** **

** SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-QSB**

**(Mark One)**
| **ý**

                                      | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| **For the quarterly period  ended September 30, 2001** |

 

 
| **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**

(Exactname of Registration as Specified in its Charter)

 
| **California**(State or other jurisdiction of incorporation or  organization)                         |   | **77-0567091**  (IRS Employer Identification No.) |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|
|                                                                                                  |   |                                              |
| **553B Higuera Street, San Luis Obispo, CA 93401**** **(Address of  principal executive offices) |

 

**(805) 541-0400**

(Registrant’stelephone number, including area code)

 

# **Not applicable**

(Formername, former address and former fiscal year, if changed since last report)

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý No o

# **APPLICABLE ONLY TO CORPORATEISSUERS**

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:

Common Stock – As of October15, 2001, there were 631,200 shares of the issuer’s common stock outstanding.

Transitional Small Business Disclosure Format

(Check one)

yes: o   no: ý

 

**CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSBINCLUDE FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF SECTION 27A OF THESECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGEACT OF 1934, AS AMENDED, AND ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSESECTIONS.  THESE FORWARD-LOOKINGSTATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUALRESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.  SUCH RISKS AND UNCERTAINTIES INCLUDE, BUTARE NOT LIMITED TO, THE FOLLOWING FACTORS: COMPETITIVE PRESSURE IN THE BANKINGINDUSTRY INCREASES SIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENTREDUCE MARGINS; GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY,ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS A DETERIORATIONIN CREDIT QUALITY AND AN INCREASE IN THE PROVISION FOR POSSIBLE LOAN LOSSES;CHANGES IN THE REGULATORY ENVIRONMENT; CHANGES IN BUSINESS CONDITIONS,PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATE SENSITIVE DEPOSITS;OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMS FAILURES OR FRAUD;ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS; THE EFFECTS OF CALIFORNIAENERGY CRISIS CHANGES IN THE SECURITIES MARKETS;  THE POSSIBLE ECONOMIC EFFECTS OF THE SEPTEMBER 11, 2001 TERRORISTATTACK ON THE WORLD TRADE CENTER AND PENTEGON AND THE UNITED STATES WAR ONTERRORISTS.**

 

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

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

** **

 

**INDEX**

**COASTBANCORP**

**PART I – FINANCIAL INFORMATION**

** **
| **Item 1 - Financial  Statements**   |                                                               |
|--------------------------------------|--------------------------------------------------------------------|
|                                 |                                                               | Statement  of Financial Condition |   |
|                                 |                                                               | Statement of  Operations |   |
|                                 |                                                               | Statement  of Changes in Shareholders’ Equity |   |
|                                 |                                                               | Cash Flow Statement |   |
|                                 |                                                               | Notes to financial  Statements |   |
|                                 | Item 2 -                                                           | Management’s  Discussion and Analysis of Financial Condition And Results of Operations |   |
|                                 |                                                               |   |   |
|                                 |                                                               | Overview |   |
|                                 |                                                               | Net Interest Income |   |
|                                 |                                                               | Provision  for Loan Losses |   |
|                                 |                                                               | Noninterest Income |   |
|                                 |                                                               | Noninterest  Expense |   |
|                                 |                                                               | Income Taxes |   |
|                                 |                                                               | Financial  Condition |   |
|                                 |                                                               | Asset Quality |   |
|                                 |                                                               | Capital |   |
|                                 |                                                               | Liquidity |   |
|                                 |                                                               |   |   |
| **PART II – OTHER INFORMATION** |                                                               |
|                                 | Item 1 – Legal Proceedings                                    |   |
|                                 | Item 2 – Changes in Securities                                |   |
|                                 | Item 3 – Defaults Upon Senior  Securities                     |   |
|                                 | Item 4 – Submission  of Matters to a Vote of Security Holders |   |
|                                 | Item 5 – Other Information                                    |   |
|                                 | Item 6 – Exhibits and Reports  of Form 8-K                    |   |
|                                 |                                                               |   |   |
| SIGNATURES                           |                                                               |   |
|                                      |                                                                    |  |  |  |  |  |

#  

# **COAST BANCORP**

 

 
| PART I - FINANCIAL  INFORMATION                                                                                             |   |                     |    |                          |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------------|--------|
| ITEM I - FINANCIAL STATEMENTS                                                                                               |   |                     |    |                          |   |
|                                                                                                                        |   |                     |    |                          |   |
| Statement of Financial  Condition (unaudited)                                                                               |   |                     |    |                          |   |
| (In Thousands)                                                                                                              |   | **September  30,  2001** |    | **December  31,********2000** |   |
|                                                                                                                        |   |                     |    |
| **Assets**                                                                                                                  |   |                     |    |                          |   |
|                                                                                                                        |   |                     |    |                          |   |
| Cash and due  from banks                                                                                                    |   | $                        | 4,872   |                          | $      | 6,043 |   |
| Federal funds  sold                                                                                                         |   | 4,100                    |    | 3,500                         |   |
| Cash and cash  equivalents                                                                                                  |   | 8,972                    |    | 9,543                         |   |
|                                                                                                                        |   |                     |    |                          |   |
| Interest -  bearing deposits                                                                                                |   | -                        |    | 200                           |   |
|                                                                                                                        |   |                     |    |                          |   |
| Investment securities                                                                                                       |   | 14,916                   |    | 20,966                        |   |
|                                                                                                                        |   |                     |    |                          |   |
| Loans                                                                                                                       |   | 76,472                   |    | 61,900                        |   |
| Allowance for  loan losses                                                                                                  |   | (800                     | )       | (700                          | )      |
|                                                                                                                        |   | 75,672                   |    | 61,200                        |   |
|                                                                                                                        |   |                     |    |                          |   |
| Premises and  equipment                                                                                                     |   | 3,695                    |    | 3,611                         |   |
| Federal Reserve  Bank Stock, at cost                                                                                        |   | 189                      |    | 172                           |   |
| Accrued interest  and other assets                                                                                          |   | 923                      |    | 1,154                         |   |
| **Total  Assets**                                                                                                           |   | $                        | 104,367 |                          | $      | 96,846 |   |
|                                                                                                                        |   |                     |    |                          |   |
| **Liabilities**                                                                                                             |   |                     |    |                          |   |
|                                                                                                                        |   |                     |    |                          |   |
| Noninterest-bearing  demand                                                                                                 |   | $                        | 20,988  |                          | $      | 21,398 |   |
| Money market and  NOW                                                                                                       |   | 33,695                   |    | 29,632                        |   |
| Savings deposits                                                                                                            |   | 4,556                    |    | 3,191                         |   |
| Time deposits of  $100,000 or more                                                                                          |   | 20,817                   |    | 19,998                        |   |
| Other time  deposits                                                                                                        |   | 16,283                   |    | 15,731                        |   |
| Total deposits                                                                                                              |   | 96,339                   |    | 89,950                        |   |
|                                                                                                                        |   |                     |    |                          |   |
| Other  liabilities                                                                                                          |   | 916                      |    | 532                           |   |
| Total  liabilities                                                                                                          |   | 97,255                   |    | 90,482                        |   |
|                                                                                                                        |   |                     |    |                          |   |
| **Shareholders  Equity**                                                                                                    |   |                     |    |                          |   |
| Common stock, no  par value 10,000,000 authorized, 631,200 outstanding at September 30, 2001  and 627,000 December 31, 2000 |   | 6,312                    |    | 6,270                         |   |
| Retained  earnings                                                                                                          |   | 549                      |    | 116                           |   |
| Accumulated  other comprehensive income                                                                                     |   | 251                      |    | (22                           | )      |
| **Total  Shareholders Equity**                                                                                              |   | 7,112                    |    | 6,364                         |   |
|                                                                                                                        |   |                     |    |                          |   |
| **Total  Liabilities and Shareholders Equity**                                                                              |   | $                        | 104,367 |                          | $      | 96,846 |   |

 

 

**COAST BANCORP**
| Statement of Operations  (unaudited)                 |   |                                                |          |                                                |           |     |          |     |          |
|------------------------------------------------------|--------|-----------------------------------------------------|---------------|-----------------------------------------------------|----------------|----------|---------------|----------|---------------|
| (In Thousands,  except for per share numbers)        |   |                                                |          |                                                |           |     |          |     |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
|                                                 |   | **For  the Three Months Ended**

**September  30,** |          | **For  the Nine Months Ended********September 30,** |      |
|                                                 |   | **2001**                                            |          | **2000**                                            |           | **2001** |          | **2000** |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Interest income:                                     |   |                                                |          |                                                |           |     |          |     |          |
| Interest and  fees on loans                          |   | $                                                   | 1,523         |                                                | $              | 1,421    |          | $        | 4,504         |   | $ | 3,856 |   |
| Interest on  taxable securities                      |   | 195                                                 |          | 232                                                 |           | 624      |          | 730      |          |
| Interest on  federal funds sold                      |   | 66                                                  |          | 136                                                 |           | 307      |          | 292      |          |
| other interest  income                               |   | -                                                   |          | -                                                   |           | 6        |          | 5        |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Total interest  income                               |   | 1,784                                               |          | 1,789                                               |           | 5,441    |          | 4,883    |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Interest  expense:                                   |   |                                                |          |                                                |           |     |          |     |          |
| Interest on  money market and NOW accounts           |   | 211                                                 |          | 253                                                 |           | 693      |          | 627      |          |
| Interest on savings  deposits                        |   | 26                                                  |          | 26                                                  |           | 76       |          | 71       |          |
| Interest on time  deposits                           |   | 434                                                 |          | 489                                                 |           | 1,476    |          | 1,307    |          |
| Interest on  other borrowings                        |   | 21                                                  |          | 5                                                   |           | 32       |          | 15       |          |
|                                                 |   | 692                                                 |          | 773                                                 |           | 2,277    |          | 2,020    |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Net interest  income                                 |   | 1,092                                               |          | 1,016                                               |           | 3,164    |          | 2,863    |          |
| Provision for  loan losses                           |   | 51                                                  |          | 100                                                 |           | 114      |          | 250      |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Net interest  income after provision for loan losses |   | 1,041                                               |     | 916                                                 |      | 3,050    |     | 2,613    |     |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Noninterest  Income:                                 |   |                                                |          |                                                |           |     |          |     |          |
| Service charges  on deposit accounts and other       |   | 56                                                  |          | 41                                                  |           | 247      |          | 125      |          |
| Gain on sale of  securities                          |   | 20                                                  |          | -                                                   |           | 95       |          | -        |          |
| Total  noninterest income                            |   | 76                                                  |          | 41                                                  |           | 342      |          | 125      |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Noninterest  Expense:                                |   |                                                |          |                                                |           |     |          |     |          |
| Salaries and  benefits                               |   | 493                                                 |          | 415                                                 |           | 1,427    |          | 1,127    |          |
| Net occupancy  expense (net of rental income)        |   | 55                                                  |          | 86                                                  |           | 143      |          | 261      |          |
| Equipment  expense                                   |   | 47                                                  |          | 45                                                  |           | 133      |          | 126      |          |
| Other expense                                        |   | 255                                                 |          | 238                                                 |           | 929      |          | 698      |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Total  noninterest expense                           |   | 850                                                 |          | 784                                                 |           | 2,632    |          | 2,212    |          |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Income before  taxes                                 |   | 267                                                 |          | 173                                                 |           | 760      |          | 526      |          |
| Income taxes                                         |   | 120                                                 |          | -                                                   |           | 327      |          | (1       | )             |
| Net income                                           |   | $                                                   | 147           |                                                | $              | 173      |          | $        | 433           |   | $ | 525 |   |
|                                                 |   |                                                |          |                                                |           |     |          |     |          |
| Earnings per  share - Basic                          |   | $                                                   | 0.23          |                                                | $              | 0.28     |          | $        | 0.68          |   | $ | 0.84 |   |
| Earnings per  share - Diluted                        |   | $                                                   | 0.22          |                                                | $              | 0.27     |          | $        | 0.66          |   | $ | 0.81 |   |

 

 

**COAST BANCORP**

 

 
| Statement of changes in  Shareholders' Equity                                                 |
|-----------------------------------------------------------------------------------------------|
| (In Thousands, Except  Number of Shares) (Unaudited)                                          |
|                                                                                          |   | **Common  Stock** |   |   |   |   |   | **Accumulated  Other** |   |   |   |
|                                                                                          |   | **Number  of  Shares** |   | **Amount** |   | **Comprehensive  Income** |   | **Retained  Earnings** |   | **Comprehensive**

**Income** |   | **Total** |   |
| **Balance  at January 1, 2000**                                                               |   | 625,800 |   | $ | 6,258 |   |   |   | $ | (528 | ) | $ | (234 | ) | 5,496 |   |
| Exercise of stock  options                                                                    |   | 1,200 |   | 12 |   |   |   |   |   |   |   | 12 |   |
| **Comprehensive  Income**                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                    |   |   |   |   |   | $ | 644 |   | 644 |   |   |   | 644 |   |
| Unrealized gain  on securities available for sale                                             |   |   |   |   |   | 215 |   |   |   | 215 |   | 215 |   |
| Reclassification adjustment  for gain on Sale of investment securities included in net income |   |   |   |   |   | (3 | ) |   |   | (3 | ) | (3 | ) |
| **Total  comprehensive income**                                                               |   |   |   |   |   | $ | 856 |   |   |   |   |   |   |   |
|                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance  at December 31, 2000**                                                             |   | 627,000 |   | 6,270 |   |   |   | 116 |   | (22 | ) | 6,364 |   |
| Exercise of stock  options                                                                    |   | 4,200 |   | 42 |   |   |   |   |   |   |   | 42 |   |
| **Comprehensive  Income**                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                    |   |   |   |   |   | $ | 433 |   | 433 |   |   |   | 433 |   |
| Unrealized  loss on securities available for sale                                             |   |   |   |   |   | 368 |   |   |   | 368 |   | 368 |   |
| Reclassification adjustment for gain on Sale of  investment securities included in net income |   |   |   |   |   | (95 | ) |   |   | (95 | ) | (95 | ) |
|                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  comprehensive income**                                                               |   |   |   |   |   | $ | 706 |   |   |   |   |   |   |   |
|                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance  at September 30, 2001**                                                            |   | 631,200 |   | $ | 6,312 |   |   |   | $ | 549 |   | $ | 251 |   | $ | 7,112 |   |
|                                                                                               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**COASTBANCORP**

 
| Statement of Cash Flows  (unaudited)              |   | **For the Nine Months Ended** |   |
|---------------------------------------------------|--------|-------------------------------|--------|
| (In Thousands)                                    |   | **September 30,**             |   |
|                                              |   | **2001**                      |   | **2000** |   |
| Operating  activities                             |   |                          |   |   |   |
| Net income                                        |   | $                             | 433    |   | $ | 525 |   |
| Adjustments to  reconcile net income to           |   |                          |   |   |   |
| Net cash  provided by operating activities:       |   |                          |   |   |   |
| Depreciation and  amortization                    |   | 149                           |   | 154 |   |
| Provision for  loan losses                        |   | 114                           |   | 250 |   |
| Realized gain on  investment securities           |   | (95                           | )      | - |   |
| Other items -  net                                |   | 635                           |   | - |   |
| Net  cash provided by operating activities   |   | 1,236                         |   | 929 |   |
|                                              |   |                          |   |   |   |
| Investing  activities                             |   |                          |   |   |   |
| Change in  interest-bearing deposits              |   | 200                           |   | (200 | ) |
| Proceeds from  sale of investment securities      |   | 10,548                        |   | - |   |
| Maturities of  investment securities              |   | 9,444                         |   | 2,000 |   |
| Purchase of  investment securities                |   | (13,594                       | )      |   |   |
| Net change in  loans                              |   | (14,586                       | )      | (9,746 | ) |
| Increase in  Federal Reserve Bank Stock           |   | (17                           | )      | (9 | ) |
| Purchase of  premises and equipment               |   | (233                          | )      | (2,064 | ) |
| Net cash  provided (used) by investing activities |   | (8,238                        | )      | (10,019 | ) |
|                                              |   |                          |   |   |   |
| Financing  activities                             |   |                          |   |   |   |
| Increase in  deposits                             |   | 6,389                         |   | 11,482 |   |
| Proceeds from  exercise of 0ptions                |   | 42                            |   | 12 |   |
| Net cash  provided by financing actvities         |   | 6,431                         |   | 11,494 |   |
|                                              |   |                          |   |   |   |
| Increase in cash  and cash equivalents            |   | (571                          | )      | 2,404 |   |
|                                              |   |                          |   |   |   |
| Cash and cash  equivalents at beginning of period |   | 9,543                         |   | 9,778 |   |
|                                              |   |                          |   |   |   |
| Cash and cash  equivalents at end of period       |   | $                             | 8,972  |   | $ | 12,182 |   |

##  

**Note 1 -Basis of Presentation**

 

The accompanying financial information has been prepared in accordancewith the Securities and Exchange Commission rules and regulations for quarterlyreporting and therefore does not necessarily include all information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles.  This information should be read inconjunction with the Bank’s Annual Report for the year ended December 31, 2000filed on Form 10-KSB.

 

Operating results for interim periods are not necessarily indicative ofoperating results for an entire fiscal year. In the opinion of management, the unaudited financial information forthe three month and nine month period ended September 30, 2001 and 2000,reflect all adjustments, consisting only of normal recurring accruals andprovisions, necessary for a fair presentation thereof.

 

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

 

 

# **Note 2 - Earnings Per Share**

 

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

 

 
|                                         |   | **For the Three Months Ended  September 30,** |   | **For the Nine Months Ended  September 30,** |   |
|----------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
|                                         |   | **2001**                                      |   | **2000**                                     |   | **2001** |   | **2000** |   |
|                                         |   | **Shares**                                    |   | **Shares**                                   |   | **Shares** |   | **Shares** |   |
| Used in Basic  EPS                           |   | 631,200                                       |   | 627,000                                      |   | 630,519 |   | 626,413 |   |
| Dilutive Effect  of Outstnding Stock Options |   | 22,908                                        |   | 19,418                                       |   | 20,292 |   | 21,216 |   |
| Earnings per  share - Basic                  |   | 654,108                                       |   | 646,418                                      |   | 650,811 |   | 647,629 |   |

 

 

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

 

Theunaudited financial statements have been prepared in accordance with the instructionsto form 10-QSB and contain statements relating to future results of the Companythat are considered to be “forward looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995.  These statements relate to, among other things, credit lossreserve adequacy, and simulation of changes in interest rates and litigationresults.  Actual results may differmaterially from those expressed or implied as a result of certain risks anduncertainties, including, but not limited to, changes in political and economicconditions, interest rate fluctuations, competitive product and pricingpressures within the Company’s markets, equity and fixed income marketfluctuations, personal and corporate customers’ bankruptcies, inflation,acquisitions and integrations of acquired businesses, technological change,changes in law, changes in fiscal, monetary, regulatory and tax policies,monetary fluctuations, the California energy crisis, success in gainingregulatory approvals when required as well as other risks and uncertaintiesdetailed elsewhere in this quarterly report or from time to time in the filingsof the Company with the Securities and Exchange Commission.  Such forward-looking statements speak onlyas of the date on which such statements are made, and the corporationundertakes no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events.  The accompanying financial information should be read inconjunction with Coast National Bank’s Annual Report on Form 10-KSB for theyear ended December 31, 2000.

 

OnJune 1, 2001 Coast Bancorp acquired all of the outstanding shares of CoastNational Bank’s common stock in a non-cash transaction.  Coast Bancorp has no material businessactivity other than the involvement in Coast National Bank.  Financial information presented herein forSeptember 30, 2001 is inclusive of the consolidated Company while thecomparative information for December 31, 2000 and September 30, 2000 is forCoast National Bank.

 

Coast National Bank commencedoperations June 16, 1997 with two offices and $6,250,000.00 in capital.  All shares sold and issued were of oneclass.  In June 1998 the Morro Baybranch was opened, expanding our customer base and service area.  In June 1999 the Los Osos branch was alsoopened to further serve the needs of the residents of the North Coast.  Coast National Bank anticipates being ableto satisfy its cash requirements, near term, with continuing deposit growth.

 

##### **Overview**

 

For the three months endedSeptember 30, 2001 the company reported net income of $147,000 or $0.22 dilutedearnings per share compared to net income of $173,000 and $0.27 dilutedearnings per share for the same period during 2000.  For the nine month ended September 30, 2001 the company reportednet income of $433,000 or $0.66 diluted earnings per share compared to netincome of $525,000 and $0.81 diluted earnings per share for the same period during2000.  Net Income for the nine monthsended September 30, 2001 was lower than the same period for 2000 due to theBank becoming fully taxable in the last quarter 2000 and because of thereduction in the Federal Reserve discount rate.

 

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

 

Netinterest income is the amount by which the interest and amortization of feesgenerated from loans and other earning assets exceed the cost of funding thoseassets, usually deposit account interest expense.  Net interest income depends on the difference (the “interest ratespread’) between gross interest and fees earned on the loans and investmentportfolios and the interest rates paid on deposits and borrowings.   Net interest income was $3,164,000 for the nine month ended September 30,2001, compared to $2,863,000 for the quarter ended September 30, 2000 anincrease of 10.5%.

 

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

 
|                    |   | **Three Months Ended********September 30,** |   | **Nine Months Ended********September 30,** |   | **Year Ended  December 31,  2000** |   |
|-------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|------------------------------------|--------|
|                    |   | **2001**                                    |   | **2000**                                   |   | **2001**                           |   | **2000** |   |   |
|                    |   |                                        |   |                                       |   |                               |   |   |   |   |   |
| Interest Income         |   | $                                           | 1,784  |                                       | $      | 1,789                              |   | $ | 5,441 |   | $ | 4,883 |   | $ | 6,745 |   |
| Interest Expense        |   | 692                                         |   | 773                                        |   | 2,277                              |   | 2,020 |   | 2,858 |   |
|                    |   |                                        |   |                                       |   |                               |   |   |   |   |   |
| Net Interest  Income    |   | $                                           | 1,092  |                                       | $      | 1,016                              |   | $ | 3,164 |   | $ | 2,863 |   | $ | 3,887 |   |
|                    |   |                                        |   |                                       |   |                               |   |   |   |   |   |
| Average Earning  Assets |   | $                                           | 92,099 |                                       | $      | 76,638                             |   | $ | 92,828 |   | $ | 76,270 |   | $ | 78,388 |   |
| Net Interest  Margin    |   | 4.74                                        | %      | 5.30                                       | %      | 4.54                               | %      | 5.01 | % | 4.96 | % |

The 10.5% increase in net interest income for the first nine months of 2001 wasprimarily the result of the significant growth in interest-earning assetsgenerated by the Bank’s branches.  TheCompany also experienced a decrease in the net interest margin due to thedecline of the prime rate by 350 basis points during the first nine months of2001.

 

##### **Provisionfor Loan Losses**

 

The Company made a $114,000 contribution to the allowance for loanlosses for the nine months ended September 30, 2001 compared to $250,000 forthe same period in 2000.  Managementbelieves that the allowance, which equals 1.04% of net loans at September 30,2001, is adequate to cover future losses. The allowance for loan losses at December 31, 2000 was also 1.1% oftotal loans.

 

 

Changes in the allowance for loan losses forthe three months ended and the six months ended September 30, 2001 and 2000 areas follows (dollar amounts in thousands):

 
|                                   |   | **Three Months Ended********September 30,** |   | **Nine Months Ended********September 30,** |   |
|----------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                   |   |                                        |   |
|                                   |   | **2001**                                    |   | **2000**                                   |   | **2001** |   | **2000** |   |
|                                   |   |                                        |   |                                       |   |   |   |   |   |
| Allowance,  Beginning of Period        |   | $                                           | 750    |                                       | $      | 445 |   | $ | 700 |   | $ | 400 |   |
| Provision for  Loan Losses             |   | 50                                          |   | 105                                        |   | 114 |   | 250 |   |
| Loans Charged  Off - net of Recoveries |   | -                                           |   | -                                          |   | (14 | ) | - |   |
|                                   |   |                                        |   |                                       |   |   |   |   |   |
| Allowance, End  of Period              |   | $                                           | 800    |                                       | $      | 550 |   | $ | 800 |   | $ | 650 |   |

 

##### **Noninterest Income**

 

Noninterest income represents deposit account service charges and othertypes of non-loan related fee income. Noninterest income for the three months ended September 30, 2001 totaled$76,000 compared to $41,000 for the same period in 2000 a 85.3% increase.Noninterest income for the nine months ended September 30, 2001 totaled$342,000 compared to $125,000 for the same period in 2000 a 173.6% increase.This increase is primarily due to the growth in deposit accounts and realizedgains on the sale of investment securities and realized gains on the sale ofthe guaranteed portion of SBA loans.

 

 

##### **Noninterest Expense**

 

Noninterest expense represents salaries,occupancy expenses, professional expenses, outside services and othermiscellaneous expenses necessary to conduct business.  Noninterest expense for the three months ended September 30, 2001totaled $850,000 compared to $784,000 for the same period in 2000 a 8.4%increase. Noninterest expense for the nine months ended September 30, 2001totaled $2,632,000 compared to $2,212,000 for the same period in 2000 a 19.0%increase. This increase is primarily due to the opening of a governmentguaranteed lending department specializing in Small Business Administrationlending programs during the latter part of 2000 and the overall expansion ofthe customer base.

 

##### **Income Taxes**

 

The Company recorded a $120,000 tax provision for the three months endedSeptember 30, 2001 compared to $0.00 during the same period in 2000.  The nine months ended tax provision was$327,000 compared to $(1,000) or the same period in 2000.  The increase is due to the utilization ofprior losses through the reduction of its deferred tax valuation allowance in2000.  The Company is fully taxable onits earnings in 2001.

 

##### **Financial Condition**

 

Total assets as of September 30, 2001 increase 7.77% to $104.3 millionin comparison to total assets of $96.8 million as of December 31, 2000.  Total assets increased by $9.8 million or10.46% to $104.3 million as of September 30, 2001, compared to  $94.4 million at September 30, 2000.  This growth is primarily due to theexpansion of the Bank’s customer base.  The majority of the increase was centered in loans, which increased, by$19.1 million from $57.3 million at September 30, 2000 to $76.4 million at September30, 2001.  This growth was funded by a$8.3 million, or 9.54%, increase in deposits since September 30, 2000.

 

##### **Asset Quality**

 

As of September 30, 2001 the Bank has two loans on nonaccrual totaling$89,000 and no loans 90 day past due and still accruing.  The Bank has had no OREO during 2000 or2001.

 

##### **Capital**

 

The objective of theCompany’s asset/liability strategy is to manage liquidity and interest raterisk is to ensure the safety and soundness of the Bank and it’s capital base,while maintaining adequate net interest margins and spreads to provide anappropriate return to the shareholders.

Shareholders equity atSeptember 30, 2001 was $7.1 million, an increase of  $.7 million over $ 6.4 million at December 31, 2000.  Average shareholder’s equity for the ninemonths ended September 30, 2001 was 6.7 million compared to $5.9 million in2000.  Shareholders equity increasedprimarily from net income of  $433,000and unrealized securities gains of $273,000.

 

The Company is required tomeet certain minimum risk-based capital guidelines and leverage ratios set bythe banks regulatory authorities. The risk-based capital standards establishcapital requirements that are more sensitive to risk differences betweenvarious assets, consider off balance sheet activities in assessing capitaladequacy, and minimize the disincentives to holding liquid, low riskassets.  The leverage ratio consists oftangible Tier I capital divided by average total assets.

 

Coast Bancorp maintains capital ratios abovethe Federal regulatory guidelines for “well-capitalized” bank holdingcompanies.  The ratios are as follows:

 
|           |   | **Minimum**

**Requirements** |   | **Nine Months Ended**

**September 30, 2001** |   | **December 31, 2000** |   |
|----------------|--------|-------------------------------|--------|-----------------------------------------------|--------|-----------------------|--------|
| Tier 1 Capital |   | 4.00                          | %      | 9.91                                          | %      | 9.85                  | %      |
| Total Capital  |   | 8.00                          | %      | 11.00                                         | %      | 10.93                 | %      |
| Leverage Ratio |   | 4.00                          | %      | 6.95                                          | %      | 7.13                  | %      |

 

##### **Liquidity**

 

Management is not aware of any future capital expenditures or othersignificant demands on commitments, which would severely impair liquidity.  For the nine months ended September 30, 2001the bank has a loan to deposit ratio of 78.4% and total investments to assetsof 26%.

 

 

PARTII – OTHER INFORMATION

 

ITEM1 – LEGAL PROCEEDINGS

                Notapplicable.

 

ITEM2 – CHANGES IN SECURITIES

                Notapplicable.

 

ITEM3 – DEFAULTS UPON SENIOR SECURITIES

                Notapplicable.

 

ITEM4 – SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

 

None

 

ITEM5 – OTHER INFORMATION

                OnSeptember 28, 2001, Coast Bancorp, as borrower, entered into a promissory notewith Frank Sheahan, as lender, in the amount of $500,000.00. The intent of thenote was to down stream $400,000.00 to Coast National Bank capital and retain$100,000.00 in Coast Bancorp for expenses. The promissory note is in the amountof $500,000.00 at 6% per annum through the maturity date and is unsecured.  The note is due and payable on November 1,2002 (“Maturity Date”).  However, theMaturity Date may be extended to November 1, 2003. If extended beyond theMaturity Date, the interest rate on the note shall be fixed at prime rate onNovember 1, 2002. Monthly payments of interest only will be due on the firstday of each month beginning November 1, 2001.

 

ITEM6 – EXHIBITS AND REPORTS OF FORM 8-K

 

 

A)   Exhibits

 

None

 

B)    Reports on Form 8-K

 

None

**Signatures**

 

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

 

 

 

                                                                                                                                        COAST BANCORP

 

 
| Date:  | November 13, 2001 |  /s/ Jack Wauchope                |
|--------|-------------------|----------------------------------------|
|   |              | Jack Wauchope                          |
|   |              | President and Chief  Executive Officer |
|   |              | [Principal Executive Officer]          |

 

 

 
| Date:  | November 13, 2001 |  /s/ Thomas Sherman       |
|--------|-------------------|--------------------------------|
|   |              | Thomas Sherman                 |
|   |              | Chief Financial Officer        |
|   |              | [Principal Financial  Officer] |