**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 June 30, 2002**                                                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                                                      |
| **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**                                                                      |   | **77-0567091**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                     |   | (IRS  Employer Identification No.) |
|                                                                                |   |                               |
| **553B Higuera Street, San Luis Obispo, CA 93401**                                  |
| (Address  of principal executive offices)                                           |
|                                                                                |
| **(805) 541-0400**                                                                  |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
| **Not applicable**                                                                  |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ýNo o

**APPLICABLEONLY TO CORPORATE ISSUERS**

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

Common Stock — As of July 15,2002, there were 632,400 shares of the issuer’s common stock outstanding.

Transitional Small Business Disclosure Format

(Check one)

yes: o  no: ý

 

----

 

**FORWARDLOOKING STATEMENTS**

 

**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 ADETERIORATION IN CREDIT QUALITY AND AN INCREASE IN THE PROVISION FOR POSSIBLELOAN LOSSES; CHANGES IN THE REGULATORY ENVIRONMENT; CHANGES IN BUSINESSCONDITIONS, PARTICULARLY IN SAN LUIS OBISPO COUNTY; VOLATILITY OF RATESENSITIVE DEPOSITS; OPERATIONAL RISKS INCLUDING DATA PROCESSING SYSTEMSFAILURES OR FRAUD; ASSET/LIABILITY MATCHING RISKS AND LIQUIDITY RISKS; ANDCHANGES IN THE SECURITIES MARKETS.**

 

**THEREFORE, THE INFORMATION SET FORTH THEREIN SHOULD BECAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF COAST BANCORPAND 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 SUCHSTATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH RESPECTTO FORWARD-LOOKING STATEMENTS.**

 

 

2

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## **INDEX**

## **COAST BANCORP**

## **PART I — FINANCIALINFORMATION**

 
| **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                                                                                               |                                                               |                       |   |   |   |
|                                                                                                          |                                                                    |                            |        |        |        |  |  |  |  |

 

3

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PART I — FINANCIAL INFORMATION

ITEMI — FINANCIAL STATEMENTS

 

Statementof Financial Condition (unaudited)

 
| **(in thousands)**                                                                                                         |   | **June  30,  2002** | ** ** | **December  31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|--------|
| ASSETS                                                                                                                     |   |                |       |                    |   |
| Cash and due from banks                                                                                                    |   | $                   | 5,250      |                    | $      | 3,899 |   |
| Federal funds sold                                                                                                         |   | 6,005               |       | 8,650                   |   |
| TOTAL CASH AND CASH  EQUIVALENTS                                                                                           |   | 11,255              |       | 12,549                  |   |
| Interest-bearing deposits                                                                                                  |   | —              |       | —                  |   |
|                                                                                                                       |   |                |       |                    |   |
| Investment securities:                                                                                                     |   |                |       |                    |   |
| Securities held to maturity                                                                                                |   | —              |       | —                  |   |
| Securities available for sale                                                                                              |   | 8,179               |       | 11,264                  |   |
| TOTAL INVESTMENT SECURITIES                                                                                                |   | 8,179               |       | 11,264                  |   |
| Loans:                                                                                                                     |   |                |       |                    |   |
| Commercial                                                                                                                 |   | 14,246              |       | 15,061                  |   |
| Real estate — construction                                                                                            |   | 5,471               |       | 5,738                   |   |
| Real estate — other                                                                                                   |   | 33,821              |       | 31,064                  |   |
| Consumer                                                                                                                   |   | 25,835              |       | 25,055                  |   |
| TOTAL LOANS                                                                                                                |   | 79,581              |       | 76,918                  |   |
| Net deferred loan fees                                                                                                     |   | (293                | )          | (274                    | )      |
| Allowance for credit losses                                                                                                |   | (940                | )          | (850                    | )      |
| NET LOANS                                                                                                                  |   | 78,140              |       | 75,794                  |   |
| Premises and equipment                                                                                                     |   | 5,113               |       | 3,894                   |   |
| Deferred taxes                                                                                                             |   | 192                 |       | 213                     |   |
| Federal reserve bank stock, at cost                                                                                        |   | 202                 |       | 189                     |   |
| Other assets                                                                                                               |   | 786                 |       | 724                     |   |
| TOTAL ASSETS                                                                                                               |   | $                   | 103,867    |                    | $      | 104,627 |   |
|                                                                                                                       |   |                |       |                    |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                 |   |                |       |                    |   |
| Deposits:                                                                                                                  |   |                |       |                    |   |
| Noninterest-bearing demand                                                                                                 |   | $                   | 26,774     |                    | $      | 24,831 |   |
| Money market and NOW                                                                                                       |   | 26,494              |       | 29,958                  |   |
| Savings                                                                                                                    |   | 5,145               |       | 4,610                   |   |
| Time deposits of $100,000 or more                                                                                          |   | 20,704              |       | 20,932                  |   |
| Other time deposits                                                                                                        |   | 16,342              |       | 16,195                  |   |
| TOTAL DEPOSITS                                                                                                             |   | 95,459              |       | 96,526                  |   |
| Notes payable                                                                                                              |   | 730                 |       | 735                     |   |
| Other liabilities                                                                                                          |   | 161                 |       | 210                     |   |
| TOTAL LIABILITIES                                                                                                          |   | 96,350              |       | 97,471                  |   |
|                                                                                                                       |   |                |       |                    |   |
| Stockholders’ equity                                                                                                  |   |                |       |                    |   |
| Preferred stock — 10,000,000 authorized, none outstanding                                                             |   |                |       |                    |   |
| Common stock no par value; 10,000,000 shares authorized; issued and outstanding: 632,400  in 2002 and 632,400 in 2001 |   | 6,324               |       | 6,324                   |   |
| Retained earnings                                                                                                          |   | 1,102               |       | 732                     |   |
| Accumulated other comprehensive income — net unrealized (losses) gains  on available-for-sale securities         |   | 91                  |       | 100                     |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                            |   | 7,517               |       | 7,156                   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                           |   | $                   | 103,867    |                    | $      | 104,627 |   |

 

4

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** **

Statement ofOperations (unaudited)

(In Thousands, except for per share numbers)

 
|                                                |   | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** |
|-----------------------------------------------------|--------|------------------------------------------|------------|----------------------------------------|
|                                                |   | **2002**                                 |       | **2001**                               |   | **2002** |   | **2001** |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Interest income:                                    |   |                                     |       |                                   |   |   |   |   |
| Interest and fees on loans                          |   | $                                        | 1,460      |                                   | $ | 1,475 |   | $ | 2,876 |   | $ | 2,981 |
| Interest on taxable securities                      |   | $                                        | 86         |                                   | 183 |   | 185 |   | 429 |
| Interest on federal funds sold                      |   | $                                        | 29         |                                   | 143 |   | 55 |   | 247 |
| Other interest income                               |   | $                                        | 3          |                                   | — |   | 6 |   | — |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Total interest income                               |   | 1,578                                    |       | 1,801                                  |   | 3,122 |   | 3,657 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Interest expense:                                   |   |                                     |       |                                   |   |   |   |   |
| Interest on money market and NOW accounts           |   | 85                                       |       | 214                                    |   | 174 |   | 482 |
| Interest on savings deposits                        |   | 14                                       |       | 28                                     |   | 29 |   | 50 |
| Interest on time deposits                           |   | 272                                      |       | 519                                    |   | 563 |   | 1,042 |
| Interest on other borrowings                        |   | 11                                       |       | 6                                      |   | 20 |   | 11 |
|                                                |   | 382                                      |       | 767                                    |   | 786 |   | 1,585 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Net interest income                                 |   | 1,196                                    |       | 1,034                                  |   | 2,336 |   | 2,072 |
| Provision for loan losses                           |   | 60                                       |       | 38                                     |   | 80 |   | 63 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Net interest income after provision for loan losses |   | 1,136                                    |       | 996                                    |   | 2,256 |   | 2,009 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Noninterest Income:                                 |   |                                     |       |                                   |   |   |   |   |
| Service charges on deposit accounts and  other      |   | 53                                       |       | 85                                     |   | 105 |   | 191 |
| Gain on sale of loans and servicing fees            |   | 257                                      |       | —                                 |   | 258 |   | — |
| Gain on sale of securities                          |   | 38                                       |       | 61                                     |   | 96 |   | 75 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Total noninterest income                            |   | 348                                      |       | 146                                    |   | 459 |   | 266 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Noninterest Expense:                                |   |                                     |       |                                   |   |   |   |   |
| Salaries and benefits                               |   | 552                                      |       | 475                                    |   | 1,112 |   | 934 |
| Net occupancy expense (net of rental  income)       |   | 70                                       |       | 46                                     |   | 142 |   | 88 |
| Equipment expense                                   |   | 50                                       |       | 43                                     |   | 99 |   | 86 |
| Other expense                                       |   | 380                                      |       | 334                                    |   | 691 |   | 674 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Total noninterest expense                           |   | 1,052                                    |       | 898                                    |   | 2,044 |   | 1,782 |
|                                                |   | —                                   |       |                                   |   |   |   |   |
| Income before taxes                                 |   | 432                                      |       | 244                                    |   | 671 |   | 493 |
| Income taxes                                        |   | 198                                      |       | 103                                    |   | 301 |   | 207 |
| Net income                                          |   | $                                        | 234        |                                   | $ | 141 |   | $ | 370 |   | $ | 286 |
|                                                |   |                                     |       |                                   |   |   |   |   |
| Earnings per share — Basic                     |   | $                                        | 0.37       |                                   | $ | 0.22 |   | $ | 0.59 |   | $ | 0.45 |
| Earnings per share — Diluted                   |   | $                                        | 0.36       |                                   | $ | 0.21 |   | $ | 0.56 |   | $ | 0.44 |

 

5

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Statement of changes in Shareholders’ Equity

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

 

 
|                                                                                         |   | **Common Stock**     |   |       |   |                     |   |                  |   |                                       |   |
|----------------------------------------------------------------------------------------------|--------|----------------------|--------|------------|--------|--------------------------|--------|-----------------------|--------|--------------------------------------------|--------|
|                                                                                         |   | **Number of Shares** |   | **Amount** |   | **Comprehensive Income** |   | **Retained Earnings** |   | **Accumulated Other Comprehensive Income** |   | **Total** |   |
| **Balance at January 1, 2001**                                                               |   | 627,000              |   | $          | 6,270  |                     |   |                  | $      | 116                                        |   | $ | (22 | ) | 6,364 |   |
| Exercise of stock options                                                                    |   | 5,400                |   | 54         |   |                     |   |                  |   |                                       |   | 54 |   |
| Cash dividends                                                                               |   |                 |   |       |   |                     |   | $                     | (32    | )                                          |   |   | (32 | ) |
|                                                                                         |   |                 |   |       |   |                     |   |                  |   |                                       |   |   |   |
| **Comprehensive Income**                                                                     |   |                 |   |       |   |                     |   |                  |   |                                       |   |   |   |
| Net income                                                                                   |   |                 |   |       |   | $                        | 648    |                  | 648    |                                       |   |   | 648 |   |
| Unrealized gain on securities available for sale                                             |   |                 |   |       |   | 178                      |   |                  |   | 178                                        |   | 178 |   |
| Reclassification adjustment for gain on Sale of investment securities included in net income |   |                 |   |       |   | (56                      | )      |                  |   | (56                                        | )      | (56 | ) |
| **Total comprehensive income**                                                               |   |                 |   |       |   | $                        | 770    |                  |   |                                       |   |   |   |   |
|                                                                                         |   |                 |   |       |   |                     |   |                  |   |                                       |   |   |   |
| **Balance at December 31,  2001**                                                            |   | 632,400              |   | 6,324      |   |                     |   | 732                   |   | 100                                        |   | 7,156 |   |
| Exercise of stock options                                                                    |   |                 |   |       |   |                     |   |                  |   |                                       |   | — |   |
| Cash dividends                                                                               |   |                 |   |       |   |                     |   |                  |   |                                       |   | — |   |
|                                                                                         |   |                 |   |       |   |                     |   |                  |   |                                       |   |   |   |
| **Comprehensive Income**                                                                     |   |                 |   |       |   |                     |   |                  |   |                                       |   |   |   |
| Net income                                                                                   |   |                 |   |       |   | $                        | 370    |                  | 370    |                                       |   |   | 370 |   |
| Unrealized loss. on securities available for sale                                            |   |                 |   |       |   | 47                       |   |                  |   | 47                                         |   | 47 |   |
| Reclassification adjustment for gain on Sale of investment securities included in net income |   |                 |   |       |   | (56                      | )      |                  |   | (56                                        | )      | (56 | ) |
| **Total comprehensive income**                                                               |   |                 |   |       |   | $                        | 361    |                  |   |                                       |   |   |   |   |
|                                                                                         |   |                 |   |       |   |                     |   |                  |   |                                       |   |   |   |
| **Balance at June 30, 2002**                                                                 |   | 632,400              |   | $          | 6,324  |                     |   |                  | $      | 1,102                                      |   | $ | 91 |   | $ | 7,517 |   |
|                                                                                              |        |                      |        |            |        |                          |        |                       |        |                                            |        |  |  |  |  |  |  |  |  |  |  |

 

6

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**COAST BANCORP**

Statement of Cash Flows (unaudited)

(In Thousands)
|                                                                               |   | **For the Six Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                               |   | **2002**                               |   | **2001** |   |
| Operating activities                                                               |   |                                   |   |   |   |
| Net income                                                                         |   | $                                      | 370    |   | $ | 286 |   |
| Adjustments to reconcile net income to  Net cash provided by operating activities: |   |                                   |   |   |   |
| Depreciation and amortization                                                      |   | 108                                    |   | 99 |   |
| Provision for loan losses                                                          |   | 80                                     |   | 64 |   |
| Realized gain on investment securities                                             |   | (96                                    | )      | (75 | ) |
| Other items — net                                                             |   | (38                                    | )      | 130 |   |
| Net  cash provided by operating activities                                         |   | 424                                    |   | 504 |   |
|                                                                               |   |                                   |   |   |   |
| Investing activities                                                               |   |                                   |   |   |   |
| Change in interest-bearing deposits                                                |   | —                                 |   | 200 |   |
| Proceeds from sale of investment  securities                                       |   | 4,133                                  |   | 9,068 |   |
| Maturities of investment securities                                                |   | 1,000                                  |   | 9,444 |   |
| Purchase of investment securities                                                  |   | (2,012                                 | )      | (12,134 | ) |
| Net change in loans                                                                |   | (2,426                                 | )      | (6,656 | ) |
| Increase in Federal Reserve Bank Stock                                             |   | (13                                    | )      | (17 | ) |
| Purchase of premises and equipment                                                 |   | (1,328                                 | )      | (82 | ) |
| Net  cash provided (used) by investing activities                                  |   | (646                                   | )      | (177 | ) |
|                                                                               |   |                                   |   |   |   |
| Financing activities                                                               |   |                                   |   |   |   |
| Increase (decrease) in deposits                                                    |   | (1,067                                 | )      | 6,073 |   |
| Proceeds from exercise of 0ptions                                                  |   | —                                 |   | 42 |   |
| Principal Payments                                                                 |   | (5                                     | )      | — |   |
| Net  cash provided (used) by financing actvities                                   |   | (1,072                                 | )      | 6,115 |   |
|                                                                               |   |                                   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                  |   | (1,294                                 | )      | 6,442 |   |
|                                                                               |   |                                   |   |   |   |
| Cash and cash equivalents at beginning of  period                                  |   | 12,549                                 |   | 9,543 |   |
|                                                                               |   |                                   |   |   |   |
| Cash  and cash equivalents at end of period                                        |   | $                                      | 11,255 |   | $ | 15,985 |   |

 

7

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**Note 1 - Basis of Presentation**

 

The accompanying financial information has been prepared in accordancewith the Securities and Exchange Commission rules and regulations for quarterlyreporting and therefore does not necessarily include all information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles.  This information should be read inconjunction with the Bank’s Annual Report for the year ended December 31, 2001filed 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 six month period ended June 30, 2002 and 2001, reflect alladjustments, consisting only of normal recurring accruals 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 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 income available to commonshareholders by the weighted average number of common shares outstanding duringeach period.  The computation of dilutedearnings per share also considers the number of shares issuable upon the assumedexercise of outstanding common stock options. All earnings per common share amounts presented have been restated inaccordance with the provisions of this statement.

 

 
|                                         |   | **For the Three Months Ended  June 30,** |   | **For the Six Months Ended  June 30,** |
|----------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|
|                                         |   | **2002**                                 |   | **2001**                               |   | **2002** |   | **2001** |
|                                         |   | **Shares**                               |   | **Shares**                             |   | **Shares** |   | **Shares** |
| Used in Basic EPS                            |   | 632,400                                  |   | 630,870                                |   | 632,400 |   | 630,150 |
| Dilutive Effect of  Outstnding Stock Options |   | 20,305                                   |   | 21,308                                 |   | 26,144 |   | 19,292 |
| Earnings per share — Basic              |   | 652,705                                  |   | 652,178                                |   | 658,544 |   | 649,442 |

 

8

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

 

Theunaudited financial statements have been prepared in accordance with theinstructions to form 10-QSB and contain statements relating to future resultsof the Company that are considered to be “forward looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to, among otherthings, credit loss reserve adequacy, and simulation of changes in interestrates and litigation results.  Actualresults may differ materially from those expressed or implied as a result ofcertain risks and uncertainties, including, but not limited to, changes inpolitical and economic conditions, interest rate fluctuations, competitiveproduct and pricing pressures within the Company’s markets, equity and fixedincome market fluctuations, personal and corporate customers’ bankruptcies,inflation, acquisitions and integrations of acquired businesses, technologicalchange, changes in law, changes in fiscal, monetary, regulatory and taxpolicies, monetary fluctuations, the California energy crisis, success ingaining regulatory 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 the Bank’s Annual Report on Form 10-KSB for the year endedDecember 31, 2001.

 

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 forJune 30, 2002 and comparative information for December 31, 2001 and  June 30, 2001.

 

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 endedJune 30, 2002 the company reported net income of $234,000 or $0.36 dilutedearnings per share compared to net income of $141,000 and $0.21 dilutedearnings per share for the same period during 2001.  For the six month ended June 30, 2002 the company reported netincome of $370,000 or $0.56 diluted earnings per share compared to net incomeof $286,000 and $0.44 diluted earnings per share for the same period during2001.

 

##### **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 $2,336,000 for the six month ended June 30, 2002,compared to $2,072,000 for the quarter ended June 30, 2001 an increase of12.7%.

 

Thefollowing table sets forth the components of net interest income, averageearning assets and net interest margin (in thousands): Net interest margin iscalculated by using net interest income divided by average earning assets.

 
|                   |   | **Three Months Ended  June 30** |   | **Six Months Ended  June 30,** |   | **Year Ended December 31,** |   |
|------------------------|--------|---------------------------------|--------|--------------------------------|--------|-----------------------------|--------|
|                   |   | **2002**                        |   | **2001**                       |   | **2002**                    |   | **2001** |   | **2001** |   |
|                   |   |                            |   |                           |   |                        |   |   |   |   |   |
| Interest Income        |   | $                               | 1,578  |                           | $      | 1,801                       |   | $ | 3,122 |   | $ | 3,657 |   | $ | 6,745 |   |
| Interest Expense       |   | 382                             |   | 767                            |   | 786                         |   | 1,585 |   | 2,858 |   |
|                   |   |                            |   |                           |   |                        |   |   |   |   |   |
| Net  Interest Income   |   | $                               | 1,196  |                           | $      | 1,034                       |   | $ | 2,336 |   | $ | 2,072 |   | $ | 3,887 |   |
|                   |   |                            |   |                           |   |                        |   |   |   |   |   |
| Average Earning Assets |   | $                               | 95,190 |                           | $      | 94,284                      |   | $ | 96,592 |   | $ | 91,260 |   | $ | 78,388 |   |
| Net Interest Margin    |   | 5.03                            | %      | 4.39                           | %      | 4.84                        | %      | 4.54 | % | 4.96 | % |

 

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The 12.7%increase in net interest income for the first six months of 2002 as compared tothe first six months of 2001 was primarily the result of the significant dropin interest expense.  The Company hasexperienced an increase in the net interest margin due to the decline in highinterest rate deposits.

 

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

 

Management of the Company believes that the allowancefor loan losses is adequate.  TheCompany has established a monitoring system for loans in order to identifyimpaired loans and potential problem loans and to permit periodic evaluation ofimpairment and adequacy of the allowance for loan losses in a timelymanner.  The monitoring system andallowance for loan losses methodology have evolved over a period of years, andloan classifications have been incorporated into the determination of theallowance for loan losses.  Thismonitoring system and allowance methodology includes a loan-by-loan analysisfor all classified loans as well as loss factors for the balance of theunclassified portfolio.  Classifiedloans are reviewed individually to estimate the amount of probable losses thatneeds to be included in the allowance. These reviews include analysis of financial information as well asevaluation of collateral securing the credit. Loss factors on the unclassified portion of the portfolio are based onsuch factors as historical loss experience, current portfolio delinquency andtrends, and other inherent risk factors such as economic conditions,concentrations in the portfolio, risk levels of particular loan categories,internal loan review and management oversight.

The Company made a $80,000 contribution to the allowance for loan lossesfor the six months ended June 30, 2002 compared to $63,000 for the same periodin 2001.  Management believes that theallowance, which equals 1.14% of total loans at June 30, 2002, is adequate tocover future losses.  The allowance forloan losses at December 31, 2001 was 1.1% of total loans.

 

Changes in the allowance for loan losses for the three months ended andthe six months ended June 30, 2002 and 2001 are as follows (dollar amounts inthousands):

 
|                                       |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|--------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                       |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Allowance, Beginning of Period             |   | $                                | 875    |                           | $      | 725 |   | $ | 850 |   | $ | 700 |   |
| Provision for Loan Losses                  |   | 60                               |   | 38                             |   | 80 |   | 63 |   |
| Loans Charged Off — net of Recoveries |   | 5                                |   | (13                            | )      | 10 |   | (13 | ) |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Allowance, End of Period                   |   | $                                | 940    |                           | $      | 750 |   | $ | 940 |   | $ | 750 |   |

 

 

 

 

##### **Noninterest Income**

 

Noninterest income represents deposit account service charges and othertypes of non-loan related fee income. Noninterest income for the three months ended June 30, 2002 totaled$348,000 compared to $146,000 for the same period in 2001 a 138.36% increase.Noninterest income for the six months ended June 30, 2002 totaled $459,000compared to $266,000 for the same period in 2001 a 72.5% increase. Thisincrease is primarily due to the realized gains on the sale of investmentsecurities and realized gains on the sale of the guaranteed portion of SBAloans.

 

 

##### **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 June 30, 2002totaled $1,052,000 compared to $898,000 for the same period in 2001 a 17.1%increase. Noninterest expense for the six months ended June 30, 2002 totaled$2,044,000 compared to $1,782,000 for the same period in 2001 a 14.7% increase.This increase is primarily due to the opening of a government guaranteedlending department specializing in Small Business Administration lendingprograms during the latter part of 2000 and the overall expansion of thecustomer base.

 

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**Income Taxes**

 

The Company recorded a $198,000 tax provision for the three months endedJune 30, 2002 compared to $103,000 during the same period in 2001.  The six months ended tax provision was$301,000 compared to $207,000 or the same period in 2001.  The Company is fully taxable on its earningsin 2001.

 

##### **Financial Condition**

 

Total assets as of June 30, 2002 decreased .66% to $103.9 million incomparison to total assets of $104.6 million as of December 31, 2001.  Total assets increased by 0.7 million or 0.7%to 103.9 million as of June 30, 2002, compared to  $103.2 million at June 30, 2001. Management has restricted growth of the company to maintainwell-capitalized capital ratios.

 

 

##### **Asset Quality**

 

Asset quality has remained excellent at the Company.  As of June 30, 2001, December 31, 2001 andJune 30, 2002 the Company had no loans on nonaccrual or loans 90 day past dueand still accruing.  The Bank has had noOREO during 2000 or 2001.

 

##### **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 at June30, 2002 was $7.5 million, an increase of $.4 million over $ 7.1 million at December 31, 2001.  Shareholders equity increased primarily fromnet income of  $370,000.

 

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** |   | **WellCapitalized** |   | **Six  Months EndedJune 30, 2002** |   | **December 31, 2001** |   |
|---------------------------------|--------|--------------------------|--------|---------------------|--------|------------------------------------|--------|-----------------------|--------|
| Total risk-based capital ratio  |   | 8.00                     | %      | 10.00               | %      | 10.51                              | %      | 10.48                 | %      |
| Tier 1 risk-based capital ratio |   | 4.00                     | %      | 6.00                | %      | 9.39                               | %      | 9.41                  | %      |
| Tier 1 leverage capital ratio   |   | 4.00                     | %      | 5.00                | %      | 7.53                               | %      | 7.15                  | %      |

 

 

 

##### **Liquidity**

 

Management is not aware of any future capital expenditures or othersignificant demands on commitments, which would severely impair liquidity.  For the six months ended June 30, 2002 thebank has a loan to deposit ratio of 81.9% and total investments to assets of14.72%.

 

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PART II — OTHER INFORMATION

 

ITEM 1 — LEGAL PROCEEDINGS

                Notapplicable.

 

ITEM 2 — CHANGES IN SECURITIES

                Notapplicable.

 

ITEM 3 — DEFAULTS UPONSENIOR SECURITIES

                Notapplicable.

 

ITEM 4 — SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

(a)           CoastBancorp’s  2002 Annual Meeting ofShareholders was held on May 22, 2002 (the “Meeting”).  The Meeting involved the following proposals:

 

1.     To elect eleven (11) persons to the Board of Directors to serveuntil the next Annual Meeting of Shareholders and until their successors areelected and have qualified.

2.     To approve the appointment of Vavrinek, Trine, Day & Co. LLPas independent public accountants for the Company’s 2002 fiscal year; and

**(**b)           Proxiesfor the meeting were solicited pursuant to Regulation 14A under the SecuritiesExchange Act of 1934, as amended. There were no solicitations in oppositionmanagement’s nominees as listed in the proxy statement, and all such nomineeswere elected.

On Proposal No. 2 to approvethe appointment of Vavrinek, Trine, Day & Co. LLP as independent publicaccountants for the Company’s 2002 fiscal year, 490,140 shares voted in favorof approval, 0 shares voted against approval, 5,550 shares abstained, and therewere 0 broker non-votes.  Accordingly,Proposal No. 2 was passed by the shareholders.

 

(c)           There was no settlement between the Company and any otherperson terminating any solicitation subject to Rule 14a-11.

 

.

 

ITEM 5 — OTHER INFORMATION

 

On  May 29, 2002, the Company filed Registration Statement No.333-89342 on Form SB-2 with the Securities and Exchange Commission. TheRegistration Statement related to new shares of the Company’s common stockissuable to the public for an aggregate consideration of up to $3,000,000. Byletter dated August 12, 2002, the registration statement was withdrawn beforebeing declared effective. No securities were sold in connection with theoffering.

 

ITEM 6 — EXHIBITS ANDREPORTS OF FORM 8-K

 

 

A)          Exhibits

 

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EXHIBIT 99.1 — CERTIFICATIONOF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

 

EXHIBIT 99.2 - — CERTIFICATIONOF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

 

 

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###### **Signatures**

 

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

 

 

 

COASTBANCORP

 

 
| Date:  | August 13, 2002 | /s/ Jack Wauchope              |
|--------|-----------------|--------------------------------|
|   |            | Jack Wauchope                  |
|   |            | Chief Executive Officer        |
|   |            | [Principal Executive  Officer] |

 

 

 
| Date:  | August 13, 2002 | /s/ Thomas Sherman                     |
|--------|-----------------|----------------------------------------|
|   |            | Thomas Sherman                         |
|   |            | President and Chief  Financial Officer |
|   |            | [Principal Financial  Officer]         |

 

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