**FORM 10-QSB**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20429**

**(Mark One)**
| **x****  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                            | ** ** | ** ** |
| **For the  quarterly period ended September 30, 2006**                                                                                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                                                                                            | ** ** | ** ** |
| **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

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

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

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

CommonStock – As of October 26, 2006, there were 676,100 shares of the issuer’scommon stock outstanding.

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

 

 

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**FORWARDLOOKING STATEMENTS**

**CERTAINSTATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKINGINFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, ASAMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,AND ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS.  THESE FORWARD-LOOKING STATEMENTS INVOLVECERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFERMATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.  SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARENOT LIMITED TO, THE FOLLOWING FACTORS: COMPETITIVE PRESSURE IN THE BANKINGINDUSTRY INCREASES SIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENTREDUCE MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS ADETERIORATION IN CREDIT QUALITY AND AN INCREASE IN THE PROVISION FOR POSSIBLELOAN LOSSES; CHANGES IN THE REGULATORY ENVIRONMENT; CHANGES IN BUSINESSCONDITIONS, PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATESENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMSFAILURES OR FRAUD; ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS;  CHANGES IN THE SECURITIES MARKETS; THEABILITY TO SATISFY THE REQUIREMENTS OF THE SARBANES-OXLEY ACT AND OTHERREGULATIONS GOVERNING INTERNAL CONTROLS; AND POTENTIAL ECOMONMIC EFFECT OF THEWAR ON TERRORISM AND THE WAR IN IRAQ AND AFGHANISTAN.**

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

**MOREOVER,WHEREVER PHRASES 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**

| **PART I – FINANCIAL  INFORMATION**                                                                       |       |
|----------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                           |       |
| **Item 1  – Financial Statements**                                                                        |       |
|                                                                                                           |       |
| Consolidated Balance Sheets                                                                                    |       |
| Statements of Operations                                                                                       |       |
| Statement of Changes in Stockholders’ Equity                                                              |       |
| Consolidated Statements 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 Loan  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 Securities and Use of Proceeds                                            |       |
| Item 3 –  Defaults upon Senior Securities                                                                 |       |
| Item 4 –  Submission of Matters to a Vote of Security Holders                                             |       |
| Item 5 – Other  Information                                                                               |       |
| Item  6 – Exhibits                                                                                        |       |
|                                                                                                           |       |
| **SIGNATURES**                                                                                                 |       |

 

3

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**COAST BANCORP & SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS(unaudited)**

**September30, 2006 and December 31, 2005**

**PART I – FINANCIAL INFORMATION**

 
| ** **                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands)**                                                                                                | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                   |       |                   |       |                  |       |
| Cash and due from banks                                                                                                |       | $                      | 8,889      |                  | $          | 9,770 |   |
| Federal funds sold                                                                                                     |       | 8,400                  |       | 24,900                |       |
| TOTAL CASH AND  CASH EQUIVALENTS                                                                                       |       | 17,289                 |       | 34,670                |       |
| ** **                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Investment securities available for sale                                                                               |       | 6,968                  |       | 7,872                 |       |
|                                                                                                                   |       |                   |       |                  |       |
| Loans:                                                                                                                 |       |                   |       |                  |       |
| Commercial                                                                                                             |       | 38,706                 |       | 29,491                |       |
| Real estate -  construction                                                                                            |       | 33,375                 |       | 25,213                |       |
| Real estate - other                                                                                                    |       | 67,346                 |       | 76,092                |       |
| Consumer                                                                                                               |       | 5,376                  |       | 2,866                 |       |
| Other                                                                                                                  |       | —                 |       | 29                    |       |
| TOTAL LOANS                                                                                                            |       | 144,803                |       | 133,691               |       |
| Net deferred loan fees                                                                                                 |       | (458                   | )          | (460                  | )          |
| Allowance for credit losses                                                                                            |       | (1,301                 | )          | (1,183                | )          |
| NET LOANS                                                                                                              |       | 143,044                |       | 132,048               |       |
| Premises and equipment                                                                                                 |       | 8,112                  |       | 8,314                 |       |
| Deferred taxes                                                                                                         |       | 345                    |       | 329                   |       |
| Federal Reserve Bank and FHLB stock, at cost                                                                           |       | 946                    |       | 923                   |       |
| Accrued interest and other assets                                                                                      |       | 1,599                  |       | 1,568                 |       |
| TOTAL ASSETS                                                                                                           |       | $                      | 178,303    |                  | $          | 185,724 |   |
|                                                                                                                   |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Deposits:                                                                                                              |       |                   |       |                  |       |
| Noninterest-bearing  demand                                                                                            |       | $                      | 38,291     |                  | $          | 40,583 |   |
| Money market and NOW                                                                                                   |       | 50,720                 |       | 45,092                |       |
| Savings                                                                                                                |       | 6,871                  |       | 8,856                 |       |
| Time deposits of  $100,000 or more                                                                                     |       | 49,793                 |       | 58,984                |       |
| Other time deposits                                                                                                    |       | 14,588                 |       | 15,434                |       |
| TOTAL DEPOSITS                                                                                                         |       | 160,263                |       | 168,949               |       |
| Notes payable                                                                                                          |       | —                 |       | 45                    |       |
| Junior subordinated  securities                                                                                        |       | 5,155                  |       | 5,155                 |       |
| Other liabilities                                                                                                      |       | 374                    |       | 332                   |       |
| TOTAL LIABILITIES                                                                                                      |       | 165,792                |       | 174,481               |       |
|                                                                                                                   |       |                   |       |                  |       |
| 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: 676,100 in 2006 and 674,100 in 2005 |       | 7,042                  |       | 6,950                 |       |
| Retained earnings                                                                                                      |       | 5,491                  |       | 4,373                 |       |
| Accumulated other  comprehensive income - net unrealized losses on available-for-sale securities                       |       | (22                    | )          | (80                   | )          |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                       |       | 12,511                 |       | 11,243                |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                       |       | $                      | 178,303    |                  | $          | 185,724 |   |

 

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

4

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**COAST BANCORP & SUBSIDIARY**

**STATEMENTSOF OPERATIONS (unaudited)**

**For thePeriods ended September 30, 2006 and 2005**
| ** **                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **(In  thousands, except for per share numbers)**      | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Interest income:                                       |       |                                               |       |                                              |       |   |   |   |   |
| Interest and  fees on loans                            |       | $                                                  | 3,453      |                                              | $          | 2,682 |   | $ | 9,569 |   | $ | 7,300 |   |
| Interest on  investment securities                     |       | 57                                                 |       | 77                                                |       | 165 |   | 238 |   |
| Interest on  federal funds sold                        |       | 136                                                |       | 145                                               |       | 582 |   | 296 |   |
| Other interest  income                                 |       | 17                                                 |       | 13                                                |       | 47 |   | 40 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| TOTAL INTEREST INCOME                                  |       | 3,663                                              |       | 2,917                                             |       | 10,363 |   | 7,874 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Interest expense:                                      |       |                                               |       |                                              |       |   |   |   |   |
| Interest on  money market and NOW accounts             |       | 382                                                |       | 181                                               |       | 992 |   | 427 |   |
| Interest on  savings deposits                          |       | 35                                                 |       | 22                                                |       | 93 |   | 55 |   |
| Interest on time  deposits                             |       | 715                                                |       | 598                                               |       | 2,084 |   | 1,355 |   |
| Interest on junior  subordinated debt securities       |       | 125                                                |       | 99                                                |       | 351 |   | 277 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| TOTAL INTEREST EXPENSE                                 |       | 1,257                                              |       | 900                                               |       | 3,520 |   | 2,114 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Net interest  income                                   |       | 2,406                                              |       | 2,017                                             |       | 6,843 |   | 5,760 |   |
| Provision for credit  losses                           |       | 56                                                 |       | 20                                                |       | 116 |   | 20 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| NET INTEREST  INCOME AFTER PROVISION FOR CREDIT LOSSES |       | 2,350                                              |       | 1,997                                             |       | 6,727 |   | 5,740 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Noninterest income:                                    |       |                                               |       |                                              |       |   |   |   |   |
| Service charges  on deposit accounts and other         |       | 114                                                |       | 50                                                |       | 280 |   | 175 |   |
| Gain on sale of  loans and net servicing fees          |       | 104                                                |       | (9                                                | )          | 250 |   | 98 |   |
| Gain on sale of  premises and equipment                |       | 15                                                 |       | 5                                                 |       | 15 |   | 47 |   |
| Gain on sale of  securities                            |       | —                                             |       | —                                            |       | — |   | 5 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| TOTAL NONINTEREST  INCOME                              |       | 233                                                |       | 46                                                |       | 545 |   | 325 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Noninterest  expense:                                  |       |                                               |       |                                              |       |   |   |   |   |
| Salaries and  benefits                                 |       | 985                                                |       | 835                                               |       | 2,860 |   | 2,502 |   |
| Net occupancy  expense (net of rental income)          |       | 104                                                |       | 126                                               |       | 367 |   | 363 |   |
| Equipment  expense                                     |       | 77                                                 |       | 81                                                |       | 246 |   | 243 |   |
| Other expense                                          |       | 634                                                |       | 519                                               |       | 1,927 |   | 1,489 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| TOTAL NONINTEREST  EXPENSE                             |       | 1,800                                              |       | 1,561                                             |       | 5,400 |   | 4,597 |   |
|                                                   |       |                                               |       |                                              |       |   |   |   |   |
| INCOME BEFORE TAXES                                    |       | 783                                                |       | 482                                               |       | 1,872 |   | 1,468 |   |
| Income taxes                                           |       | 318                                                |       | 234                                               |       | 754 |   | 692 |   |
| NET INCOME                                             |       | $                                                  | 465        |                                              | $          | 248 |   | $ | 1,118 |   | $ | 776 |   |
| Per share data:                                        |       |                                               |       |                                              |       |   |   |   |   |
| Earnings per  share - Basic                            |       | $                                                  | 0.69       |                                              | $          | 0.37 |   | $ | 1.65 |   | $ | 1.16 |   |
| Earnings per share -  Diluted                          |       | $                                                  | 0.66       |                                              | $          | 0.35 |   | $ | 1.59 |   | $ | 1.09 |   |

*The accompanying notes are an integral part ofthese consolidated financial statements*

5

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**COAST BANCORP & SUBSIDIARY**

**STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY(unaudited)**

 
| ** **                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                          | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **        | ** ** | **Other**    | ** ** | ** **        | ** ** |
| ** **                                                                          | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| **(In  thousands, except number of Shares)**                                        | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Income**        | ** ** | **Total**  | ** ** |
| **Balance  at January 1, 2005**                                                     |       | 652,700               |       | $          | 6,641      |              |       |         | $          | 3,393             |       | $          | (61        | ) | $ | 9,973 |   |
| Exercise of  stock options, including the realization of tax benefits of $22,417    |       | 21,400                |       | 309        |       |              |       |         |       |              |       | 309        |       |
| Cash dividends                                                                      |       |                  |       |       |       |              |       | (118         | )          |              |       | (118       | )          |
| **Comprehensive Income**                                                            |       |                  |       |       |       |              |       |         |       |              |       |       |       |
| Net income                                                                          |       |                  |       |       |       | $                 | 1,098      |         | 1,098      |              |       |       | 1,098      |   |
| Unrealized  losses on available-for-sale securities, net of taxes of $13,024        |       |                  |       |       |       | (19               | )          |         |       | (19               | )          | (19        | )          |
| **Total comprehensive income**                                                      |       |                  |       |       |       | $                 | 1,079      |         |       |              |       |       |       |   |
| ** **                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Balance  at December 31, 2005**                                                   |       | 674,100               |       | $          | 6,950      |              |       |         | $          | 4,373             |       | $          | (80        | ) | $ | 11,243 |   |
| Exercise of  stock options, including the realization of tax benefits of $7,716     |       | 2,000                 |       | 36         |       |              |       |         |       |              |       | 36         |       |
| Stock based  compensation expense                                                   |       |                  |       | 56         |       |              |       |         |       |              |       | 56         |       |
| **Comprehensive Income**                                                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| Net income                                                                          |       |                  |       |       |       | 1118              |       | 1,118        |       |              |       | 1,118      |       |
| Unrealized gain  (losses) on available-for-sale securities, net of taxes of $40,188 |       |                  |       |       |       | 58                |       |         |       | 58                |       | 58         |       |
| **Total comprehensive income**                                                      |       |                  |       |       |       | $                 | 1,176      |         |       |              |       |       |       |   |
| ** **                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Balance at September 30, 2006**                                                   |       | 676,100               |       | $          | 7,042      |              |       |         | $          | 5,491             |       | $          | (22        | ) | $ | 12,511 |   |

*The accompanying notes are an integral part ofthese consolidated financial statements*

6

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**COAST BANCORP & SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (unaudited)**

**For theNine Months ended September 30, 2006 and 2005**
| ** **                                                                         | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**                            | ** ** |
| **(In thousands)**                                                            | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                                                               |       |                                              |       |   |   |
| Operating  activities:                                                             |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 1,118      |   | $ | 776 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 355                                               |       | 373 |   |
| Provision for credit losses                                                        |       | 116                                               |       | 20 |   |
| Stock based compensation                                                           |       | 56                                                |       | — |   |
| Gain on sale of loans                                                              |       | (312                                              | )          | — |   |
| Other items - net                                                                  |       | (64                                               | )          | 280 |   |
| Net cash provided by operating activities                                          |       | 1,269                                             |       | 1,449 |   |
|                                                                               |       |                                              |       |   |   |
| Investing  activities:                                                             |       |                                              |       |   |   |
| Net increase in loans                                                              |       | (14,546                                           | )          | (10,114 | ) |
| Proceeds from loans sold                                                           |       | 3,749                                             |       | — |   |
| Proceeds of Federal Reserve Bank and Federal Home  Loan Bank stock                 |       | (23                                               | )          | (33 | ) |
| Proceeds from the sale and maturity of  available-for-sale securities              |       | 1,000                                             |       | 2,000 |   |
| Purchase of premises and equipment                                                 |       | (135                                              | )          | 86 |   |
| Net cash used by investing activities                                              |       | (9,955                                            | )          | (8,061 | ) |
|                                                                               |       |                                              |       |   |   |
| Financing  activities:                                                             |       |                                              |       |   |   |
| Increase (decrease) in deposits                                                    |       | (8,686                                            | )          | 18,115 |   |
| Principle payments on notes payable                                                |       | (45                                               | )          | (56 | ) |
| Proceeds from exercise of options, including tax  benefits                         |       | 36                                                |       | 287 |   |
| Net cash provided (used) by financing actvities                                    |       | (8,695                                            | )          | 18,346 |   |
| ** **                                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Increase (decrease) in cash and cash equivalents                                   |       | (17,381                                           | )          | 11,734 |   |
|                                                                               |       |                                              |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 34,670                                            |       | 20,690 |   |
|                                                                               |       |                                              |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                 | 17,289     |   | $ | 32,424 |   |

*The accompanying notes are an integral part ofthese consolidated financial statements*

7

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**Item 1. Financial Statements-Continued**

**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 informationshould be read in conjunction with the Company’s Annual Report for the yearended December 31, 2005 filed on Form 10-KSB.

Operating results forinterim periods are not necessarily indicative of operating results for an entirefiscal year.  In the opinion ofmanagement, the unaudited financial information for the three month and ninemonth period ended September 30, 2006 and 2005, reflect all adjustments,consisting only of normal recurring accruals and provisions, necessary for afair 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.  Thesestatements generally appear with words such as “anticipate”, “believe”, “estimate”,“may”, “intend”, and “expect”.

# **Note 2                    Earnings Per Share**

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

|                                               | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                    | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       | **Shares**                                         | ** ** | **Shares**                                        | ** ** | **Shares** | ** ** | **Shares** |   |
| Used in Basic  EPS                            |       | 676,100                                            |       | 671,790                                           |       | 675,597 |   | 668,179 |   |
| Dilutive Effect  of Outstanding Stock Options |       | 27,219                                             |       | 44,354                                            |       | 25,913 |   | 44,354 |   |
| Used in Earnings Per  Share - Diluted         |       | 703,319                                            |       | 716,144                                           |       | 701,510 |   | 712,533 |   |

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

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

The Companyadopted this Statement in 2006 for all new stock option awards as well as anyexisting awards that are modified, repurchased or cancelled.  In addition, the unvested portion ofpreviously awarded options have also been recognized as an expense during thefirst nine months of 2006.  During thefirst nine months of 2006, $56,024 was expensed by the Company for stock optionrelated compensation.

Prior to January1, 2006, the Company accounted for stock-based compensation under the FASB’sSFAS No. 123, “Accounting for Stock-Based Compensation,” which allowedcompanies to use an intrinsic value method prescribed in Accounting PrinciplesBoard (“APB”) Opinion No. 25, *“Accounting for StockIssued to Employees,”* and related interpretations.

8

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SFAS No. 123 (R)requires that cash flows resulting from the realization of tax deductions inexcess of the compensation cost recognized (excess tax benefits) are to beclassified as financing cash flows. Before the adoption of SFAS No. 123 (R), the Company presented all taxbenefits realized from the exercise of stock options as operating cash flows inthe Statement of Cash Flows.  The $7,716excess tax benefit classified as a financing cash inflow for September 30, 2006would have been classified as an operating cash inflow if we had not adoptedSFAS 123 (R).

Had previouslyrecognized compensation cost (prior to 2006) for the Company’s stock optionplan been determined based on the fair value at the grant dates for awardsunder those plans consistent with the method of SFAS 123R, the Company’s netincome and earnings per share would have been reduced to the pro forma amountsindicated below:
| ** **                                                                                       | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| ** **                                                                                       | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Net Income:                                                                                      |       |                                               |       |                                              |       |   |   |   |   |
| As Reported                                                                                      |       | $                                                  | 465        |                                              | $          | 248 |   | $ | 1,118 |   | $ | 776 |   |
| 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                                               | )          | *—* |   | (30 | ) |
| Pro Forma Net  Income                                                                            |       | $                                                  | 465        |                                              | $          | 238 |   | $ | 1,118 |   | $ | 746 |   |
|                                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Basic Earnings Per  Share:                                                                       |       |                                               |       |                                              |       |   |   |   |   |
| As Reported                                                                                      |       | $                                                  | 0.69       |                                              | $          | 0.37 |   | $ | 1.65 |   | $ | 1.16 |   |
| Proforma                                                                                         |       | $                                                  | 0.69       |                                              | $          | 0.35 |   | $ | 1.65 |   | $ | 1.12 |   |
|                                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Diluted Earnings Per  Share:                                                                     |       |                                               |       |                                              |       |   |   |   |   |
| As Reported                                                                                      |       | $                                                  | 0.66       |                                              | $          | 0.35 |   | $ | 1.59 |   | $ | 1.09 |   |
| Pro Forma                                                                                        |       | $                                                  | 0.66       |                                              | $          | 0.34 |   | $ | 1.59 |   | $ | 1.06 |   |

**Note 4****                                                          CurrentAccounting Pronouncements**

As discussed inthe preceding note, SFAS No.123 (R) became effective January 1, 2006 and hasbeen fully implemented by the Company.

In March 2006, theFASB issued SFAS No. 156, *“Accounting for Servicingof Financial Assets, an amendment of FASB Statement No. 140.”* The statement amends SFAS No. 140 by  (1) requiring the separate accounting forservicing assets and servicing liablilties, 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 must adopt the statement no later than January 1, 2007.  Management does not expect that the adoptionof this new standard will have a material impact on the Company’s financialposition, results of operations or cash flows.

In June 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accountingfor Uncertainty in Income Taxes*.” This interpretation applies to all tax positions accounted for inaccordance with SFAS No. 109, *“Accounting for IncomeTaxes.”* FIN 48 clarifies theapplication of SFAS No. 109 by defining the criteria that an individual taxposition must meet in order for the position to be recognized within thefinancial statements and provides guidance on measurement, derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition for tax positions. The Company must adopt the interpretation by January 1, 2007.  Management does not expect that the adoptionof this new interpretation will have a material impact on the Company’s financialposition, results of operations or cash flows.

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 and contain statements relating to future results of the Companythat are considered to be “forward looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995.  These statements relate to, among otherthings, credit loss reserve adequacy and simulations of changes in interestrates and litigation results.  Actualresults may differ materially from those expressed or implied as a result ofcertain risks and uncertainties, including, but not limited to, changes inpolitical and economic conditions, interest rate fluctuations, competitiveproduct and pricing pressures within the Company’s markets, equity and fixedincome market fluctuations, personal and corporate customers’ bankruptcies,inflation, technological change, changes in law, changes in fiscal, monetary,regulatory and tax policies, monetary fluctuations, political and globalchanges arising from the terrorist attacks of September 11, 2001 as well as thewar in Iraq and its aftermath, success in gaining regulatory approvals whenrequired as well as other risks and uncertainties detailed elsewhere in thisquarterly report or from time to time in the filings of the Company with theSecurities 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 unanticipated events.

The accompanyingfinancial information should be read in conjunction with Coast Bancorp’s AnnualReport on Form 10-KSB for the year ended December 31, 2005.

Description ofBusiness

*Coast Bancorp*

Coast Bancorp, headquartered in San Luis Obispo,California, is a California corporation incorporated in 2001.  Coast Bancorp became the bank holding companyof Coast National Bank on May 31, 2001 through a corporate reorganization.  In the reorganization, Coast National Bankbecame the wholly-owned subsidiary of Coast Bancorp and the shareholders of theBank became shareholders of Coast Bancorp. Coast Bancorp is operated through a two-tiered corporate structure.  At the holding company level the affairs ofCoast Bancorp are overseen by a Board of Directors elected by the shareholdersof Coast Bancorp at the annual meeting of shareholders.  The business of the Bank is overseen by aBoard of Directors elected by Coast Bancorp, the sole owner of the Bank.  As of the date of this Form 10-QSB therespective members of the Board of Directors of the Bank and the Board ofDirectors of Coast Bancorp are identical. Coast Bancorp is subject to the regulations of, and examination by, theBoard of Governors of the Federal Reserve System.  At present, Coast Bancorp does not engage inany material business activities other than the ownership of the Bank.  Financial information presented in this Form10-QSB for September 30, 2006 and comparative information for December 31, 2005and September 30, 2005 is inclusive of the consolidated Company.

*Coast National Bank*

CoastNational Bank (the “Bank”) was chartered June 16, 1997 (charter #23222) by TheOffice of the Comptroller of the Currency as a national bank.  The Bank commenced operations on that datewith two offices, 16 employees and $6,250,000 in capital.  The original branch offices were located at486 Marsh Street, San Luis Obispo and 1199 Grand Avenue, Arroyo Grande,California.  Since that time, an additionalbranch office was opened in June 1998 at 948 Morro Bay Boulevard in Morro Bay,California and another branch office was opened in July 1999 at 1193 Los OsosValley Road in Los Osos, California.  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.  In October 2004 a loan production office wasopened in Santa Barbara, California at 15 West Carrillo Street, Ste. 252.  The original lease on this facility expiredand the office was closed in September 2005. The Bank applied for and received approval from the Comptroller of theCurrency for another branch office at 2138 Spring Street, Paso Robles,California which opened in March 2005. The Bank also purchased a lot at 2045 Spring Street, Paso Robles,California with the intention of relocating the Paso Robles branch.  However, the lot was not adequate for therelocation of the branch and on October 26, 2006, the Bank purchased a new lotat 2110 Spring St, Paso Robles, California. The Bank intends to relocate the Paso Robles branch to this larger lot,sometime in the future. In June 2005, the Bank opened a new loan productionoffice 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.

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, the Bankalso purchased the contiguous property and building that was home to the SanLuis Obispo main office at 486 Marsh Street. Construction of a new head office building on the adjacent lot began onOctober 11, 2001 and was completed on November 25, 2002.  The new main office, located at 500 MarshStreet is approximately 10,700 square feet with the San Luis Obispo branchoperation occupying the ground floor and the administrative offices occupyingthe second floor.  Half of the originalmain office at 486 Marsh Street now houses the Bank’s Small Business LendingCenter and the Bank’s Note Department while the other half is leased to variousbusinesses.

10

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

Asof September 30, 2006, the Bank had a total of 73 employees.  A number of these employees are part-timehowever. Part-time employees are converted to full-time equivalent employees onthe percentage of their weekly hours worked compared to 40 hours.  On a full-time equivalent basis, employeesrepresent 68 positions.  The Bank valuesits employees.  They are actively engagedindividually and as a team in contributing to the Bank’s realization of itsvision and mission.

**CriticalAccounting Policies**

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

*Allowance for 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.

### *Income Taxes*

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

11

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**Overview**

*Earnings Summary*

For the three months ended September 30, 2006 theCompany reported consolidated net income of $465,000 or $0.66 diluted earningsper share compared to net income of $248,000 and $0.35 diluted earnings pershare for the same period during 2005, a 87.5% increase.  For the nine months ended September 30, 2006the Bancorp reported consolidated net income of $1,118,000 or $1.59 dilutedearnings per share compared to consolidated net income of $776,000 or $1.09diluted earnings per share for the same period in 2005, a 44.1% increase.  The increase in net income was primarily dueto an increase in loans and loan income as well as increases in service chargesand gains resulting from the sale of the guaranteed portion of governmentguaranteed loans.

*BalanceSheet Summary*

Asof September 30, 2006, total consolidated assets of Coast Bancorp were $178.3million in comparison to total assets of $185.7 million as of December 31,2005. This represents a decrease of $7.4 million, or 4.0%.  Compared to total consolidated assets of$179.2 million at September 30, 2005, assets have decreased by $903,000, or0.5%, over the last twelve months.  Thedecreased quantity of time deposits was somewhat offset by the increasedquantity of money market and Now accounts. The Company has been strategically reducing the amount of time depositsover $100,000 as a percentage of total deposits while remaining competitivewith customers that have existing relationships with the Company.

TheBank has continued to grow its loan portfolio. Gross loans as of September 30, 2006 were $144.8 million in comparisonto total loans of $133.7 million as of December 31, 2005.  This represents an increase of $11.1 million,or 8.3%.  Compared to total loans of$126.4 million at September 30, 2005, the Company has increased loans by $18.4million, or 14.6%, over the last twelve months. The loan portfolio has grown asa result of continued strong loan demand in the Bank’s market area and the Bankhas drawn on Fed funds to fund this growth.

Totaldeposits as of September 30, 2006 were $160.3 million in comparison to totaldeposits of $169.0 million as of December 31, 2005.  This represents a decrease of $8.7 million,or 5.1%. Compared to total deposits of $162.6 million at September 30, 2005,deposits have decreased by $2.3 million, or 1.4%, over the last twelvemonths.  These decreases are due to theCompany’s strategic realignment of its deposit portfolio.

**EarningsAnalysis**

##### *Net Interest Income*

A significantcomponent of the Bank’s earnings is from net interest income.  Net interest income is the amount by whichthe interest and amortization of fees generated from loans and other earningassets exceed the cost of funding those assets, usually deposit accountinterest expense.  Net interest incomedepends on the difference between gross interest and fees earned on the loansand investment portfolios and the interest rates paid on deposits andborrowings (“the interest rate spread”).  Net interest income after the provision for credit losses was $2,350,000for the quarter ended September 30, 2006, compared to $1,997,000 for thequarter ended September 30, 2005, representing an increase of 17.7%.  Net interest income after the provision forcredit losses was $6,727,000 for the nine months ended September 30, 2006,compared to $5,740,000 for the nine months ended September 30, 2005,representing an increase of 17.2%.  Theseincreases were primarily the result of rising interest rates and loan growthgenerated by the Banks’ branches. The percentage change in the average interestrate paid on deposits increased faster than the percentage change in the averageinterest rates earned on loans for both the three and nine months endedSeptember 30, 2006 as compared to the three and nine months ended September 30,2005.  However, this was offset by bothan increase in net interest margin and a larger increase in loans as comparedto deposits for the same time periods.

12

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Thefollowing tables present, for the three months and nine months ended September30, 2006 and 2005, the distribution of average assets, liabilities andshareholders’ equity.  In addition, thetotal amounts of interest income from average interest-earning assets and theresultant yields, and the dollar amounts of interest expense and averageinterest-bearing liabilities, expressed both in dollars and in rates are alsopresented.  Non-accrual loans areincluded in the calculation of the average balances of loans, and interest notaccrued is excluded (dollar amounts in thousands).
| ** **                                       | ** ** | **Distribution of Assets, Liabilities and Stockholders’ Equity** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **For the Three Months Ended**                                                  | ** ** |
| ** **                                       | ** ** | **September 30, 2006**                                                                    | ** ** | **September 30, 2005** | ** ** |
| ** **                                       | ** ** | ** **                                                                                          | ** ** | **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                           |       | $                                                                                                   | 6,907      |   | $ | 57 |   | 3.27 | % | $ | 12,013 |   | $ | 77 |   | 2.54 | % |
| Federal Funds  Sold                              |       | 10,367                                                                                              |       | 136 |   | 5.20 | % | 16,450 |   | 145 |   | 3.50 | % |
| Other Earning Assets                             |       | 943                                                                                                 |       | 17 |   | 7.15 | % | 912 |   | 13 |   | 5.66 | % |
| Loans                                            |       | 144,283                                                                                             |       | 3,453 |   | 9.49 | % | 128,431 |   | 2,682 |   | 8.29 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  Interest-Earning Assets                   |       | 162,500                                                                                             |       | 3,663 |   | 8.94 | % | 157,806 |   | 2,917 |   | 7.33 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Cash and Due  from Bank                          |       | 7,288                                                                                               |       |   |   |   |   | 9,839 |   |   |   |   |   |
| Premises and  Equipment                          |       | 8,139                                                                                               |       |   |   |   |   | 8,386 |   |   |   |   |   |
| Other Real  Estate Owned                         |       | —                                                                                              |       |   |   |   |   | — |   |   |   |   |   |
| Accrued Interest  and Other Assets               |       | 1,875                                                                                               |       |   |   |   |   | 1,739 |   |   |   |   |   |
| Allowance For  Loan Losses                       |       | (1,264                                                                                              | )          |   |   |   |   | (1,168 | ) |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |       | $                                                                                                   | 178,538    |   |   |   |   |   | $ | 176,602 |   |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**   |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest-Bearing  Liabilities:                   |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Money Market and  NOW:                           |       | $                                                                                                   | 47,541     |   | $ | 382 |   | 3.19 | % | $ | 38,895 |   | $ | 181 |   | 1.85 | % |
| Savings                                          |       | 7,133                                                                                               |       | 35 |   | 1.95 | % | 8,648 |   | 22 |   | 1.01 | % |
| Time Deposits  under $100,000                    |       | 14,058                                                                                              |       | 143 |   | 4.04 | % | 14,404 |   | 101 |   | 2.78 | % |
| Time Deposits of  $100,000 or More               |       | 51,709                                                                                              |       | 572 |   | 4.39 | % | 57,831 |   | 497 |   | 3.41 | % |
| Trust Preferred  Securities                      |       | 5,155                                                                                               |       | 125 |   | 9.62 | % | 5,155 |   | 99 |   | 7.62 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  Interest-Bearing Liabilities              |       | 125,596                                                                                             |       | 1,257 |   | 3.97 | % | 124,933 |   | 900 |   | 2.86 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-Interest  Bearing Liabilities                |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Demand Deposits                                  |       | 40,152                                                                                              |       |   |   |   |   | 40,219 |   |   |   |   |   |
| Other  Liabilities                               |       | 539                                                                                                 |       |   |   |   |   | 478 |   |   |   |   |   |
| Stockholders’  Equity                       |       | 12,251                                                                                              |       |   |   |   |   | 10,872 |   |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  Liabilities and Stockholders’ Equity |       | $                                                                                                   | 178,538    |   |   |   |   |   | $ | 176,502 |   |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest  Income                             |       |                                                                                                |       | $ | 2,406 |   |   |   |   |   | $ | 2,017 |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net Yield on  Interest-Earning Assets            |       |                                                                                                |       |   |   | 5.87 | % |   |   |   |   | 5.07 | % |

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| ** **                                       | ** ** | **Distribution of Assets, Liabilities and Stockholders’ Equity** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **For the Nine Months Ended**                                                   | ** ** |
| ** **                                       | ** ** | **September 30, 2006**                                                                    | ** ** | **September 30, 2005** | ** ** |
| ** **                                       | ** ** | ** **                                                                                          | ** ** | **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                            |       | $                                                                                                   | 7,482      |   | $ | 165 |   | 2.95 | % | $ | 12,547 |   | $ | 238 |   | 2.54 | % |
| Federal Funds Sold                               |       | 16,256                                                                                              |       | 582 |   | 4.79 | % | 13,264 |   | 296 |   | 2.98 | % |
| Other Earning Assets                             |       | 933                                                                                                 |       | 47 |   | 6.74 | % | 900 |   | 40 |   | 5.94 | % |
| Loans                                            |       | 139,186                                                                                             |       | 9,569 |   | 9.19 | % | 124,283 |   | 7,300 |   | 7.85 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  Interest-Earning Assets                   |       | 163,857                                                                                             |       | 10,363 |   | 8.46 | % | 150,994 |   | 7,874 |   | 6.97 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Cash and Due  from Bank                          |       | 7,791                                                                                               |       |   |   |   |   | 9,589 |   |   |   |   |   |
| Premises and  Equipment                          |       | 8,200                                                                                               |       |   |   |   |   | 8,472 |   |   |   |   |   |
| Other Real  Estate Owned                         |       | —                                                                                              |       |   |   |   |   | — |   |   |   |   |   |
| Accrued Interest  and Other Assets               |       | 1,687                                                                                               |       |   |   |   |   | 1,788 |   |   |   |   |   |
| Allowance For  Loan Losses                       |       | (1,227                                                                                              | )          |   |   |   |   | (1,168 | ) |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total Assets                                     |       | $                                                                                                   | 180,308    |   |   |   |   |   | $ | 169,675 |   |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**   | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-Bearing  Liabilities:                   |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Money Market and NOW:                            |       | $                                                                                                   | 45,756     |   | $ | 992 |   | 2.90 | % | $ | 37,743 |   | $ | 427 |   | 1.51 | % |
| Savings                                          |       | 7,711                                                                                               |       | 93 |   | 1.61 | % | 8,638 |   | 55 |   | 0.85 | % |
| Time Deposits under $100,000                     |       | 14,928                                                                                              |       | 414 |   | 3.71 | % | 14,217 |   | 238 |   | 2.24 | % |
| Time Deposits of $100,000 or More                |       | 54,293                                                                                              |       | 1,669 |   | 4.11 | % | 52,372 |   | 1,117 |   | 2.85 | % |
| Trust Preferred Securities                       |       | 5,155                                                                                               |       | 351 |   | 9.10 | % | 5,155 |   | 277 |   | 7.18 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  Interest-Bearing Liabilities              |       | 127,843                                                                                             |       | 3,520 |   | 3.68 | % | 118,125 |   | 2,114 |   | 2.39 | % |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-Interest  Bearing Liabilities                |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Demand Deposits                                  |       | 40,107                                                                                              |       |   |   |   |   | 40,582 |   |   |   |   |   |
| Other Liabilities                                |       | 481                                                                                                 |       |   |   |   |   | 423 |   |   |   |   |   |
| Stockholders’ Equity                        |       | 11,877                                                                                              |       |   |   |   |   | 10,494 |   |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total  Liabilities and Stockholders’ Equity |       | $                                                                                                   | 180,308    |   |   |   |   |   | $ | 169,624 |   |   |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net Interest  Income                             |       |                                                                                                |       | $ | 6,843 |   |   |   |   |   | $ | 5,760 |   |   |   |
|                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net Yield on  Interest-Earning Assets            |       |                                                                                                |       |   |   | 5.58 | % |   |   |   |   | 5.10 | % |

 

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

14

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Thefollowing table sets forth changes in interest income and interest expense foreach major category of interest-earning asset and interest-bearing depositaccounts, and the amount of change attributable to volume and rate changes forthe three and nine months ended September 30, 2006 and 2005.  Changes not solely attributable to rate orvolume have been allocated to volume and rate changes in proportion to therelationship of the absolute dollar amounts of the changes in each (dollaramounts in thousands).
| ** **                        | ** ** | **Three Months Ended September 30, 2006**      | ** ** | **Nine Months Ended September 30, 2006**       | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **compared to the**                                           | ** ** | **compared to the**                                           | ** ** |
| ** **                        | ** ** | **Three Months Ended September 30, 2005**      | ** ** | **Nine Months Ended September 30, 2005**       | ** ** |
| ** **                        | ** ** | **Increase (Decrease) in interest income and** | ** ** | **Increase (Decrease) in interest income and** | ** ** |
| ** **                        | ** ** | **expense due to change in:**                       | ** ** | **expense due to change in:**                       | ** ** |
| ** **                        | ** ** | **Volume**                                                              | ** ** | **Rate**                                                                | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest-Earning Assets:**      |       |                                                                    |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Investment  Securities            |       | $                                                                       | (101       | )                                                                       | $          | 81 |   | $ | (20 | ) | $ | (126 | ) | $ | 53 |   | $ | (73 | ) |
| Federal Funds  Sold               |       | (102                                                                    | )          | 93                                                                      |       | (9 | ) | 78 |   | 208 |   | 286 |   |
| Other Earning  Assets             |       | 0                                                                       |       | 4                                                                       |       | 4 |   | 2 |   | 5 |   | 7 |   |
| Loans                             |       | 199                                                                     |       | 572                                                                     |       | 771 |   | 937 |   | 1,332 |   | 2,269 |   |
| Total Interest  Income            |       | (4                                                                      | )          | 750                                                                     |       | 746 |   | 890 |   | 1,599 |   | 2,489 |   |
|                              |       |                                                                    |       |                                                                    |       |   |   |   |   |   |   |   |   |
| **Interest-Bearing Liabilities:** | ** ** | ** **                                                              | ** ** | ** **                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction  Accounts             |       | 48                                                                      |       | 153                                                                     |       | 201 |   | 107 |   | 458 |   | 565 |   |
| Savings                           |       | (23                                                                     | )          | 36                                                                      |       | 13 |   | (10 | ) | 48 |   | 38 |   |
| Time Deposits                     |       | (17                                                                     | )          | 59                                                                      |       | 42 |   | 12 |   | 164 |   | 176 |   |
| Time Deposits  $100,000 or more   |       | (285                                                                    | )          | 360                                                                     |       | 75 |   | 43 |   | 510 |   | 552 |   |
| Trust Preferred                   |       | —                                                                  |       | 26                                                                      |       | 26 |   | — |   | 74 |   | 74 |   |
| Total Interest  Expense           |       | (277                                                                    | )          | 634                                                                     |       | 357 |   | 152 |   | 1,254 |   | 1,406 |   |
|                              |       |                                                                    |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Net Interest Income               |       | $                                                                       | 273        |                                                                    | $          | 116 |   | $ | 389 |   | $ | 738 |   | $ | 345 |   | $ | 1,083 |   |

 

Thefollowing table sets forth the components of net interest income, averageearning assets and net interest margin (in thousands):
|                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** | **Year Ended**   | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **December 31,** | ** ** |
| ** **              | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006**              | ** ** | **2005** | ** ** | **2005** | ** ** |
|                    |       |                             |       |                            |       |                  |       |   |   |   |   |
| Interest Income         |       | $                                | 3,663      |                            | $          | 2,917                 |       | $ | 10,363 |   | $ | 7,874 |   | $ | 10,903 |   |
| Interest Expense        |       | 1,257                            |       | 900                             |       | 3,520                 |       | 2,114 |   | 3,171 |   |
|                    |       |                             |       |                            |       |                  |       |   |   |   |   |
| Net Interest Income     |       | $                                | 2,406      |                            | $          | 2,017                 |       | $ | 6,843 |   | $ | 5,760 |   | $ | 7,732 |   |
|                    |       |                             |       |                            |       |                  |       |   |   |   |   |
| Average Earning  Assets |       | $                                | 162,500    |                            | $          | 157,806               |       | $ | 150,994 |   | $ | 150,994 |   | $ | 154,573 |   |
| Net Interest Margin     |       | 5.87                             | %          | 5.07                            | %          | 5.58                  | %          | 5.10 | % | 5.00 | % |

 

Interest expensewas $1,257,000 for the quarter ended September 30, 2006 compared to $900,000for the quarter ended September 30, 2005, representing an increase of39.7%.  Interest expense was $3,520,000for the nine months ended September 30, 2006, compared to $2,114,000 for thenine months ended September 30, 2005, an increase of 66.5%.  These increases reflect higher interest ratespaid to all interest bearing accounts which is offset by decreased volume.

The net interestmargin is the ratio of net interest income to average earning assets. Thisratio is useful in allowing the Company to monitor the spread between interestincome and interest expense between reporting periods irrespective of thegrowth of the Company’s assets.  The netinterest margin increased 80 basis points to 5.87% for the quarter endedSeptember 30, 2006 as compared to 5.07% for the quarter ended September 30,2005.  The net interest margin, 5.58% forthe nine months ending September 30, 2006 was 48 basis points higher than thecomparable figure, 5.10%, for the nine month period ending September 30,2005.  These increases are primarily dueto the continued growth of quality loans and the Bank’s ability to respond tothe changes in interest rates.

15

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##### *Non-interest Income*

Non-interest income represents deposit account service charges and othertypes of fee income including gain on sale of fixed assets and mortgagereferral fees.  Non-interest income forthe three months ended September 30, 2006 totaled $233,000 compared to $46,000for the same period in 2005, a 406.5% increase.    Non-interest income for the nine monthsended September 30, 2006 totaled $545,000 compared to $325,000 for the sameperiod in 2005 representing a 67.7% increase. The increases in non-interest income for 2006 were principally due toincreases in service charges on deposit accounts, servicing fees and realizedgains on the sale of the guaranteed portion of government-guaranteed loans.

##### *Non-interest Expense*

Non-interestexpense represents salaries, occupancy expenses, professional expenses, outsideservices and other miscellaneous expenses necessary to conduct business.  Non-interest expense for the three monthsended September 30, 2006 totaled $1.8 million compared to $1.6 million for thesame period in 2005 for an increase of 15.3%. Non-interest expense for the nine months ended September 30, 2006totaled $5.4 million compared to $4.6 million for the same period in 2005 foran increase of 17.5%.  These increasesare primarily due to an overall rise in salary and benefit expenses and anincrease in promotional expenses.   Thenumber of fulltime equivalent employees necessary to provide superior customerservice was 68 in September 2006 as compared to 61 in September, 2005.  The continuing growth of the Bank’sgovernmental guaranteed lending department specializing in Small BusinessAdministration lending programs, and the overall expansion of the Bank’scustomer base also contributed to the increase.

##### **IncomeTaxes**

The Company recorded a $318,000 tax provision during the three monthsended September 30, 2006 compared to $234,000 during the same period in2005.  The Company recorded a $754,000tax provision for the nine months ended September 30, 2006 compared to $692,000during the same period in 2005. The increase in the tax provisions is a resultof the increasing income for the three months and nine months ended September30, 2006.

**BalanceSheet Analysis**

*Investment Portfolio*

Thefollowing table summarizes the amounts and distribution of our investmentsecurities held as of the dates indicated, and the weighted average yields asof September 30, 2006 and December 31, 2005 (dollar amounts in thousands):
| ** **                                            | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | **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                                       |       | 7,004                            |       | 6,968                           |       | 2.94 | % | 4,992 |   | 4,920 |   |
| One to Five Years                                     |       | —                           |       | —                          |       | 0.00 | % | 3,015 |   | 2,952 |   |
| Five to Ten Years                                     |       | —                           |       | —                          |       | 0.00 | % | — |   | — |   |
| After Ten Years                                       |       | —                           |       | —                          |       | 0.00 | % | — |   | — |   |
| Total U.S. Treasury and  Government Agency Securities |       | 7,004                            |       | 6,968                           |       | 2.94 | % | 8,007 |   | 7,872 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |   |   |
| **Mutual Funds**                                      |       | —                           |       | —                          |       |   |   | — |   | — |   |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mortgage Backed Securities**                        |       | —                           |       | —                          |       |   |   | — |   | — |   |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Available-for-Sale Securities**               |       | $                                | 7,004      |                            | $          | 6,968 |   | 2.94 | % | $ | 8,007 |   | $ | 7,872 |   |
|                                                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Securitiesmay be pledged to meet security requirements imposed as a condition to receiptof deposit of public funds and for other purposes.  At September 30, 2006, the fair market valueof securities pledged to secure public deposits and other purposes were$999,380 or 14.3% of available for sale securities.

16

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*LoanPortfolio*

Thefollowing table sets forth the components of total net loans outstanding ineach category at the date indicated (dollar amounts in thousands):
|                                                   | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** **                                                                                                   |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|--------------------------------------------------------------------------------------------------------------|
| **Loans**                                         |       |                             |       |                            |                                                                                                         |
| Commercial loans                                  |       | $                                | 38,706     |                            | $                                                                                                            | 29,491 |   |
| Real Estate -  Construction                       |       | 33,375                           |       | 25,213                          |                                                                                                         |
| Real Estate -  Other                              |       | 67,346                           |       | 76,092                          |                                                                                                         |
| Consumer loans                                    |       | 5,376                            |       | 2,866                           |                                                                                                         |
| Other                                             |       | —                           |       | 29                              |                                                                                                         |
| **Total  loans**                                  |       | 144,803                          |       | 133,691                         |                                                                                                         |
| Net Deferred  Loan Costs (Fees)                   |       | (458                             | )          | (460                            | )                                                                                                            |
| Allowance for  Loan Losses                        |       | (1,301                           | )          | (1,183                          | )                                                                                                            |
| **Net  Loans**                                    |       | $                                | 143,044    |                            | $             132,048                       |   |
|                                              |       |                             |       |                            |                                                                                                         |
| **Commitments**                                   |       |                             |       |                            |                                                                                                         |
| Standby Letters  of Credit                        |       | $                                | 2,715      |                            | $                 2,589 |   |
| Undisbursed  Loans and Commitments to Grant Loans |       | 65,038                           |       | 57,356                          |                                                                                                         |
| **Total Commitments**                             |       | $                                | 67,753     |                            | $               59,945            |   |
|                                                   |            |                                  |            |                                 |                                                                                                              |  |  |

 

##### *Asset Quality*

Asof September 30, 2006, the Company had three government guaranteed loans onnon-accrual for a total of $321,792.  Thenon-guaranteed portion of these non-accrual loans is $116,023.  As of September 30, 2006, there are no loanspast due 90 days or more and still accruing. As of September 30, 2005, the Company had no loans on non-accrual and noloans past due 90 days or more and still accruing.   As of December 31, 2005 the company had oneloan on non-accrual of $15,186 and no loans 90 days past due and stillaccruing.

Asof September 30, 2006 and 2005 the Company has had no OREO or restructuredloans.

##### *Provision for Loan Losses*

Managementof the Bank and Coast Bancorp believes that the allowance for loan losses isadequate.  The Bank has established amonitoring system for loans in order to identify impaired loans and potentialproblem loans and to permit periodic evaluation of impairment and adequacy ofthe allowance for loan losses in a timely manner.  The monitoring system and allowance for loanlosses methodology have evolved over a period of years, and loanclassifications have been incorporated into the determination of the allowancefor loan losses.  This monitoring systemand allowance methodology includes a loan-by-loan analysis for all classifiedloans as well as loss factors for the balance of the unclassified portfolio.  Classified loans are reviewed individually toestimate the amount of probable losses that needs to be included in theallowance.  These reviews includeanalysis of financial information as well as evaluation of collateral securingthe credit.  Loss factors on theunclassified portion of the portfolio are based on such factors as historicalloss experience, current portfolio delinquency and trends, and other inherentrisk factors such as economic conditions, concentrations in the portfolio, risklevels of particular loan categories, internal loan review and management oversight.

TheBank made a $116,000 contribution to the allowance for loan losses for the ninemonths ended September 30, 2006 compared to $20,000 for the same period in 2005to accommodate the increase in the Bank’s loan portfolio.  Management believes that the allowance, whichequals 0.90% of gross loans at September 30, 2006, is adequate to cover futurelosses.  The allowance for loan losses atDecember 31, 2005 was 0.88% of gross loans.

17

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Thefollowing table summarizes, for the periods indicated, changes in the allowancefor loan losses arising from loans charged-off, recoveries on loans previouslycharged-off, and additions to the allowance which have been charged tooperating expenses and certain ratios relating to the allowance for loan losses(dollar amounts in thousands):
|                                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| ** **                                                                | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Outstanding Net Loans**                                                 |       |                             |       |                             |       |   |   |   |   |
| Average for the  Year                                                     |       | $                                | 145,084    |                             | $          | 129,263 |   | $ | 140,002 |   | $ | 123,115 |   |
|                                                                      |       |                             |       |                             |       |   |   |   |   |
| **Allowance for Loan Losses:**                                            |       |                             |       |                             |       |   |   |   |   |
| Balance, beginning of  period                                             |       | $                                | 1,244      |                             | $          | 1,168 |   | $ | 1,183 |   | $ | 1,168 |   |
| Actual Charge-Offs:                                                       |       |                             |       |                             |       |   |   |   |   |
| Commercial                                                                |       | 1                                |       | —                           |       | 1 |   | — |   |
| Consumer                                                                  |       | —                           |       | —                           |       | — |   | — |   |
| Real Estate                                                               |       | —                           |       | —                           |       | — |   | — |   |
| Total Charge-Offs                                                         |       | 1                                |       | —                           |       | 1 |   | — |   |
|                                                                      |       |                             |       |                             |       |   |   |   |   |
| Less Recoveries:                                                          |       |                             |       |                             |       |   |   |   |   |
| Commercial                                                                |       | —                           |       | —                           |       | — |   | — |   |
| Consumer                                                                  |       | 2                                |       | —                           |       | 3 |   | — |   |
| Real Estate                                                               |       | —                           |       | —                           |       | — |   | — |   |
| Total Recoveries                                                          |       | 2                                |       | —                           |       | 3 |   | — |   |
|                                                                      |       |                             |       |                             |       |   |   |   |   |
| Net Loans Recovered  (Charged-Off)                                        |       | 1                                |       | —                           |       | 2 |   | — |   |
| Provision for Loan  Losses                                                |       | 56                               |       | 20                               |       | 116 |   | 20 |   |
| Balance, end of period                                                    |       | $                                | 1,301      |                             | $          | 1,188 |   | $ | 1,301 |   | $ | 1,188 |   |
|                                                                      |       |                             |       |                             |       |   |   |   |   |
| **Ratios:**                                                               |       |                             |       |                             |       |   |   |   |   |
| Net Loans  Charged-Off to Average Loans                                   |       | 0.00                             | %          | 0.00                             | %          | 0.00 | % | 0.00 | % |
| Allowance for  Loan Losses to Total Loans                                 |       | 0.90                             | %          | 0.92                             | %          | 0.93 | % | 0.96 | % |
| Net Loans  Recovered (Charged-Off) to Beginning Allowance for Loan Losses |       | 0.08                             | %          | 0.00                             | %          | 0.17 | % | 0.00 | % |
| Net Loans  Recovered (Charged-Off) to Provision for Loan Losses           |       | 1.79                             | %          | 0.00                             | %          | 1.72 | % | 0.00 | % |
| Allowance for Loan  Losses to Non-performing Loans                        |       | 1121.55                          | %          | n/a                              |       | n/a |   | n/a |   |

 

*Funding*

Depositsare our primary source of funds.  AtSeptember 30, 2006, we had a deposit mix of 44.5% in time and savings deposits,31.6% in money market and NOW deposits, and 23.9% in non-interest-bearingdemand deposits.  Our net interest incomeis enhanced by our percentage of non-interest-bearing deposits.

*Return on Equity and Assets*

Thefollowing table sets forth several key operating ratios for the nine monthsended September 30, 2006 and 2005:
|                                                            | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **September 30,**          | ** ** |
| ** **                                                 | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Return on  Average Assets                                  |       | 0.84                            | %          | 0.61 | % |
| Return on  Average Equity                                  |       | 12.59                           | %          | 9.89 | % |
| Dividend Payout  Ratio                                     |       | 0.00                            | %          | 0.00 | % |
| Average Stockholder’s  Equity to Average Total Assets |       | 6.66                            | %          | 6.19 | % |

 

18

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##### *Capital Resources*

Stockholdersequity at September 30, 2006 was $12.5 million, compared to $11.2 million atDecember 31, 2005, an 11.3% increase. Stockholders equity increased primarily from net income of $1,118,000.

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 the disincentivesto holding liquid, low risk assets.  Theleverage ratio consists of tangible Tier 1 capital divided by average totalassets.

BothCoast Bancorp and Coast National Bank maintain capital ratios above the Federalregulatory guidelines for “well-capitalized” bank holding companies.  The ratios for the Bank and Bancorp are asfollows:
|                                  | ** ** | ** **                   | ** ** | ** **             | ** ** | **Coast**                        | ** ** | **Coast**                       | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **National Bank** | ** ** | **National Bank**           | ** ** |
| ** **                       | ** ** | **Adequately**               | ** ** | **Well**               | ** ** | **As of**                   | ** ** | **As of**                  | ** ** |
| ** **                       | ** ** | **Capitalized**              | ** ** | **Capitalized**        | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
| Total risk-based  capital ratio  |       |                         | 8.00       | %                      |       |                             | 10.00      | %                               |       |   | 11.95 | % |   |   | 11.52 | % |   |
| Tier 1  risk-based capital ratio |       |                         | 4.00       | %                      |       |                             | 6.00       | %                               |       |   | 11.09 | % |   |   | 10.70 | % |   |
| Tier 1 leverage capital  ratio   |       |                         | 4.00       | %                      |       |                             | 5.00       | %                               |       |   | 9.76 | % |   |   | 8.75 | % |   |

 
|                                  | ** ** | ** **                   | ** ** | ** **      | ** ** | **Coast**                        | ** ** | **Coast**                       | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **Bancorp**     | ** ** | **Bancorp**                      | ** ** |
| ** **                       | ** ** | **Adequately**               | ** ** | **Well**        | ** ** | **As of**                   | ** ** | **As of**                  | ** ** |
| ** **                       | ** ** | **Capitalized**              | ** ** | **Capitalized** | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
| Total risk-based  capital ratio  |       |                         | 8.00       | %               |       |                             | 10.00      | %                               |       |   | 12.70 | % |   |   | 11.73 | % |   |
| Tier 1  risk-based capital ratio |       |                         | 4.00       | %               |       |                             | 6.00       | %                               |       |   | 11.24 | % |   |   | 10.04 | % |   |
| Tier 1 leverage capital  ratio   |       |                         | 4.00       | %               |       |                             | 5.00       | %                               |       |   | 9.35 | % |   |   | 8.61 | % |   |

 

**Liquidity**

Theobjective of the Company’s asset/liability strategy is to manage liquidity andinterest rate risk.  Ultimately,management seeks to monitor the safety and soundness of the Bank and itscapital base, while maintaining adequate net interest margins and spreads toprovide an appropriate return to the stockholders.  The bank manages liquidity by maintaining amajority of its investment portfolio in federal funds sold and other liquidinvestments.  The ratio of net loans todeposits, a key liquidity ratio, at September 30, 2006 was 89.3%, as comparedto 78.2% at December 31, 2005, which are within acceptable liquidity levels forthe 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**

Based on their evaluation as of September 30, 2006, the Bancorp’s ChiefExecutive Officer and Chief Financial Officer have concluded that the Bancorp’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in the reports that the Bancorp files or submits underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  There havebeen no significant changes in the Bancorp’s internal controls or in otherfactors that could significantly affect those controls subsequent to the dateof their evaluation.

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**PART II – OTHER INFORMATION**

**ITEM 1 –LEGAL PROCEEDINGS**

Not applicable.

**ITEM 2 –CHANGES IN SECURITIES**

Not applicable.

**ITEM 3 –DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

Not applicable.

**ITEM 5 –OTHER INFORMATION**

Not applicable.

**ITEM 6 –EXHIBITS**

EXHIBITS

Exhibit 10.1 -          Fresno SBALease Agreement

Exhibit 10.2 -          PasoRobles Property Purchase Agreement

Exhibit 31 -             RULE13a-14(a) CERTIFICATIONS

31.1                  Certification ofChief Executive Officer

31.2                  Certification ofChief Financial Officer

Exhibit 32 -             SECTION 1350 CERTIFICATIONS

32.1                  Certification ofChief Executive Officer

32.2                  Certification ofChief Financial Officer

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######  

###### **Signatures**

In accordance with the requirements of the ExchangeAct of 1934, the registrant has caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|        |               | COAST BANCORP                      |
|--------|--------------------|------------------------------------|
|   |               |                               |
|   |               |                               |
| Date:  | November 13,  2006 |                               | /s/ Jack C. Wauchope |   |
|   |               | Jack C. Wauchope                   |
|   |               | Chairman of the  Board             |
|   |               | President/Chief  Executive Officer |
|   |               | (Principal  Executive Officer)     |
|   |               |                               |
|   |               |                               |
| Date:  | November 13,  2006 |                               | /s/ Karan C. Pohl |   |
|   |               | Karan C. Pohl,  CPA                |
|   |               | Senior Vice  President             |
|   |               | Chief Financial  Officer           |
|   |               | (Principal  Financial Officer)     |

 

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