**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20429**

# **FORM10-QSB**

| **(Mark One)**                                                                                                                                                                             |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                 |       |
| **x****QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                               |
| ** **                                                                                                                                                                                 | ** ** |
| **For the  quarterly period ended March 31, 2007**                                                                                                                                         |
| ** **                                                                                                                                                                                 | ** ** |
| **o****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                                                                                                                   |
| ** **                                                                                                                                                                                 | ** ** |
| **For the  transition period from               to              ** |
| ** **                                                                                                                                                                                 | ** ** |
| **Commission  File No. 000-32827**                                                                                                                                                         |

 

**COAST BANCORP**

(Exact name of Registration as Specified in its Charter)

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

 

**500 Marsh Street, San 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

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-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 May 1, 2007, there were 682,900 shares of the issuer’s commonstock outstanding.

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

 

 

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**FORWARD LOOKING 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 INFORMATIONCONTAINED IN THIS DOCUMENT SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THEBUSINESS PROSPECTS OF COAST BANCORP AND COAST NATIONAL BANK.**

**MOREOVER, WHEREVER PHRASES SUCHAS SIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENT BELIEVES,” OR “MANAGEMENTCONSIDERS” ARE USED, SUCH STATEMENTS ARE AS OF, AND BASED UPON THE KNOWLEDGE OFMANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGE BY THE PASSAGE OF TIMEAND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THESAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TO FORWARD-LOOKING STATEMENTS.**

## ** **

2

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## ** **

## **INDEX**

## **COAST BANCORP**

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

 

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**COASTBANCORP & SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS (unaudited)**

**March 31,2007 and December 31, 2006**
| **ITEM I - FINANCIAL STATEMENTS**                                            | ** **                                      | ** **               | ** ** | ** **                  | ** ** |
|--------------------------------------------------------------------------------------------------|-------------------------------------------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                       | ** **                                      | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| **ASSETS**                                                                                       |                                            |                     |       |                        |       |
| *(in thousands)*                                                                                 |                                            |                     |       |                        |       |
| Cash and due from banks                                                                          |                                            | $                        | 8,863      |                        | $          | 7,173 |   |
| Federal funds sold                                                                               |                                            | 13,800                   |       | 17,800                      |       |
| TOTAL CASH AND CASH  EQUIVALENTS                                                                 |                                            | 22,663                   |       | 24,973                      |       |
| ** **                                                                                       | ** **                                      | ** **               | ** ** | ** **                  | ** ** |
| Investment securities  available for sale                                                        |                                            | 7,953                    |       | 7,926                       |       |
|                                                                                             |                                            |                     |       |                        |       |
| Loans:                                                                                           |                                            |                     |       |                        |       |
| Commercial                                                                                       |                                            | 45,069                   |       | 41,726                      |       |
| Real estate -  construction                                                                      |                                            | 28,693                   |       | 28,126                      |       |
| Real estate - other                                                                              |                                            | 62,236                   |       | 62,298                      |       |
| Consumer                                                                                         |                                            | 4,915                    |       | 4,705                       |       |
|                                                                                             | TOTAL LOANS                                     |                     | 140,913    |                        | 136,855    |   |
| Net deferred loan fees                                                                           |                                            | (313                     | )          | (352                        | )          |
| Allowance for credit  losses                                                                     |                                            | (1,414                   | )          | (1,388                      | )          |
|                                                                                             | NET LOANS                                       |                     | 139,186    |                        | 135,115    |   |
| Premises and equipment                                                                           |                                            | 8,993                    |       | 9,740                       |       |
| Deferred taxes                                                                                   |                                            | 417                      |       | 472                         |       |
| Federal Reserve Bank  stock and Federal Home Loan Bank stock, at cost                            |                                            | 964                      |       | 946                         |       |
| Accrued interest and  other assets                                                               |                                            | 1,414                    |       | 1,567                       |       |
|                                                                                             | TOTAL ASSETS                                    |                     | $          | 181,590                     |       | $ | 180,739 |   |
|                                                                                             |                                            |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                    | ** **                                      | ** **               | ** ** | ** **                  | ** ** |
| Deposits:                                                                                        |                                            |                     |       |                        |       |
| Noninterest-bearing  demand                                                                      |                                            | $                        | 39,164     |                        | $          | 39,556 |   |
| Money market and NOW                                                                             |                                            | 49,225                   |       | 50,036                      |       |
| Savings                                                                                          |                                            | 7,081                    |       | 6,673                       |       |
| Time deposits of  $100,000 or more                                                               |                                            | 51,293                   |       | 50,709                      |       |
| Other time deposits                                                                              |                                            | 16,321                   |       | 15,556                      |       |
|                                                                                             | TOTAL DEPOSITS                                  |                     | 163,084    |                        | 162,530    |   |
| Junior subordinated  debt securities                                                             |                                            | 5,155                    |       | 5,155                       |       |
| Other liabilities                                                                                |                                            | 350                      |       | 343                         |       |
|                                                                                             | TOTAL LIABILITIES                               |                     | 168,589    |                        | 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:  682,900 in 2007 and 679,600 in 2006                                     |                                            | 7,082                    |       | 7,035                       |       |
| Additional paid-in  capital                                                                      |                                            | 90                       |       | 76                          |       |
| Retained earnings                                                                                |                                            | 5,827                    |       | 5,611                       |       |
| Accumulated other  comprehensive income - net unrealized losses on available-for-sale securities |                                            | 2                        |       | (11                         | )          |
|                                                                                             | TOTAL STOCKHOLDERS’ EQUITY                 |                     | 13,001     |                        | 12,711     |   |
|                                                                                             | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |                     | $          | 181,590                     |       | $ | 180,739 |   |
|                                                                                                  |                                                 |                          |            |                             |            |  |  |  |  |

 
| *The  accompanying notes are an integral part of these consolidated financial  statements* | * * |
|--------------------------------------------------------------------------------------------|----------|

 

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# **COAST BANCORP & SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOME (unaudited)**

**For theThree Months Ended March 31, 2007 and 2006**
| ** **                                        | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(In  thousands, except for per share numbers)** | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
|                                              |       |                                                               |       |   |   |
| Interest income:                                  |       |                                                               |       |   |   |
| Interest and fees on loans                        |       | $                                                                  | 3,091      |   | $ | 2,917 |   |
| Interest on investment securities                 |       | 87                                                                 |       | 56 |   |
| Interest on federal funds sold                    |       | 217                                                                |       | 242 |   |
| Other interest income                             |       | 26                                                                 |       | 8 |   |
|                                              |       |                                                               |       |   |   |
| TOTAL INTEREST INCOME                             |       | 3,421                                                              |       | 3,223 |   |
|                                              |       |                                                               |       |   |   |
| Interest  expense:                                |       |                                                               |       |   |   |
| Interest on money market and NOW accounts         |       | 418                                                                |       | 267 |   |
| Interest on savings deposits                      |       | 36                                                                 |       | 27 |   |
| Interest on time deposits                         |       | 795                                                                |       | 676 |   |
| Interest on junior subordinated debt securities   |       | 120                                                                |       | 109 |   |
| TOTAL INTEREST EXPENSE                            |       | 1,369                                                              |       | 1,079 |   |
|                                              |       |                                                               |       |   |   |
| Net interest income                               |       | 2,052                                                              |       | 2,144 |   |
| Provision for loan losses                         |       | 25                                                                 |       | 40 |   |
| NET INTEREST  INCOME AFTER PROVISION              |       |                                                               |       |   |   |
| FOR CREDIT  LOSSES                                |       | 2,027                                                              |       | 2,104 |   |
|                                              |       |                                                               |       |   |   |
| Noninterest  income:                              |       |                                                               |       |   |   |
| Service charges on deposit accounts and other     |       | 85                                                                 |       | 76 |   |
| Gain on sale of loans and servicing fees          |       | 36                                                                 |       | 129 |   |
| Mortgage packaging fees                           |       | 15                                                                 |       | — |   |
| Gain on sale of premises and equipment            |       | 1                                                                  |       | — |   |
|                                              |       |                                                               |       |   |   |
| TOTAL NONINTEREST INCOME                          |       | 137                                                                |       | 205 |   |
|                                              |       |                                                               |       |   |   |
| Noninterest  expense:                             |       |                                                               |       |   |   |
| Salaries and benefits                             |       | 975                                                                |       | 913 |   |
| Net occupancy expense (net of rental income)      |       | 129                                                                |       | 138 |   |
| Equipment expense                                 |       | 76                                                                 |       | 86 |   |
| Other expense                                     |       | 606                                                                |       | 633 |   |
|                                              |       |                                                               |       |   |   |
| TOTAL NONINTEREST EXPENSE                         |       | 1,786                                                              |       | 1,770 |   |
|                                              |       |                                                               |       |   |   |
| INCOME BEFORE TAXES                               |       | 378                                                                |       | 539 |   |
| Income taxes                                      |       | 162                                                                |       | 219 |   |
| NET INCOME                                        |       | $                                                                  | 216        |   | $ | 320 |   |
|                                              |       |                                                               |       |   |   |
| Per share data                                    |       |                                                               |       |   |   |
| Earnings per share - Basic                        |       | $                                                                  | 0.32       |   | $ | 0.47 |   |
| Earnings per  share - Diluted                     |       | $                                                                  | 0.30       |   | $ | 0.45 |   |

 
| *The  accompanying notes are an integral part of these consolidated financial  statements* | * * |
|--------------------------------------------------------------------------------------------|----------|

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# **COAST BANCORP & SUBSIDIARY**

**STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)**
| ** **                                                                     | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **    | ** ** | ** **           | ** ** | ** **             | ** ** | ** **                | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|---------------|------------|----------------------|------------|------------------------|------------|---------------------------|------------|------------|------------|
|                                                                                | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **    | ** ** | ** **           | ** ** | ** **             | ** ** | **Accumulated**           | ** ** | ** ** | ** ** |
| ** **                                                                     | ** ** | ** **                | ** ** | **Common Stock**      | ** ** | **Additonal** | ** ** | ** **           | ** ** | **Other**              | ** ** | ** **                | ** ** |
| **(In  thousands, except number of shares)**                                   | ** ** | **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 - no tax benefits                                   |       |                      |       | 3,300                      |       | 47            |       |                 |       |                   |       |                      |       | 47         |       |
| Stock-based  compensation expense                                              |       |                      |       |                       |       |          |       | 14                   |       |                   |       |                      |       | 14         |       |
| **Comprehensive Income**                                                       | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **    | ** ** | ** **           | ** ** | ** **             | ** ** | ** **                | ** ** | ** ** |       |
| Net income                                                                     |       | $                         | 216        |                       |       |          |       |                 |       |                   | 216        |                      |       |       | 216        |   |
| Unrealized loss  on available-for-sale securities, net of taxes of $9,017      |       | 13                        |       |                       |       |          |       |                 |       |                   |       | 13                        |       | 13         |       |
| **Total comprehensive income**                                                 |       | $                         | 1,672      |                       |       |          |       |                 |       |                   |       |                      |       |       |       |   |
| **Balance at March 31, 2007**                                                  |       |                      |       | 682,900                    |       | $             | 7,082      |                 | $          | 90                     |       | $                         | 5,827      |       | $          | 2 |   | $ | 13,001 |   |

 
| *The accompanying notes are an integral part of  these consolidated financial statements* |
|-------------------------------------------------------------------------------------------|

 

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# **COAST BANCORP & SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**

**For theThree Months Ended March 31, 2007 and 2006**
| ** **                                                         | ** **                                        | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------------|---------------------------------------------------|----------------------------------------------------|------------|
| ** **                                                         | ** **                                        | **March 31,**                                 | ** ** |
| **(In  thousands)**                                                | ** **                                        | **2007**                                           | ** ** | **2006** | ** ** |
| Operating activities:                                              |                                              |                                               |       |   |   |
| Net income                                                         |                                              | $                                                  | 216        |   | $ | 320 |   |
| Adjustments to reconcile net income to                             |                                              |                                               |       |   |   |
| Net cash provided by operating activities:                         |                                              |                                               |       |   |   |
| Depreciation and amortization                                      |                                              | 115                                                |       | 125 |   |
| Provision for credit losses                                        |                                              | 25                                                 |       | 40 |   |
| Stock-based compensation                                           |                                              | 14                                                 |       | 19 |   |
| Gain on sale of loans                                              |                                              | (14                                                | )          | (127 | ) |
| Other items - net                                                  |                                              | 245                                                |       | 96 |   |
|                                                               | NET CASH  PROVIDED BY OPERATING ACTIVITIES        |                                               | 601        |   | 473 |   |
|                                                               |                                              |                                               |       |   |   |
| Investing activities:                                              |                                              |                                               |       |   |   |
| Net increase in loans                                              |                                              | (4,363                                             | )          | (1,609 | ) |
| Proceeds from loans sold                                           |                                              | 243                                                |       | 1,516 |   |
| Proceeds of Federal Reserve Bank and Federal Home  Loan Bank stock |                                              | (18                                                | )          | — |   |
| Proceeds from sale of premises and equipment                       |                                              | 691                                                |       | — |   |
| Purchase of premises and equipment                                 |                                              | (65                                                | )          | (53 | ) |
|                                                               | NET CASH USED BY  INVESTING ACTIVITIES            |                                               | (3,512     | ) | (146 | ) |
|                                                               |                                              |                                               |       |   |   |
| Financing activities:                                              |                                              |                                               |       |   |   |
| Increase (decrease) in deposits                                    |                                              | 554                                                |       | (2,922 | ) |
| Principle payments on notes payable                                |                                              | —                                             |       | (45 | ) |
| Proceeds from exercise of options, including tax  benefits         |                                              | 47                                                 |       | 36 |   |
|                                                               | NET CASH  PROVIDED (USED) BY FINANCING ACTIVITIES |                                               | 601        |   | (2,931 | ) |
|                                                               |                                              |                                               |       |   |   |
|                                                               | INCREASE IN CASH  AND CASH EQUIVALENTS            |                                               | (2,310     | ) | (2,604 | ) |
|                                                               |                                              |                                               |       |   |   |
| Cash and cash  equivalents at beginning of period                  |                                              | 24,973                                             |       | 34,670 |   |
|                                                               |                                              |                                               |       |   |   |
|                                                               | Cash and cash  equivalents at end of period       |                                               | $          | 22,663 |   | $ | 32,066 |   |
|                                                                    |                                                   |                                                    |            |  |  |  |  |  |  |  |  |  |

 

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

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 information should be read in conjunction with theCompany’s Annual Report for the year ended December 31, 2006 filed on Form10-KSB.

Operating results forinterim periods are not necessarily indicative of operating results for anentire fiscal year. In the opinion of management, the unaudited financialinformation for the three month periods ended March 31, 2007 and 2006 reflectall adjustments, consisting only of normal recurring accruals and provisions,necessary for a fair presentation 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. These statements generally appear with words suchas “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 are computed bydividing income available to common shareholders by the weighted average numberof common shares outstanding during each period. The computation of dilutedearnings per share also considers the number of shares issuable upon theassumed exercise of outstanding common stock options. All earnings per commonshare amounts presented have been restated in accordance with the provisions ofthis statement.

**Earnings Per Share Detail**
|                                               | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **March 31,**                                 | ** ** |
| ** **                                    | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **Shares**                                         | ** ** | **Shares** | ** ** |
| Used in Basic  EPS                            |       | 680,790                                            |       | 674,573 |   |
| Dilutive Effect  of Outstanding Stock Options |       | 41,163                                             |       | 28,862 |   |
| Used in Earnings Per  Share - Diluted         |       | 721,953                                            |       | 703,435 |   |

 

**Note 3**      **Stock-Based Compensation**

InDecember 2004, Financial Accounting Standards Board (“FASB”) revised SFAS 123and issued under its new name,*“Share-Based Payment.”*Thisstatement eliminates the previously allowable alternative to use Opinion 25’sintrinsic value method of accounting. Instead, this Statement generallyrequires entities to recognize the cost of employee services received inexchange for awards of stock options, or other equity instruments, based on thegrant-date fair value of those awards. This cost is recognized over the periodduring which an employee is required to provide service in exchange for theaward, generally the vesting period.

TheCompany adopted this Statement in 2006 for all new stock option awards as wellas any existing awards that are modified, repurchased or cancelled. Inaddition, the unvested portion previously awarded options have also beenrecognized as expense during the first quarter of 2007. During the firstquarter of 2007, $13,602 was expensed by the Company for stock option relatedcompensation.

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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.

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 tax benefits realized from the exercise ofstock options as operating cash flows in the Statement of Cash Flows. Therewere no excess tax benefits for the first quarter of 2007.

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

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.”*Thestatement 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 statementas if January 1, 2007. Management does not expect that the adoption of this newstandard will have a material impact on the Company’s financial position,results of operations or cash flows.

InJune 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes*.” Thisinterpretation applies to all tax positions accounted for in accordance withSFAS No. 109, *“Accounting for Income Taxes.”*FIN48 clarifies 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 theinterpretation as of January 1, 2007. Management does not expect that theadoption of this new interpretation will have a material impact on the Company’sfinancial position, results of operations or cash flows.

 In September 2006, the FASB issuedSFAS No. 157*, “Fair Value Measurements.”*SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS No. 157 is effectivefor 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 anentity to measure certain financial assets and financial liabilities at fairvalue. The Standard’s objective is to improve financial reporting by allowingentities to mitigate volatility in reported earnings caused by the measurementof related assets and liabilities using different attributes, without having toapply complex hedge accounting provisions. The Standard becomes effective as ofthe beginning of the fiscal year that begins after November 15, 2007. Earlyadoption is allowed, within 120 days after the first day of the fiscal year, aslong as the requirements of SFAS 157 are met either currently or prior to theadoption of SFAS 159. The Company has chosen not to implement the earlyadoption of SFAS 159 and is currently assessing the impact the adoption of thestandard will have on its consolidated financial statements.

9

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#### **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. This report contains statements relating to future results of theCompany that are considered to be “forward looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995. Thesestatements relate to, among other things, credit loss reserve adequacy, andsimulation of changes in interest rates and litigation results. Actual resultsmay differ materially from those expressed or implied as a result of certainrisks and uncertainties, including, but not limited to, changes in politicaland economic conditions, interest rate fluctuations, competitive product andpricing pressures within the Company’s markets, equity and fixed income marketfluctuations, personal and corporate customers’ bankruptcies, inflation,acquisitions and integrations of acquired businesses, technological change,changes in law, changes in fiscal, monetary, regulatory and tax policies,monetary fluctuations, political and global changes arising from the terroristattacks of September 11, 2001 as well as the war in Iraq and its aftermath,success in gaining regulatory approvals when required as well as other risksand uncertainties detailed elsewhere in this quarterly report or from time totime in the filings of the Company with the Securities Exchange Commission. Suchforward-looking statements speak only as of the date on which such statementsare made, and the corporation undertakes no obligation to update anyforward-looking statement to reflect events or circumstances after the date onwhich such statement is made or to reflect the occurrence of unanticipatedevents. The accompanying financial information should be read in conjunctionwith Coast Bancorp’s Annual Report on Form 10-KSB for the year ended December31, 2006.

**Descriptionof Business**

*Coast Bancorp*

Coast Bancorp headquartered in San Luis Obispo,California, is a California corporation incorporated in 2001. Coast Bancorpbecame the bank holding company of Coast National Bank on May 31, 2001 througha corporate reorganization. In the reorganization, Coast National Bank becamethe wholly-owned subsidiary of Coast Bancorp and the shareholders of the Bankbecame shareholders of Coast Bancorp. Coast Bancorp is operated through atwo-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 theBank is overseen by a Board of Directors elected by Coast Bancorp, the soleowner of the Bank. As of the date of this Form 10-QSB the respective members ofthe Board of Directors of the Bank and the Board of Directors of Coast Bancorpare identical. Coast Bancorp is subject to the regulations of, and examinationby, the Board of Governors of the Federal Reserve System. At present, CoastBancorp does not engage in any material business activities other than theownership of the Bank. Financial information presented herein for March 31,2007 and comparative information for December 31, 2006 and March 31, 2006 isinclusive of the consolidated Company.

*Coast National Bank*

TheBank was chartered June 16, 1997 (charter #23222) by The Office of the Comptrollerof 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 branchoffices were located at 486 Marsh Street, San Luis Obispo and 1199 GrandAvenue, Arroyo Grande, California. Since that time, additional branch officeswere opened in June 1998 at 948 Morro Bay Boulevard in Morro Bay, California,in July 1999 at 1193 Los Osos Valley Road in Los Osos, California and mostrecently in March 2005 at 2138 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, theBank purchased an adjacent lot next to the San Luis Obispo main office on MarshStreet. A few months later on February 1, 2000, the Bank also purchased thecontiguous property and building that was home to the San Luis Obispo mainoffice at 486 Marsh Street. Construction of a new head office building on theadjacent lot began on October 11, 2001 and was completed on November 25, 2002. Thenew main office, located at 500 Marsh Street is approximately 10,700 squarefeet with the San Luis Obispo branch operation occupying the ground floor andthe administrative offices occupying the second floor. Half of the originalmain office

10

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at 486 MarshStreet now houses the Bank’s Small Business Lending Center and the Bank’s NoteDepartment while the other half is leased to various businesses.

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 purposefor this acquisition was the eventual construction and relocation of the MorroBay branch to a larger facility with a drive-through lane. In October 2003construction began on the new Morro Bay facility which was completed andoccupied in August 2004. The branch consists of approximately 2700 square feetwith 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 also purchased a lot at 2045 Spring Street, PasoRobles, California with the intention of relocating the Paso Robles branch. However,the lot was not adequate for the relocation of the branch and on October 26,2006, the Bank purchased a new lot at 2110 Spring St, Paso Robles, California. TheBank intends to relocate the Paso Robles branch to this larger lot, sometime inthe future. On March 20, 2007, the lot at 2045 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 theBank could more efficiently, and just as effectively, serve our Santa BarbaraCounty customers from our San Luis Obispo SBA office, and as of April 1, 2007the Santa Maria lease was terminated. In October 2004 a loan production officewas opened in Santa Barbara, California at 15 West Carrillo Street, Ste. 252. Theoriginal lease on this facility expired and the office was closed in September2005. In June 2005, the Bank opened a new loan production office at 7429 N.First St., Ste. 104, Fresno, California. In July of 2006, the Fresno office wasrelocated to 466 W. Fallbrook Ave., #109, Fresno, California.

Asof March 31, 2006, the Bank had a total of 75 employees. A number of theseemployees are part-time however. Part-time employees are converted to full-timeequivalent employees on the percentage of their weekly hours worked compared to40 hours. On a full-time equivalent basis, employees represent 66 positions. TheBank values its employees. They are actively engaged individually and as a teamin contributing to the Bank’s realization of its vision and mission.

**Critical Accounting Policies**

Ouraccounting policies are integral to understanding the results reported. Inpreparing its consolidated financial statements, the Company is required tomake judgments and estimates that may have a significant impact upon itsfinancial results. Certain accounting policies require the Company to makesignificant estimates and assumptions, which have a material impact on thecarrying value of certain assets and liabilities, and are considered criticalaccounting policies. The estimates and assumptions used are based on thehistorical experiences and other factors, which are believed to be reasonableunder the circumstances. Actual results could differ significantly from theseestimates and assumptions, which could have a material impact on the carryingvalue of assets and liabilities at the balance sheet dates and results ofoperations for the reporting periods. For example, the Company’s determinationof the adequacy of its allowance for credit losses is particularly susceptibleto management’s judgment and estimates. The following is a brief description ofour current accounting policies involving significant management valuationjudgments.

*Allowance for Credit Losses*

Theallowance for credit losses represents management’s best estimate of lossesinherent in the existing loan portfolio. The allowance for loan losses isincreased by the provision for loan losses charged to expense and reduced byloans charged off, net of recoveries. The allowance for loan losses isdetermined based on management’s assessment of several factors: reviews andevaluation of individual loans, changes in the nature and volume of the loanportfolio, current economic conditions and the related impact on specificborrowers and industry groups, historical loan loss experiences and the levelsof classified and nonperforming loans.

11

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Loansare considered impaired if, based on current information and events, it isprobable that we will be unable to collect the scheduled payments of principalor interest when due according to the contractual terms of the loan agreement. Themeasurement of impaired loans is generally based on the present value ofexpected future cash flows discounted at the historical effective interest ratestipulated in the loan agreement, except that all collateral-dependent loansare measured for impairment based on the fair value of the collateral. Inmeasuring the fair value of the collateral, management uses assumptions andmethodologies consistent with those that would be utilized by unrelated thirdparties.

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

*Available for Sale Securities*

Availablefor sale securities are reported at fair market value. The fair market value isbased on quoted market prices. If quoted market prices are not available, fairvalues are extrapolated from the quoted prices of 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 valuationallowance is established to reduce the deferred tax asset to the level at whichit is “more likely than not” that the tax asset or benefits will be realized. Realizationof tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriatecharacter within the carry forward periods.

##### **Overview**

*Earnings Summary*

Consolidated net income for the three months endedMarch 31, 2007 was $216,000 or $0.30 diluted earnings per share compared to netincome of $320,000 or $0.45 diluted earnings per share for the same periodduring 2006 a 32.5% decrease. The decrease in net income was primarily due tosmaller gains resulting from the sale of the guaranteed portion of governmentguaranteed loans and an increase of interest expense.

*BalanceSheet Summary*

Asof March 31, 2007, total consolidated assets of Coast Bancorp were $181.6million in comparison to total assets of $180.7 million as of December 31,2006. This represents an increase of $900,000, or 0.5%. The increase in assetswas funded by an increase in savings accounts and time deposits. Compared tototal assets of $183.0 million at March 31, 2006, assets have decreased by $1.4million, or 0.77%, over the last twelve months. The decrease was primarily theresult of a decrease in time deposits over $100,000. Over the last year, theCompany has strategically reduced the amount of time deposits over $100,000 asa percentage of total deposits while remaining competitive with customers thathave existing relationships with the Company.

TheBank has continued to grow its loan portfolio. Gross loans as of March 31, 2007were $140.9 million in comparison to total loans of $136.9 million as ofDecember 31, 2006. This represents an increase of $4.0 million, or 2.9%. Comparedto total loans of $133.9 million at March 31, 2006, the Company has increasedloans by $7.0 million, or 5.2%, over the last twelve months. The loan portfoliohas grown as a result of continued strong loan demand in the Bank’s market areaand the Bank has drawn on Fed funds to fund this growth.

Totaldeposits as of March 31, 2007 were $163.1 million in comparison to totaldeposits of $162.5 million as of December 31, 2006. This represents an increaseof $600,000, or 0.37%. Compared to total deposits of $166.0 million at March31, 2006, deposits have decreased by $2.9 million, or 1.8%, over the lasttwelve months. This decrease is due to the Company’s strategic realignment ofits deposit portfolio.

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**Earnings Analysis**

##### *Net Interest Income*

A significantcomponent of the Bank’s earnings is from net interest income. Net interestincome is the amount by which the interest and amortization of fees generated fromloans and other earning assets exceed the cost of funding those assets, usuallydeposit account interest expense. Net interest income depends on the differencebetween gross interest and fees earned on the loans and investment portfoliosand the interest rates paid on deposits and borrowings (the “interest ratespread”). Net interest income after the provision for credit losses was$2,027,000 for the quarter ended March 31, 2007, compared to $2,104,000 for thequarter ended March 31, 2006, representing a decrease of 3.7%. This decreasewas primarily the result of an increase in interest rates paid, especially inthe NOW and money market accounts. The percentage change in the averageinterest rate paid on deposits did increase faster than the percentage changein the average interest rates earned on loans for the three months ended March31, 2007 as compared to the three months ended March 31, 2006. However, thiswas somewhat offset by an increase in loans as compared to the decrease indeposits for the same time periods.

Thefollowing tables present, for the three months ended March 31, 2007 and 2006,the distribution of average assets, liabilities and shareholders’ equity. Inaddition, the total amounts of interest income from average interest-earning assetsand the resultant yields, and the dollar amounts of interest expense andaverage interest-bearing liabilities, expressed both in dollars and in ratesare also presented. Non-accrual loans are included in the calculation of theaverage balances of loans, and interest not accrued is excluded.

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**Average Rates and Balances**

*(dollaramounts in thousands)*
| ** **                                       | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                       | ** ** | **March 31, 2007**                       | ** ** | **March 31, 2006** | ** ** |
| ** **                                       | ** ** | ** **                                         | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Average**                                        | ** ** | **Earned** | ** ** | **Yield or** | ** ** | **Average** | ** ** | **Earned** | ** ** | **Yield or** | ** ** |
| ** **                                       | ** ** | **Balance**                                        | ** ** | **or Paid** | ** ** | **Rate Paid** | ** ** | **Balance** | ** ** | **or Paid** | ** ** | **Rate Paid** | ** ** |
| **Assets**                                       | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-Earning  Assets:                        |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Investment  Securities                           |       | $                                                  | 7,929      |   | $ | 87 |   | 4.45 | % | $ | 7,872 |   | $ | 56 |   | 2.89 | % |
| Federal Funds  Sold                              |       | 16,797                                             |       | 217 |   | 5.24 | % | 21,988 |   | 242 |   | 4.46 | % |
| Other Earning  Assets                            |       | 955                                                |       | 26 |   | 11.04 | % | 923 |   | 8 |   | 3.52 | % |
| Loans                                            |       | 137,926                                            |       | 3,091 |   | 9.09 | % | 133,756 |   | 2,917 |   | 8.84 | % |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Total Interest-Earning  Assets                   |       | 163,607                                            |       | 3,421 |   | 8.48 | % | 164,539 |   | 3,223 |   | 7.94 | % |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Cash and Due from Bank                           |       | 6,682                                              |       |   |   |   |   | 8,076 |   |   |   |   |   |
| Premises and Equipment                           |       | 9,672                                              |       |   |   |   |   | 8,272 |   |   |   |   |   |
| Other Real Estate Owned                          |       | —                                             |       |   |   |   |   | — |   |   |   |   |   |
| Accrued Interest and  Other Assets               |       | 1,911                                              |       |   |   |   |   | 1,697 |   |   |   |   |   |
| Allowance For Loan  Losses                       |       | (1,389                                             | )          |   |   |   |   | (1,194 | ) |   |   |   |   |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |       | $                                                  | 180,483    |   |   |   |   |   | $ | 181,390 |   |   |   |   |   |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’  Equity**   | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-Bearing  Liabilities:                   |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Money Market and  NOW:                           |       | $                                                  | 50,458     |   | $ | 418 |   | 3.36 | % | $ | 44,033 |   | $ | 267 |   | 2.46 | % |
| Savings                                          |       | 6,820                                              |       | 36 |   | 2.14 | % | 8,365 |   | 27 |   | 1.31 | % |
| Time Deposits  under $100,000                    |       | 15,915                                             |       | 181 |   | 4.61 | % | 15,490 |   | 129 |   | 3.38 | % |
| Time Deposits of  $100,000 or More               |       | 50,908                                             |       | 614 |   | 4.89 | % | 57,093 |   | 547 |   | 3.89 | % |
| Trust Preferred  Securities                      |       | 5,155                                              |       | 120 |   | 9.44 | % | 5,155 |   | 109 |   | 8.58 | % |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Total Interest-Bearing  Liabilities              |       | 129,256                                            |       | 1,369 |   | 4.30 | % | 130,136 |   | 1,079 |   | 3.36 | % |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Non-Interest Bearing  Liabilities                |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Demand Deposits                                  |       | 37,819                                             |       |   |   |   |   | 39,328 |   |   |   |   |   |
| Other  Liabilities                               |       | 552                                                |       |   |   |   |   | 491 |   |   |   |   |   |
| Stockholders’  Equity                       |       | 12,856                                             |       |   |   |   |   | 11,435 |   |   |   |   |   |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Total Liabilities and  Stockholders’ Equity |       | $                                                  | 180,483    |   |   |   |   |   | $ | 181,390 |   |   |   |   |   |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest Income                              |       |                                               |       | $ | 2,052 |   |   |   |   |   | $ | 2,144 |   |   |   |
|                                             |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Net Yield on  Interest-Earning Assets            |       |                                               |       |   |   | 5.09 | % |   |   |   |   | 5.28 | % |
| *(Net  Interest Margin)*                         | * *   | * *                                           | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |

 

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 changes in the yields we earn oninterest-earning assets and rates we pay on interest-bearing deposits and otherborrowed funds, referred to as a “rate change.”

Thefollowing table sets forth changes in interest income and interest expense foreach major category of interest-earning asset and interest-bearing depositaccounts, and the amount of change attributable to volume and rate changes forthe three months ended March 31, 2007 and 2006. Changes not solely attributableto rate or volume have been allocated to volume and rate changes in proportionto the relationship of the absolute dollar amounts of the changes in each.

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**Rate/Volume Analysis**

*(dollaramounts in thousands)*
| ** **                        | ** ** | **Three Months Ended March 31, 2007**          | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **compared to the**                                           | ** ** |
| ** **                        | ** ** | **Three Months Ended March 31, 2006**          | ** ** |
| ** **                        | ** ** | **Increase (Decrease) in interest income and** | ** ** |
| ** **                        | ** ** | **expense due to change in:**                       | ** ** |
| ** **                        | ** ** | **Volume**                                                              | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest-Earning Assets:**      | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment  Securities            |       | $                                                                       | 4          |   | $ | 27 |   | $ | 31 |   |
| Federal Funds  Sold               |       | (211                                                                    | )          | 186 |   | (25 | ) |
| Other Earning  Assets             |       | —                                                                  |       | 18 |   | 18 |   |
| Loans                             |       | 92                                                                      |       | 82 |   | 174 |   |
| Total Interest  Income            |       | (115                                                                    | )          | 313 |   | 198 |   |
|                              |       |                                                                    |       |   |   |   |   |
| **Interest-Bearing Liabilities:** | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction  Accounts             |       | 3                                                                       |       | 148 |   | 151 |   |
| Savings                           |       | —                                                                  |       | 9 |   | 9 |   |
| Time Deposits                     |       | 3                                                                       |       | 49 |   | 52 |   |
| Time Deposits  $100,000 or more   |       | 6                                                                       |       | 61 |   | 67 |   |
| Trust Preferred                   |       | 0                                                                       |       | 11 |   | 11 |   |
| Total Interest  Expense           |       | 12                                                                      |       | 278 |   | 290 |   |
|                              |       |                                                                    |       |   |   |   |   |
| Net Interest  Income              |       | $                                                                       | (128       | ) | $ | 36 |   | $ | (92 | ) |

 

Interestexpense was $1,369,000 for the quarter ended March 31, 2007 compared to$1,079,000 for the quarter ended March 31, 2006, representing an increase of26.9%. This increase reflects higher interest rates paid on all interest bearingaccounts which is offset by decreased volume.

 The net interest margin is the ratio of netinterest income to average earning assets. This ratio is useful in allowing theCompany to monitor the spread between interest income and interest expense betweenreporting periods irrespective of the growth of the Company’s assets. The netinterest margin decreased 19 basis points to 5.09% for the quarter ended March31, 2007 as compared to 5.28% for the quarter ended March 31, 2006. Thisdecrease was primarily due to the higher rates paid on all interest bearingaccounts.

##### *Non-interest Income*

Non-interest income represents deposit account service charges, othertypes of fee income and gains on the sales of loans and securities. Non-interestincome for the quarter ended March 31, 2007 totaled $137,000 compared to$205,000 for the same period in 2006 a 33.2% decrease. This decrease wassubstantially due to selling fewer guaranteed portions of government guaranteedloans. While the volume of lending in the Small Business AdministrationDepartment has decreased, the Bank has still realized gains from the sale ofthe guaranteed portions that have been sold.

##### *Non-interest Expense*

Non-interestexpense represents salaries, occupancy expenses, professional expenses, outsideservices and other miscellaneous expenses necessary to conduct business. Non-interestexpense for the quarter ended March 31, 2007 totaled $1,786,000 compared to$1,770,000 for the same period in 2006 for an increase of 0.9%. This increaseis substantially due to an increase in salaries and employee benefits. Thenumber of full time equivalent employees was 66 in March 2007 compared to 63for March 2006. The continuing growth of the loan portfolio contributed to theincrease.

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##### *Income Taxes*

Due to the Company’s lower net income before taxes of $378,000 for thequarter ended March 31, 2007 as compared $539,000 for the same period in 2006,the Company recorded a lower tax provision. The tax provision for the firstquarter of 2007 was $162,000 as compared to $219,000 during the same period in2006.

##### **BalanceSheet Analysis**

*InvestmentPortfolio*

The followingtable summarizes the amounts and distribution of our investment securities heldas of the dates indicated, and the weighted average yields as of March 31, 2007:

**Maturity Distribution of InvestmentSecurities**

*(dollaramounts in thousands)*
| ** **                                 | ** ** | **March 31, 2007** | ** ** | **Deecember 31, 2006** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | ** **                   | ** ** | ** **                       | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Book**                     | ** ** | **Market**                       | ** ** | **Average** | ** ** | **Book** | ** ** | **Market** | ** ** |
| ** **                                 | ** ** | **Value**                    | ** ** | **Value**                        | ** ** | **Yield** | ** ** | **Value** | ** ** | **Value** | ** ** |
| **Available-for-Sale Securities**          | ** ** | ** **                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **U.S.  Treasuries**                       |       | —                       |       | —                           |       | — |   | — |   | — |   |
|                                       |       |                         |       |                             |       |   |   |   |   |   |   |
| **U.S.  Government and Agency Securities** | ** ** | ** **                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Within One Year                            |       | 3,977                        |       | 3,978                            |       | 3.61 | % | 2,985 |   | 2,972 |   |
| One to Five  Years                         |       | 3,973                        |       | 3,975                            |       | 4.51 | % | 4,960 |   | 4,954 |   |
| Five to Ten  Years                         |       | —                       |       | —                           |       | 0 | % | — |   | — |   |
| After Ten Years                            |       | —                       |       | —                           |       | 0 | % | — |   | — |   |
| Total U.S.  Treasury and Government        |       |                         |       |                             |       |   |   |   |   |   |   |
| Agency  Securities                         |       | 7,950                        |       | 7,953                            |       | 4.06 | % | 7,945 |   | 7,926 |   |
| **Mutual  Funds**                          |       | —                       |       | —                           |       | 0 | % | — |   | — |   |
| **Mortgage  Backed Securities**            |       | —                       |       | —                           |       | 0 | % | — |   | — |   |
| **Total  Available-for-Sale Securities**   | ** ** | **$**                        | **7,950**  | ** **                       | **$**      | **7,953** | ** ** | **4.06** | **%** | $ | 7,945 |   | $ | 7,926 |   |
|                                            |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

Securities may bepledged to meet security requirements imposed as a condition to receipt ofdeposit of public funds and for other purposes. At March 31, 2007, the bookvalue of securities pledged to secure public deposits and other purposes was$994,008 or 12.5% of available for sale securities.

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*LoanPortfolio*

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

**Loan Portfolio Composition**

*(dollaramounts in thousands)*
|                                                   | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Loans**                                         | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Commercial loans                                  |       | $                            | 45,069     |                            | $          | 41,726 |   |
| Real Estate -  Construction                       |       | 28,693                       |       | 28,126                          |       |
| Real Estate - Other                               |       | 62,236                       |       | 62,298                          |       |
| Consumer loans                                    |       | 4,915                        |       | 4,705                           |       |
| Other                                             |       | —                       |       | —                          |       |
| **Total loans**                                   | ** ** | 140,913                      |       | 136,855                         |       |
| Net Deferred Loan Costs  (Fees)                   |       | (313                         | )          | (352                            | )          |
| Allowance for Loan  Losses                        |       | (1,414                       | )          | (1,388                          | )          |
| **Net Loans**                                     | ** ** | $                            | 139,186    |                            | $          | 135,115 |   |
|                                              |       |                         |       |                            |       |
| **Commitments**                                   | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Standby Letters of  Credit                        |       | $                            | 2,858      |                            | $          | 2,012 |   |
| Undisbursed Loans and  Commitments to Grant Loans |       | 62,187                       |       | 48,768                          |       |
| **Total Commitments**                             |       | $                            | 65,045     |                            | $          | 50,780 |   |

 

##### *Asset Quality*

Asof March 31, 2007, the Company had five loan relationships on non-accrual of$2,345,708 and no loans 90 days or more past due and still accruing. As ofMarch 31, 2006 the Company had one loan on non-accrual for $4,651 and no loans90 day past due and still accruing. As of December 31, 2006, the company hadfive loans on non-accrual totaling $2,543,000 and no loans 90 days past due andstill accruing.  The non-accrual loanrelationships existing as of March 31, 2007 consist of four SBA guaranteedloans. All of these loans are well collateralized.

Asof March 31, 2007 and 2006 the Company had no OREO or restructured loans.

##### *Provision for Credit Losses*

Managementof the Bank and the Company believes that the allowance for credit losses isadequate. The Bank has established a monitoring system for loans in order toidentify impaired loans and potential problem loans and to permit periodicevaluation of impairment and adequacy of the allowance for loan losses in atimely manner. The monitoring system and allowance for loan losses methodologyhave evolved over a period of years, and loan classifications have beenincorporated into the determination of the allowance for loan losses. Thismonitoring system and allowance methodology includes a loan-by-loan analysisfor all classified loans as well as loss factors for the balance of theunclassified portfolio. Classified loans are reviewed individually to estimatethe amount of probable losses that needs to be included in the allowance. Thesereviews include analysis of financial information as well as evaluation ofcollateral securing the credit. Loss factors on the unclassified portion of theportfolio are based on such factors as historical loss experience, currentportfolio delinquency and trends, and other inherent risk factors such aseconomic conditions, concentrations in the portfolio, risk levels of particularloan categories, internal loan review and management oversight.

TheCompany made a contribution to the allowance for loan losses for the threemonths ended March 31, 2007 of $25,000 as compared to no contributions made forthe same period in 2006. Management believes that the allowance, which equals1.02% of net loans at March 31, 2007, is adequate to cover future losses. Theallowance for loan losses at December 31, 2006 was 1.01% of gross loans.

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The following table summarizes, for the quarter ended March 31, 2007and 2006, changes in the allowance for loan losses arising from loanscharged-off, recoveries on loans previously charged-off, and additions to theallowance which have been charged to operating expenses:

**Activity in the Allowance for LoanLosses**

*(dollar amounts in thousands)*
|                                                                           | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Outstanding  Net Loans**                                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Average for the Year                                                      |       | $                                | 138,558    |   | $ | 135,122 |   |
|                                                                      |       |                             |       |   |   |
| **Allowance  for Loan Losses:**                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Balance,  beginning of period                                             |       | $                                | 1,388      |   | $ | 1,183 |   |
| Actual  Charge-Offs:                                                      |       |                             |       |   |   |
| Commercial                                                                |       | —                           |       | — |   |
| Consumer                                                                  |       | —                           |       | — |   |
| Real Estate                                                               |       | —                           |       | — |   |
| Total  Charge-Offs                                                        |       | —                           |       | — |   |
|                                                                      |       |                             |       |   |   |
| Less Recoveries:                                                          |       |                             |       |   |   |
| Commercial                                                                |       | —                           |       | 1 |   |
| Consumer                                                                  |       | 1                                |       | — |   |
| Real Estate                                                               |       | —                           |       | — |   |
| Total Recoveries                                                          |       | 1                                |       | 1 |   |
|                                                                      |       |                             |       |   |   |
| Net Loans  Recovered (Charged-Off)                                        |       | 1                                |       | 1 |   |
| Provision for  Loan Losses                                                |       | 25                               |       | 40 |   |
| Balance, end of  period                                                   |       | $                                | 1,414      |   | $ | 1,224 |   |
|                                                                      |       |                             |       |   |   |
| **Ratios:**                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net Loans Charged-Off  to Average Loans                                   |       | 0.00                             | %          | 0.00 | % |
| Allowance for  Loan Losses to Net Loans                                   |       | 1.02                             | %          | 0.91 | % |
| Net Loans  Recovered (Charged-Off) to Beginning Allowance for Loan Losses |       | 0.07                             | %          | 0.08 | % |
| Net Loans  Recovered (Charged-Off) to Provision for Loan Losses           |       | 4.00                             | %          | 2.50 | % |
| Allowance for Loan  Losses to Non-performing Loans                        |       | 61.67                            | %          | 24480.00 | % |

 

*Funding*

Depositsare our primary source of funds. At March 31, 2007, we had a deposit mix of45.8% in time and savings deposits, 30.2% in money market and NOW deposits, and24.0% in non-interest-bearing demand deposits. Our net interest income isenhanced by our percentage of non-interest-bearing deposits.

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*Return on Equity and Assets*

Thefollowing table sets forth several key operating ratios for the three monthsended March 31, 2007 and 2006:

**Operating Ratios**
|                                                            | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Return on  Average Assets                                  |       | 0.49                             | %          | 0.72 | % |
| Return on  Average Equity                                  |       | 6.81                             | %          | 11.35 | % |
| Dividend Payout  Ratio                                     |       | 0.00                             | %          | 0.00 | % |
| Average Stockholder’s  Equity to Average Total Assets |       | 7.12                             | %          | 6.30 | % |

 

##### *Capital Resources*

Stockholders equity at March 31, 2007 was $13.0million, compared to $12.7 at December 31, 2006. Stockholders equity increasedprimarily from net income of $216,000.

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 consistsof tangible Tier 1 capital divided by average total assets.

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

**CapitalRatios**
| ** **                       | ** ** | ** **                   | ** ** | ** **             | ** ** | **Coast**                    | ** ** | **Coast**                       | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **National Bank** | ** ** | **National Bank**       | ** ** |
| ** **                       | ** ** | **Adequately**               | ** ** | **Well**               | ** ** | **As of**               | ** ** | **As of**                  | ** ** |
| ** **                       | ** ** | **Capitalized**              | ** ** | **Capitalized**        | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| Total risk-based  capital ratio  |       | 8.00%                        |       | 10.00%                 |       | 12.50%                       |       | 12.50%                          |       |
| Tier 1  risk-based capital ratio |       | 4.00%                        |       |  6.00%            |       | 11.55%                       |       | 11.55%                          |       |
| Tier 1 leverage capital  ratio   |       | 4.00%                        |       |  5.00%            |       |  9.91%                  |       |  9.65%                     |       |

 
| ** **                       | ** ** | ** **                   | ** ** | ** **      | ** ** | **Coast**                    | ** ** | **Coast**                       | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **Bancorp**     | ** ** | **Bancorp**                  | ** ** |
| ** **                       | ** ** | **Adequately**               | ** ** | **Well**        | ** ** | **As of**               | ** ** | **As of**                  | ** ** |
| ** **                       | ** ** | **Capitalized**              | ** ** | **Capitalized** | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| Total risk-based  capital ratio  |       | 8.00%                        |       | 10.00%          |       | 12.65%                       |       | 12.56%                          |       |
| Tier 1  risk-based capital ratio |       | 4.00%                        |       |  6.00%     |       | 11.24%                       |       | 11.15%                          |       |
| Tier 1 leverage capital  ratio   |       | 4.00%                        |       |  5.00%     |       |  9.55%                  |       |  9.33%                     |       |

 

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*Liquidity*

Theobjective of the Company’s asset/liability strategy is to manage liquidity andinterest rate risk. Ultimately, management seeks to monitor the safety andsoundness of the Bank and its capital base, while maintaining adequate netinterest margins and spreads to provide an appropriate return to thestockholders. The Bank manages liquidity by maintaining a majority of itsinvestment portfolio in federal funds sold and other liquid investments. Theratio of net loans to deposits, a key liquidity ratio, at March 31, 2007 was85.4%, as compared to 83.1% at December 31, 2006, which are within acceptableliquidity levels for the Company.

Management is not aware of any future capital expenditures or othersignificant demands on commitments which would severely impair liquidity.

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

*Evaluation of 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 March 31, 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.

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**PART II – OTHER INFORMATION**

**ITEM 1 –LEGAL PROCEEDINGS**

Not applicable.

**ITEM 2 –UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

Notapplicable.

**ITEM 3 –DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

Not applicable

**ITEM 5 –OTHER INFORMATION**

Not applicable.

**ITEM 6 –EXHIBITS**

(a)   EXHIBITS

Exhibit 10.1 - Paso Robles Property Sale Agreement

Exhibit 11 -   EARNINGS PER SHARE (See Note 2 under Item 1 – Basis of Presentation onpage 8 of this report)

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

31.1    Certification of Chief Executive Officer

31.2    Certification of ChiefFinancial Officer

Exhibit 32 -    SECTION 1350CERTIFICATIONS

32.1    Certification of Chief Executive Officer

32.2    Certification of ChiefFinancial 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:  | May 15, 2007                       | /s/Jack C. Wauchope |   |
|   | Jack C. Wauchope                   |
|   | President/Chief  Executive Officer |
|   | Chairman of the  Board             |
|   | (Principal  Executive Officer)     |
|   |                               |
|   |                               |
| Date:  | May 15, 2007                       | /s/Karan C. Pohl |   |
|   | Karan C. Pohl,  CPA                |
|   | Senior Vice  President             |
|   | Chief Financial  Officer           |
|   | (Principal  Financial Officer)     |
|        |                                    |  |  |  |

 

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