# **FORM 10-QSB**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20429**

 
| **(Mark One)**                                                                                                                                                                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                                                                            | **QUARTERLY REPORT UNDER SECTION  13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                  |   |   |
| **For the quarterly period ended September 30,  2004**                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                  |   |   |
| **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 Luis Obispo, CA 93401**                                     |
| (Address of principal executive offices)                                            |
|                                                                                |   |                              |
| **(805) 541-0400**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |                              |
| **Not applicable**                                                                  |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes:   ý    No:   o

 

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

 

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

Common Stock – As of September 30, 2004, there were647,700 shares of the issuer’s common stock outstanding.

 

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

 

 

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**FORWARDLOOKING STATEMENTS**

 

**CERTAINSTATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKINGINFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT 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 BUSINESS CONDITIONS,PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATE SENSITIVE DEPOSITS;OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMS FAILURES OR FRAUD;ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS;  CHANGES IN THE SECURITIES MARKETS AND RISKSASSOCIATED WITH THE WAR ON TERRORISM AND THE WAR IN IRAQ.**

 

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

 

**MOREOVER,WHEREVER PHRASES ARE USED SUCH AS OR SIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENTBELIEVES,” OR “MANAGEMENT CONSIDERS”, SUCH STATEMENTS ARE AS OF, AND BASED UPONTHE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TO CHANGE BY THEPASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTS ARESUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TOFORWARD-LOOKING STATEMENTS.**

 

2

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## **INDEX**

## **COAST BANCORP**

 

## **PARTI – FINANCIAL INFORMATION**

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

 

3

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**COAST BANCORP & SUBSIDIARY**

 

**ITEM I -FINANCIAL STATEMENTS**

 

Consolidated Balance Sheet (Unaudited)

 
| **(in thousands)**                                                                                                   | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                           |       |                    |       |                   |       |
| Cash and due from banks                                                                                              |       | $                       | 8,676      |                   | $          | 9,273 |   |
| Federal funds sold                                                                                                   |       | 20,125                  |       | 5,400                  |       |
| TOTAL CASH  AND CASH EQUIVALENTS                                                                                     |       | 28,801                  |       | 14,673                 |       |
|                                                                                                                 |       |                    |       |                   |       |
| Interest-bearing deposits                                                                                            |       | —                  |       | —                 |       |
|                                                                                                                 |       |                    |       |                   |       |
| Investment securities:                                                                                               |       |                    |       |                   |       |
| Securities held to maturity                                                                                          |       | —                  |       | —                 |       |
| Securities available for sale                                                                                        |       | 6,940                   |       | 12,073                 |       |
| TOTAL  INVESTMENT SECURITIES                                                                                         |       | 6,940                   |       | 12,073                 |       |
| Loans:                                                                                                               |       |                    |       |                   |       |
| Commercial                                                                                                           |       | 38,370                  |       | 28,244                 |       |
| Real estate - construction                                                                                           |       | 8,798                   |       | 13,501                 |       |
| Real estate - other                                                                                                  |       | 65,786                  |       | 62,282                 |       |
| Consumer                                                                                                             |       | 3,246                   |       | 3,849                  |       |
| TOTAL LOANS                                                                                                          |       | 116,200                 |       | 107,876                |       |
| Net deferred loan fees                                                                                               |       | (415                    | )          | (414                   | )          |
| Allowance for credit losses                                                                                          |       | (1,173                  | )          | (1,109                 | )          |
| NET LOANS                                                                                                            |       | 114,612                 |       | 106,353                |       |
| Premises and equipment                                                                                               |       | 8,541                   |       | 7,091                  |       |
| Deferred taxes                                                                                                       |       | 579                     |       | 367                    |       |
| Federal Reserve Bank and FHLB stock, at  cost                                                                        |       | 879                     |       | 415                    |       |
| Accrued interest and other assets                                                                                    |       | 1,674                   |       | 1,312                  |       |
| TOTAL ASSETS                                                                                                         |       | $                       | 162,026    |                   | $          | 142,284 |   |
|                                                                                                                 |       |                    |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                       |       |                    |       |                   |       |
| Deposits:                                                                                                            |       |                    |       |                   |       |
| Noninterest-bearing demand                                                                                           |       | $                       | 39,207     |                   | $          | 34,636 |   |
| Money market and NOW                                                                                                 |       | 40,039                  |       | 35,754                 |       |
| Savings                                                                                                              |       | 8,253                   |       | 7,015                  |       |
| Time deposits of $100,000 or more                                                                                    |       | 44,006                  |       | 32,412                 |       |
| Other time deposits                                                                                                  |       | 15,430                  |       | 18,206                 |       |
| TOTAL  DEPOSITS                                                                                                      |       | 146,935                 |       | 128,023                |       |
| Notes payable                                                                                                        |       | 111                     |       | 164                    |       |
| Junior subordinated securities                                                                                       |       | 5,155                   |       | 5,155                  |       |
| Other liabilities                                                                                                    |       | 124                     |       | 129                    |       |
| TOTAL LIABILITIES                                                                                                    |       | 152,325                 |       | 133,471                |       |
|                                                                                                                 |       |                    |       |                   |       |
| 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: 647,700 in 2004 and 638,300 in 2003 |       | 6,510                   |       | 6,407                  |       |
| Additional paid-in capital                                                                                           |       |                    |       |                   |       |
| Retained earnings                                                                                                    |       | 3,212                   |       | 2,375                  |       |
| Accumulated other comprehensive income -  net unrealized gains (losses) on available-for-sale securities        |       | (21                     | )          | 31                     |       |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                     |       | 9,701                   |       | 8,813                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                     |       | $                       | 162,026    |                   | $          | 142,284 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

4

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# **COAST BANCORP & SUBSIDIARY**

 

Statement ofOperations (unaudited)

(In Thousands, except for per share numbers)

 
| ** **                                           | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Interest income:                                     |       |                                          |       |                                         |       |   |   |   |   |
| Interest and fees on loans                           |       | $                                             | 1,940      |                                         | $          | 1,839 |   | $ | 5,805 |   | 5,276 |   |
| Interest on taxable securities                       |       | 41                                            |       | 45                                           |       | 132 |   | 84 |   |
| Interest on federal funds sold                       |       | 69                                            |       | 28                                           |       | 100 |   | 118 |   |
| Other interest income                                |       | 14                                            |       | 10                                           |       | 30 |   | 24 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Total interest income                                |       | 2,064                                         |       | 1,922                                        |       | 6,067 |   | 5,502 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Interest expense:                                    |       |                                          |       |                                         |       |   |   |   |   |
| Interest on money market and NOW accounts            |       | 81                                            |       | 52                                           |       | 196 |   | 184 |   |
| Interest on savings deposits                         |       | 11                                            |       | 15                                           |       | 36 |   | 41 |   |
| Interest on time deposits                            |       | 284                                           |       | 280                                          |       | 826 |   | 860 |   |
| Interest on other borrowings                         |       | 75                                            |       | 75                                           |       | 211 |   | 229 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Total interest expense                               |       | 451                                           |       | 422                                          |       | 1,269 |   | 1,314 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Net interest income                                  |       | 1,613                                         |       | 1,500                                        |       | 4,798 |   | 4,188 |   |
| Provision for loan losses                            |       | —                                        |       | 20                                           |       | 70 |   | 174 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Net interest income after provision for loan  losses |       | 1,613                                         |       | 1,480                                        |       | 4,728 |   | 4,014 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Noninterest income:                                  |       |                                          |       |                                         |       |   |   |   |   |
| Service charges on deposit accounts and  other       |       | 77                                            |       | 75                                           |       | 285 |   | 233 |   |
| Gain on sale of loans and servicing fees             |       | 90                                            |       | 238                                          |       | 621 |   | 583 |   |
| Gain on sale of securities                           |       | —                                        |       | —                                       |       | 43 |   | 0 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Total noninterest income                             |       | 167                                           |       | 313                                          |       | 949 |   | 816 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Noninterest expense:                                 |       |                                          |       |                                         |       |   |   |   |   |
| Salaries and benefits                                |       | 790                                           |       | 699                                          |       | 2,339 |   | 1,973 |   |
| Net occupancy expense (net of rental  income)        |       | 113                                           |       | 82                                           |       | 276 |   | 267 |   |
| Equipment expense                                    |       | 67                                            |       | 62                                           |       | 199 |   | 192 |   |
| Other expense                                        |       | 405                                           |       | 394                                          |       | 1,408 |   | 1,134 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Total noninterest expense                            |       | 1,375                                         |       | 1,237                                        |       | 4,222 |   | 3,566 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Income before taxes                                  |       | 405                                           |       | 556                                          |       | 1,455 |   | 1,264 |   |
| Income taxes                                         |       | 198                                           |       | 231                                          |       | 618 |   | 526 |   |
| Net income                                           |       | $                                             | 207        |                                         | $          | 325 |   | $ | 837 |   | $ | 738 |   |
|                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Earnings per share - Basic                           |       | $                                             | 0.33       |                                         | $          | 0.51 |   | $ | 1.32 |   | $ | 1.16 |   |
| Earnings per share - Diluted                         |       | $                                             | 0.30       |                                         | $          | 0.48 |   | $ | 1.20 |   | $ | 1.11 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

5

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**COAST BANCORP &SUBSIDIARY**

 

Statementof changes in Stockholders’ Equity

(In Thousands, Except Number of Shares)(Unaudited)

 
| ** **                                                                                 | ** ** | **Common Stock**      | ** ** | ** ** | ** ** | ** **                | ** ** | **Accumulated  Other** | ** ** | ** **                | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|---------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                                 | ** ** | **Number of  Shares** | ** ** | **Amount** | ** ** | **Comprehensive  Income** | ** ** | **Retained  Earnings** | ** ** | **Comprehensive  Income** | ** ** | **Total** | ** ** |
| **Balance at January  1, 2003**                                                            |       | 632,400               |       | $          | 6,324      |                      |       |                   | $          | 1,456                     |       | $ | 49 |   | $ | 7,829 |   |
| Exercise of stock options                                                                  |       | 5,900                 |       | 83         |       |                      |       |                   |       |                      |       | 83 |   |
| Cash dividends                                                                             |       |                  |       |       |       |                      |       | (63                    | )          |                      |       | (63 | ) |
| **Comprehensive  Income**                                                                  |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| Net income                                                                                 |       |                  |       |       |       |                      |       | 982                    |       |                      |       | 982 |   |
| Unrealized gain on available-for-sale  securities, net of taxes                            |       |                  |       |       |       |                      |       |                   |       | (3                        | )          | (3 | ) |
| Less reclassification  adjustments for gains (losses) included in net income, net of taxes |       |                  |       |       |       | (15                       | )          |                   |       | (15                       | )          | (15 | ) |
| **Total comprehensive income**                                                             |       |                  |       |       |       | $                         | (15        | )                      |       |                      |       |   |   |   |
|                                                                                       |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| **Balance at December  31, 2003**                                                          |       | 638,300               |       | $          | 6,407      |                      |       |                   | $          | 2,375                     |       | $ | 31 |   | $ | 8,813 |   |
| Exercise of stock options                                                                  |       | 9,400                 |       | 103        |       |                      |       |                   |       |                      |       | 103 |   |
| Cash dividends                                                                             |       |                  |       |       |       |                      |       |                   |       |                      |       | — |   |
| **Comprehensive  Income**                                                                  |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| Net income                                                                                 |       |                  |       |       |       | 837.00                    |       | 837                    |       |                      |       | 837 |   |
| Less reclassification adjustment  for gains (losses) included in net income; net of taxes  |       |                  |       |       |       | (25                       | )          |                   |       | (25                       | )          | (25 | ) |
| Unrealized gain (losses) on  available-for-sale securities, net of taxes                   |       |                  |       |       |       | (27                       | )          |                   |       | (27                       | )          | (27 | ) |
| **Total comprehensive income**                                                             |       |                  |       |       |       | $                         | 785        |                   |       |                      |       |   |   |   |
|                                                                                       |       |                  |       |       |       |                      |       |                   |       |                      |       |   |   |
| **Balance at  September 30, 2004**                                                         |       | 647,700               |       | $          | 6,510      |                      |       |                   | $          | 3,212                     |       | $ | (21 | ) | $ | 9,701 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

6

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# **COAST BANCORP & SUBSIDIARY**

 

Statementof Cash Flows (unaudited)

(In Thousands)

 
| ** **                                                                         | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
| Operating activities                                                               |       |                                         |       |   |   |
| Net income                                                                         |       | $                                            | 837        |   | $ | 738 |   |
| Adjustments to reconcile net  income to Net cash provided by operating activities: |       |                                         |       |   |   |
| Depreciation and amortization                                                      |       | 299                                          |       | 264 |   |
| Provision for loan losses                                                          |       | 70                                           |       | 174 |   |
| Realized gain on investment  securities                                            |       | (43                                          | )          | — |   |
| Other items - net                                                                  |       | (539                                         | )          | (88 | ) |
| Net cash provided by operating activities                                          |       | 624                                          |       | 1,088 |   |
|                                                                               |       |                                         |       |   |   |
| Investing activities                                                               |       |                                         |       |   |   |
| Proceeds from sale of investment  securities                                       |       | 5,094                                        |       | — |   |
| Maturities of investment  securities                                               |       | 2,000                                        |       | — |   |
| Purchase of investment  securities                                                 |       | (2,019                                       | )          | (10,093 | ) |
| Net change in loans                                                                |       | (8,329                                       | )          | (16,255 | ) |
| Increase in Federal Reserve Bank  and FHLB Stock                                   |       | (455                                         | )          | (125 | ) |
| Purchase of premises and  equipment                                                |       | (1,749                                       | )          | (1,010 | ) |
| Net cash provided (used) by investing activities                                   |       | (5,458                                       | )          | (27,483 | ) |
|                                                                               |       |                                         |       |   |   |
| Financing activities                                                               |       |                                         |       |   |   |
| Increase (decrease) in deposits                                                    |       | 18,912                                       |       | 17,783 |   |
| Principle payments on notes  payable                                               |       | (53                                          | )          | (52 | ) |
| Proceeds from exercise of  options                                                 |       | 103                                          |       | 13 |   |
| Net cash provided (used) by financing actvities                                    |       | 18,962                                       |       | 17,744 |   |
|                                                                               |       |                                         |       |   |   |
| Increase (decrease) in cash and cash equivalents                                   |       | 14,128                                       |       | (8,651 | ) |
|                                                                               |       |                                         |       |   |   |
| Cash and cash equivalents at  beginning of period                                  |       | 14,673                                       |       | 23,212 |   |
|                                                                               |       |                                         |       |   |   |
| Cash and cash equivalents at end  of period                                        |       | $                                            | 28,801     |   | $ | 14,561 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

7

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

 

The accompanying financial information has been prepared in accordancewith the Securities and Exchange Commission rules and regulations for quarterlyreporting and therefore does not necessarily include all information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles.  This information should be read inconjunction with the Company’s Annual Report for the year ended December 31,2003 filed on Form 10-KSB.

 

Operating results for interim periods are not necessarily indicative ofoperating results for an entire fiscal year. In the opinion of management, the unaudited financial information forthe three month and nine month period ended September 30, 2004 and 2003,reflect all adjustments, consisting only of normal recurring accruals andprovisions, necessary for a fair presentation thereof.

 

Some matters discussed in this Form 10-QSB may be “forward-lookingstatements” within the meaning of the Private Litigation Reform Act of 1995 andtherefore may involve risks, uncertainties and other factors which may causeour actual results to be materially different from the results expressed orimplied by our forward-looking statements. These statements generally appear with words such as “anticipate”, “believe”,“estimate”, “may”, “intend”, and “expect”.

 

# **Note 2**            BasisofEarnings Per Share

 

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

 
| ** **                                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **Shares**                                    | ** ** | **Shares**                                   | ** ** | **Shares** | ** ** | **Shares** | ** ** |
| Used in Basic EPS                             |       | 636,687                                       |       | 633,300                                      |       | 632,138 |   | 633,119 |   |
| Dilutive Effect of Outstanding Stock  Options |       | 64,654                                        |       | 41,864                                       |       | 66,853 |   | 34,315 |   |
| Earnings per share - Diluted                  |       | 701,341                                       |       | 675,164                                      |       | 698,991 |   | 667,434 |   |

 

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

 

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

 

8

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Had compensation costs for the Company’s stock option plans beendetermined based on the fair value at the grant dates for awards under thisplan consistent with the method of SFAS No. 123, the Company’s net income andearnings per share would have been reduced for 2004 and 2003 to the pro formaamounts indicated below:

 
| ** **                                                                                      | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                            |       |                                          |       |                                         |       |   |   |   |   |
| Net Income:                                                                                     |       |                                          |       |                                         |       |   |   |   |   |
| As reported                                                                                     |       | $                                             | 207        |                                         | $          | 325 |   | $ | 837 |   | $ | 738 |   |
| Stock-based compensation using the  intrinsic value method                                      |       | —                                        |       | —                                       |       | — |   | — |   |
| Stock-Based compensation that would have  been reported using the fair value method of SFAS 123 |       | (10                                           | )          | (11                                          | )          | (30 | ) | (34 | ) |
| Pro Forma net income                                                                            |       | $                                             | 197        |                                         | $          | 314 |   | $ | 807 |   | $ | 704 |   |
|                                                                                            |       |                                          |       |                                         |       |   |   |   |   |
| Basic earnings per share:                                                                       |       |                                          |       |                                         |       |   |   |   |   |
| As reported                                                                                     |       | $                                             | 0.33       |                                         | $          | 0.51 |   | $ | 1.32 |   | $ | 1.16 |   |
| Proforma                                                                                        |       | $                                             | 0.31       |                                         | $          | 0.50 |   | $ | 1.28 |   | $ | 1.11 |   |
|                                                                                            |       |                                          |       |                                         |       |   |   |   |   |
| Diluted earnings per share:                                                                     |       |                                          |       |                                         |       |   |   |   |   |
| As reported                                                                                     |       | $                                             | 0.30       |                                         | $          | 0.48 |   | $ | 1.20 |   | $ | 1.11 |   |
| Pro forma                                                                                       |       | $                                             | 0.28       |                                         | $          | 0.47 |   | $ | 1.15 |   | $ | 1.05 |   |

 

In March 2004, the Financial Accounting Standards Board (“FASB”)released an Exposure Draft that would replace SFAS No. 123.  Under the FASB proposal, all forms ofshare-based payments to employees, including employee stock options, would betreated the same as other forms of compensation by recognizing the related costin the income statement.  The commentperiod for the Exposure Draft ended June 30, 2004.

 

**Note 4            Current Accounting Pronouncements**

 

In November 2003, the Emerging Issues Task Force of the FASB reachedconsensus on Issue 03-1, “The meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments.” Issue 03-1 provides guidance in the recognition and measurement ofother-than-temporary impairment for debt and equity securities that are withinthe scope of SFAS 115, “Accounting for Certain Investments in Debt and EquitySecurities” and equity securities that are accounted for under the cost methodof accounting, or cost method investments. In September 2004 the FASB reconsidered the guidance for evaluatingwhether an investment is other-than-temporarily impaired should be applied inthe other-than-temporary impairment evaluations, and it is anticipated that theeffective date will be in late 2004 or 2005. Issue 03-1 also provides guidance on disclosure requirements forother-than-temporary impairments.  Thosedisclosure requirements were effective for fiscal years ending after December15, 2003.  We do not believe this willhave a material effect.

 

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

 

The unauditedfinancial statements have been prepared in accordance with the instructions toform 10-QSB and contain statements relating to future results of the Companythat are considered to be “forward looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995.  These statements relate to, among other things,credit loss reserve adequacy, and simulation of changes in interest rates andlitigation results.  Actual results maydiffer materially from those expressed or implied as a result of certain risksand uncertainties, including, but not limited to, changes in political andeconomic 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 ExchangeCommission.  Such forward-lookingstatements speak only as of the date on which such statements are made, and thecorporation undertakes no obligation to update any forward-looking statement toreflect events or circumstances after the date on which such statement is madeor to reflect the occurrence of unanticipated events.  The accompanying financial information shouldbe read in conjunction with Coast Bancorp’s Annual Report on Form 10-KSB forthe year ended December 31, 2003.

 

9

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Descriptionof Business

 

*Coast Bancorp*

 

CoastBancorp, headquartered in San Luis Obispo, California, is a Californiacorporation incorporated in 2001.  CoastBancorp became the bank holding company of Coast National Bank on May 31, 2001through a corporate reorganization.  Inthe reorganization, Coast National Bank became the wholly-owned subsidiary ofCoast Bancorp and the shareholders of the Bank became shareholders of CoastBancorp.  Coast Bancorp is operatedthrough a two-tiered corporate structure. At the holding company level the affairs of Coast Bancorp are overseenby a Board of Directors elected by the shareholders of Coast Bancorp at theannual meeting of shareholders.  Thebusiness of the Bank is overseen by a Board of Directors elected by CoastBancorp, the sole owner of the Bank.  Asof the date of this Form 10-QSB the respective members of the Board ofDirectors of the Bank and the Board of Directors of Coast Bancorp are identical.  Coast Bancorp is subject to the regulationsof, and examination by, the Board of Governors of the Federal ReserveSystem.  At present, Coast Bancorp doesnot engage in any material business activities other than the ownership of theBank.  Financial information presentedfor September 30, 2004 and comparative information for December 31, 2003 andSeptember 30, 2003 is inclusive of the consolidated Company.

 

*Coast National Bank*

 

CoastNational Bank was chartered June 16, 1997 (charter #23222) by The Office of theComptroller of the Currency as a national bank. The Bank commenced operations on that date with two offices, 16employees and $6,250,000 in capital.  Theoriginal branch offices were located at 486 Marsh Street, San Luis Obispo and1199 Grand Avenue, Arroyo Grande, California. Since that time, an additional branch office was opened in June 1998 at948 Morro Bay Boulevard in Morro Bay, California and another branch office wasopened in July 1999 at 1193 Los Osos Valley Road in Los Osos, California.  In July 2002, a loan production office wasopened at 930 South Broadway Street in Santa Maria, California and in May 2003the Bank opened another loan production office in Bakersfield.  In September 2004 the Morro Bay officevacated it’s facility at 948 Morro Bay Boulevard and moved into the newfacility at 898 Morro Bay Boulevard, Morro Bay, California. In July 2004 theSanta Maria loan production office moved to 301 So. Miller St., Ste 110, SantaMaria, California.

 

Whenthe Bank opened for business in June 1997, it purchased the real estate andbuilding that housed the Arroyo Grande branch office.  On October 14, 1999, the Bank purchased anadjacent lot next to the San Luis Obispo main office on Marsh Street.  A few months later on February 1, 2000, theBank also purchased the contiguous property and building that was home to theSan Luis Obispo main office at 486 Marsh Street.  Construction of a new head office building onthe adjacent lot began on October 11, 2001 and was completed on November 25,2002.  The new main office, located at 500Marsh Street is approximately 10,700 square feet with the San Luis Obispobranch operation occupying the ground floor and the administrative officesoccupying the second floor.  Originalmain office now houses the Bank’s Small Business Lending Center and the Bank’sNote Department.

 

OnMarch 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard inMorro Bay that is approximately one block from the existing branch.  The purpose for this acquisition was theeventual construction and relocation of the Morro Bay branch to a largerfacility with a drive-through lane. Construction began in the first quarter 2004 and was completed in August2004.  The branch is now operational.

 

Asof September 30, 2004, the Bank had a total of 64 employees.  A number of these employees work part-timehowever.  Part-time employees areconverted to full-time equivalent employees on the percentage of their weeklyhours worked compared to 40 hours.  On afull-time equivalent basis, employees represent 55 positions.  The Bank values its employees and believesthat it enjoys satisfactory working relations with them.  They are actively engaged individually and asa team in contributing to the Bank’s realization of its vision and mission.

 

**CriticalAccounting Policies**

 

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

 

10

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determination of the adequacyof its allowance for loan losses is particularly susceptible to management’sjudgment and estimates.  The following isa brief description of our current accounting policies involving significantmanagement valuation judgments.

 

*Allowance for Loan Losses*

 

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

 

Loansare considered impaired if, based on current information and events, it isprobable that we will be unable to collect the scheduled payments of principalor interest when due according to the contractual terms of the loanagreement.  The measurement of impairedloans is generally based on the present value of expected future cash flowsdiscounted at the historical effective interest rate stipulated in the loanagreement, except that all collateral-dependent loans are measured forimpairment based on the fair value of the collateral.  In measuring the fair value of thecollateral, management uses assumptions and methodologies consistent with thosethat would be utilized by unrelated third parties.

 

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

 

*Available for Sale Securities*

 

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

 

##### **Overview**

 

Asof September 30, 2004, total consolidated assets of Coast Bancorp were $162.0million in comparison to total assets of $142.2 million as of December 31, 2003.This represents an increase of $19.8 million, or 13.92%.  Compared to total assets of $140.2 million atSeptember 30, 2003, the Company has increased assets by $21.8 million, or15.5%, over the last twelve months.

 

For the three months ended September 30, 2004 the Bancorp reportedconsolidated net income of $207,000 or $0.30 diluted earnings per sharecompared to net income of $325,000 and $0.48 diluted earnings per share for thesame period during 2003.  For the ninemonths ended September 30, 2004 the Bancorp reported consolidated net income of$837,000 or $1.20 diluted earnings per share compared to consolidated netincome of $738,000 or $1.11 diluted earnings per share for the same period in2003.

 

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

 

Net interestincome is the amount by which the interest and amortization of fees generatedfrom loans and other earning assets exceed the cost of funding those assets,usually deposit account interest expense. Net interest income depends on the interest rate spread, or morespecifically on the difference between gross interest and fees earned on theloans and investment portfolios and the interest rates paid on deposits andborrowings.   Net interest income was$1,613,000 for the quarter ended September 30, 2004, compared to $1,500,000 forthe quarter ended September 30, 2003, representing an increase of 7.5%.  Net interest income was $4,798,000 for thenine months ended September 30, 2004, compared to $4,188,000 for the ninemonths ended September 30, 2003, representing an increase of 14.6%.  This increase was primarily the result of thesignificant loan growth generated by the Bank’s branches.

 

The following table sets forth the components of net interest income,average earning assets and net interest margin: (in thousands)

 

11

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| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2003** | ** ** |
|                   |       |                                  |       |                                 |       |                         |       |   |   |   |   |
| Interest Income        |       | $                                     | 2,064      |                                 | $          | 1,922                        |       | $ | 6,067 |   | $ | 5,502 |   | $ | 7,444 |   |
| Interest Expense       |       | 451                                   |       | 422                                  |       | 1,269                        |       | 1,314 |   | 1,413 |   |
|                   |       |                                  |       |                                 |       |                         |       |   |   |   |   |
| Net Interest Income    |       | $                                     | 1,613      |                                 | $          | 1,500                        |       | $ | 4,798 |   | $ | 4,188 |   | $ | 6,031 |   |
|                   |       |                                  |       |                                 |       |                         |       |   |   |   |   |
| Average Earning Assets |       | $                                     | 142,634    |                                 | $          | 122,132                      |       | $ | 135,080 |   | $ | 116,482 |   | $ | 120,807 |   |
| Net Interest Margin    |       | 4.52                                  | %          | 4.91                                 | %          | 4.74                         | %          | 4.79 | % | 4.99 | % |

 

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

 

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

 

The Bank made a $70,000 contribution to the allowancefor loan losses for the nine months ended September 30, 2004 compared to$174,000 for the same period in 2003. Management believes that the allowance, which equals 1.01% of totalloans at September 30, 2004, is adequate to cover future losses.  The allowance for loan losses at December 31,2003 was 1.03% of total loans.

 

Changes in theallowance for loan losses for the three months ended and the nine months endedSeptember 30, 2004 and 2003 are as follows (dollar amounts in thousands):

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Allowance, Beginning of Period        |       | $                                     | 1,177      |                                 | $          | 1,050 |   | $ | 1,109 |   | $ | 1,000 |   |
| Provision for Loan Losses             |       | 0                                     |       | 20                                   |       | 70 |   | 174 |   |
| Loans Charged Off - net of recoveries |       | (4                                    | )          | 3                                    |       | (6 | ) | (101 | ) |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Allowance, End of Period              |       | $                                     | 1,173      |                                 | $          | 1,073 |   | $ | 1,173 |   | $ | 1,073 |   |

 

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

 

Non-interestincome represents deposit account service charges and other types of feeincome.  Non-interest income for thethree months ended September 30, 2004 totaled $167,000 compared to $313,000 forthe same period in 2003 reflecting the decrease of $148,000 in mortgage loanrefinance fees for the quarter. Non-interest income for the nine months ended September 30, 2004 totaled$949,000 compared to $816,000 for the same period in 2003 representing a 16.3%increase.  Compared to the samenine-month period in 2003, the increases in non-interest income for 2004 havebeen due to increases in service charges of $52,000 on our growing portfolio ofdeposit accounts, increases in the amount of servicing fees and realized gainson the sale of the guaranteed portion of government-guaranteed loans totaling$38,000. Over the nine month period ending September 30, 2004, the Bank electedto realize $43,000 in gains from the sale of investment securities.

 

12

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

 

Non-interest expense represents salaries, occupancy expenses,professional expenses, outside services and other miscellaneous expensesnecessary to conduct business. Noninterest expense for the three months ended September 30, 2004totaled $1,375,000 compared to $1,237,000 for the same period in 2003 for anincrease of 11.2%.  Non-interest expensefor the nine months ended September 30, 2004 totaled $4,222,000 compared to$3,566,000 for the same period in 2003 for an increase of 18.4%.  This increase is primarily due to thecontinuing growth of the Bank’s government guaranteed lending departmentspecializing in Small Business Administration lending programs, the opening ofthe Bank’s new Morro Bay office building during the third quarter and theoverall expansion of the Bank’s customer base. Full time equivalent employeeson September 30, 2004 compared to September 30, 2003 were 55 and 51respectively, accounting for the increases due to salaries.

 

##### **Income Taxes**

 

The Companyrecorded a $198,000 tax provision during the three months ended September 30,2004 compared to $231,000 during the same period in 2003.  The Company recorded a $618,000 tax provisionfor the nine months ended September 30, 2004 compared to $526,000 during thesame period in 2003.

 

##### **Financial Condition**

 

*Balance Sheet Summary*

 

As of September 30, 2004, total consolidated assets ofCoast Bancorp were $162.0 million in comparison to total assets of $142.2million as of December 31, 2003. This represents an increase of $19.8 million,or 13.92%.  Compared to total assets of$140.2 million at September 30, 2003, the Company has increased assets by $21.8million, or 15.5%, over the last twelve months. These increases are the result of significant growth in non-interest-bearingdemand deposits, money-market and NOW accounts, as well as modest growth insavings and time deposit accounts.

 

The majority of the growth in deposits has beenreinvested in loans, which have increased by $8.8 million, or 8.2%, from $107.8million at September 30, 2003 to $116.2 million at September 30, 2004.  The balance of the deposit growth has beeninvested in short-term investment securities and in Fed Funds to fundcontinuing strong loan demand and to meet the ongoing liquidity needs of theBank.

 

*Earnings Summary*

 

Consolidated net income for the three months ended September 30, 2004was $207,000 or $0.30 diluted earnings per share compared to net income of$325,000 or $0.48 diluted earnings per share for the same period during 2003, adecrease of 36.30%.  Consolidated netincome for the nine months ended September 30, 2004 was $837,000 or $1.20diluted earnings per share compared to net income of $738,000 or $1.11 dilutedearnings per share for the same period during 2003, an increase of 13.41%.  The increase in earnings in 2004 as comparedto the same nine-month period in 2003 was primarily due to the increase in netinterest income resulting from the growth of the Bank’s earning assets.  This increase in net interest income wasstill attained in the face of increases in non-interest expenses such as thoseassociated with the opening of the Bank’s new head office building and the newMorro Bay office, the continuing expansion of the Bank’s Government Guaranteedlending department, and the payment of quarterly interest on the Company’sTrust Preferred borrowing.   The increasein short term rates has not had a material effect on net income.

 

##### **Asset Quality**

 

As of September 30, 2004, the Company had no loans onnon-accrual and no loans past due 90 days or more and still accruing.  As of September 30, 2003 the Company had oneloan on nonaccrual. As of December 31, 2003 the company had no loans onnon-accrual or loans 90 days past due and still accruing.  As of September 30, the Company has had noOREO or restructured loans during 2004 or 2003.

 

##### **Capital**

 

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

 

13

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Stockholders equity at September 30, 2004 was $9.7million, compared to $8.8 million at December 31, 2003.  Stockholders equity increased primarily fromnet income of $837,000.

 

The Company is required to meet certain minimum risk-based capitalguidelines and leverage ratios set by the bank regulatory authorities. Therisk-based capital standards establish capital requirements that are moresensitive to risk differences between various assets, consider off balancesheet activities in assessing capital adequacy, and minimize the disincentivesto holding liquid, low risk assets.  Theleverage ratio consists of tangible Tier I capital divided by average totalassets.

 

Coast Bancorp and Coast National Bank maintain capital ratios above theFederal regulatory guidelines for “well-capitalized” bank holdingcompanies.  The ratios for the Bank andBancorp are as follows:

 
| ** **                      | ** ** | **Regulatory Standard**       | ** ** | **Coast  Bancorp**      | ** ** | **Coast  Bancorp**               | ** ** |
|---------------------------------|------------|-------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **Adequately****Capitalized** | ** ** | **Well****Capitalized** | ** ** | **As of****September  30, 2004** | ** ** | **As of****December  31, 2003** | ** ** |
| Total risk-based capital ratio  |       | 8.00                          | %          | 10.00                   | %          | 11.32                            | %          | 13.00 | % |
| Tier 1 risk-based capital ratio |       | 4.00                          | %          | 6.00                    | %          | 13.93                            | %          | 10.20 | % |
| Tier 1 leverage capital ratio   |       | 4.00                          | %          | 5.00                    | %          | 7.93                             | %          | 8.92 | % |

 
| ** **                      | ** ** | **Regulatory  Standard**    | ** ** | **Coast  National Bank** | ** ** | **Coast  National Bank**      | ** ** |
|---------------------------------|------------|-----------------------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **Adequately  Capitalized** | ** ** | **Well  Capitalized**    | ** ** | **As of  September 30, 2004** | ** ** | **As of  December 31, 2003** | ** ** |
| Total risk-based capital ratio  |       | 8.00                        | %          | 10.00                    | %          | 12.21                         | %          | 12.51 | % |
| Tier 1 risk-based capital ratio |       | 4.00                        | %          | 6.00                     | %          | 11.28                         | %          | 11.54 | % |
| Tier 1 leverage capital ratio   |       | 4.00                        | %          | 5.00                     | %          | 8.92                          | %          | 9.49 | % |

 

**Liquidity**

 

The objectiveof liquidity management is to ensure the continuous availability of funds tomeet the demands of depositors, investors and borrowers.  Asset liquidity is primarily derived fromloan payments and the maturity of other earning assets.  Liquidity from liabilities is obtainedprimarily from the receipt of new deposits. The Bank’s Investment Committee is responsible for the managing of theon-and-off balance sheet commitments to meet the needs of customers whileachieving the Bank’s financial objectives.

 

Management isnot aware of any future capital expenditures or other significant demands oncommitments which would severely impair liquidity.  As of the nine months ended September 30,2004, the Bank had a loan-to-deposit ratio of 77.8%.

 

**Item 3.    Controlsand****Procedures**

 

Based on theirevaluation as of September 30, 2004, the Bancorp’s Chief Executive Officer andChief Financial Officer have concluded that the Bancorp’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed in the reports that the Bancorp files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.  There have been no significantchanges in the Bancorp’s internal controls or in other factors that couldsignificantly affect those controls subsequent to the date of their evaluation.

 

14

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**PART II– OTHER INFORMATION**

 

**ITEM 1 – LEGAL PROCEEDINGS**

 

Notapplicable.

 

**ITEM 2 – CHANGES INSECURITIES**

 

Notapplicable.

 

**ITEM 3 – DEFAULTS UPONSENIOR SECURITIES**

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 5 – OTHER INFORMATION**

 

Notapplicable.

 

**ITEM 6 – EXHIBITS**

 

EXHIBITS

 
| Exhibit  31 - | RULE  13a-14(a) CERTIFICATIONS |
|---------------|--------------------------------|
|          |                           |
|          | 31.1                           | Certification  of Chief Executive Officer |
|          | 31.2                           | Certification  of Chief Financial Officer |
|          |                           |   |
| Exhibit  32 - | SECTION  1350 CERTIFICATIONS   |
|          |                           |   |
|          | 32.1                           | Certification  of Chief Executive Officer |
|          | 32.2                           | Certification  of Chief Financial Officer |

 

15

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###### **Signatures**

 

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

 

 
|   |              | COAST BANCORP                                                                           |
|--------|-------------------|-----------------------------------------------------------------------------------------|
|   |              |                                                                                    |
|   |              |                                                                                    |
| Date:  | November 12, 2004 | /s/ Jack C. Wauchope                                                                    |   |
|   |              | Jack C. Wauchope                                                                        |
|   |              | Chairman of the Board  President/Chief Executive Officer  (Principal Executive Officer) |
|   |              |                                                                                    |
|   |              |                                                                                    |
| Date:  | November 12, 2004 | /s/ Berta F. Olson                                                                      |   |
|   |              | Senior Vice President                                                                   |
|   |              | Chief Financial Officer  (Principal Financial Officer)                                  |

 

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