank became 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 inany material business activities other than the ownership of the Bank.  Financial information presented herein forJune 30, 2007 and comparative information for December 31, 2006 and June 30,2006 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 and most recently in March 2005 at2138 Spring Street in Paso Robles, California.

Whenthe Bank opened for business in June 1997, it purchased the real estate andbuilding that housed the Arroyo Grande branch office.  On October 14, 1999, the Bank purchased 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.  Half of theoriginal main office at 486 Marsh Street now houses the Bank’s Small BusinessLending Center and the Bank’s Note Department while the other half is leased tovarious businesses.

OnMarch 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard inMorro Bay that is approximately one block from the existing branch.  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.

TheBank applied for and received approval from the Comptroller of the Currency foranother branch office at 2138 Spring Street, Paso Robles, California whichopened in March 2005.  The Bank alsopurchased a lot at 2045 Spring Street, Paso Robles, California with theintention of relocating the Paso Robles branch. However, the lot was not adequate for the relocation of the branch andon October 26, 2006, the Bank purchased a new lot at 2110 Spring St, PasoRobles, California.  The Bank intends torelocate the Paso Robles branch to this larger lot, sometime in thefuture.  On March 20, 2007, the lot at2045 Spring Street, Paso Robles, California was sold.

InJuly 2002, a loan production office was opened at 930 South Broadway Street inSanta Maria, California and in July 2004 moved to 301 S. Miller Street, Ste.110 in Santa Maria, California. In December 2005, the office was relocated to411 Betteravia Rd., Ste 201, Santa Maria, California.  It was decided that the Bank could moreefficiently, and just as effectively, serve our Santa Barbara County customersfrom our San Luis Obispo SBA office, and as of April 1, 2007 the Santa Marialease was terminated.   In October 2004 aloan production office was opened in Santa Barbara, California at 15 WestCarrillo Street, Ste. 252.  The originallease on this facility expired and the office was closed in September2005.  In June 2005, the Bank opened anew loan production office at 7429 N. First St., Ste. 104, Fresno,California.  In July of 2006, the Fresnooffice was relocated to 466 W. Fallbrook Ave., #109, Fresno, California.

10

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Asof June 30, 2007, the Bank had a total of 80 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 69 positions.  The Bank valuesits employees.  They are actively engagedindividually and as a team in contributing to the Bank’s realization of itsvision and mission.

**CriticalAccounting Policies**

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

Theallowance for credit losses represents management’s best estimate of losses inherentin the existing loan portfolio.  Theallowance for loan losses is increased by the provision for loan losses chargedto 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 could 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.

### *Income Taxes*

Deferredincome taxes are computed using the asset and liability method, whichrecognizes a liability or asset representing the tax effects, based on currenttax law, of future deductible or taxable amounts attributable to events thathave been recognized in the consolidated financial statements.  A valuation allowance is established toreduce the deferred tax asset to the level at which it is “more likely than not”that the tax asset or benefits will be realized.  Realization of tax benefits of deductibletemporary differences and operating loss carry forwards depends on havingsufficient taxable income of an appropriate character within the carry forwardperiods.

11

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##### **Overview**

*Earnings Summary*

For the three months ended June 30, 2007 the Bancorpreported consolidated net income of $307,000 or $0.42 diluted earnings pershare compared to net income of $333,000 and $0.47 diluted earnings per sharefor the same period during 2006, a 7.8% decrease.  For the six months ended June 30, 2007 theBancorp reported consolidated net income of $523,000 or $0.72 diluted earningsper share compared to consolidated net income of $653,000 or $0.93 dilutedearnings per share for the same period in 2006, a 19.9% decrease.  The decrease in net income was primarily dueto smaller gains resulting from the sale of the guaranteed portion ofgovernment guaranteed loans and an increase in interest expense.

*BalanceSheet Summary*

Asof June 30, 2007, total consolidated assets of Coast Bancorp were $185.1million in comparison to total assets of $180.7 million as of December 31,2006. This represents an increase of $4.4 million, or 2.4%.  This increase in assets was funded by anincrease in time deposits.  Compared tototal consolidated assets of $183.9 million at June 30, 2006, assets haveincreased by $1.2 million, or 0.7%, over the last twelve months.

TheBank has continued to grow its loan portfolio during the first the six monthsof 2007.  Total loans as of June 30, 2007were $141.3 million in comparison to total loans of $136.9 million as ofDecember 31, 2006.  This represents anincrease of $4.4 million, or 3.2%. Compared to total loans of $143.7 million at June 30, 2006, loans havedecreased by $2.4 million, or 1.7%, over the last twelve months. The decreasein the loan portfolio occurred primarily in other real estate loans but waspartially offset by increases in commercial and real estate construction loans.

Totaldeposits as of June 30, 2007 were $166.0 million in comparison to totaldeposits of $162.5 million as of December 31, 2006.  This represents an increase of $3.5 million,or 2.2%. The increase is due to an increase in time deposits.  Compared to total deposits of $166.5 millionat June 30, 2006, deposits have decreased by $0.5 million, or 0.3%, over thelast twelve months.  The slight decreaseis due to a decrease in our non-interest bearing demand deposits which isoffset by increases in time deposits less than $100,000 as well as money marketand NOW accounts.

**Earnings Analysis**

##### *Net Interest Income*

A significantcomponent of the Bank’s earnings is net interest income.  Net interest income is the amount by whichthe interest and amortization of fees generated from loans and other earningassets exceed the cost of funding those assets, usually deposit accountinterest expense.  Net interest incomedepends on the difference between gross interest and fees earned on the loansand investment portfolios and the interest rates paid on deposits andborrowings (“the interest rate spread”).  Net interest income after provision for credit losses was $2,236,000 forthe three months ended June 30, 2007, compared to $2,273,000 for the threemonths ended June 30, 2006, representing a decrease of 1.63%.  Net interest income after provision forcredit losses was $4,263,000 for the six months ended June 30, 2007, comparedto $4,377,000 for the six months ended June 30, 2006, representing a decreaseof 2.6%.  This decrease was primarily theresult of an increase in interest rates paid, especially in time depositaccounts.  The percentage change in theaverage interest rate paid on deposits increased faster than the percentagechange in the average interest rates earned on loans for the three and sixmonths ended June 30, 2007 as compared to the three and six months ended June30, 2006.  This increase was somewhatoffset by a slightly higher increase in average loans as compared to theincrease in average deposits for the same time periods.

Thefollowing tables present, for the three months and six months ended June 30,2007 and 2006, the distribution of average assets, liabilities and shareholders’equity.  In addition, the total amountsof interest income from average interest-earning assets and the resultantyields, and the dollar amounts of interest expense and average interest-bearingliabilities, expressed both in dollars and in rates are also presented.  Non-accrual loans are included in thecalculation of the average balances of loans, and interest not accrued isexcluded.

12

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**Average Rates and BalancesFor the Three Month Period Ended June 30, 2007 and 2006***(dollar amounts in thousands)*
| ** **                                       | ** ** | **June 30, 2007** | ** ** | **June 30, 2006**        | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **Average  Balance**        | ** ** | **Interest  Earned  or Paid** | ** ** | **Average  Yield or  Rate Paid** | ** ** | **Average  Balance** | ** ** | **Interest  Earned  or Paid** | ** ** | **Average  Yield or  Rate Paid** | ** ** |
| **Assets**                                       | ** ** | ** **                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-Earning  Assets:                        |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Investment  Securities                           |       | $                           | 8,223      |                               | $          | 108 |   | 5.27 | % | $ | 7,679 |   | $ | 52 |   | 2.72 | % |
| Federal Funds  Sold                              |       | 17,477                      |       | 229                                |       | 5.26 | % | 16,539 |   | 204 |   | 4.95 | % |
| Other Earning  Assets                            |       | 971                         |       | 16                                 |       | 6.61 | % | 932 |   | 22 |   | 9.47 | % |
| Loans                                            |       | 141,277                     |       | 3,288                              |       | 9.33 | % | 139,404 |   | 3,199 |   | 9.20 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total Interest-Earning  Assets                   |       | 167,948                     |       | 3,641                              |       | 8.70 | % | 164,554 |   | 3,477 |   | 8.48 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Cash and Due from Bank                           |       | 7,058                       |       |                               |       |   |   | 8,018 |   |   |   |   |   |
| Premises and Equipment                           |       | 8,986                       |       |                               |       |   |   | 8,190 |   |   |   |   |   |
| Other Real Estate Owned                          |       | —                      |       |                               |       |   |   | — |   |   |   |   |   |
| Accrued Interest and  Other Assets               |       | 1,744                       |       |                               |       |   |   | 1,572 |   |   |   |   |   |
| Allowance For Loan  Losses                       |       | (1,415                      | )          |                               |       |   |   | (1,224 | ) |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total Assets                                     |       | $                           | 184,321    |                               |       |   |   |   | $ | 181,110 |   |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’  Equity**   | ** ** | ** **                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-Bearing  Liabilities:                   |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Money Market and  NOW:                           |       | $                           | 50,355     |                               | $          | 412 |   | 3.28 | % | $ | 45,864 |   | $ | 343 |   | 3.00 | % |
| Savings                                          |       | 6,715                       |       | 37                                 |       | 2.21 | % | 7,649 |   | 31 |   | 1.63 | % |
| Time Deposits  under $100,000                    |       | 16,657                      |       | 194                                |       | 4.67 | % | 15,252 |   | 142 |   | 3.73 | % |
| Time Deposits of  $100,000 or More               |       | 51,757                      |       | 640                                |       | 4.96 | % | 54,137 |   | 551 |   | 4.08 | % |
| Trust Preferred  Securities                      |       | 5,155                       |       | 122                                |       | 9.49 | % | 5,155 |   | 117 |   | 9.10 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total Interest-Bearing  Liabilities              |       | 130,639                     |       | 1,405                              |       | 4.31 | % | 128,057 |   | 1,184 |   | 3.71 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Non-Interest Bearing  Liabilities                |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Demand Deposits                                  |       | 39,890                      |       |                               |       |   |   | 40,831 |   |   |   |   |   |
| Other  Liabilities                               |       | 500                         |       |                               |       |   |   | 413 |   |   |   |   |   |
| Shareholders’  Equity                       |       | 13,292                      |       |                               |       |   |   | 11,809 |   |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total Liabilities and  Shareholders’ Equity |       | $                           | 184,321    |                               |       |   |   |   | $ | 181,110 |   |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Net Interest Income                              |       |                        |       | $                                  | 2,236      |   |   |   |   |   | $ | 2,293 |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Net Yield on Interest-Earning Assets             |       |                        |       |                               |       | 5.34 | % |   |   |   |   | 5.59 | % |

 

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**Average Rates and BalancesFor the Six Month Period Ended June 30, 2007 and 2006***(dollar amounts in thousands)*
| ** **                                       | ** ** | **June 30, 2007** | ** ** | **June 30, 2006**        | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **Average  Balance**        | ** ** | **Interest  Earned  or Paid** | ** ** | **Average  Yield or  Rate Paid** | ** ** | **Average  Balance** | ** ** | **Interest  Earned  or Paid** | ** ** | **Average  Yield or  Rate Paid** | ** ** |
| **Assets**                                       | ** ** | ** **                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-Earning  Assets:                        |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Investment Securities                            |       | $                           | 8,077      |                               | $          | 195 |   | 4.87 | % | $ | 7,775 |   | $ | 108 |   | 2.80 | % |
| Federal Funds Sold                               |       | 17,140                      |       | 446                                |       | 5.25 | % | 19,249 |   | 446 |   | 4.67 | % |
| Other Earning Assets                             |       | 963                         |       | 42                                 |       | 8.80 | % | 927 |   | 30 |   | 6.53 | % |
| Loans                                            |       | 139,610                     |       | 6,379                              |       | 9.21 | % | 136,596 |   | 6,116 |   | 9.03 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total  Interest-Earning Assets                   |       | 165,790                     |       | 7,062                              |       | 8.59 | % | 164,547 |   | 6,700 |   | 8.21 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Cash and Due  from Bank                          |       | 6,871                       |       |                               |       |   |   | 8,047 |   |   |   |   |   |
| Premises and  Equipment                          |       | 9,327                       |       |                               |       |   |   | 8,231 |   |   |   |   |   |
| Other Real  Estate Owned                         |       | —                      |       |                               |       |   |   | — |   |   |   |   |   |
| Accrued Interest  and Other Assets               |       | 1,830                       |       |                               |       |   |   | 1,625 |   |   |   |   |   |
| Allowance For  Loan Losses                       |       | (1,402                      | )          |                               |       |   |   | (1,209 | ) |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total Assets                                     |       | $                           | 182,416    |                               |       |   |   |   | $ | 181,241 |   |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**   | ** ** | ** **                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-Bearing  Liabilities:                   |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Money Market and NOW:                            |       | $                           | 50,306     |                               | $          | 830 |   | 3.33 | % | $ | 44,952 |   | $ | 610 |   | 2.74 | % |
| Savings                                          |       | 6,767                       |       | 73                                 |       | 2.18 | % | 8,005 |   | 58 |   | 1.46 | % |
| Time Deposits under $100,000                     |       | 16,289                      |       | 375                                |       | 4.64 | % | 15,370 |   | 271 |   | 3.56 | % |
| Time Deposits of $100,000 or More                |       | 51,335                      |       | 1,254                              |       | 4.93 | % | 55,607 |   | 1,098 |   | 3.98 | % |
| Trust Preferred Securities                       |       | 5,155                       |       | 242                                |       | 9.47 | % | 5,155 |   | 226 |   | 8.84 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total  Interest-Bearing Liabilities              |       | 129,852                     |       | 2,774                              |       | 4.31 | % | 129,089 |   | 2,263 |   | 3.54 | % |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Non-Interest  Bearing Liabilities                |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Demand Deposits                                  |       | 38,892                      |       |                               |       |   |   | 40,084 |   |   |   |   |   |
| Other Liabilities                                |       | 525                         |       |                               |       |   |   | 451 |   |   |   |   |   |
| Shareholders’ Equity                        |       | 13,147                      |       |                               |       |   |   | 11,617 |   |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Total  Liabilities and Shareholders’ Equity |       | $                           | 182,416    |                               |       |   |   |   | $ | 181,241 |   |   |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Net Interest  Income                             |       |                        |       | $                                  | 4,288      |   |   |   |   |   | $ | 4,437 |   |   |   |
|                                             |       |                        |       |                               |       |   |   |   |   |   |   |   |   |
| Net Yield on  Interest-Earning Assets            |       |                        |       |                               |       | 5.22 | % |   |   |   |   | 5.44 | % |

 

Netinterest income is affected by changes in the amount and mix of ourinterest-earning assets and interest-bearing liabilities, referred to as a “volumechange.”  It is also affected by changesin the yields we earn on interest-earning assets and rates we pay oninterest-bearing deposits and other borrowed funds, referred to as a “ratechange.”

14

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Thefollowing table sets forth changes in interest income and interest expense foreach major category of interest-earning assets and interest-bearing depositaccounts, and the amount of change attributable to volume and rate changes forthe three and six month periods ended June 30, 2007 and 2006.  Changes not solely attributable to rate orvolume have been allocated to volume and rate changes in proportion to therelationship of the absolute dollar amounts of the changes in each.

**Rate/Volume Analysis***(dollar amounts in thousands)*
| ** **                        | ** ** | **Three Months Ended June 30, 2007  compared to the  Three Months Ended June, 30, 2006** | ** ** | **Six Months Ended June 30, 2007  compared to the  Six Months Ended June 30, 2006** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Increase (Decrease) in interest income and  expense due to change in:**                               | ** ** | **Increase (Decrease) in interest income and  expense due to change in:**                          | ** ** |
| ** **                        | ** ** | **Volume**                                                                                                                                           | ** ** | **Rate**                                                                                                                                        | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest-Earning  Assets:**     | ** ** | ** **                                                                                                                                           | ** ** | ** **                                                                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment Securities             |       | $                                                                                                                                                    | 28         |                                                                                                                                            | $          | 28 |   | $ | 56 |   | $ | 13 |   | $ | 74 |   | $ | 87 |   |
| Federal Funds Sold                |       | 12                                                                                                                                                   |       | 13                                                                                                                                              |       | 25 |   | — |   | — |   | — |   |
| Other Earning Assets              |       | 1                                                                                                                                                    |       | (7                                                                                                                                              | )          | (6 | ) | 1 |   | 11 |   | 12 |   |
| Loans                             |       | 43                                                                                                                                                   |       | 46                                                                                                                                              |       | 89 |   | 136 |   | 127 |   | 263 |   |
| **Total Interest Income**         |       | 84                                                                                                                                                   |       | 80                                                                                                                                              |       | 164 |   | 150 |   | 212 |   | 362 |   |
|                              |       |                                                                                                                                                 |       |                                                                                                                                            |       |   |   |   |   |   |   |   |   |
| **Interest-Bearing  Liabilities** | ** ** | ** **                                                                                                                                           | ** ** | ** **                                                                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction Accounts              |       | 36                                                                                                                                                   |       | 33                                                                                                                                              |       | 69 |   | 80 |   | 140 |   | 220 |   |
| Savings                           |       | (21                                                                                                                                                  | )          | 27                                                                                                                                              |       | 6 |   | (24 | ) | 39 |   | 15 |   |
| Time Deposits                     |       | 14                                                                                                                                                   |       | 38                                                                                                                                              |       | 52 |   | 17 |   | 87 |   | 104 |   |
| Time Deposits $100,000 or more    |       | (23                                                                                                                                                  | )          | 112                                                                                                                                             |       | 89 |   | (75 | ) | 231 |   | 156 |   |
| Trust Preferred                   |       | —                                                                                                                                               |       | 5                                                                                                                                               |       | 5 |   | — |   | 16 |   | 16 |   |
| **Total Interest Expense**        |       | 6                                                                                                                                                    |       | 215                                                                                                                                             |       | 221 |   | (2 | ) | 513 |   | 511 |   |
|                              |       |                                                                                                                                                 |       |                                                                                                                                            |       |   |   |   |   |   |   |   |   |
| **Net  Interest Income**          |       | $                                                                                                                                                    | 78         |                                                                                                                                            | $          | (135 | ) | $ | (57 | ) | $ | 152 |   | $ | (301 | ) | $ | (149 | ) |

 

Interestexpense was $1,405,000 for the three months ended June 30, 2007 compared to$1,184,000 for the three months ended June 30, 2006, representing an increaseof 18.7%.  Interest expense was$2,774,000 for the six months ended June 30, 2007, compared to $2,263,000 forthe six months ended June 30, 2006, an increase of 22.6%.  These increases reflect higher interest ratespaid on all interest bearing accounts.

Thenet interest margin is the ratio of net interest income to average earningassets. This ratio is useful in allowing the Company to monitor the spreadbetween interest income and interest expense between reporting periodsirrespective of the growth of the Company’s assets.  The net interest margin decreased 25 basispoints to 5.34% for the three months ended June 30, 2007 as compared to 5.59%for the three months ended June 30, 2006. The net interest margin, 5.22% for the six months ending June 30, 2007was 22 basis points lower than the comparable figure, 5.44%, for the six monthperiod ending June 30, 2006.  Thesedecreases are primarily due to the higher rates paid on all interest bearingaccounts.

*Non-InterestIncome*

Non-interestincome represents deposit account service charges and other types of feeincome.  Non-interest income for thethree months ended June 30, 2007 totaled $117,000 compared to $107,000 for thesame period in 2006, a 9.4% increase. This increase was due to increases in service charges on depositaccounts and mortgage packaging fees. Non-interest income for the six months ended June 30, 2007 totaled$254,000 compared to $312,000 for the same period in 2006, an 18.6%decrease.  This decrease wassubstantially due to selling fewer guaranteed portions of government guaranteedloans as the volume of lending in the Small Business Administration Departmenthas decreased.

15

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##### *Non-Interest Expense*

Non-interestexpense represents salaries, occupancy expenses, professional expenses, outsideservices and other miscellaneous expenses necessary to conduct business.  Non-interest expense for the three monthsended June 30, 2007 totaled $1,806,000 compared to $1,830,000 for the sameperiod in 2006 for a decrease of 1.3%. Non-interest expense for the six months ended June 30, 2007 totaled$3,592,000 compared to $3,600,000 for the same period in 2006 for a decrease of0.2%.  These decreases are primarily dueto a concerted effort on the bank to reduce non-interest expenses.    

##### *Income Taxes*

The tax provision recorded for the three months ended June 30, 2007 was$240,000 as compared to $217,000 during the same period in 2006.  The tax provision for the six months endedJune 30, 2007 was $402,000 as compared to $436,000 during the same period in2006.  The smaller tax provision for thesix months ended June 30, 2007 as compared to June 30, 2006, was due to theCompany’s decreased net income before taxes. 

**BalanceSheet Analysis**

*Investment Portfolio*

Thefollowing table summarizes the amounts and distribution of our investmentsecurities held as of the dates indicated, and the weighted average yields asof June 30, 2007 and December 31, 2006:

**MaturityDistribution of Investment Securities***(dollar amounts inthousands)*

|                                            | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | ** **                  | ** ** | ** **                      | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Book**                    | ** ** | **Market**                      | ** ** | **Average** | ** ** | **Book** | ** ** | **Market** | ** ** |
| ** **                                 | ** ** | **Value**                   | ** ** | **Value**                       | ** ** | **Yield** | ** ** | **Value** | ** ** | **Value** | ** ** |
| **Available-for-Sale Securities:**         |       |                        |       |                            |       |   |   |   |   |   |   |
|                                       |       |                        |       |                            |       |   |   |   |   |   |   |
| **U.S. Government and Agency  Securities** |       |                        |       |                            |       |   |   |   |   |   |   |
| Within One Year                            |       | 2,991                       |       | 2,985                           |       | 4.15 | % | 2,985 |   | 2,972 |   |
| One to Five Years                          |       | 6,613                       |       | 6,596                           |       | 4.67 | % | 4,960 |   | 4,954 |   |
| Five to Ten Years                          |       | —                      |       | —                          |       | 0.00 | % | — |   | — |   |
| After Ten Years                            |       | —                      |       | —                          |       | 0.00 | % | — |   | — |   |
| Total U.S. Government  Agency Securities   |       | 9,604                       |       | 9,581                           |       | 4.41 | % | 7,945 |   | 7,926 |   |
|                                       |       |                        |       |                            |       |   |   |   |   |   |   |
| **Total Available-for-Sale Securities**    |       | $                           | 9,604      |                            | $          | 9,581 |   | 4.41 | % | $ | 7,945 |   | $ | 7,926 |   |
|                                            |            |                             |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Securitiesmay be pledged to meet security requirements imposed as a condition to receiptof deposit of public funds and for other purposes.  At June 30, 2007, the carrying values ofsecurities pledged to secure public deposits and other purposes were $994,975or 10.4% of available for sale securities.

16

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*LoanPortfolio*

Thefollowing table sets forth the components of total net loans outstanding ineach category at the date indicated:

**LoanPortfolio Composition***(dollar amounts inthousands)*
| ** **                                        | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Loans**                                         |       |                        |       |                            |       |
| Commercial                                        |       | $                           | 45,406     |                            | $          | 41,726 |   |
| Real Estate -  Construction                       |       | 40,655                      |       | 28,126                          |       |
| Real Estate -  Other                              |       | 51,462                      |       | 62,298                          |       |
| Consumer                                          |       | 3,751                       |       | 4,705                           |       |
| **Total  Loans**                                  |       | 141,274                     |       | 136,855                         |       |
| Net Deferred  Loan Costs (Fees)                   |       | (247                        | )          | (352                            | )          |
| Allowance for  Loan Losses                        |       | (1,416                      | )          | (1,388                          | )          |
| **Net  Loans**                                    |       | $                           | 139,611    |                            | $          | 135,115 |   |
|                                              |       |                        |       |                            |       |
| **Commitments**                                   | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Standby Letters  of Credit                        |       | $                           | 2,852      |                            | $          | 2,012 |   |
| Undisbursed  Loans and Commitments to Grant Loans |       | 40,254                      |       | 48,768                          |       |
| **Total Commitments**                             |       | $                           | 43,106     |                            | $          | 50,780 |   |

 

Thefollowing table shows the maturity distribution of the fixed rate portion ofthe loan portfolio at June 30, 2007:

**Maturity Distribution of FixedRate Loans***(dollar amounts in thousands)*

|                             | ** ** | **3 Months  or Less** | ** ** | **Over 3 Months  through  12 Months** | ** ** | **Due after  one year  to five years** | ** ** | **Due after  five years** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| **Loans**                   |       |                            |       |                                                 |       |                                                       |       |                                |       |      |       |
|                        |       |                            |       |                                                 |       |                                                       |       |                                |       |      |       |
| Commercial                  |       | $                               | 1,351      |                                                 | $          | 516                                                        |       | $                                   | 546        |      | $          | 946 |   | $ | 3,359 |   |
| Real Estate -  Construction |       | 2,791                           |       | 988                                                  |       | 1,247                                                      |       | —                              |       | 5,026     |       |
| Real Estate -  Other        |       | 815                             |       | 317                                                  |       | 4,371                                                      |       | 6,047                               |       | 11,550    |       |
| Consumer                    |       | 383                             |       | 54                                                   |       | 475                                                        |       | 306                                 |       | 1,218     |       |
| Total Loans                 |       | $                               | 5,340      |                                                 | $          | 1,875                                                      |       | $                                   | 6,639      |      | $          | 7,299 |   | 21,153 |   |
| Loans on  Non-Accrual       |       |                            |       |                                                 |       |                                                       |       |                                |       | —    |       |
| Total Fixed Rate Loans      |       |                            |       |                                                 |       |                                                       |       |                                |       | $         | 21,153     |   |

 

17

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Thefollowing table shows the maturity distribution of the variable rate portion ofthe loan portfolio at June 30, 2007: 

**Maturity Distribution of Variable Rate Loans***(dollar amounts in thousands)*

|                             | ** ** | **3 Months  or Less** | ** ** | **Over 3 Months  through  12 Months** | ** ** | **Due after  one year  to five years** | ** ** | **Due after  five years** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| **Loans**                   |       |                            |       |                                                 |       |                                                       |       |                                |       |      |       |
|                        |       |                            |       |                                                 |       |                                                       |       |                                |       |      |       |
| Commercial                  |       | $                               | 31,895     |                                                 | $          | 5,165                                                      |       | $                                   | 4,720      |      | $          | — |   | $ | 41,780 |   |
| Real Estate -  Construction |       | 32,080                          |       | 367                                                  |       | 2,072                                                      |       | —                              |       | 34,519    |       |
| Real Estate -  Other        |       | 22,651                          |       | 4,806                                                |       | 10,284                                                     |       | 2,170                               |       | 39,911    |       |
| Consumer                    |       | 2,523                           |       | 10                                                   |       | —                                                     |       | —                              |       | 2,533     |       |
| Total Loans                 |       | $                               | 89,149     |                                                 | $          | 10,348                                                     |       | $                                   | 17,076     |      | $          | 2,170 |   | 118,743 |   |
| Loans on  Non-Accrual       |       |                            |       |                                                 |       |                                                       |       |                                |       | 1,378     |       |
| Total Variable Rate  Loans  |       |                            |       |                                                 |       |                                                       |       |                                |       | $         | 120,121    |   |

 

*Asset Quality*

Asof June 30, 2007, the Company had four loan relationships on non-accrualtotaling $1,378,000 and no loans 90 days or more past due and stillaccruing.  As of June 30, 2006 theCompany had no loans on non-accrual and no loans 90 day past due and stillaccruing.   As of December 31, 2006, thecompany had five loan relationships on non-accrual totaling $2,543,000 and noloans 90 days past due and still accruing.  The non-accrual loan relationships existing as of June 30, 2007 includetwo SBA guaranteed loan relationships. The two SBA guaranteed loan relationships totaling $267,000 have anon-guaranteed balance of $60,000.  Thetwo remaining loan relationships consist of one well collateralized landdevelopment loan totaling $1,110,000 and one unsecured credit card loantotaling $1,000.

Asof June 30, 2007 and December 31, 2006 the Company had no OREO or restructuredloans.  

*Provision for Credit Losses*

Managementof the Bank and the Bancorp believes that the allowance for credit losses isadequate.  The Bank has established amonitoring system for loans in order to identify impaired loans and potentialproblem loans and to permit periodic evaluation of impairment and adequacy ofthe allowance for credit losses in a timely manner.  The monitoring system and allowance forcredit losses methodology have evolved over a period of years, and loanclassifications have been incorporated into the determination of the allowancefor credit losses.  This monitoringsystem and allowance methodology includes a loan-by-loan analysis for allclassified loans as well as loss factors for the balance of the unclassifiedportfolio.  Classified loans are reviewedindividually to estimate the amount of probable losses that needs to beincluded in the allowance.  These reviewsinclude analysis of financial information as well as the 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. 

TheCompany made a $25,000 contribution to the allowance for credit losses for thesix months ended June 30, 2007 compared to $60,000 contribution having beenmade in the same period in 2006. Management believes that the allowance, which equals 1.00% of grossloans at June 30, 2007, is adequate to cover future losses.  The allowance for loan losses at December 31,2006 was 1.01% of gross loans.

18

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Thefollowing table summarizes, for the periods indicated, changes in the allowancefor credit losses arising from loans charged-off, recoveries on loanspreviously charged-off, and additions to the allowance which have been chargedto operating expenses and certain ratios relating to the allowance for creditlosses:

**Activity in the Allowance forCredit Losses***(dollar amounts in thousands)*

|                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Outstanding Net Loans:**                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Average for the Year                                                        |       | $                                | 141,852    |                           | $          | 140,216 |   | $ | 140,213 |   | $ | 137,419 |   |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| **Allowance for Credit Losses:**                                            | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of  period                                               |       | $                                | 1,414      |                           | $          | 1,224 |   | $ | 1,388 |   | $ | 1,183 |   |
| Actual Charge-Offs:                                                         |       |                             |       |                           |       |   |   |   |   |
| Commercial                                                                  |       | —                           |       | (1                             | )          | — |   | (1 | ) |
| Consumer                                                                    |       | —                           |       | —                         |       | — |   | — |   |
| Real Estate                                                                 |       | —                           |       | —                         |       | — |   | — |   |
| Total Charge-Offs                                                           |       | —                           |       | (1                             | )          | — |   | (1 | ) |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Adjustments to  Charge-Offs                                                 |       | 2                                |       | —                         |       | 2 |   | — |   |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Recoveries:                                                                 |       |                             |       |                           |       |   |   |   |   |
| Commercial                                                                  |       | —                           |       | —                         |       | — |   | — |   |
| Consumer                                                                    |       | —                           |       | 1                              |       | 1 |   | 2 |   |
| Real Estate                                                                 |       | —                           |       | —                         |       | — |   | — |   |
| Total Recoveries                                                            |       | —                           |       | 1                              |       | 1 |   | 2 |   |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| Net Loans Recovered  (Charged-Off)                                          |       | 2                                |       | —                         |       | 3 |   | 1 |   |
| Provision for Credit  Losses                                                |       | —                           |       | 20                             |       | 25 |   | 60 |   |
| Balance, end of period                                                      |       | $                                | 1,416      |                           | $          | 1,244 |   | $ | 1,416 |   | $ | 1,244 |   |
|                                                                        |       |                             |       |                           |       |   |   |   |   |
| **Ratios:**                                                                 | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Loans Charged-Off  to Average Loans                                     |       | 0.00                             | %          | 0.00                           | %          | 0.00 | % | 0.00 | % |
| Allowance for Loan  Losses to Total Loans                                   |       | 1.00                             | %          | 0.89                           | %          | 1.01 | % | 0.91 | % |
| Net Loans Recovered  (Charged-Off) to Beginning Allowance for Credit Losses |       | 0.14                             | %          | 0.00                           | %          | 0.22 | % | 0.08 | % |
| Net Loans Recovered  (Charged-Off) to Provision for Credit Losses           |       | 0.00                             | %          | 0.00                           | %          | 12.00 | % | 1.67 | % |

 

*Funding*

Depositsare our primary source of funds.  At June30, 2007, we had a deposit mix of 46.8% in time and savings deposits, 29.9% inmoney market and NOW deposits, and 23.3% in non-interest-bearing demanddeposits.  Our net interest income isenhanced by our percentage of non-interest-bearing deposits.  For a detailed review of the distribution ofour average deposits, please refer to the Average Rates and Balances table onpages 13 and 14.

19

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Thescheduled maturity distribution of our time deposits of $100,000 or greater, asof June 30, 2007, were as follows:

**MaturityDistribution of Time Deposits $100,000 and Greater**

*(dollar amounts in thousands)*

| Three months or less             |   | $      | 24,195 |   |
|----------------------------------|--------|--------|--------|--------|
| Over three months to  six months |   | 14,289 |   |
| Over six months to one  year     |   | 14,294 |   |
|                             |   | $      | 52,778 |   |

 

*Return on Equity and Assets*

Thefollowing table sets forth several key operating ratios for the six monthsended June 30, 2007 and 2006:

**Operating Ratios**

|                                                           | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30,**              | ** ** |
| ** **                                                | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Return on Average  Assets                                 |       | 0.58                           | %          | 0.73 | % |
| Return on Average  Equity                                 |       | 8.02                           | %          | 10.65 | % |
| Dividend Payout Ratio                                     |       | 0.00                           | %          | 0.00 | % |
| Average Stockholder’s Equity to Average Total Assets |       | 7.21                           | %          | 6.82 | % |

 

*Capital Resources*

Stockholders’ equity at June 30, 2007 was $13,582,000,compared to $12,711,000 at December 31, 2006, an increase of 6.8%.  Stockholders’ equity increased primarily fromnet income of $523,000.

The Company is required to meet certain minimumrisk-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 Tier1 capital divided by average total assets.

BothCoast Bancorp and the Bank maintain capital ratios above the Federal regulatoryguidelines for “well-capitalized” bank holding companies.  The ratios for the Bank are as follows:

**CapitalRatios**
| ** **                       | ** ** | ** **                   | ** ** | ** **             | ** ** | **Coast**                   | ** ** | **Coast**                       | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **National Bank** | ** ** | **National Bank**      | ** ** |
| ** **                       | ** ** | **Adequately**               | ** ** | **Well**               | ** ** | **As of**              | ** ** | **As of**                  | ** ** |
| ** **                       | ** ** | **Capitalized**              | ** ** | **Capitalized**        | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
| Total Risk-Based  Capital Ratio  |       | 8.00                         | %          | 10.00                  | %          | 12.75                       | %          | 12.50                           | %          |
| Tier 1 Risk-Based  Capital Ratio |       | 4.00                         | %          | 6.00                   | %          | 11.80                       | %          | 11.55                           | %          |
| Tier 1 Leverage Capital  Ratio   |       | 4.00                         | %          | 5.00                   | %          | 9.93                        | %          | 9.65                            | %          |

 

20

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The ratios for theBancorp are as follows:

**CapitalRatios**
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **Coast  Bancorp** | ** ** | **Coast  Bancorp**          | ** ** |
|----------------------------------|------------|------------------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **Adequately**               | ** ** | **Well**           | ** ** | **As of**              | ** ** | **As of** | ** ** |
| ** **                       | ** ** | **Capitalized**              | ** ** | **Capitalized**    | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
| Total Risk-Based  Capital Ratio  |       | 8.00                         | %          | 10.00              | %          | 12.92                       | %          | 12.56 | % |
| Tier 1 Risk-Based  Capital Ratio |       | 4.00                         | %          | 6.00               | %          | 11.66                       | %          | 11.15 | % |
| Tier 1 Leverage Capital Ratio    |       | 4.00                         | %          | 5.00               | %          | 9.65                        | %          | 9.33 | % |

 

*Liquidity*

Theobjective of the Company’s asset/liability strategy is to manage liquidity andinterest rate risk.  Ultimately,management seeks to monitor the safety and soundness of the Bank and itscapital base, while maintaining adequate net interest margins and spreads toprovide an appropriate return to the stockholders.  The Bank manages liquidity by maintaining amajority of its investment portfolio in federal funds sold and other liquidinvestments. The ratio of net loans to deposits, a key liquidity ratio, at June30, 2007 was 84.1%, as compared to 83.1% at December 31, 2006, which are withinacceptable liquidity levels for the Company.

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

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

*Evaluationof Disclosure and Procedures*

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our reports filed pursuantto the Securities Exchange Act of 1934, as amended (the “Exchange Act”), isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules, regulations and relatedforms, and that such information is accumulated and communicated to ourprincipal executive officer and principal financial officer, as appropriate, toallow timely decisions regarding required disclosure.

Based on their evaluation as of June 30, 2007 of the filing of thisForm 10-QSB, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that the Company’s disclosure controls and procedures areeffective to ensure that information required to be disclosed in the reportsthat the Company files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.

*Changes in Internal Controls*

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.

21

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**PART II — OTHER INFORMATION**

**ITEM 1 —LEGAL PROCEEDINGS**

Not applicable.

**ITEM 2 —****UNREGISTERED SALES OF SECURITIES AND USE OFPROCEEDS**

Not applicable.

**ITEM 3 —DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

(a)                                  CoastBancorp’s 2007 Annual Meeting of Shareholders was held on June 26, 2007 (the “Meeting”).  The Meeting involved the following proposals:

1.               Toelect nine (9) persons to the Board of Directors to serve until the next AnnualMeeting of Shareholders and until their successors are elected and havequalified.

2.               To approve theappointment of Vavrinek, Trine, Day & Co. LLP as independent publicaccountants for the Company’s 2007 fiscal year, and

(b)                                 Proxiesfor the meeting were solicited pursuant to Regulation 14A under the Securitiesand Exchange Act of 1934, as amended. There were no solicitations in opposition to management’s nominees aslisted in the proxy statement, and all such nominees were elected.

On Proposal No. 2 to approve the appointment ofVavrinek, Trine, Day & Co. LLP as independent public accountants for theCompany’s 2007 fiscal year, 465,862 shares voted in favor of approval, 1,084voted against approval, and 2,000 abstained, and there were zero (0) brokernon-votes.  Accordingly, Proposal No. 2was passed by the shareholders.

(c)                                  Therewas no settlement between the Company and any other person terminating anysolicitation subject to Rule 14a-11.

**ITEM 5 —OTHER INFORMATION**

Not applicable

**ITEM 6 —EXHIBITS**

(a)                                  EXHIBITS

Exhibit 11 - EARNINGS PER SHARE (see note 2under Item 1-Basis of Presentation on page 8 of this report)

Exhibit 31 - RULE 13a-14(a) CERTIFICATIONS

31.1                           Certificationof Chief Executive Officer

31.2                           Certificationof Chief Financial Officer

Exhibit 32 - SECTION 1350 CERTIFICATIONS

32.1                           Certificationof Chief Executive Officer

32.2                           Certificationof Chief Financial Officer

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###### **Signatures**

In accordance with the requirements of the ExchangeAct of 1934, the registrant has caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|                                                |   | COAST BANCORP                     |   |
|------------------------------------------------|--------|-----------------------------------|--------|
|                                           |   |                              |   |
|                                           |   |                              |   |
| Date:      August 14, 2007 |   | /s/ Jack C. Wauchope              |   |
|                                           |   | Jack C. Wauchope                  |   |
|                                           |   | Chairman of the Board             |   |
|                                           |   | President/Chief Executive Officer |   |
|                                           |   | (Principal Executive Officer)     |   |
|                                           |   |                              |   |
|                                           |   |                              |   |
| Date:      August 14, 2007 |   | /s/ Karan C. Pohl                 |   |
|                                           |   | Karan C. Pohl, CPA                |   |
|                                           |   | Senior Vice President             |   |
|                                           |   | Chief Financial Officer           |   |
|                                           |   | (Principal Financial Officer)     |   |

 

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