# ** **

# **FORM 10-QSB**

# ** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20429**

 

**(Mark One)**

 

**ý****        ****QUARTERLY REPORT UNDER SECTION 13OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2006**

 

**o****        ****TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**For the transition period from               to                **

 

**Commission File No. 000-32827**

 

**COAST BANCORP**

(Exact name of Registration as Specified in its Charter)

 

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

 

**500 Marsh Street, San Luis Obispo, CA 93401**

(Address of principal executive offices)

 

**(805) 541-0400**

(Registrant’s telephone number, including area code)

 

**Not applicable**

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

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes:  o     No:  ý

 

# **APPLICABLE ONLY TO CORPORATE ISSUERS**

# ** **

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

 

Common Stock – As of May 1, 2006, there were 676,100shares of the issuer’s common stock outstanding.

 

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

 

 

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**FORWARDLOOKING STATEMENTS**

 

**CERTAINSTATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDE FORWARD-LOOKINGINFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, ASAMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,AND ARE SUBJECT TO THE “SAFE HARBOR” CREATED BY THOSE SECTIONS. THESEFORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULDCAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKINGSTATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THEFOLLOWING FACTORS: COMPETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASESSIGNIFICANTLY; CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS; GENERALECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THANEXPECTED, RESULTING IN, AMONG OTHER THINGS A DETERIORATION IN CREDIT QUALITYAND AN INCREASE IN THE PROVISION FOR POSSIBLE LOAN LOSSES; CHANGES IN THEREGULATORY ENVIRONMENT; CHANGES IN BUSINESS CONDITIONS, PARTICULARLY IN SANLUIS OBISPO COUNTY; VOLATILITY OF RATE SENSITIVE DEPOSITS; OPERATIONAL RISKSINCLUDING DATA PROCESSING SYSTEMS FAILURES OR FRAUD; ASSET/LIABILITY MATCHINGRISKS AND LIQUIDITY RISKS; CHANGES IN THE SECURITIES MARKETS; THE ABILITY TOSATISFY THE REQUIREMENTS OF THE SARBANES-OXLEY ACT AND OTHER REGULATIONSGOVERNING INTERNAL CONTROLS; AND POTENTIAL ECONOMIC EFFECT OF THE WAR ONTERRORISM 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 SUCH AS SIMILAR TO, “IN MANAGEMENT’S OPINION,”“MANAGEMENTBELIEVES,” OR “MANAGEMENT CONSIDERS” ARE USED, SUCH STATEMENTS ARE AS OF, ANDBASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT TOCHANGE BY THE PASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH STATEMENTSARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECT TOFORWARD-LOOKING STATEMENTS.**

 

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## **INDEX**

## **COAST BANCORP**

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

 

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**COAST BANCORP & SUBSIDIARY**

 

**CONSOLIDATED BALANCE SHEETS (Unaudited)**

 

**March 31, 2006 and December 31, 2005**

 

**ITEM I - FINANCIAL STATEMENTS**

 
| ** **                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| **(in Thousands)**                                                                                                | ** ** | **2006**      | ** ** | **2005**         | ** ** |
| **ASSETS**                                                                                                             |       |          |       |             |       |
| Cash and due  from banks                                                                                               |       | $             | 7,116      |             | $          | 9,770 |   |
| Federal  funds sold                                                                                                    |       | 24,950        |       | 24,900           |       |
| TOTAL CASH AND CASH EQUIVALENTS                                                                                        |       |          | 32,066     |             | 34,670     |   |
|                                                                                                                   |       |          |       |             |       |
| Investment  securities available for sale                                                                              |       | 7,888         |       | 7,872            |       |
|                                                                                                                   |       |          |       |             |       |
| Loans:                                                                                                                 |       |          |       |             |       |
| Commercial                                                                                                             |       | 30,133        |       | 29,491           |       |
| Real estate - construction                                                                                             |       | 28,077        |       | 25,213           |       |
| Real estate - other                                                                                                    |       | 72,795        |       | 76,092           |       |
| Consumer                                                                                                               |       | 2,876         |       | 2,866            |       |
| Other                                                                                                                  |       | —        |       | 29               |       |
| TOTAL LOANS                                                                                                            |       |          | 133,881    |             | 133,691    |   |
| Net deferred  loan fees                                                                                                |       | (430          | )          | (460             | )          |
| Allowance  for credit losses                                                                                           |       | (1,224        | )          | (1,183           | )          |
| NET LOANS                                                                                                              |       |          | 132,227    |             | 132,048    |   |
| Premises and  equipment                                                                                                |       | 8,243         |       | 8,314            |       |
| Deferred  taxes                                                                                                        |       | 171           |       | 329              |       |
| Federal  Reserve Bank stock and Federal Home Loan Bank stock, at cost                                                  |       | 923           |       | 923              |       |
| Accrued  interest and other assets                                                                                     |       | 1,515         |       | 1,568            |       |
| TOTAL ASSETS                                                                                                           |       |          | $          | 183,033          |       | $ | 185,724 |   |
|                                                                                                                   |       |          |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                          |       |          |       |             |       |
| Deposits:                                                                                                              |       |          |       |             |       |
| Noninterest-bearing demand                                                                                             |       | $             | 37,543     |             | $          | 40,583 |   |
| Money market and NOW                                                                                                   |       | 48,524        |       | 45,092           |       |
| Savings                                                                                                                |       | 8,240         |       | 8,856            |       |
| Time deposits of $100,000 or more                                                                                      |       | 56,187        |       | 58,984           |       |
| Other time deposits                                                                                                    |       | 15,533        |       | 15,434           |       |
| TOTAL DEPOSITS                                                                                                         |       |          | 166,027    |             | 168,949    |   |
| Note payable                                                                                                           |       | —        |       | 45               |       |
| Junior subordinated debt securities                                                                                    |       | 5,155         |       | 5,155            |       |
| Other liabilities                                                                                                      |       | 272           |       | 332              |       |
| TOTAL LIABILITIES                                                                                                      |       |          | 171,454    |             | 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 |       | 7,004         |       | 6,950            |       |
| Retained earnings                                                                                                      |       | 4,645         |       | 4,373            |       |
| Accumulated other comprehensive income -  net unrealized losses on available-for-sale securities                       |       | (70           | )          | (80              | )          |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                        |       |          | 11,579     |             | 11,243     |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                        |       |          | $          | 183,033          |       | $ | 185,724 |   |
|                                                                                                                        |            |               |            |                  |            |  |  |  |  |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements*

 

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# **COAST BANCORP & SUBSIDIARY**

 

**STATEMENT OF OPERATIONS (unaudited)**

 

**For the Years Ended March 31, 2006 and 2005**

 
| ** **                                                                     | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**             | ** ** |
| **(In Thousands, except for per share numbers)** | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                           |       |                           |       |   |   |
| Interest  income:                                                              |       |                           |       |   |   |
| Interest and fees on loans                                                     |       | $                              | 2,917      |   | $ | 2,120 |   |
| Interest on investment securities                                              |       | 56                             |       | 80 |   |
| Interest on federal funds sold                                                 |       | 242                            |       | 84 |   |
| Other interest income                                                          |       | 8                              |       | 6 |   |
|                                                                           |       |                           |       |   |   |
| TOTAL INTEREST INCOME                                                          |       | 3,223                          |       | 2,290 |   |
|                                                                           |       |                           |       |   |   |
| Interest  expense:                                                             |       |                           |       |   |   |
| Interest on money market and NOW accounts                                      |       | 267                            |       | 106 |   |
| Interest on savings deposits                                                   |       | 27                             |       | 12 |   |
| Interest on time deposits                                                      |       | 676                            |       | 320 |   |
| Interest on junior subordinated debt  securities                               |       | 109                            |       | 86 |   |
| TOTAL INTEREST EXPENSE                                                         |       | 1,079                          |       | 524 |   |
|                                                                           |       |                           |       |   |   |
| Net interest income                                                            |       | 2,144                          |       | 1,766 |   |
| Provision for loan losses                                                      |       | 40                             |       | — |   |
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES                          |       | 2,104                          |       | 1,766 |   |
|                                                                           |       |                           |       |   |   |
| Noninterest  income:                                                           |       |                           |       |   |   |
| Service charges on deposit accounts and  other                                 |       | 76                             |       | 75 |   |
| Gain on sale of loans and servicing fees                                       |       | 129                            |       | 39 |   |
| Gain on sale of real estate                                                    |       | —                         |       | 47 |   |
| Gain on sale of securities                                                     |       | —                         |       | — |   |
|                                                                           |       |                           |       |   |   |
| TOTAL NONINTEREST INCOME                                                       |       | 205                            |       | 161 |   |
|                                                                           |       |                           |       |   |   |
| Noninterest  expense:                                                          |       |                           |       |   |   |
| Salaries and benefits                                                          |       | 913                            |       | 859 |   |
| Net occupancy expense (net of rental  income)                                  |       | 138                            |       | 121 |   |
| Equipment expense                                                              |       | 86                             |       | 80 |   |
| Other expense                                                                  |       | 633                            |       | 431 |   |
|                                                                           |       |                           |       |   |   |
| TOTAL NONINTEREST EXPENSE                                                      |       | 1,770                          |       | 1,491 |   |
|                                                                           |       |                           |       |   |   |
| INCOME BEFORE TAXES                                                            |       | 539                            |       | 436 |   |
| Income taxes                                                                   |       | 267                            |       | 176 |   |
| NET INCOME                                                                     |       | $                              | 272        |   | $ | 260 |   |
|                                                                           |       |                           |       |   |   |
| Per share  data                                                                |       |                           |       |   |   |
| Earnings per share - Basic                                                     |       | $                              | 0.40       |   | $ | 0.40 |   |
| Earnings per share - Diluted                                                   |       | $                              | 0.39       |   | $ | 0.37 |   |

 

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

 

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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                                                                       |       |             |       |       |       | 2,122             |       | 1,098        |       |              |       | 1,098      |       |
| Unrealized loss on available-for-sale  securities, net of taxes of $13,024       |       |             |       |       |       | (19               | )          |         |       | (19               | )          | (19        | )          |
| **Total comprehensive income**                                                   |       |             |       |       |       | $                 | 2,103      |         |       |              |       |       |       |   |
|                                                                             |       |             |       |       |       |              |       |         |       |              |       |       |       |
| **Balance  at December 31, 2005**                                                |       | 674,100          |       | $          | 6,950      |              |       |         | $          | 4,373             |       | $          | (80        | ) | $ | 11,243 |   |
| Exercise of stock options including the  realization of $7,716 in tax benefits   |       | 2,000            |       | 35         |       |              |       |         |       |              |       | 35         |       |
| Stock-based  compensation expense                                                |       |             |       | 19         |       |              |       |         |       |              |       | 19         |       |
| **Comprehensive Income**                                                         |       |             |       |       |       |              |       |         |       |              |       |       |       |
| Net income                                                                       |       |             |       |       |       | 272               |       | 272          |       |              |       | 272        |       |
| Unrealized loss on available-for-sale securities,  net of taxes of $6,716        |       |             |       |       |       | 10                |       |         |       | 10                |       | 10         |       |
| **Total comprehensive income**                                                   |       |             |       |       |       | $                 | 2,385      |         |       |              |       |       |       |   |
|                                                                             |       |             |       |       |       |              |       |         |       |              |       |       |       |
| **Balance  at March 31, 2006**                                                   |       | 676,100          |       | $          | 7,004      |              |       |         | $          | 4,645             |       | $          | (70        | ) | $ | 11,579 |   |

 

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

 

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# **COAST BANCORP & SUBSIDIARY**

# ** **

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

 

**For the Three Months Ended March 31, 2006 and2005**

 
| ** **                                                 | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **March 31,**                  | ** ** |
| **(In Thousands)**                                    | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Operating  activities                                      |       |                           |       |   |   |
| Net income                                                 |       | $                              | 272        |   | $ | 260 |   |
| Adjustments to reconcile net income to                     |       |                           |       |   |   |
| Net cash provided by operating activities:                 |       |                           |       |   |   |
| Depreciation and amortization                              |       | 125                            |       | 115 |   |
| Provision for credit losses                                |       | 40                             |       | — |   |
| Stock-based compensation                                   |       | 19                             |       | — |   |
| Gain on sale of loans                                      |       | (127                           | )          | — |   |
| Other items - net                                          |       | 144                            |       | 464 |   |
| Net cash provided by operating activities                  |       |                           | 473        |   | 839 |   |
|                                                       |       |                           |       |   |   |
| Investing  activities                                      |       |                           |       |   |   |
| Net increase in loans                                      |       | (1,609                         | )          | (6,086 | ) |
| Proceeds from loans sold                                   |       | 1,516                          |       |   |   |
| Net Proceeds/Purchase of premises and  equipment           |       | (53                            | )          | 55 |   |
| Net cash provided (used) by investing activities           |       |                           | (146       | ) | (6,031 | ) |
|                                                       |       |                           |       |   |   |
| Financing  activities                                      |       |                           |       |   |   |
| Increase in deposits                                       |       | (2,922                         | )          | 4,116 |   |
| Principle payments on notes payable                        |       | (45                            | )          | (45 | ) |
| Proceeds from exercise of options,  including tax benefits |       | 36                             |       | 107 |   |
| Net cash provided (used) by financing actvities            |       |                           | (2,931     | ) | 4,178 |   |
|                                                       |       |                           |       |   |   |
| Increase in cash and cash equivalents                      |       |                           | (2,604     | ) | (1,014 | ) |
|                                                       |       |                           |       |   |   |
| Cash and  cash equivalents at beginning of period          |       | 34,670                         |       | 20,690 |   |
|                                                       |       |                           |       |   |   |
| Cash and cash equivalents at end of period                 |       |                           | $          | 32,066 |   | $ | 19,676 |   |

 

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

 

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

 

The accompanying financial information has been prepared in accordancewith the Securities and Exchange Commission rules and regulations for quarterlyreporting and therefore does not necessarily include all information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles. This informationshould be read in conjunction with the Company’s Annual Report for the yearended December 31, 2005 filed on Form 10-KSB.

 

Operating results for interim periods are not necessarily indicative ofoperating results for an entire fiscal year. In the opinion of management, theunaudited financial information for the three month periods ended March 31,2006 and 2005 reflect all adjustments, consisting only of normal recurringaccruals and provisions, 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 appearwith words such as “anticipate”, “believe”, “estimate”, “may”, “intend”, and “expect”.

 

**Note 2****                                                             Basisof Earnings Per Share**

 

Effective December 31, 1997, the Company adopted SFAS No. 128, *“Earnings per Share”.*Accordingly, basic earnings per shareare computed by dividing income available to common shareholders by theweighted average number of common shares outstanding during each period. Thecomputation of diluted earnings per share also considers the number of sharesissuable upon the assumed exercise of outstanding common stock options. Allearnings per common share amounts presented have been restated in accordancewith the provisions of this statement.

 

| ** **                                    | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **March 31,**                  | ** ** |
| ** **                                    | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **Shares**                     | ** ** | **Shares** | ** ** |
| Used in  Basic EPS                            |       | 674,573                        |       | 656,515 |   |
| Dilutive  Effect of Outstanding Stock Options |       | 28,862                         |       | 50,400 |   |
| Used in  Earnings Per Share - Diluted         |       | 703,435                        |       | 706,915 |   |

 

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

 

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

 

The Company has adopted this Statement in 2006 for all new stock optionawards as well as any existing awards that are modified, repurchased orcancelled. In addition, the unvested portion previously awarded options havealso been recognized as expense during the first quarter of 2006. During thefirst quarter of 2006, $18,674 was expensed by the Company for stock optionrelated compensation.

 

Prior to January 1, 2006, the Company accounted for stock-basedcompensation under the FASB’s SFAS No. 123, “Accounting for Stock-BasedCompensation,” which allowed companies to use an intrinsic value methodprescribed in Accounting Principles Board (“APB”) Opinion No. 25, *“Accounting for Stock Issued to Employees,”* and relatedinterpretations.

 

8

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SFAS No. 123 (R) requires that cash flows resulting from therealization of tax deductions in excess of the compensation cost recognized(excess tax benefits) are to be classified as financing cash flows. Before theadoption of SFAS No. 123 (R), the Company presented all tax benefits realizedfrom the exercise of stock options as operating cash flows in the Statement ofCash Flows. The $7,716 excess tax benefit classified as a financing cash inflowwould have been classified as an operating cash inflow if we had not adoptedSFAS 123 (R).

 

Had previously recognized compensation cost (prior to 2006) for theCompany’s stock option plan been determined based on the fair value at thegrant dates for awards under those plans consistent with the method of SFAS123R, the Company’s net income and earnings per share would have been reducedto the pro forma amounts indicated below:

 
| ** **                                                                                      | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                      | ** ** | **March 31,**                  | ** ** |
| ** **                                                                                      | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                                            |       |                           |       |   |   |
| Net Income:                                                                                     |       |                           |       |   |   |
| As reported                                                                                     |       | $                              | 272        |   | $ | 260 |   |
| Stock-based compensation using the  intrinsic value method                                      |       | —                         |       | — |   |
| Stock-Based compensation that would have  been reported using the fair value method of SFAS 123 |       | —                         |       | (14 | ) |
| Pro Forma net income                                                                            |       | $                              | 272        |   | $ | 246 |   |
|                                                                                            |       |                           |       |   |   |
| Basic  earnings per share:                                                                      |       |                           |       |   |   |
| As reported                                                                                     |       | $                              | 0.40       |   | $ | 0.40 |   |
| Proforma                                                                                        |       | $                              | 0.40       |   | $ | 0.38 |   |
|                                                                                            |       |                           |       |   |   |
| Diluted  earnings per share:                                                                    |       |                           |       |   |   |
| As reported                                                                                     |       | $                              | 0.39       |   | $ | 0.37 |   |
| Pro forma                                                                                       |       | $                              | 0.39       |   | $ | 0.36 |   |

 

**Note 4**                                                             **Current Accounting Pronouncements**

 

As discussed in the preceding note, SFAS No.123 (R) became effectiveJanuary 1, 2006 and has been fully implemented by the Company.

 

#### **Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The unaudited financial statements have been prepared in accordancewith the instructions to Form 10-QSB. This report contains statements relatingto future results of the Company that are considered to be “forward lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. These statements relate to, among other things, credit loss reserveadequacy, and simulation of changes in interest rates 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, acquisitions and integrations of acquired businesses, technologicalchange, changes in law, changes in fiscal, monetary, regulatory and taxpolicies, monetary fluctuations, political and global changes arising from theterrorist attacks of September 11, 2001 as well as the war in Iraq and itsaftermath, success in gaining regulatory approvals when required as well asother risks and uncertainties detailed elsewhere in this quarterly report orfrom time to time in the filings of the Company with the Securities ExchangeCommission. Such forward-looking statements speak only as of the date on whichsuch statements are made, and the corporation undertakes no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which such statement is made or to reflect the occurrence ofunanticipated events. The accompanying financial information should be read inconjunction with Coast Bancorp’s Annual Report on Form 10-KSB for the yearended December 31, 2005.

 

9

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Description of Business

 

*Coast Bancorp*

 

CoastBancorp (the “Bancorp” or “Coast Bancorp”), headquartered in San Luis Obispo,California, is a California corporation incorporated in 2001. Coast Bancorpbecame the bank holding company of Coast National Bank on May 31, 2001 througha corporate reorganization. In the reorganization, Coast National Bank becamethe wholly-owned subsidiary of Coast Bancorp and the shareholders of the Bankbecame shareholders of Coast Bancorp. Coast Bancorp is operated through atwo-tiered corporate structure. At the holding company level the affairs ofCoast Bancorp are overseen by a Board of Directors elected by the shareholdersof Coast Bancorp at the annual meeting of shareholders. The business of theBank is overseen by a Board of Directors elected by Coast Bancorp, the soleowner of the Bank. As of the date of this Form 10-QSB the respective members ofthe Board of Directors of the Bank and the Board of Directors of Coast Bancorpare identical. Coast Bancorp is subject to the regulations of, and examinationby, the Board of Governors of the Federal Reserve System. At present, CoastBancorp does not engage in any material business activities other than theownership of the Bank. Financial information presented herein for March31, 2006 and comparative information for December 31, 2005 and March 31, 2005is 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 Bankcommenced operations on that date with two offices, 16 employees and $6,250,000in capital. The original branch offices were located at 486 Marsh Street, SanLuis Obispo and 1199 Grand Avenue, Arroyo Grande, California. Since that time,an additional branch office was opened in June 1998 at 948 Morro Bay Boulevardin Morro Bay, California and another branch office was opened in July 1999 at1193 Los Osos Valley Road in Los Osos, California. In July 2002, a loanproduction office was opened at 930 South Broadway Street in Santa Maria,California and in July 2004 moved to 301 S. Miller Street, Ste. 110 in SantaMaria, California. In December 2005, the office was relocated to 411 BetteraviaRd., Ste 201, Santa Maria, California. In October 2004 a loan production officewas opened in Santa Barbara, California at 15 West Carrillo Street, Ste. 252. Theoriginal lease on this facility expired and the office was closed inSeptember2005. The Bank applied for and received approval from the Comptrollerof the Currency for another branch office at 2138 Spring Street, Paso Robles,California which opened in March 2005. The Bank also purchased a lot at 2045Spring Street, Paso Robles, California with the intention of relocating thePaso Robles branch sometime in the future. In June 2005, the Bank opened a newloan production office at 7429 N. First St., Ste. 104, 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, theBank purchased an adjacent lot next to the San Luis Obispo main office on MarshStreet. A few months later on February 1, 2000, the Bank also purchased thecontiguous property and building that was home to the San Luis Obispo mainoffice at 486 Marsh Street. Construction of a new head office building on theadjacent lot began on October 11, 2001 and was completed on November 25, 2002. Thenew main office, located at 500 Marsh Street is approximately 10,700 squarefeet with the San Luis Obispo branch operation occupying the ground floor andthe administrative offices occupying the second floor. Half of the originalmain office 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.

 

OnMarch 29, 2002, the Bank purchased a vacant site on Morro Bay Boulevard inMorro Bay that is approximately one block from the existing branch. The purposefor this acquisition was the eventual construction and relocation of the MorroBay branch to a larger facility with a drive-through lane. In October 2003construction began on the new Morro Bay facility which was completed andoccupied in August 2004. The branch consists of approximately 2700 square feetwith two drive through lanes.

 

Asof March 31, 2006, the Bank had a total of 69 employees. A number of theseemployees are part-time however. Part-time employees are converted to full-timeequivalent employees on the percentage of their weekly hours worked compared to40 hours. On a full-time equivalent basis, employees represent 63 positions. TheBank values its employees. They are actively engaged individually and as a teamin contributing to the Bank’s realization of its vision and mission.

 

**CriticalAccounting Policies**

 

Ouraccounting policies are integral to understanding the results reported. Inpreparing its consolidated financial statements, the Company is required tomake judgments and estimates that may have a significant impact upon itsfinancial results. Certain accounting policies require the Company to makesignificant estimates and assumptions, which have a material impact on thecarrying value of certain assets and liabilities, and are considered criticalaccounting policies. The estimates and assumptions used

 

10

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are based on the historical experiences andother factors, which are believed to be reasonable under the circumstances. Actualresults could differ significantly from these estimates and assumptions, whichcould have a material impact on the carrying value of assets and liabilities atthe balance sheet dates and results of operations for the reporting periods. Forexample, the Company’s determination of the adequacy of its allowance for loanlosses is particularly susceptible to management’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 isincreased by the provision for loan losses charged to expense and reduced byloans charged off, net of recoveries. The allowance for loan losses isdetermined based on management’s assessment of several factors: reviews andevaluation of individual loans, changes in the nature and volume of the loanportfolio, current economic conditions and the related impact on specificborrowers and industry groups, historical loan loss experiences and the levelsof classified and nonperforming loans.

 

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

 

Changesin the financial condition of individual borrowers, in economic conditions, inhistorical loss experience and in the condition of the various markets in whichcollateral may be sold may all affect the required level of the allowance 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 market prices are not available, fair valuesare extrapolated from the quoted prices of similar instruments.

 

##### **Overview**

 

*Earnings Summary*

 

Consolidatednet income for the three months ended March 31, 2006 was $272,000 or $0.39diluted earnings per share compared to net income of $260,000 or $0.37 dilutedearnings per share for the same period during 2005.

 

*Balance Sheet Summary*

 

As of March 31, 2006, total consolidated assets ofCoast Bancorp were $183.0 million in comparison to total assets of $185.7million as of December 31, 2005. This represents a decrease of $2.7 million, or1.45%. The decrease in noninterest-bearing demand accounts was offset by theincrease in money market and NOW accounts. Time deposits of $100,000 or moredecreased due to competitive interest rates offered at other institutions. TheCompany has responded and adjusted rates to remain strategically positioned inthe market. Compared to total assets of $164.5 million at March 31, 2005, theCompany has increased assets by $18.5 million, or 11.25%, over the last twelvemonths. These increases are the result of expansion of our customer base andoverall growth in money market, NOW and time deposits accounts.

 

The majority of the growth in deposits has beenreinvested in loans, which have increased by $10.9 million, or 8.89%, from$123.0 million at March 31, 2005 to $133.9 million at March 31, 2006. Thebalance of the deposit growth has been invested in Fed Funds to fund continuingstrong loan demand and to meet the ongoing liquidity needs of the Bank. Depositshave decreased by $2.9 million, or 1.70% when compared to December 31, 2005. Thisdecrease in deposits was reflected in a decrease in cash and cash equivalents.

 

11

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**EarningsAnalysis**

 

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

 

Net interestincome is the amount by which the interest and amortization of fees generatedfrom loans and other earning assets exceed the cost of funding those assets,usually deposit account interest expense. Net interest income depends on thedifference between gross interest and fees earned on the loans and investmentportfolios and the interest rates paid on deposits and borrowings (the “interestrate spread”). Net interest income was $2,144,000 for the quarter ended March31, 2006, compared to $1,766,000 for the quarter ended March 31, 2005,representing an increase of 21.4%. This increase was primarily the result ofgrowth in interest-earning assets generated by the Bank’s branches and theincrease in interest rates.

 

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

 

| ** **              | ** ** | **Three Months Ended** | ** ** | **Year Ended**   | ** ** |
|-------------------------|------------|------------------------|------------|------------------|------------|
| ** **              | ** ** | **March 31,**          | ** ** | **December 31,** | ** ** |
| ** **              | ** ** | **2006**               | ** ** | **2005**         | ** ** | **2005** | ** ** |
|                    |       |                   |       |             |       |   |   |
| Interest  Income        |       | $                      | 3,223      |             | $          | 2,290 |   | $ | 10,903 |   |
| Interest  Expense       |       | 1,079                  |       | 524              |       | 3,171 |   |
|                    |       |                   |       |             |       |   |   |
| Net Interest Income     |       | $                      | 2,144      |             | $          | 1,766 |   | $ | 7,732 |   |
|                    |       |                   |       |             |       |   |   |
| Average  Earning Assets |       | $                      | 164,539    |             | $          | 145,341 |   | $ | 172,963 |   |
| Net Interest  Margin    |       | 5.21                   | %          | 4.86             | %          | 5.00 | % |

 

The increase in the net interest margin in the first quarter of 2006 ascompared to the net interest margin at December 31, 2005 was due primarily tothe continued growth of quality loans and the Bank’s ability to respond to thechanges in interest rates.

 

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

 

Management of the Bank and the Company believes thatthe allowance for loan losses is adequate. 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 andallowance for loan losses methodology have evolved over a period of years, andloan classifications have been incorporated into the determination of theallowance for loan losses. This monitoring system and allowance methodologyincludes a loan-by-loan analysis for all classified loans as well as lossfactors for the balance of the unclassified portfolio. Classified loans arereviewed individually to estimate the amount of probable losses that needs tobe included in the allowance. These reviews include analysis of financialinformation as well as evaluation of collateral securing the credit. Lossfactors on the unclassified portion of the portfolio are based on such factorsas historical loss experience, current portfolio delinquency and trends, andother inherent risk factors such as economic conditions, concentrations in theportfolio, risk levels of particular loan categories, internal loan review andmanagement oversight.

 

The Company made a contribution to the allowance forloan losses for the three months ended March 31, 2006 of $40,000 as compared tono contributions made for the same period in 2005. Management believes that theallowance, which equals 0.914% of total loans at March 31, 2006, is adequate tocover future losses. The allowance for loan losses at December 31, 2005 was0.885% of total loans.

 

12

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The followingtable summarizes, for the quarter ended March 31, 2006 and 2005, changes in theallowance for loan losses arising from loans charged-off, recoveries on loanspreviously charged-off, and additions to the allowance which have been chargedto operating expenses (dollar amounts in thousands):

 

| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**          | ** ** |
| ** **                      | ** ** | **2006**               | ** ** | **2005** | ** ** |
| **Outstanding  Gross Loans**    |       |                   |       |   |   |
|                            |       |                   |       |   |   |
| Allowance,  Beginning of Period |       | $                      | 1,183      |   | $ | 1,168 |   |
|                            |       |                   |       |   |   |
| Charge-offs                     |       | —                 |       | — |   |
| Recoveries                      |       | 1                      |       | — |   |
| Net Loans  Charged-Off          |       | 1                      |       | — |   |
|                            |       |                   |       |   |   |
| Provision  for Loan Losses      |       | 40                     |       | — |   |
|                            |       |                   |       |   |   |
| Allowance,  End of Period       |       | $                      | 1,224      |   | $ | 1,168 |   |

 

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

 

Non-interestincome represents deposit account service charges, other types of fee incomeand gains on the sales of loans and securities. Non-interest income for thequarter ended March 31, 2006 totaled $205,000 compared to $161,000 for the sameperiod in 2005 a 27.3% increase. This is substantially due to the fact thatduring the three months ended March 31, 2006, the Company elected to sell theguaranteed portion of government guaranteed loans. No securities were soldduring the first quarter of 2006 although it has been the Company’s policy tosell securities due in one year if the gain will result in higher income afterreinvesting the proceeds.

 

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

 

Non-interest expense represents salaries, occupancy expenses,professional expenses, outside services and other miscellaneous expensesnecessary to conduct business. Noninterest expense for the quarter ended March31, 2006 totaled $1,770,000 compared to $1,491,000 for the same period in 2005for an increase of 18.7 %. This increase is primarily due to the increase inmarketing and promotion as well as increased salaries and employee benefits. Thenumber of full time equivalent employees was 63 in March, 2006 compared to 57for March, 2005. The increase in total loans and deposits of $10.93 million and$17.45 million respectively compared to March, 2005 required additionalpersonnel to provide the service our customers deserve. Other expense alsoreflects the cost of processing and servicing these increased loans anddeposits as well as occupancy expenses.

 

##### ***Income Taxes***

 

Due to theCompany’s increased net income of $272,000 for the quarter ended March 31, 2006as compared $260,000 for the same period in 2005, the Company recorded a highertax provision. The tax provision for the first quarter of 2006 was $267,000 ascompared to $176,000 during the same period in 2005.

 

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##### **Balance SheetAnalysis**

 

*Investment Portfolio*

 

Thefollowing table summarizes the amounts and distribution of our investment securitiesheld as of the dates indicated, and the weighted average yields as of March 31,2006 (dollar amounts in thousands):

 
| ** **                                            | ** ** | **3/31/2006** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | ** ** | ** ** | **Weighted** | ** ** | **12/31/2005** | ** ** |
| ** **                                            | ** ** | **Book**      | ** ** | **Market** | ** ** | **Average** | ** ** | **Book** | ** ** | **Market** | ** ** |
| ** **                                            | ** ** | **Value**     | ** ** | **Value**  | ** ** | **Yield** | ** ** | **Value** | ** ** | **Value** | ** ** |
| **Available-for-Sale Securities**                     |       |          |       |       |       |   |   |   |   |   |   |
| **U.S.  Treasuries:**                                 |       |          |       |       |       |   |   |   |   |   |   |
| Within One Year                                       |       | $             | —     |       | $          | — |   | 0 | % | $ | — |   | $ | — |   |
| One to Five Years                                     |       | —        |       | —     |       | 0 | % | — |   | — |   |
| Five to Ten Years                                     |       | —        |       | —     |       | 0 | % | — |   | — |   |
| After Ten Years                                       |       | —        |       | —     |       | 0 | % | — |   | — |   |
| Total U.S.  Treasury Securities                       |       | —        |       | —     |       | 0 | % | — |   | — |   |
|                                                  |       |          |       |       |       |   |   |   |   |   |   |
| **U.S.  Government and Agency Securities**            |       |          |       |       |       |   |   |   |   |   |   |
| Within One Year                                       |       | 4,994         |       | 4,936      |       | 2.49 | % | 4,992 |   | 4,920 |   |
| One to Five Years                                     |       | 3,012         |       | 2,952      |       | 3.25 | % | 3,015 |   | 2,952 |   |
| Five to Ten Years                                     |       | —        |       | —     |       | 0 | % | — |   | — |   |
| After Ten Years                                       |       | —        |       | —     |       | 0 | % | — |   | — |   |
| Total U.S. Treasury and Government Agency  Securities |       | 8,006         |       | 7,888      |       | 2.87 | % | 8,007 |   | 7,872 |   |
| **Mutual  Funds**                                     |       | —        |       | —     |       | 0 | % | — |   | — |   |
| **Mortgage  Backed Securities**                       |       | —        |       | —     |       | 0 | % | — |   | — |   |
| **Total Available-for-Sale Securities**               | ** ** | **$**         | **8,006**  | ** ** | **$**      | **7,888** | ** ** | **2.87** | **%** | $ | 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 March 31, 2006, the bookvalue of securities pledged to secure public deposits and other purposes was$1,003,214 or 12.5% of available for sale securities.

 

##### ***AssetQuality***

 

As of March 31, 2006, the Company had one loan on non-accrual of$4,650.53 and no loans 90 days or more past due and still accruing. As of March31, 2005 the Company had no loans on non-accrual and no loans 90 day past dueand still accruing. As of December 31, 2005, the company had one loan onnon-accrual of $15,186.63 and no loans 90 days past due and still accruing.

 

As of March 31, 2006 and 2005 the Company had no OREOor restructured loans.

 

##### ***Capital***

 

The objective of the Company’s asset/liabilitystrategy is to manage liquidity and interest rate risk. Ultimately, managementseeks to monitor the safety and soundness of the Bank and its capital base,while maintaining adequate net interest margins and spreads to provide anappropriate return to the stockholders.

 

Stockholders equity at March 31, 2006 was $11.6 million, compared to$11.2 at December 31, 2005. Stockholders equity increased primarily from netincome of $272,000.

 

14

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

 

Coast Bancorp and the Bank maintain capital ratios above the Federalregulatory guidelines for “well-capitalized” bank holding companies. The ratiosfor the Company are as follows:

 
| ** **                       | ** ** | ** **              | ** ** | **Coast**         | ** ** | **Coast**          | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                       | ** ** | **Regulatory Standard** | ** ** | **National Bank** | ** ** | **Bancorp**        | ** ** |
| ** **                       | ** ** | **Adequately**          | ** ** | **Well**          | ** ** | **As of**          | ** ** | **As of** | ** ** |
| ** **                       | ** ** | **Capitalized**         | ** ** | **Capitalized**   | ** ** | **March 31, 2006** | ** ** | **March 31, 2006** | ** ** |
| Total  risk-based capital ratio  |       | 8.00                    | %          | 10.00             | %          | 11.50              | %          | 12.64 | % |
| Tier 1  risk-based capital ratio |       | 4.00                    | %          | 6.00              | %          | 10.67              | %          | 10.94 | % |
| Tier 1  leverage capital ratio   |       | 4.00                    | %          | 5.00              | %          | 9.06               | %          | 8.52 | % |

 

*Liquidity*

 

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

 

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

 

Based on theirevaluation as of March 31, 2006 of the filing of this Form 10-QSB, the Company’sChief Executive Officer and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed in the reports that the Company files orsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. There have been no significant changesin the Company’s internal controls or in other factors that could significantlyaffect those controls subsequent to the date of their evaluation.

 

15

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**PART II – OTHER INFORMATION**

 

**ITEM 1 – LEGAL PROCEEDINGS**

 

Notapplicable.

 

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

 

Notapplicable.

 

**ITEM 3– DEFAULTS UPON SENIOR SECURITIES**

 

Notapplicable.

 

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

 

Notapplicable

 

**ITEM 5 – OTHER INFORMATION**

 

Notapplicable.

 

**ITEM 6 – EXHIBITS**

 

(a)          EXHIBITS

 
| Exhibit  11 - | EARNINGS  PER SHARE (See Note 2 under Item 1 – Basis of Presentation on page 8 of this  report) |
|---------------|------------------------------------------------------------------------------------------------------|
|          |                                                                                                 |   |   |
| Exhibit  31 - | RULE  13a-14(a) CERTIFICATIONS                                                                       |
|          |                                                                                                 |   |   |
|          | 31.1                                                                                                 | Certification  of Chief Executive Officer |
|          | 31.2                                                                                                 | Certification  of Chief Financial Officer |
|          |                                                                                                 |   |   |
| Exhibit  32 - | SECTION  1350 CERTIFICATIONS                                                                         |
|          |                                                                                                 |   |   |
|          | 32.1                                                                                                 | Certification  of Chief Executive Officer |
|          | 32.2                                                                                                 | Certification  of Chief Financial Officer |
|               |                                                                                                      |  |  |  |  |  |

 

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###### **Signatures**

 

In accordance withthe requirements of the Exchange Act of 1934, the registrant has caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                                                                                 |   | COAST  BANCORP                     |
|--------------------------------------------------------------------------------------|--------|------------------------------------|
|                                                                                 |   |                               |
|                                                                                 |   |                               |
| Date:           May  15, 2006 |   | /s/Jack  C. Wauchope               |   |
|                                                                                 |   | Jack  C. Wauchope                  |
|                                                                                 |   | President/Chief  Executive Officer |
|                                                                                 |   | Chairman  of the Board             |
|                                                                                 |   | (Principal  Executive Officer)     |
|                                                                                 |   |                               |
|                                                                                 |   |                               |
| Date:           May  15, 2006 |   | /s/Karan  C. Pohl                  |   |
|                                                                                 |   | Karan  C. Pohl, CPA                |
|                                                                                 |   | Senior  Vice President             |
|                                                                                 |   | Chief  Financial Officer           |
|                                                                                 |   | (Principal  Financial Officer)     |
|                                                                                      |        |                                    |  |  |

 

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